U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

73–382 2013

INTERACTION OF TAX AND FINANCIAL 

ACCOUNTING ON TAX REFORM 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 8, 2012

Serial No. 112–19 

Printed for the use of the Committee on Ways and Means 

( 


srobinson on DSKB307YQ1PROD with HEARING
ii 

COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER M. SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Staff Director 


srobinson on DSKB307YQ1PROD with HEARING
iii 

C O N T E N T S 

Page 

Advisory of February 8, 2012 announcing the hearing ........................................ 2 

WITNESSES 

Mr. Michael D. Fryt, Corporate Vice President, Tax, FedEx Corporation .......... 6 

Mr. Mark A. Schichtel, Senior Vice President & Chief Tax Officer, Time 

Warner Cable ....................................................................................................... 13 

Ms. Michelle Hanlon, Associate Professor of Accounting, MIT Sloan School 

of Management ..................................................................................................... 21 

Mr. Tom S. Neubig, National Director, Quantitative Economics and Statistics, 

Ernst & Young LLP ............................................................................................. 30 

Mr. Timothy S. Heenan, Vice President, Treasury & Tax, Praxair, Inc. ............ 42 

MEMBER SUBMISSIONS FOR THE RECORD 

The Honorable Jim McDermott .............................................................................. 96 

SUBMISSIONS FOR THE RECORD 

American Council for Capital Formation ............................................................... 97 

American Enterprise Institute ................................................................................ 107 

Association for Financial Professionals .................................................................. 117 

Center for Fiscal Equity .......................................................................................... 120 

Equipment Leasing and Finance Association ....................................................... 124 

Fiscal Associates ...................................................................................................... 127 

Institute for Research on the Economics of Taxation ........................................... 137 

United States Steel Corporation ............................................................................. 147 


srobinson on DSKB307YQ1PROD with HEARING

srobinson on DSKB307YQ1PROD with HEARING
(1) 

INTERACTION OF TAX AND FINANCIAL 

ACCOUNTING ON TAX REFORM 

WEDNESDAY, FEBRUARY 8, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The committee met, pursuant to call, at 9:05 a.m., in Room 1100, 

Longworth House Office Building, the Honorable Dave Camp 

[chairman of the committee] presiding. 

[The advisory of the hearing follows:] 


srobinson on DSKB307YQ1PROD with HEARING
2 

HEARING ADVISORY 

Congressman Camp Announces Hearing on 

Interaction of Tax and Financial 

Accounting on Tax Reform 

Wednesday, February 8, 2012 

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

Means, today announced that the Committee will hold the first of two hearings on 

how accounting rules affect how businesses evaluate tax policy. This hearing will 

focus on the interaction of tax policy and financial accounting rules (such as Generally Accepted Accounting Principles, or ‘‘GAAP’’), and how this interaction affects 

how publicly-traded companies respond to tax policy. The second hearing will focus 

on the special challenges faced by small and closely-held businesses that are less 

concerned with GAAP but must confront tremendous complexity in dealing with tax 

accounting and related rules such as choice of entity. The hearing will take place 

on Wednesday, February 8, 2012, in Room 1100 of the Longworth House Office Building, beginning at 9:00 A.M. 

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

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

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

list of invited witnesses will follow. 

BACKGROUND: 

Publicly-traded companies and other businesses that rely on outside investors 

must prepare financial statements (e.g., balance sheets and income statements) in 

conformity with GAAP. The impact of federal tax liability on certain key GAAP calculations, however, can diverge significantly from a company’s actual cash tax liability. For instance, full expensing of capital investments can improve a company’s 

cash flow in the short term, but it does not improve a company’s earnings per share 

(‘‘EPS’’) as calculated under GAAP. Thus, comparing a rate cut with expensing requires consideration of the impact of financial accounting considerations on business 

investment decisions. 

More generally, tax policymakers might create unintended consequences when 

they enact tax policies without considering how such policies will affect financial 

statements. For instance, tax provisions might not work as intended if the GAAP 

treatment of such provisions diverges sharply from the effect on cash flows. Conversely, when policymakers structure tax policy around financial statement effects, 

they run the risk of adding complexity to the Tax Code in order to try to conform 

tax laws with financial reporting rules that were created without tax considerations 

in mind. 

In any case, the large and growing number of enacted and proposed temporary 

business tax incentives and other provisions creates planning and economic uncertainty for public and private companies alike, and diminishes the intended policy 

objectives of these provisions. As a result, companies across the business community 

have identified the need to bring stability to our tax laws as a key tax reform objective. 

In announcing this hearing, Chairman Camp said, ‘‘As the Committee evaluates tax reform options intended both to make the United States a more attractive place to locate activity and to simplify tax compliance for business 

taxpayers, it is important to understand how financial accounting rules influence behavior. Tax policy does not exist in isolation, and the Committee 

needs to understand the interaction between tax policy and accounting 

rules so that we make informed decisions about which policy choices will 

help employers grow and create jobs.’’ 


srobinson on DSKB307YQ1PROD with HEARING
3 

FOCUS OF THE HEARING: 

The hearing will consider how public companies evaluate tax policy options in 

light of financial accounting considerations. It will examine whether tax legislation 

works as intended when Congress fails to account for the effects of financial accounting on corporate behavior. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov/, select ‘‘Hearings.’’ Select the 

hearing for which you would like to submit, and click on the link entitled, ‘‘Click 

here to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word 

document, in compliance with the formatting requirements listed below, by the 

close of business on Wednesday, February 22, 2012. Finally, please note that 

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

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

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

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

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

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

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

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

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

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

by the Committee. 

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

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

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

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

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

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

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

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

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

f 

/. 

Chairman CAMP. Good morning. 

Today we are continuing our series of hearings on comprehensive 

tax reform. This morning’s hearing will focus on the interaction of 

tax policy and financial accounting rules such as generally accepted 

accounting principles, or GAAP, and we will examine how this 

interaction affects the way in which publicly traded companies respond to tax policy. 


srobinson on DSKB307YQ1PROD with HEARING
4 

A later hearing will look at the special challenges faced by small 

and closely held businesses that might be less concerned with 

GAAP but must confront tremendous complexity in dealing with 

tax accounting and related rules such as choice of entity. 

During today’s hearing, though, we will consider how public companies evaluate tax policy options in light of financial accounting 

or book considerations and, as such, will examine whether tax legislation works as intended when Congress does not consider the effects of financial accounting. 

When companies report profits in financial statements the primary purpose is to convey information about a company’s financial 

condition to investors and creditors. Conversely, the primary purpose of tax accounting is to measure income for levying the Federal 

income tax. These two functions are not necessarily consistent and 

in some cases may even be at odds. For publicly traded companies 

focused on earnings per share in addition to cash flows, changes in 

tax policy might not produce intended results if the effective tax 

policy on earnings per share is not well understood. 

As a recent Tax Notes article suggests, when presented with an 

option between targeted tax benefits and lower corporate rate, 

many publicly traded companies might prefer a lower corporate 

rate over those tax benefits because of the book treatment. Similarly, tax provisions that provide cash benefits might not have their 

desired effect on behavior due to a less favorable book treatment. 

A variety of factors can affect publicly traded companies in their 

decision making processes differently. For instance, the high U.S. 

corporate rate is an important factor for companies that use either 

GAAP or international accounting standards. If the rate is too 

high, companies will, all other factors being equal, allocate capital 

to a location that provides more favorable tax treatment. 

Today, the current top Federal corporate income tax rate in the 

United States is 35 percent and the average combined FederalState corporate income tax rate is 39.1 percent, second only to Japan’s 39.5 percent rate. However, in fewer than 60 days, effective 

April 1, 2012, Japan will lower its combined corporate rate to 38 

percent. That will leave the United States with the highest corporate tax rate in the entire industrialized world. This dubious distinction will make it that much more challenging to attract businesses to hire and invest here at home where we need jobs. 

However, not all employers have the same tax profile. The impact of Federal tax policy on certain key book calculations can diverge significantly from the impact of the same policy on a company’s cash tax liability. We need to understand better how public 

companies respond to tax policy when such divergences occur. If 

the goal is, as I believe, to transform the code and create a climate 

ripe for hiring and investment, then we must solicit input and insight from the very job creators who will do the hiring and investing. 

Properly designing tax reform requires an understanding of the 

financial accounting rules and how those rules might influence the 

investment decisions of public companies. I am pleased to have 

some of those businesses here today, along with members of the 

academic community, who have done extensive research on how fiVerDate Mar 15 2010 00:15 Feb 06, 2014 Jkt 073382 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\73382.XXX 73382

srobinson on DSKB307YQ1PROD with HEARING
5 

nancial accounting affects corporate behavior, and I look forward to 

hearing from them all. 

Chairman CAMP. With that, I will yield to the ranking member 

for purposes of an opening statement. 

Mr. LEVIN. Thank you very much, and welcome. 

When this hearing was scheduled on the interaction of tax and 

financial accounting on tax reform I thought I would take out my 

accounting book from law school. Fortunately, I could not find it. 

I remember so well the course taught by a brilliant teacher, and 

it convinced me I never wanted to be an accountant. That was I 

think the main lesson I learned from his brilliance. 

It is useful to have this hearing to discuss these various techniques, important as they are, and their impact on tax reform. I 

do think we need to continue to talk about tax reform and always 

to keep our eye on the ball, and that is what are the purposes of 

tax reform and what would be the impact on what our needs are. 

And this is why I think it is so essential that we not jump to conclusions or essentially embrace I think rather simplified alternatives. 

As we know, we asked Joint Tax to take a look at the code and 

to determine if the rate were lowered to a certain level what would 

be the impact. And they came back with the conclusion that even 

if we eliminated all of the specific provisions it would not bring the 

rate down to 25 percent; and I think the challenge is now intensified, because at long last we are beginning to understand fully the 

importance of manufacturing in the American economy. I think we 

somewhat lost that understanding. 

And now I think with the return of the auto industry, with the 

help of the Federal Government, not to run the companies but to 

get all of them back on their feet, I think it has helped to highlight 

how as we proceed as we must, talking about tax reform, we keep 

our eyes on the ball. And here I want to quote what the President 

said just a few weeks ago: 

‘‘If you are an American manufacturer’’—and this was part of his 

plea that we continue to help American manufacturing get fully 

back on its feet. ‘‘If you are an American manufacturer, you should 

get a bigger tax cut. If you are a higher tech manufacturer, we 

should double the tax deduction you get for making your products 

here. And if you want to relocate in a community that was hard 

hit when a factory left town, you should get help financing a new 

plant, equipment, or training for new workers.’’ 

The chairman and I—that is the end of the quote—for years have 

tried to expand, to strengthen the R&D tax credit; and here we are 

many, many months into this new session, a year plus a month 

now, and the R&D tax credit seems to be in jeopardy. 

So I think we very much welcome the testimony. I think at first 

some of us were somewhat perplexed whether we would ever understand what you are talking about. We will try. 

I yield back. 

Chairman CAMP. Thank you. 

We are pleased to welcome our panel of experts, all of whom 

bring a wealth of experience, either from academia or the private 

sector; and I believe that their experience and insight will be helpVerDate Mar 15 2010 00:15 Feb 06, 2014 Jkt 073382 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\73382.XXX 73382

srobinson on DSKB307YQ1PROD with HEARING
6 

ful as we focus on the interaction of tax policy and financial accounting rules. 

First, I would like to welcome and introduce Michael Fryt, the 

Corporate Vice President for Tax for the FedEx Corporation. Mr. 

Fryt has spent the last 30 years as a tax attorney for different corporations and comes to us today from FedEx’s headquarters in 

Memphis, Tennessee. 

Second, we will hear from Mark Schichtel, the Senior Vice President and Chief Tax Officer for Time Warner Cable. He is responsible for all areas of tax at Time Warner Cable, including policy 

planning, financial reporting, and compliance. 

Third, we welcome Michelle Hanlon, an Associate Professor of 

Accounting at the Massachusetts Institute of Technology Sloan 

School of Management. Ms. Hanlon’s research focuses on the intersection of taxation and financial accounting. 

Fourth, we will hear from Tom Neubig, the National Director of 

Quantitative Economics and Statistics for Ernst & Young, LLP, 

and the former Director and Chief Economist for the Treasury’s Office of Tax Analysis. Mr. Neubig leads a group of 24 quantitative 

analysts who assist clients with tax and economic policy issues. 

And, finally, we welcome Mr. Timothy Heenan, the Vice President for Treasury and Tax at Praxair, Inc. Praxair is the largest 

provider of industrial gases in North and South America. Mr. 

Heenan joined Praxair in 2004 from Ernst & Young where he last 

served as a senior manager specializing in the development and 

implementation of international tax strategies. 

Thank you all very much for your time today. The committee has 

received each of your written statements, and they will be made 

part of the formal hearing record. Each of you will be recognized 

for 5 minutes for your oral remarks followed by questions. 

So, Mr. Fryt, we will begin with you. You are recognized for 5 

minutes. 

STATEMENT OF MICHAEL D. FRYT, CORPORATE VICE 

PRESIDENT, TAX, FEDEX CORPORATION 

Mr. FRYT. Thank you. 

Good morning, Chairman Camp, Ranking Member Levin, Members of the Committee. I very much appreciate this opportunity to 

appear before you today to discuss the importance of tax reform to 

FedEx. We believe that reducing the U.S. corporate tax rate significantly to be more in line with the rest of the developed world is 

essential to overall economic and job growth and will help our company continue to invest in critical infrastructure to compete and 

grow. 

Before I delve into the details of how we analyze tax reform, I 

would like to make a couple of points about FedEx and our business and our tax profile. 

With respect to our business, through our global expedited transportation network we connect more than 90 percent of the world’s 

GDP in 48 hours or less. So if a business of any size wants to send 

its product from Beijing to Billings or Cleveland to Cologne, we can 

do that for them without them having to invest billions of dollars 

to build their own distribution networks. Our business is based on 


srobinson on DSKB307YQ1PROD with HEARING
7 

this global network. If our global network is competitive, it will 

grow, so will we, both around the world and in the United States. 

With respect to our tax profile, we are a full-rate taxpayer. Our 

effective tax rate has not been below 35 percent in more than 20 

years. This is a real competitive disadvantage for us. 

We are also troubled by other aspects of the current corporate 

Tax Code. It creates distortions in economic decision making, it diverts capital from its most efficient and effective use, and it leads 

to lower wages in employment. 

Like many of you in Congress, our company has also been evaluating, and even modeling, some of the tax reform proposals. We 

look at these from the perspective of both what is good for our 

country and what is good for our company. 

Overall, we believe the ideal corporate tax system would include 

a materially lower tax rate, something at least close to the average 

OECD rate, along with capital investment incentives, such as 100 

percent expensing. 

We have also said, however, that if tax reform must be revenue 

neutral so be it. We are willing to put all base-broadeners, including expensing or accelerated depreciation, on the table in exchange 

for a materially lower tax rate. Doing so, however, would come with 

a cost, both macroeconomically and to our company. 

Strong capital cost incentives, like expensing, generate new investment and new productive assets in the United States; and, as 

reflected in the chart—this chart that I attached to my written testimony—there is an almost perfect correlation between new investment and jobs in this country. 

From our company’s perspective, we would generally expect a 

lower tax rate to increase our cash flow, bottom line earnings, and 

earnings per share. To the contrary, reducing capital incentives 

would have a generally greater adverse effect on our cash flow. 

This is important because, as is often said, cash is the lifeblood of 

any business. 

Our investors pay close attention to our cash flow, as well as to 

our bottom line earnings and earnings per share, and they routinely quiz our CEO and CFO about all three. One of our biggest 

cash outflows that gets a lot of attention is capital expenditures, 

$4.2 billion in our current year, for example, up from $3.4 billion 

last year. 

So while there are other factors, assuming business tax reform 

must be revenue neutral, the most critical analysis from my company’s perspective is a comparison of the cash flow detriment from 

slowing capital cost recovery versus the earnings and cash flow 

benefits of a lower tax rate. If a tax reform package cannot get us 

to a materially lower tax rate, it will not address our competitiveness issues, particularly if capital cost incentives are reduced as 

part of the deal. 

One other thing that needs to be considered in the mix of tax reform is simplification. This is difficult, if not impossible, to measure, but its value should not be underestimated. 

In closing, we commend the recent tax reform discussion draft released by you Chairman Camp. We think it is an excellent starting 

point, and we urge that you continue your efforts to lower the corporate tax rate to be consistent with the OECD average and to simVerDate Mar 15 2010 00:15 Feb 06, 2014 Jkt 073382 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\73382.XXX 73382

srobinson on DSKB307YQ1PROD with HEARING
8 

plify. We need to get back to the basics, where businesses compete 

on the basis of the merits of their products and services, not on the 

basis of what the Tax Code says. 

Thank you. 

Chairman CAMP. Thank you very much, Mr. Fryt. 

[The prepared statement of Mr. Fryt follows:] 


srobinson on DSKB307YQ1PROD with HEARING
9 


srobinson on DSKB307YQ1PROD with HEARING73382.001.eps

Testimony of Michael D. Fryt 

Corporate Vice President, Tax 

FedEx Corporation 

Chairman Camp, Ranking Member levin and members of the Committee, I very much 

appreciate the opportunity to appear before you today to discuss FedEx and the importance of 

fundamental tax reform to Fed Ex. We believe that reducing the U.S. corporate tax rate 

significantly to be more in line with the rest of the developed world i5 essential to overall 

economic and job growth and will help our company continue to invest in critical infrastructure 

to compete and grow. 

FedEx Corporation is a Fortune 100 company headquartered in Memphis, TN. We provide a 

broad portfolio of transportation, e-commerce and bUSiness services under the respected 

FedEx brand. Consistently ranked among the world's most admired and trusted employers, 

Fed Ex inspires its more than 290,000 team members to remain "absolutely, positively" focused 

on safety, the highest ethical and profeSSional standards, and the needs of our customers and 

communities. 

Before delving into the details of how we analyze tax reform, it is important I describe a couple 

of fundamental aspects of our business and our tax profile. First, with respect to our business, 

we own and operate a global expedited transportation network, which is a huge part of the 

value proposition we provide to our customers. We connect more than 90% of the world's 

GDP ill 48 hours or less. So, if a business of any size - small, medium, or large -- wants to move 

its product from Beijing to Billings, or Cleveland to Cologne, or Manila to Mexico City, we can do 

that for them, without them having to invest the many billions of dollars in capital that would 

otherwise be required to build their own distribution networks. And given that 95% of the 

world's population, and 75% of its purchasing power, is today outside the U.S., it goes without 

saying that global markets are a critical component of the future growth and success of U.s. 

businesses and, I daresay, the United States itself. 

More to the pOint, our bUSiness, and value proposition to our customers, is based on our global 

network. If our global network is competitive and grows, we grow, both around the world, and 

in the United States. If it does not grow, or has too many holes, we will not be competitive and 

will not grow - or worse. 

This is demonstrated by a few facts about our company. In 1989, before we began operating a 

global network in earnest, we had 56,000 U.S.-based team-members and $4 billion in revenues. 

By 2010, we had grown to 290,000 team-members, 245,000 of them in the United States, and 

our revenues had grown to $35 billion. And our taxes in the u.s. (federal, state, local, income, 
10 


srobinson on DSKB307YQ1PROD with HEARING73382.002.eps

property, sales & use, FICA, FUTA, etc.) had increased from $370 million per year to over $1.4 

billion per year. 

With respect to our income tax profile, we are a full·rate taxpayer. Our effective tax rate has 

not been below 35% in more than 20 years. As you know, this is definitely on the high end, 

both in the U.S. and around the world. This is a real competitive disadvantage for us. 

But it is not just this competitiveness aspect of the current U.S. corporate tax code that is 

troublesome. In addition, today's corporate tax code creates distortions in economic decision· 

making; it diverts capital from its most efficient and effective use; and it leads to lower wages 

and employment. It is for all of these reasons that we are intensely interested in corporate tax 

reform and we are encouraged by the strong bipartisan momentum we see developing for this. 

like many of you in Congress, our company has also already been evaluating, and even 

modeling, some proposals. We are evaluating these from two perspectives - our country's 

macro-economic perspective, and our narrower company's perspective. We are, of course, 

interested in the macro-economic effects, because we, like you, and our team members, 

shareholders, customers, and communities, desire a strong, vibrant, competitive economy, 

which can improve our lives and those of our children and grandchildren. We strongly believe 

- as do many reputable experts across the world - that a significantly reformed corporate tax 

code can help provide that. 

From our company's perspective, our evaluations are done bearing in mind that we have an 

obligation to our shareholders, team members, and other important constituencies, to 

maximize value, in the form of bottom line earnings, earnings per share, and cash flow. Our 

models are not precise, of course, particularly when there is still a good deal of information not 

yet available, but they do give us a directional idea of how tax reform could affect us. 

Overall, we believe the ideal corporate tax reform would include a materially lower rate, 

something at least close to the average OECD rate of 25%, with capital investment incentives, 

such as the 100% expensing that just expired at the end of last December and is included in the 

House-passed version of H.R. 3630 currently pending before the House-Senate conference 

committee. 

We have also said, however, that if tax reform, including corporate tax reform, must be 

revenue-neutral, so be it. In other words, we are willing to put all base-broadeners on the 

table for a significantly simpler and reformed corporate tax code with a materially !ower tax 

rate. In that regard, if capital cost incentives, such as expensing or accelerated depreciation, 

are one of the things that must be put on the table, we will live with that, assuming of course, it 

enables a much lower tax rate. We must recognize, however that would come with a cost, both 

macro-economically and to our company. 

2 
11 


srobinson on DSKB307YQ1PROD with HEARING73382.003.eps

From a macro-economic standpoint, strong capital cost incentives, like expensing, generate 

new investment in new productive property, plant and equipment in the U,S, This, in turn, 

generates jobs, Attached as Exhibit 1 is a chart demonstrating the very strong - almost perfect 

- correlation of private employment and investment over the last 50 years. And, of course, 

with jobs comes additional tax revenues, etc. For example, it has been estimated that a FedEx 

purchase of one new large aircraft from Boeing injects nearly $520 million into the economy, 

creates 1,940 jobs, and generates about $45 million in federal, state, and local taxes. This 

cause-and-effect relationship, replicated across many capital investments by many companies 

across the entire U.S, economy, is one of the reasons expensing/bonus depreciation has had 

strong bipartisan support over the years. 

From our company's perspective, we would generally expect a lower tax rate to increase our 

cash flow, bottom line earnings, and earnings per share, To the contrary, changing the current 

capital cost rules to slower recovery periods and/or methods would generally adversely affect 

our cash flow, with less of an impact on our bottom line earnings and earnings per share. This 

is important, because, as is often said, cash is the lifeblood of any business. 

Our investors pay close attention to our bottom line earnings and earnings per share, but they 

also pay close attention to our cash flow and balance sheet. Our CEO and CFO are routinely 

quizzed about our cash flow and major inflows and outflows therefrom, One of the biggest 

outflows, for a capital-intensive company like ours, is capital expenditures. In our current fiscal 

year, for example, we are projecting $4,2 billion in capital expenditures, up from $3.4 billion 

last year. 

Our investors applaud capital incentives like expensing, because our after-tax cash outflow on a 

new capital investment can be up to 35% less than what it would otherwise be in the first year 

(evening out over time, of course, because it is only a temporary tax benefit). Which, we 

believe, is how it should be, conSidering that expenditures on business property, plant, & 

equipment are similar to almost every other business expenditure -- including salaries and 

wages, utilities, and many intangible development costs -- all of which are generally expensed 

for tax purposes as incurred. 

In the current debate on business tax reform, many references have been made to the need for 

revenue-neutral reform. From my company's perspective, this is where the rubber meel, the 

road, so to speak. There are other factors, but the cash flow detriment from slowing capital 

cost recovery versus the earnings, earnings per share, and cash flow benefits of a lower tax rate 

is the most critical economic analysis for us. 

If a tax reform package cannot get us to a significantly lower tax rate - something at least dose 

to the average OECD rate - it will not be competitive, particularly if capital cost incentives are 

3 
12 


srobinson on DSKB307YQ1PROD with HEARING73382.004.eps

reduced or eliminated as part of the deal. Continuation of the kinds of tax rate differentials 

that we now see will only perpetuate the ability of our international competitors to devote 

more after-tax funds for reinvestment in their global networks than we can. Over time, a 10-

percentage point higher effective tax rate on our business would reduce the amount of capital 

we could invest in our global network by billions of dollars, leading to significantly lower 

network improvements and expansions. As I explained earlier, since a big part of our value 

proposition to our customers is our global network, if we cannot keep up with, or exceed, 

improvements and expansions of our competitors in their networks, we will lose those 

customers, with ominous potential long-term consequences. 

One final factor we consider in the context oftax reform is simplification and the inherent value 

thereof. Value in terms of lower compliance costs, in terms of more certainty and 

predictability, and in terms of freeing our business people to make business decisions based on 

the merits of our services versus those of our competitors, not on what the tax code says. Our 

business decision-makers have, many times, lamented the idiosyncrasies of our "arcane" tax 

system. I strongly believe our decision-makers, and others in thousands of companies like ours 

across the country, would be more productive if they needed not to worry about the proverbial 

"traps for the unwary" contained in our current system. This is difficult, if not impossible, to 

measure, but its importance should not be underestimated. 

To summarize, Fed Ex, like many other businesses across this country, is intensely interested in 

comprehensive corporate income tax reform. We believe it is critical that this occur. Indeed, 

we do not think continuation of the status quo is an acceptable option, either for us as a 

company or for our country. 

We commend the recent Tax Reform Discussion Draft released by Chairman Camp. We think it 

is an excellent starting point and urge that you continue your efforts to lower the corporate tax 

rate to be consistent with the OECD average, and to simplify. As I and many others in my 

company and other businesses have said many times -- we need to get back to the basics, 

where businesses of all sizes, all types, and all forms, make business decisions - and competeon the basis of the merits of their products and services, not on the basis of what the tax code 

says. 

4 
13 

f 

Chairman CAMP. Mr. Schichtel, you have 5 minutes. 

STATEMENT OF MARK A. SCHICHTEL, SENIOR VICE 

PRESIDENT AND CHIEF TAX OFFICER, TIME WARNER CABLE 

Mr. SCHICHTEL. Thank you. 

Chairman Camp, Ranking Member Levin, and Members of the 

Committee, thank you very much for inviting me to share our 


srobinson on DSKB307YQ1PROD with HEARING73382.005.eps
14 

views on corporate tax reform. I am the Senior Vice President and 

Chief Tax Officer for Time Warner Cable. 

I would like to first tell you about our business and the impact 

of taxes and tax policy on Time Warner Cable. Then I will explain 

why we believe that less complexity and a lower rate will benefit 

our investors, employees, and customers, as well as the overall 

economy and Americans at large. 

Spun off from Time Warner Cable nearly 3 years ago, Time Warner Cable is a Fortune 150 capital-intensive domestic company that 

provides high-speed data, video, and voice services to over 141⁄2

million customers. We have over 48,000 employees in 29 States. We 

offer our workers secure jobs and wages and benefit packages that 

are competitive and that support families, dreams, and retirements. Last year, we hired over 7,300 people, including hundreds 

of veterans. 

We are part of our Nation’s communications backbone that enables domestic companies to compete regionally, nationally, and 

globally. We help small- and medium-sized businesses grow and 

thrive. 

Time Warner Cable spends about $3 billion a year on capital improvements, a third of which goes to wages. In 2012, we are continuing to extend our network to even more businesses and families. 

Our investments also support a national network of suppliers, including nearly a quarter of a billion dollars spent annually with 

minority and female-owned businesses. 

Our effective tax rate is historically around 39 percent, while our 

cash taxes paid are lower, driven by temporary incentives such as 

bonus depreciation, the benefits of which are now reversing. Taxes 

are a significant business cost, ranking among our largest in terms 

of magnitude, along with our programming, employee, financing, 

and capital outlays. 

Although difficult to quantify and allocate, these taxes are ultimately borne by our investors, workers, and customers through 

lower returns in wages, less investment in training, and higher 

costs and prices. We are strongly influenced by tax policies that impact our net income, effective tax rate, and earnings per share. 

We do benefit from targeted incentives, like the research credit 

and Section 199. Given our capital intensity, however, we currently 

rely even more heavily on timing incentives that don’t impact 

GAAP financial accounting, such as expensing and accelerated depreciation, which significantly enhance our cash flows and ability 

to invest in our people, technology, and network infrastructure. 

These policies have and continue to support our business. 

Over the decades, well-intentioned policy choices have helped 

produce a Tax Code and related regulations that are read in small 

print and measured in volumes. Each enacted policy objective is accompanied by nuanced rules needed to implement, clarify, and 

limit potential abuse. 

It is not just the complexity that burdens our economy, it is the 

year after year starts, fits, stops, changes, and uncertainty that 

frustrate business leaders, analysts, and investors alike. Often, the 

benefits are very large, swaying or thwarting decisions of what, 

when, and where to invest. Subtle changes from one year to the 


srobinson on DSKB307YQ1PROD with HEARING
15 

next, intentionally or unintentionally, deny one company a benefit 

while often heaping on an extra helping for another. 

It is time for American businesses to put aside our industry specific wish list and to work collectively to support a more coherent 

and equitable tax policy and corporate taxation structure. We recognize that competing priorities and deficit reduction efforts likely 

mean that corporate tax reform will need to be revenue neutral. 

As a member of the RATE coalition, we are willing to put all of 

our tax incentives on the table and broaden the base in order to 

bring America’s corporate tax rate in line with the rest of the developed world. We advocate for a significantly lower rate, a simpler 

code, and a predictable, consistent set of tax rules upon which business can make long-term decisions. 

America has so many business advantages. Yet, we are saddled 

with an inefficient tax structure and an uncompetitive tax rate. We 

are pleased that there is growing consensus for reform that significantly reduces the corporate tax rate. We want to commend Chairman Camp and this committee for its leadership in this regard. We 

would welcome the opportunity to work with the committee and its 

members and staff in dealing with these issues as tax reform progresses. 

Once again, I want to thank Chairman Camp, Ranking Member 

Levin, and the members of this committee for inviting me today. 

I very much appreciate this opportunity to testify and would be 

happy to answer any questions you might have. 

Thank you. 

Chairman CAMP. Thank you, Mr. Schichtel. 

[The prepared statement of Mr. Schichtel follows:] 


srobinson on DSKB307YQ1PROD with HEARING
16 


srobinson on DSKB307YQ1PROD with HEARING73382.006.eps

Testimony of Mark Schichtcl 

Senior Vice President and Chief Tax Officer 

Time Warner Cable Inc. 

Before the House Committee on Ways and Means 

Washington, DC 

February 8, 2012 

Chairman Camp, Ranking Member Levin and members of the Committee, thank 

you very much for inviting me to appea r before you today to share our views on 

corporate tax reform. I am the Senior Vice President and Chief Tax Officer of Time 

Warner Cable and have held that position since we spun off from Time Warner 

nearly three years ago. As a Fortune 150 capital-intensive domestic company, we 

believe that tax reform that significantly reduces the corporate tax rate is critical 

not only to our growth, but to the growth of the overall economy. 

Time Warner Cable provides high-speed data, video and voice services to over 

14.5 million customers in the United States. We employ over 48,000 employees 

in 29 states across the country. We offer our workers secure white-collar and 

blue-collar jobs with competitive wages and generous benefit packages that 

support families, dreams and retirements. Last year, we hired over 7,300 people, 

including hundreds of veterans. 

We are part of our nation's backbone that enables domestic businesses to 

compete regionally, nationally and globally. We connect individuals and 

businesses through high-speed broadband, video and voice services in ever 

evolVing, consumer-driven ways. One of our highest growth areas relates to 

commercial services, helping businesses, especially small and medium-sized 

businesses, grow and thrive even in a challenging environment. 

To better serve our customers and the communities in which we do business, we 

continue to invest to expand our broadband network, to improve our technology 
17 


srobinson on DSKB307YQ1PROD with HEARING73382.007.eps

and to hire new people. Time Warner Cable spends about $3 billion a year on 

capital improvements, one-third of which goes to wages. In 2012, we are 

continuing to extend our network to new areas, connecting the internet and our 

services to even more businesses and families. Similarly, our capital investment 

supports the growth of our broad supplier network, including small and medium 

size suppliers across our national footprint and nearly a quarter of a billion dollars 

spent annually with minority and female-owned suppliers. 

And the cable industry as a whole is a key economic driver. As of 2010, the cable 

industry (directly and indirectly) accounted for nearly 1.8 million U.S. jobs 

representing almost $77 billion in personal income. Gross economic output 

attributable to the industry amounts to more than $251 billion. Additionally, 

historical data suggests that for every $1 billion in revenue, "core" network 

companies provided 2,329 jobs. 

As a business and an industry, we understand that our growth is largely tied to 

the overall economy. That is why we are strong advocates for tax reform 

generally and for a significant reduction in the corporate tax rate. 

The 35 percent statutory tax rate will soon be the highest in the OECD (if Japan 

advances its plans to lower its rate in 2012). Our high corporate tax rate 

discourages domestic investment by U.S. companies, and makes the U.S. a less 

attractive place for in-bound foreign investment. Our higher cost structure, also 

places upward pressure on the price of products and services sold in the U.S. and 

the price competitiveness of our exports abroad. Thus, the current tax system is a 

barrier to economic growth. We believe that tax reform that significantly lowers 

the corporate tax rate will enhance economic growth, increase investment and 

employment, make domestic businesses more competitive and reduce the role of 

taxes in business decisions. 

Our business and the cable industry generally have a high tax burden as 

compared to other businesses and industries. Our effective tax rate is historically 

around 39 percent, while our cash taxes are lower driven by temporary capital 

cost timing incentives such as bonus depreciation, the benefits of which are now 

reversing. Taxes are a significant business cost, ranking among our largest in 

2 
18 


srobinson on DSKB307YQ1PROD with HEARING73382.008.eps

terms of magnitude along with our programming, employee, financing and capital 

outlays. Although difficult to quantify and allocate, these taxes are ultimately 

borne by our investors, workers and customers through lower returns and wages, 

less investment and training, and higher costs and prices. And, because taxes 

affect rates of returns on investments and the prices of products and services, 

they are a major factor in our business planning. 

Like most companies, we are strongly influenced by tax incentives that improve 

our GAAP financial reporting metrics, such as our reported income, effective tax 

rate and earnings per share. Items like the research credit and the section 199 

domestic production incentive are differences that permanently reduce our taxes 

paid and concomitantly our effective tax rate, thereby encouraging new 

investments. 

Given the capital intensity of our business, however, we rely even more on timing 

incentives that do not impact GAAP financial reporting, such as expensing or 

accelerated depreciation, which significantly enhance our actual cash flows and 

ability to invest in our people, technology and network infrastructure. These 

policies have and continue to support our business, consumers and the 

communities that we serve. 

Over the decades, well-intentioned policy choices have helped produce a tax code 

and related regulations that are read in small print and measured in volumes. 

Each enacted policy objective is accompanied by a hefty helping of nuanced rules 

needed to implement, clarify and limit potential abuse. It's not just complexity 

that burdens our economy; it's the year-after-year starts, fits, stops, changes and 

uncertainty that frustrate business leaders, analysts and investors alike. Often 

the benefits are very large, swaying or thwarting decisions about what, when and 

where to invest. Subtle changes from one year to the next, intentionally or 

unintentionally, deny one company a benefit, while often heaping on an extra 

helping for another. 

It's time for American businesses to put our industry-specific wishlists to the side 

and work collectively to support a more coherent and equitable approach to 

corporate taxation. We recognize that given competing priorities and deficit 
19 


srobinson on DSKB307YQ1PROD with HEARING73382.009.eps

reduction efforts, corporate tax reform will most likely need to be revenue 

neutral. 

We are part of the RATE coalition, a group of major companies and associations 

willing to put all of our respective tax expenditures on the table and broaden the 

tax base in order to bring America's corporate tax rate in line with the rest of the 

developed world, We advocate for a significantly lower rate, a simpler tax code, 

and predictable, consistent tax rules upon which business can make long-term 

deCisions. We strongly believe that such changes will spur economic growth and 

create jobs in the U,S" increase American competitiveness and benefit American 

workers. 

According to the Heritage Foundation, lowering the corporate tax rate to 25 

percent would create an average of 581,000 jobs in the U,S. annually from 2011 

to 2020; At their current high corporate tax rates, the u.s. and Japan suffered a 

net loss of 46 and 39 Fortune Global 500 company headquarters respectively 

between 2000 and 2011, Finally, studies suggest that workers bear up to 75 

percent of the burden of the corporate income tax. According to Ernst & Young, 

this equates to lower wages and benefits of $100 - $200 billion at the average 

level of corporate taxes in the u.S. between 2000 and 2010. 

We have so many advantages that make America a great place to invest and grow 

a business - our people, legal system and capital markets. Yet, we have an 

administratively cumbersome tax structure with an uncompetitive high statutory 

tax rate. We are pleased that there is a growing consensus for corporate tax 

reform that significantly reduces the corporate tax rate. We commend the 

Members of the Committee for their leadership in this regard. 

We support such efforts, not just because it is advantageous for our company or 

industry, but also because it is good for our economy and our country. It's what 

we need to create a business climate that attracts investment, grows jobs and 

invigorates our economy, We would welcome the opportunity to work with the 

Committee Members and their staff on these important matters as tax reform 

progresses. 

4 
20 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.010.eps
21 

Chairman CAMP. Ms. Hanlon, you are recognized for 5 minutes. 

STATEMENT OF MICHELLE HANLON, ASSOCIATE PROFESSOR 

OF ACCOUNTING, MIT SLOAN SCHOOL OF MANAGEMENT 

Ms. HANLON. Thank you. Chairman Camp, Ranking Member 

Levin and distinguished members of this committee, thank you for 

the opportunity to testify before you today. 

The main point of my testimony is that the responsiveness to tax 

policies can be affected by the financial implications of those policies. I would like to first offer some general examples of the importance of financial accounting to managers of publicly traded companies. 

One example is found in a study of companies accused by the 

SEC of fraudulently overstating accounting earnings. It turns out 

that these companies also overstated their income to the IRS and 

paid taxes on their inflated accounting income. This suggests that 

these companies were willing to pay substantial sums of cash in 

order to report higher financial accounting earnings. In the literature we call this the book-tax tradeoff. 

A second example is found in a recent survey of tax executives 

of publicly traded companies. Eighty-five percent of the tax executives said that top management at their companies view the accounting effective tax rate as being as least as or more important 

than the actual cash taxes paid. 

To illustrate the financial accounting effect of tax policies, my 

written testimony discusses three current tax policies related to investments. 

As you know, the U.S. has one of the highest statutory corporate 

tax rates in the world, with a top rate of 35 percent. Rather than 

reducing our corporate rates, our policies have instead included targeted tax provisions such as bonus depreciation and Section 199 in 

attempts to reduce economic effective tax rates and promote investment. 

In addition to high corporate statutory tax rates in the U.S., we 

have a worldwide tax system with deferral, which has in part led 

to multinational U.S. companies holding a great deal of cash overseas. Financial accounting has affected corporation tax policy responses in each of these cases. Because the details can become 

technical quickly, I will discuss only one of these in detail today, 

accelerated depreciation, including bonus depreciation. 

Accounting earnings are computed using the accrual method of 

accounting. This means, for example, that expenses are recorded in 

financial statements when incurred, regardless of when the actual 

cash is paid. The same method of accounting applies to the accounting for income tax expense. 

In the case of depreciation, most companies use straight-line depreciation for both purposes and accelerated depreciation for tax 

purposes. Thus, the tax deduction for depreciation is larger than 

the depreciation expense for financial accounting in the early years 

of an asset’s life. However, this is only temporary in nature, because the same amount will be depreciated for financial accounting 

and tax purposes over the life of the asset. The deduction for tax 

is just faster than the expense for book. 


srobinson on DSKB307YQ1PROD with HEARING
22 

To compute the income tax expense for financial accounting purposes in this case, the accounting rules require expensing not only 

the cash taxes actually paid but also accruing and expensing the 

future taxes that will be paid because a company used that tax 

shield early. Thus, accelerated or bonus depreciation does not reduce a firm’s accounting income tax expense, it will not reduce 

their reported effective tax rate, and it does not increase reported 

accounting earnings relative to a world without accelerated depreciation for tax purposes. 

When asked, corporate management will often reveal a preference for a rate cut over bonus depreciation for several reasons, 

one of which is that there is no reduction in income tax expense 

on the income statement but there would be with a rate cut. In addition, empirical evidence on the responsiveness to accelerated depreciation relative to the investment tax credit which did reduce financial accounting income tax expense reveals that the responsiveness to the credit was greater holding the present value of the cash 

tax savings constant. This evidence suggests that the accounting effect is important and serves to mitigate the responsiveness to accelerated depreciation because there is no financial accounting benefit. 

In conclusion, the main point of my testimony is that what many 

consider to be cosmetic accounting effects actually play a role in responsiveness to tax policy. These financial accounting implications 

can often mitigate the effectiveness of policies, such as bonus depreciation for public firms. 

In addition, as I discuss more fully in my written testimony, 

sometimes the accounting implications lead to other unintended 

consequences, such as exasperating the tax incentives to leave cash 

overseas for U.S. multi-nationals. 

In addition, at times concern over the accounting implications 

has caused tax policy to be enacted in a particular manner, as was 

the case with Section 199. 

In sum, it is important to recognize that both tax and financial 

accounting effects are included in the set of factors that public corporations will consider in their decision making process. 

Thank you for inviting me to testify today. I look forward to your 

questions. 

Chairman CAMP. Thank you, Ms. Hanlon. 

[The prepared statement of Ms. Hanlon follows:] 


srobinson on DSKB307YQ1PROD with HEARING
23 


srobinson on DSKB307YQ1PROD with HEARING73382.011.eps

Testimony of Michelle Hanlon 

before the 

United States House Committee on Ways and Means 

February 8, 2012 

Chairman Camp, Ranking Member Levin, and distinguished members ofthe Committee, 

I appreciate the oppOltunity to participate in this hearing. I am an associate professor of 

accounting and taxation at the Sloan School of Management at the Massachusetts Institute of 

Technology. I am an editor of the Journal of Acco/lIlting and Economics and the chair of the 

accounting group at MIT Sloan. 

The main point of my testimony is that fmancial accounting implications for publicly 

traded companies can influence the etJectiveness of tax policies, including policies related to 

investment The fmancial accounting effects represent a non-tax cost (or benefit) that public 

companies consider in their decision-making process. Thus, companies' responses to tax policies 

are not only govemed by the tax effects, but also the cosmetic financial accounting effects, often 

producing unintended consequences. 

I illustrate the financial accounting effects using current u.s. tax policies. The United 

States has one of the highest statutOlY corporate tax rates in the world. In recent years, rather 

than reducing the corporate statutory tax rate, our policies have instead included targeted tax 

provisions such as bonus depreciation and the IRC Section 199 Domestic Production Activities 

Deduction in attempts to reduce economic effective tax rates and provide incentives for 

investment There is little evidence that these policies have spurred aggregate investment 

Furthermore, because the US. has retained such a high corporate tax rate, U.S. multinational 

corporations hold a great deal of cash overseas, an anlOunt in excess of $1 trillion. Financial 

accounting has affected corporations' tax policy responses in each of these cases. 

I offer a detailed discussion and support in the remainder of the document, but a summary 

is as follows. First, companies respond less than predicted to bonus depreciation partly because 

the tax savings are not reflected on a firm's accounting income statement. Second, the Section 

199 deduction was structured as a deduction at least partially because of financial accounting. 

Specifically, finns with substantial deferred tax assets on their accounting balance sheets would 

have had to write-down these assets if the provision were structured as a rate cut Structuring the 

provision as a deduction, however, has led to a complex tax rule that is expensive to comply with 

and expensive to police and enforce. Finally, financial accounting provides an unintended, 

additional incentive for multinational companies to leave cash in offshore locations. If the 

foreign earnings are designated as permanently reinvested for financial accounting purposes, 

repatriating the cash and subjecting it to U.S. taxation requires not only an additional cash outlay 

but an additional financial accounting expense as well. Firms' reluctance to repatriate foreign 

1 
24 


srobinson on DSKB307YQ1PROD with HEARING73382.012.eps

earnings leads to more corporate debt in the U.S., lower payouts to shareholders, and quite 

possibly less investment in the U.S. and less efficient investment in foreign jurisdictions. I would 

like to emphasize, however, that given the current tax rules, the financial accounting treatment is 

correct. A reduction in the corporate tax rate (and/or move to a territorial tax system) would 

simultaneously lower both the tax and accounting disincentives related to the repatriation of 

foreign earnings. 

The remainder of the document proceeds as follows. T first provide a brief discussion of 

the reporting rules for public corporations in the U.S. to provide a basis for describing the 

accounting effects of tax policy. I then provide evidence on the impOltance of accounting to finn 

management and describe the accounting effects related to bonus depreciation, Section 199, and 

the international tax system of the U.S. 1 close with conclusions and caveats. 

Book-Tax Differences and AccounlingjiJr Income Taxes 

Publicly traded companies compute two different measures of income every yeartaxable income and financial accounting (book) income. The two measures of income are 

computed for different purposes. Financial accounting is intended to measure economic 

performance for external stakeholders. The rules for computing accounting income are 

conservative in nature, requiring the recognition of expenses and losses earlier than the 

recognition of income and gains. Taxable income is not publicly available and is not intended to 

inform external parties. The rules for taxable income are, of course, not guided by conservatism. 

Rather, the income tax rules are written to ensure taxpayers do not understate their income and to 

raise revenue to fmance the government. 

The line item differences between book and taxable incomes are referred to as book-tax 

differences and include two types - temporary and pennanent. Temporary differences are items 

of income or expense that are included in both income computations but in different time 

periods. Thus, a temporary difference in the current period will reverse in some future period. 

The classic example of a temporary book-tax difference is depreciation. In the early years in the 

life of a depreciable asset, tax depreciation (accelerated) will often be greater than bookdepreciation (generally, straight-line). As the asset nears the end of its life, however, this 

ditIerence will reverse such that the same total amount of depreciation is taken for both book and 

tax purposes over the life of the asset. 

The financial accounting rules require firms to account for these temporary differences. 

The income tax expense on the financial accounting income statement is an accrual based 

expense; it is not the cash taxes paid by the company. In essence, what this means is that the 

income tax expense related to this period's accounting earnings is accrued and expensed 

regardless of when the cash is paid. In the depreciation example, for instance, the company 

receives an additional tax deduction in the current year but in some future period will have a tax 
25 


srobinson on DSKB307YQ1PROD with HEARING73382.013.eps

deduction for depreciation that is less than book depreciation expense. Thus, for financial 

accounting, the futnre tax related to the reversal is accrued (expensed) in the current period. 

Again, the total income tax expense for accounting purposes will represent the current and future 

tax on reported accounting earnings which in this case means allowing only straight-line 

depreciation. As a result ofthe accrual basis accounting for income taxes, accelerated 

depreciation does not reduce income tax expense for accounting purposes in the current period 

even though it saves cash taxes in the current period. 

Such an accrued expense (or benefit) without a corresponding cash payment (or receipt) 

creates a liability or asset on the firm's accounting balance sheet. The liabilities, termed deferred 

tax liabilities, represent the tax effects of future reversals that result in an increase to future 

taxable income relative to book income (or a decrease in fhtnre book income relative to taxable 

income). The depreciation example above creates (or increases) a deferred tax liability in the 

years that tax depreciation is greater than book depreciation. The assets, termed deferred tax 

assets, represent the tax effects of future reversals that reduce future taxable income relative to 

future book income (or increase future book income relative to future taxable income). 

Deferred tax assets and liabilities are computed by taking the tax rate expected to be in 

effect in the period that the temporary book-tax differences reverse times the cumulative 

tempormy book-tax differences (i.e., differences between book and tax bases). Thus, a corporate 

tax rate increase causes an increase in the amount recorded for deferred tax liabilities and a 

corresponding increase in income tax expense in dle period in which dle rate change becomes 

known. A rate increase applied to net deferred tax assets increases the mnount recorded for 

deferred tax assets (i.e., computed at the higher rate) mld decreases income tax expense. 

Conversely, a corporate tax rate decrease requires a decrease in the amount recorded for deferred 

tax assets and liabilities. Thus, for firms with deferred tax assets in excess of deferred tax 

liabilities, a tax rate decrease reduces recorded net deferred tax assets on the balance sheet and 

results in a one-time decrease to reported accounting earnings. 

The total amount of deferred tax assets mld liabilities are substantial. Ernst & Y Ollllg 

recently tabulated the deferred tax assets and liabilities in the financial statements of the 50 

largest U.S. companies (ranked by 2009 revenues). The gross deferred tax assets totaled $521 

billion in 20 I 0 for these companies and the deferred tax liabilities totaled $465 billion. 1 

Pernlanent differences are straight-forward. The classic example is municipal bond 

interest. This type of interest income is not taxable so is not included in taxable income in any 

period, current or future. Municipal bond interest is, however, included in accounting income. 

Thus, there is a difference between book and taxable incomes that is pennanent in nature - it will 

1 Neubig, T.. C. Abell. and M. Cox (2011) "Some Financial Reporting Considerations for the Tax Reform Debate: 

Changing the Corporate Tax Rate'" Emst & Young Tax Insights Report. Deferred Tax Assets net of the valuation 

allowance totaled $396 billion. 

3 
26 


srobinson on DSKB307YQ1PROD with HEARING73382.014.eps

never reverse. Because there is no future reversal there is no deferred tax asset or liability. Thus, 

pennanent differences affect the income tax expense on the firm's income statement and 

correspondingly affect reported accounting income. 

The Importance of Accouflling and How Tax Policies Affect Accounting Numbers 

Accounting income is an important perfOlmance measure used in the capital markets, 

many lending contracts, and often for intemal performance evaluation. Indeed, there is a longline ofresearch in acconnting that shows that companies will often tradeoff tax savings in 

exchange for more favorable accounting treatment. One example, documented in a study I coauthored with Merle Erickson and Ed Maydew, is that some companies that were accused of 

fraudulently overstating fmancial accounting earnings by the Securities and Exchange 

Commission (SEC) also overstated their income to the Internal Revenue Service. Management at 

these companies paid cash (to the IRS) in order to overstate their accounting earnings 2 There is 

also evidence that companies not only care about pre-tax accounting earnings but also the 

reported income tax expense for financial accounting purposes. In a recent survey of tax 

executives, 85% of the tax executives from publicly traded companies responded that top 

management at their company viewed the effective tax rate for financial accounting purposes 

(defined as total income tax expense for accOlmting purposes divided by pre-tax accounting 

earnings) as being at least as important or more important than cash taxes paid.' 

Bonus Depreciation 

As stated above, accelerated depreciation, including bonus depreciation, is a temporary 

book-tax difference and therefore, does not affect accounting earnings. Tom Neubig wrote an 

article in 2006 that he entitled "v,'here's the Applause?'''' He presented portions of that article in 

his testimony before the Subcom11littee on Select Revenue Measures ofthe House Committee on 

Ways and Means. In the article, he discusses the Growth and Investment Tax Plan outlined in the 

President's AdvisolY Panel on Federal Tax Reform. This plan essentially included an expensing 

option allowing for a first-year 100% write-off of capital investment. Contrary to his 

expectations, the response from corporate America was the "proverbial sound of one hand 

clapping." Companies much preferred the alternative refornl option of a lower corporate tax rate. 

One reason Neubig offers about why companies were not excited about the targeted expensing 

provision is that it is only a timing benefit and does not reduce the accounting effective tax rate. 

, Ericksoll. M .. M. Hanlon. and E. Maydew (2004) "How Much Will Finns Pay for Earnings That Do Not Exist" 

Evidence of Taxes Paid on Allegedly Fraudulent Earnings·' n,e Accounting Review (April). 

'Graham, J., M. Hanlon, and T. Shevlin (2011) "Inside the Corporate Tax Department: Insights on Corporate 

Decision Making and Tax Planning" working paper. 

4 Nellbig. T. 2006. "Where's the Applause'! Why Most Corporations Prefer a Lower Rate·' III Tax Noles 483 (April 

24). 

4 
27 


srobinson on DSKB307YQ1PROD with HEARING73382.015.eps

A recent study by economist Jesse Edgerton also provides evidence on this issue5 He 

compares the effectiveness of accelerated depreciation to the effectiveness of the investment tax 

credit, which in contrast to accelerated depreciation reduces income tax expense and increases 

accounting earnings. He concludes that the investment tax credit had more of an effect on 

investment than accelerated depreciation because ofthe accounting benefits of the credit. 

Section 199 Domestic Production Activities Deduction 

Under the rules for Section 199, qualified activities are eligible for a deduction equal to 

9% of the lesser of taxable income derived from qualified production activities, or taxable 

income. For a C-corporation subject to the highest corporate tax rate, the provision results in 

qualified activity income being subject to a 3 I .85% rate rather than a 35% rate. By structuring 

the provision as a deduction rather than a corporate tax rate reduction, the benefits were made 

available to non-corporate taxpayers. In addition, it avoided a negative financial accounting 

etIect for the finns with deferred tax assets. Hanna (20 I I) describes the efforts by these 

companies to obtain deduction treatment - they wanted a deduction rather than a rate cut in order 

to avoid the earnings charge that would result from a tax rate reduction (i.e., from a write-down 

of the tax assets)6 

While the tax rules allow an additional deduction under Section 199, there is no 

analogous expense for fmancial accounting purposes and never will be. Thus, a permanent 

difference is created and the Section 199 deduction reduces accounting tax expense. In other 

words, the Section 199 deduction has no mitigating financial accounting effect. However, 

stmcturing the policy as a targeted provision rather than a rate reduction (which also would not 

create a mitigating accounting effect) has resulted in a complicated tax rule that is more 

expensive to comply with, more difficult to audit (e.g., Section 199 is a Tier 1 audit issue), less 

eftective at promoting real investment, and easier to game. 7 Tn my opinion, the fact that some 

fIrms with deferred tax assets would have to write-down the value of those assets if corporate tax 

~ Edgerton, J. (2011) '-Investment Accounting, and the Salience of the CorpOl-ate Income TcDC \vorking paper. 

Federal Reserve Board. 

(, Hanna, C. (2009) "Corporate Tax Reform: Listening to Corporate America" J Corp Lmr 283 (\Vinter). See also 

White, G. (2011) ""Dead Space 2: Tax Rip-OtT? l'axNotes, October 3; and Poterba, J., N. S. Rao, and J. K. Seidman 

(2011) "Deferred Tax Positions and Incentives for Corporate Behavior Around Corporate Ta.x Rate Changes" 

Nationall'ax Journal, March. 1 note that other jUlisdictions have also adjusted the fann or method of 

implementation of tax policy because of the deferred tax issue, for example the state of Ohio and the U.K. See 

1\eubig et a1. (2011) and Poterba et a1. (2011) referenced above for ti.lrther discussion. 

? For example, Seoll Naa(jes, V.P. and General Tax Counsel a( Cargill, Incorpora(ed, in his oral (cs(imony before (he 

Scnate Committee on Finrmcc in September 2011 stated that mosllax directors of large companies \vould agrec that 

such (argc(ed provisions arc " ... ealcula(ed aftcr year-cnd in back offices by CPAs [or months on end ... (hey hardly 

ever motivate anything in the boardroom ... they spawn an industry to capture Ulem and an industry to lobby [or t.hcm 

but at the end of the day arc not as effective as low rales." In addition, an internet scarch of-'Section 199 Deduction" 

produces a myriad of advertisemcnts and fliers such as the advertisement from Freed 1\-laxick & Battaglia, Pc. CPAs 

that states "Domestic Manufacturers' Deduction: A guide to finding lIC\\' opportunities othcrs might miss." 

5 
28 


srobinson on DSKB307YQ1PROD with HEARING73382.016.eps

rates are reduced should not stop the U.S. from lowering the corporate tax rate. Even this sub-set 

of companies will benefit from lower rates if they become profitable in the future. 

Worldwide Taxation and High Statutory Tax Rate 

Operating income earned by a U.S. multinational in a foreign subsidiary is not included 

in U.S. taxable income until the earnings are repatriated8 For financial accounting purposes, the 

income is included in reported earnings in the period earned. Thus, the foreign income included 

in accounting earnings but not included in U.S. taxable income (until repatriated) is a temporary 

book-tax difference which requires a deferred tax liability and a related deferred tax expense to 

be recorded. There is an exception, however, to the deferred tax accounting for these earnings (in 

ASC 740, previously in APB 23). This exception requires fums to designate the amount of 

foreign earnings that are "permanently reinvested." For earnings that are pennanently reinvested, 

the book-tax difference is accounted for as a permanent difference - and thus no deferred tax 

liability or expense is recorded. Pennanent difference treatment reduces income tax expense and 

increases earnings compared to a case where the U.S. income tax is fully accrued. The result of 

tllis exception to deferred tax accounting is that the accounting statements are more comparable 

to the statements of companies in jurisdictions with territorial taxation because there is generally 

no home country tax to record in territorial regimes. This also puts U.S. companies in a more 

competitive position relative to companies from territorial jurisdictions in terms of accounting 

returns. 

If a U.S. multinational repatriates earnings that were previously designated as 

permanently reinvested the company not only has to pay cash taxes but also has to record an 

accounting expense. This accounting effect is an additional reason why firms do not repatriate 

earnings9 One anecdote is found in a letter to the editor ofthe Wall Street .foumal written by 

James Tisch, CEO ofLoews, that states "Unbeknownst to many .. GAAP allows corporations to 

avoid the accrual of taxes on foreign earnings ... The results of the interaction of our repatriation 

tax laws and the GAAP accounting rules is that very little in the way offoreign earnings are 

repatriated ... The accounting penalty for repatriating even a penny of foreign profits is so great 

thatthose foreign funds will not come back to the U.S ... " (July 5, 2008). 

Further evidence is fomld in a recent smyey of tax executives. Depending on the sanlple, 

between 44% and 65% of the respondents indicate that the financial accounting effect is 

important in their decision of whether to repatriate earnings. Indeed, overall, the fmancial 

8 The repatriated amount is taxable at the U.S. rate and a foreign tax credit is allowed. Expense allocation rules arc 

used in determination oftlle allowable credit. 

q To be sure, neither taxes nor accounting: are likely primary drivers of foreign investment or retention of cash 

overseas (especially for non-intangibles based companies). Companies consider many factors - grmvth in the 

foreit,'lllllarkets. location of customers, and other detenninants - which often dominate tax and accOlmting 

considerations. 

6 
29 


srobinson on DSKB307YQ1PROD with HEARING73382.017.eps

accounting effect has an importance rating that is statistically equal to the importance rating of 

the cash tax effect. 10 

Conelusions and Caveats 

The main point of the above testimony is that financial accounting effects can act to 

mitigate or strengthen incentives provided by the tax code. That is, financial accounting effects 

have the potential to bhmt the intended incentive effects of policies designed to lower the 

effective U.S. corporate tax rate and they have the potential to lead to unintended consequences. 

There is little evidence that the current bonus depreciation provisions are effective at 

increasing investment. Studies have shown that "taxes matter" in the sense that the timing of 

investment is altered, but the evidence that aggregate investment has responded is scarce. The 

Section 199 deduction is complex and as a result is costly to comply with for taxpayers and is 

costly to audit and enforce for the tax authority. Tn addition, the complexity likely enables 

gaming and ex post maximization. Financial accounting has a role in each of these outcomes. 

Bonus depreciation does not reduce the income tax expense for financial accounting mld thus 

does not reduce a company's etIective tax rate, mitigating the responsiveness to the incentive. 

The reason that Section 199 is a deduction and was not implemented as a rate cut is, it seems, in 

part due to the fact that with a rate cut, companies with large deferred tax assets are required to 

'",rite those assets down and value them using the new, lower tax rate. 

There are currently large amounts of cash held overseas by U.S. multinationals. The 

reluctance to repatriate these earnings leads to more debt in the U.S., lower payouts to 

shareholders, and quite possibly less investment in the U.S. and less efficient investment in 

foreign jurisdictions. Research indicates that the disincentive to repatriate foreign earnings due to 

the relatively high U.S. corporate statutory tax rate is exacerbated by financial accounting 

effects. 

It is important to recognize that financial accounting can affect responsiveness to tax 

policies. However, tile fact that some finns with deferred tax assets would have to write-down 

the value of those assets if corporate rates are reduced should not stop the U.S. ti-mn lowering the 

corporate tax rate. Even this sub-set of companies will benefit in the future from lower rates, 

assuming these companies become profitable. 

A few caveats to this testimony are in order. The above discussion deals only with 

corporate income taxes. COlporations pay many other types of taxes (e.g., value added taxes in 

other countries) that contribute to their tax burden. Tn addition, many businesses operate in a 

non-corporate fonn. How these companies are affected by corporate tax refol1n is important. For 

10 Graham, J., M. Hanlon, and T. Shevlin (2011) "Real Effects of Accounting Rules: Evidence from Multinational 

Firms' Investment Location and Profit Repatriation Decisions-' Journal (dAccountillg Research 49. 

7 
30 

f 

Chairman CAMP. Mr. Neubig, you are recognized for 5 minutes. 

STATEMENT OF TOM S. NEUBIG, NATIONAL DIRECTOR, QUANTITATIVE ECONOMICS AND STATISTICS, ERNST & YOUNG 

LLP 

Mr. NEUBIG. Thank you for the opportunity to testify. 

I was an economist at the U.S. Treasury’s Office of Tax Analysis 

from 1980 to 1990 during the development of the 1986 Tax Reform 


srobinson on DSKB307YQ1PROD with HEARING73382.018.eps
31 

Act. Financial accounting issues were not very important then, but 

over the last 25 years I have seen their importance grow, not only 

at the Federal level but also in terms of State tax policy and tax 

policy in other countries. 

In 2005, President Bush’s Advisory Panel on Federal Tax Reform 

outlined a business cash flow tax that allowed first year 100 percent write-off of capital investment, like bonus depreciation. One 

might have expected that this plan, which many of my economist 

brethren claim results in a zero effective tax rate for new capital 

investment, would have received strong support from the business 

community, but it did not. This led me to consider a number of reasons why many economists often predict the effects of tax reforms 

much differently than the business community. 

Although I am not an accountant, in testimony before the Select 

Revenue Measure Subcommittee in 2006, I noted the importance of 

financial accounting rules when many corporate executives evaluate alternative tax reform proposals. I will restrict my comments 

to several reasons why many corporations may prefer a lower corporate tax rate to more targeted tax reductions. 

I will use accelerated tax depreciation as one example, since its 

repeal has been proposed in combination with lowering the corporate tax rate in several recent tax reform plans. 

Also, a number of countries have moved towards economic depreciation to partially finance their reduction in their corporate tax 

rates. 

Timing of taxes matters, and particularly for cash constrained 

firms accelerated depreciation can provide important cash flow benefits. Accelerated deductions provide benefits similar to an unsecured zero interest rate loan from the Federal Government. At today’s historically low interest rates, the value of accelerated tax deductions is relatively modest for corporations with access to capital 

markets. 

Many corporate tax executives, as Dr. Hanlon noted, focus not 

only on their cash tax liabilities but also on their reported financial 

statement effective tax rates and reported book earnings. Temporary book-tax differences, such as accelerated depreciation and 

many other provisions, do not affect the total financial statement 

effective tax rate, which is based on the total accrued tax expense, 

both current and deferred. 

A lower corporate tax rate and accelerated depreciation both reduce the economic effective tax rate on tangible business capital investments, but a lower corporate tax rate also reduces many other 

tax distortions, including the double tax on corporate equity, the 

bias toward corporate debt, taxable income shifting across tax jurisdictions, the lock-in effect on corporate capital gain realizations, 

the lock-out effect on foreign dividend repatriations, and also reduces the tax on corporate entrepreneurship and innovation. 

A number of reports emphasize the necessity of combining permanent expensing with repeal of interest deductibility in order to 

prevent negative effective tax rates. In 1982, Congress scaled back 

accelerated depreciation as part of its deficit reduction efforts due 

to what were considered excessive tax benefits from combining an 

investment tax credit with accelerated depreciation and interest deductibility. 


srobinson on DSKB307YQ1PROD with HEARING
32 

The 1982 Tax Act was a key starting point for the 1986 tax reform process. The base broadening in 1982 enabled the lower individual income tax rates to continue to be indexed for inflation while 

also reducing the deficit. It was clearly a tradeoff between base 

broadening versus lower tax rates, which continued in 1984 and 

then culminated in the 1986 Tax Reform Act. 

Finally, I would like to point out a recent study by two Treasury 

economists. A report found that only 50 to 60 percent of corporations and only 30 to 40 percent of pass-through businesses took advantage of the recent bonus depreciation rules. The study notes 

that while accelerated depreciation in theory reduces the cost of investment, in practice various factors limit the use of bonus depreciation and its relative value. 

Financial statement accounting is one of those factors that influence a company’s business decisions and which economists generally don’t include in their tax modeling. 

In addition to financial accounting, tax risk and uncertainty, 

compliance burdens and other non-income taxes also affect business decisions. Financial accounting is one of several reasons why 

many corporations may prefer a permanently lower corporate tax 

rate to more targeted tax incentives. 

I would be happy to answer any questions about my testimony. 

Chairman CAMP. Thank you very much, Mr. Neubig. 

[The prepared statement of Mr. Neubig follows:] 


srobinson on DSKB307YQ1PROD with HEARING
33 


srobinson on DSKB307YQ1PROD with HEARING73382.019.eps

Testimony before the House Committee on Ways and Means 

Hearing on 

"Interaction of Tax and Financial Accounting on Tax Reform" 

Thomas S. Neubig1 

February 8, 2012 

Chairman Camp, Ranking Member Levin, and distinguished members on the Committee, 

thank you for the opportunity to testify today on corporate tax reform and the interaction 

of tax and financial accounting. 

I am the National Director of Ernst & Young LLP's Quantitative Economics and 

Statistics practice. I was an economist at the U.S. Treasury's Office of Tax Analysis 

from 1980 to 1990, during Treasury's development of the 1984 tax reform proposal, the 

President's 1985 tax reform proposal, and the enactment of the Tax Reform Act of 1986. 

I was the Director and Chief Economist of the Office of Tax Analysis between 1986 and 

1990. Since 1990, I have worked on business tax policy issues at the federa~ state and 

globalleve1 for both private and public sector clients. 

I testified on corporate tax reform before the Ways and Means Select Revenue Measures 

Subcommittee in 2006, where I commented on the important effects of financial 

accounting on a variety of tax policy issues. Although I am not an accountant, I noted 

the importance offinancial accounting rules when many corporate executives evaluate 

alternative tax reform proposals. Financial accounting considerations are one of the 

reasons why many economists view the effects oftax reforms differently than the 

business community. This has also led me to ask whether most current economic models 

might understate the potential benefits of a lower US corporate income tax rate. 

Given the breadth ofthe topic of corporate tax reform, I will restrict my comments to the 

reasons why many corporations prefer a lower corporate tax rate to more targeted tax 

reductions. I will use the example of accelerated tax depreciation. Its repeal was 

proposed in combination with lowering the corporate tax rate by President Obama's 

Fiscal Commission (Simpson-Bowles) and in Senator Wyden and Coat's tax reform 

legislation. Moving toward economic depreciation has been used by many other 

countries to help partially finance their reduction in corporate tax rates2 

In 2005, President Bush's Advisory Panel on Federal Tax Reform outlined a Growth and 

Investment Tax Plan for a business cash-flow tax-essentially an expensing proposal that 

I Principal, Ernst & Young LLP. TIle views expressed in this testimony are my OW11, and do not 

necessarily rellcc!!he views of Ems! & Young LLP or ilS clients. 

2 Michael P. Devereux, "Developments in the Taxation of Corporate Profit in the OECD Since 1965," 

Oxford University Centre for Business Taxation, WP 07!04, December 2006. Nine of the 15 OECD 

countries studied that reduced their corporate tax rate between 1982 and 2004 also broadened their tax base 

by reducing the amount of accelerated depreciation. 
34 


srobinson on DSKB307YQ1PROD with HEARING73382.020.eps

allows for a first-year 100% write-off of capital investment3 One might have expected 

that this plan-which many economists claim results in a zero effective tax rate for new 

capital investment-would have received strong support from the business community, 

but it did not 

Why the tepid response from the corporate community? Several years ago, the Tax 

Council Policy Institute asked multinational corporations to rank a range of altemative 

tax reform options. According to the survey, the clear favorite was lowering the 

corporate tax rate to 25 percent compared to other incremental or fundamental tax 

reforms 4 

With economists and the business community differing in their response to the 2005 

Advisory Panel's expensing option, many observers wonder why the disconnect. Here 

are seven reasons why many corporations may prefer a lower corporate tax rate to 

accelerated tax depreciation or other targeted tax incentives. 

1. A lower corporate tax rate would lower corporations' financial statement 

effective tax rate and increase book net income for most corporations. 

Accelerated depreciation offers only a timing benefit, and doesn't reduce 

corporations' financial statement effective tax rate or increase reported book 

profits. 

Most economists don't think reported book effective tax rates matter. Investors are 

assumed to be savvy enough to see that accelerated depreciation reduces current tax 

liability, which lowers the present value of current and future taxes, and thus increases 

the value of the fIrm. Timing of taxes matters and for a growing fIrm accelerated 

depreciation can offer lower taxes long into the future and for cash-constrained fIrms 

accelerated depreciation can provide important cash-flow benefits. Accelerated 

depreciation provides benefIts similar to an unsecured zero-interest rate loan from the 

government) At today's historically low interest rates, the value of accelerated 

depreciation is relatively modest for corporations with access to the capital markets. 

Many corporate tax executives focus on their cash tax liabilities and the net present value 

or internal rate ofreturn when evaluating individual projects6

, but many also factor in 

their reported fInancial statement effective tax rates and reported book earnings. 7 

Temporary book-tax differences, such as accelerated depreciation, do not affect the total 

3 The President's Advisory Panel on Federal Tax Reform, Simple, Fair & Pro-Growth: Proposals to Fix 

America's Tax Svstem, November 2005. 

4 Tax Council Poiicy Institute, The U.S. Intemational Tax Regime: Confi'onting the challenge of the 

Evolving Global Marketplace, February 10-11, 2005, Final Report. p. 90. 

, Tom Nellbig, "'Expensed Intangibles Have a Zero Effective Tax Rate .... NOT'," Tax Notes, September 10, 

2007 

6 John Graham and Campbell Hnrvey, "How Do CFOs Make Capital Budgeting and Capital Stmeture 

Decisions:' Journal of Applied Corporate Finance, Vol. 15, No. I, Spring 2002. 

7 John R. Grahmn, Michelle Hmllml. lUld Terry Shevlin, "Real Effects of Accounting Rules: Evidence from 

Multinational Finns' Investment Location and Profit Repatriation Decisions," Journal of Accounting 

Research, Vol. 49, 1\10. I, March 2011. 

2 
35 


srobinson on DSKB307YQ1PROD with HEARING73382.021.eps

financial statement effective tax rate, which is based on total tax expense (both current 

and deferred). Accelerated depreciation in the initial years reduces current tax expense 

while increasing deferred tax expense, but the total tax expense remains unchanged. 

Thus, many corporate tax executives value permanent book-tax differences higher than 

temporary book-tax differences. They also value the permanent benefit of a lower 

corporate tax rate more than a temporary, cash-flow benefitS Reducing the corporate tax 

rate would immediately lower corporations' financial statement effective tax rates, 

thereby increasing their reported after -tax book profits. 

A lower corporate marginal tax rate would also immediately reduce corporations' 

deferred book tax liabilities and assets-a welcome development for companies reporting 

deferred tax liabilities. In their 2010 financial statements, 31 of the top 50 US public 

corporations were in a net deferred tax liability position (19 were in a net deferred tax 

asset position).9 The 50 companies' total deferred tax liabilities were $465 billion, 

compared to net deferred tax assets of$396 billion (after valuation allowance). 

Accelerated depreciation accounted for ahnost half of the total deferred tax liabilities of 

the top 50 public companies. 10 

Corporations with a net US deferred tax liability position would have a double benefit 

from a lower US corporate tax rate: 1) a reduction in their fmancial statement effective 

tax rate on current earnings, plus 2) a reduction in their net deferred tax liability, both of 

which would result in higher reported book earnings. Many corporations with a deferred 

tax asset would favor a permanent lower future corporate tax rate on their future profits, 

even if there was a one-time adverse financial accounting effect in the year of enactment. 

When Ohio enacted legislation phasing down its corporate income tax rate on June 30, 

2005, a number of public corporations reported higher profits due to the future tax rate 

reductions in their 2005 second quarter fmancial results. Several of the top 50 US 

companies reported a reduction in their deferred tax assets due to the reduction in the 

United Kingdom corporate tax rate from 28% to 26% enacted in 2010. 

8 Jesse Edgel10n, "Investment Accounting and the Salience of the Corporate Income Tax," Federal Reserve 

Board of Governors Finance and Economics Discussion Series Staff working paper 2011-20. Edgerton 

finds that investment tax credits, which affect accounting prolits, had more effect on investment than 

accelerated depreciation, \vhich does not affect accounting profits. 

9 Tom Neubig, Chesler Abell and Morgan Cox, "DTAs, DTLs and Corporale Tax Rate Reduction." Tax 

Notes, July 25,2011. 

10 The 201 () findings are consistent with those of James M. Poterba, Nirupama S. &10 and Jeri K. Seidman, 

"Deferred Tax Positions and Incentives for Corporate Behavior Around Corporate Tax Changes," National 

Tax Journal, lviarch 2011, 64 0), pp. 27-58. TIley found that a sample of large corporations were in an 

overall net deferred tax liability (DTL) position every year ITom 1991 to 2004, a majority of the fin11s were 

in a net DTL position, and accelerated depreciation was the largest DTL. 

3 
36 


srobinson on DSKB307YQ1PROD with HEARING73382.022.eps

2. A lower corporate tax rate would reduce the tax distortion on many margins 

of tax decision making, while accelerated depreciation or expensing reduces 

the tax distortion on only two margins. 

Accelerated depreciation or expensing lowers the tax wedge on tangible capital 

investments, which can result in higher capital investment and higher wages for 

American workers. Expensing would also eliminate the wedge between some intangible 

assets that are expensed and other assets that are depreciated or amortized. Alternatively, 

with the same level of revenue, a lower corporate tax rate could lower the tax wedge and 

tax distortion across many different margins of business investment decisions. 

A lower corporate tax rate would lower the tax wedge on tangible capital investments. In 

addition, a lower corporate tax rate would: 

• Reduce the tax distortion between corporate capital, which is subject to tax at both 

the corporate and shareholder levels, and non-corporate capital, which is taxed 

once at the owners' individual income tax rate; 

• Reduce the tax distortion between corporate debt, where interest is deductible, 

and corporate equity investment. where dividends and retained earnings are not 

deductible; 

• Reduce taxable income shifting across jurisdictions due to the high US statutory 

tax rate relative to other countries' lower tax rates; 

• Reduce the lock-in effect on corporate capital gain realizations and lock-out effect 

on repatriation of Controlled Foreign Corporations' foreign source earnings; 

• Reduce the tax on corporate entrepreneurship and innovation; and 

• Encourage foreign capital investment and economic activity in the United States. 

A number of reports state that a territorial system of international taxation could put 

increased pressure on transfer pricing. 11 Transfer pricing and other tax arbitrage issues 

are important when marginal tax rates differ significantly across co untries or types 0 f 

activity. 

After Japan's new legislation lowers its top corporate tax rate to 38.0% on April 1, 2012. 

the United States will have the highest top statutOlY corporate tax rate among the 50 

largest economies, at 39.1%, including the average state income tax rate. The average 

top corporate tax rate for the other top 30 world economies, weighted by their Gross 

Domestic Product, is 29.5% in 2012. Our top 30 major trading partners' average 

corporate tax rate is 27.5%, weighted by total exports and imports. The average 

corporate tax rate in the top 30 economies where there is the most US foreign direct 

investment is 22.4%. 

II 2005 President's Advisory Panel, p. 242. The President's Economic Recovery Advisory Board 

(PERAB), The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation, 

August 20 I 0, p. 89,90. 

4 
37 


srobinson on DSKB307YQ1PROD with HEARING73382.023.eps

These corporate tax rate differentials affect both taxable income shifting as well as the 

location of real economic activity and investment decisions. 12 

3. Permanent expensing of capital investment is unlikely to occur without a 

counterbalancing loss of interest deductibility. A lower corporate marginal 

tax rate could occur with continued interest deductibility. 

A number ofreports emphasize the necessity of combining permanentl3 expensing with 

repeal of interest deductibil ity to prevent negative economic effective tax rates. 

"Allowing both expensing of new investments and an interest deduction would result in a 

net tax subsidy to new investment. Projects that would not be economical in a no-tax 

world might become viable just because of the tax subsidy. This would result in 

economic distOltions and adversely impact economic activity." I 

4 

In 1982, Congress scaled back accelerated depreciation as part of its deficit reduction 

efforts due to what were considered excessive tax benefits from combining an investment 

tax credit with both accelerated depreciation and interest deductibility. There were 

concerns about wasteful tax-driven investment expenditures, tax arbitrage and large 

revenue losses. The 1982 Tax Act was one ofthe key starting points for the 1986 Tax 

Reform process. The base broadening in 1982 enabled the lower individual income tax 

rate brackets to continue to be indexed for inflation while also reducing the deficit. It 

was clearly a trade-off between base-broadening versus lower tax rates, that was repeated 

in the 1984 Act as well as the 1986 Tax Reform Act, which further scaled back 

accelerated depreciation to the current Modified Accelerated Cost Recovery System and 

repealed the investment tax credit. 

When comparing expensing versus a lower corporate tax rate, a more meaningful 

comparison would be permanent expensing without interest deductions versus a lower 

corporate tax rate with interest deductions. Tn that comparison, expensing would only 

help a small fraction of corporate investment: equity-financed tangible investments. 

4. Corporations invest to earn above-normal returns, not just the "normal" or 

risk-free return. A lower corporate tax rate applies to the entire return to 

capital, while accelerated depreciation or expensing reduces the tax rate on 

only the risk-free return. 

Economists distinguish between four different returns to investors: 

1) a "normal" or risk-free retum for deferring consumption, or a "return to waiting"; 

2) an expected risk premium; 

12 Robert Carroll and Thomas Neubig, The Economic BeneJils of Reducing the US Corporate Income Tax 

Rate, Ernst & Young LLP report, September 201 I. 

13 The combination of interest expense deductions willi pennanent expensing would cause greater 

economic distortions than \vith temporary investment tax incentives. 14 2005 President's Advisory Panel, p. 164. 2010 PERAB rcport, p. 71 and 73. 

5 
38 


srobinson on DSKB307YQ1PROD with HEARING73382.024.eps

3) a return due to entrepreneurial skill, a unique idea, a patent or other specific factors; 

and 

4) an unexpected return from good or bad luck where the actual return differs from the 

expected return. IS 

The 2005 Advisory Panel report stated "Removing the tax on the first component, the 

return to waiting, is the key to removing taxes from influencing savings and investment 

decisions."16 Academic economists argue that in competitive markets businesses can 

only earn the "normal" or risk-liee retum to capital on their last (marginal) dollar of 

investment. They argue that anything earned above the risk-free return, the so-called 

"super-normal" return or "rent", has no economic effects, even if taxed at high tax rates. 

An important caveat is that taxes on super-normal returns can afTect the location of 

investment in a global economy. Companies don't invest just to earn a risk-free retum; 

they expect to earn returns to justify their risk-taking, specialized factors and competitive 

positioning. 

Economic proponents of expensing point out that under a business cash flow tax proflts 

above the risk-free return would be taxed. They argue that taxing "rents" is equivalent to 

a lump-sum tax. My colleague, Bob Cline, and I did an analysis of an Australian 

proposal for a 40% "super profits" tax on the mining industry. I? It included a new 40% 

cash-flow tax, with expensing of new capital investment, in addition to the Australian 

30% corporate income tax. A report prepared for the government argned that since snper 

profits have no economic effects and since minerals aren't mobile, there would be no 

adverse economic effects. We pointed out that capital investment and the engineers are 

globally mobile, mineral extraction can be deferred until a future date, and companies 

care about their total tax burden, even on so-called "super profits", so adverse short-term, 

medium-term and long-term etTects should be expected. The Australian super profits tax 

proposal was eventnally scaled back significantly. 

While many economists focus on the "marginal" investment, e.g., the last laptop 

computer purchased, companies make investments that are large, discrete, fmite, risky, 

and also include substantial entrepreneurial and innovative efforts. When entering a 

market or expanding existing operations, companies look at their total after-tax return. 

While a company might earn a risk-free return from the time-value of money from 

accelerating depreciation deductions, companies invest to earn significantly higher 

returns on their total investment. A lower corporate tax rate would reduce the tax on all 

corporate income-both the normal risk-free return income as well as the return to risktaking, entrepreneurial skill and innovation. 

15 William :vi. Gentry and R. Glenn Hubbard, "Distributional Implications of Introducing a Broad-Based 

Consumption Tax," National Bureau of Economic Research Working Paper 5832. November 1996. 

1(. 2005 Advisory Panel, p. 150. 

l' 1110mas S. Neubig and Robert 1. Cline, A critique of the economic theory and modeling underlying the 

Australian resource super profits lax proposal, Ernst & Young report, June 2010. 

6 
39 


srobinson on DSKB307YQ1PROD with HEARING73382.025.eps

5. A lower corporate tax rate applies to all types of future income, while 

targeted incentives generally lower the cost of certain inputs. 

Proposals for expensing would lower the economic effective tax rate for depreciable 

property, land and inventories. But, recent studies report that business investment in 

intangibles-research and development, copyrights, computerized databases, 

development of improved organization stmctures, and brand equity-is now as large as 

the spending on tangible capita1. 1R Many of these intangible assets have high rates of 

return, well in excess ofa "normal", risk-free rate of return, and in many cases can be 

developed in alternative locations within a global organization. 

The current tax mles require the amortization of many intangible assets, but in some 

cases allow the equivalent of expensing through the deduction of wages in the creation of 

certain self-constmcted intangible assets. In the case of certain intangible assets, such as 

advertising and research and development, expensing is allowed due to the lack of good 

information about the depreciable life and depreciation pattern ofthe intangible asset and 

the administrative issues that would otherwise be involved. 

Expensing would benefit depreciable and capitalized investments, but would provide no 

incremental benefit to many intangible assets that are currently expensed. A lower 

corporate marginal tax rate, on the other hand, would benefit income from all tangible 

and intangible investments. Several European countries, most recently the United 

Kingdom, are moving to a lower corporate tax rate on certain types of intangible income 

(so-called patent box or intellectual property regimes), reflecting the power ofa lower 

corporate tax rate on future income, even when those countries have other incentives, 

such as R&D tax credits or super-deductions, to lower the cost of the inputs. 

6. Many companies would not receive the full benefit of expensing, and many 

have not used bonus depreciation. 

Many companies would not benefit from the full effect of expensing, because expensing 

would create or add to tax losses for many companies. Unless the goverrnnent provided 

immediate cash refilllds, these companies would only realize a fraction of the potential 

benefits that expensing might offer. 

Two recent studies by US Treasury Department economists report that between 2002 and 

2009 many companies did not take advantage of the temporary bonus depreciation 

mles. 19 Only 50% to 60% ofC and S corporations used bonus depreciation for eligible 

investments, while only 30% to 40% of partnerships and sole proprietorships used bonus 

18 Carol Corrado, Charles Hulten, and Daniel Sichel, "Intangible Capital and US Economic GrO\v1h," The 

Review o[]ncome and Wealth, 2009, 55:3, pp. 661-685. 

19 John Kitchen and Matthew Knittel, "Business Use ofSpeciaJ Provisions for Accelerated Depreciation: 

Section 179 Expensing and Bonus Depreciation, 2002-2009." mimco, November 2011. Matthew KnitteL 

"Corporate Response to Accelerated Tax Depreciation: Bonus Depreciation for Tax Years 2002-2004," US 

Department of !he Treasury. Offiee of Tax Analysis Working: Paper 98, May 2007. 

7 
40 


srobinson on DSKB307YQ1PROD with HEARING73382.026.eps

depreciation for eligible investments. The use of Section 179 expensing ranged from 

60% to 80%. 

The study notes that many fIrms are in a tax net operating loss position or have loss 

carryforwards, which reduce the cash-flow tax benefIts of bonus depreciation and 

expensing. In addition, 31 of the 47 states that impose a corporate income did not fully 

conform to the federal bonus depreciation provisions in 20 I 0, which increased 

companies' compliance costs and reduced the total tax benefIt. The study notes that 

while accelerated depreciation in theory reduces the cost of investment, "in practice 

various factors limit the use of bonus depreciation and its relative value". 

7. A lower corporate tax rate reduces the value of financial statement deferred 

tax assets and liabilities. Expensing leaves large deferred tax liabilities that 

could be increased by future tax increases. 

Economists' assertion that expensing creates a zero effective tax rate on the risk-free 

return only holds if tax rates remain unchanged over the life of the investment. Tftax 

rates increase in the future, then the effective tax rate would be higher. Tftax rates 

decreased in the future, then the economists' effective tax rate would fall below zero. 

Expensing would create large deferred tax liabilities. Some economists might argue that 

these could later be taxed at higher rates without adverse economic effects since the 

investments had already been made. This is the same argument that many economists 

use for estimating the future economic benefits of moving to a consumption tax (either a 

value-added tax or business cash flow tax), since the shift can be financed by imposing 

taxes on old capital (existing investments), which they argue has no adverse economic 

effects. 

Some economists argue against a reduction in the corporate tax rate since it would 

provide a "windfall" to "old capital". Accelerated depreciation has been cited as 

providing a bigger "bang-for-the-buck" than a lower corporate tax rate20 Instead, some 

economists propose focusing any favorable tax mles on "new" investment. Of course, 

most "new" investment is actually replacing depreciating "old" investment, rather than 

increasing the total capital stock. Attempting to limit favorable tax treatment to 

"incremental new" activity (e.g., R&D tax credit, new jobs tax credit) involves significant 

complexity, unintended consequences, and limited incentive effects. Business executives 

don't distinguish between "new" and "old" capital. Policy analysts haven't distinguished 

between "new" and "old" "human capital" when payroll or income tax rates are changed. 

Lowering corporate income taxes will be benefIcial to companies that have made "old" 

investments in the United States which are contributing to today's US jobs, as well as to 

20 U.S. Treasury Department, Office of Tax Policy, Approaches to Improve the Competitiveness of the U.S. 

Business Ta.x System for thc 21" Century, December 2007, p. 50. Treasury states that the United SUlles has 

relatively generous depreciation allowances for equipment. "In the OEeD, only Greece and ltalyhave 

more generous depreciation allowances." p. 9. 

8 
41 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.027.eps

those same companies making future replacement and incremental new investments in 

the United States. 

Conclusion 

Financial statement accounting is one of several factors that influence business decision 

making, and is often not taken into account in some economists' proposals for tax reform 

and their modeling. The positive effects of a lower corporate income tax rate compared 

to the negative effects of corporate base broadening will be underestimated without 

understanding these other effects. These other effects include tax risk and uncertaintl 1

, 

compliance burdens, and other non-income taxes that affect business decisions. 

Fortunately, the tax accounting academic community is starting to weigh in on tax policy 

and the effects of financial accounting on business investment decisions. I know from 

my days at the Treasury Department how much potential damage a solo tax policy 

economist can do, without the benefit of working with good tax lawyers and 

knowledgeable industry and business executives. We need to add the benefit of tax 

accountants and even behavioral economists to fully capture the effect ofthe different 

types of incentives and responses to changes in tax policy. 

These seven reasons help explain why many corporate executives have not stood up with 

many economists to support pemlanent expensing and business cash-flow tax proposals. 

It is why many corporations, but not all, would prefer a permanently lower corporate tax 

rate over accelerated depreciation. If accelerated depreciation were changed, it would be 

important for the US tax depreciation rules to be updated to reflect the economic realities 

of the 21 5t century22 

Most of the corporate tax community would prefer to see the United States join other 

countries in significantly lowering its corporate income tax rate. How a lower corporate 

tax rate would be financed matters, but 1 hope that future modeling of US corporate tax 

reforms will take into account more of the benefits of a lower corporate tax rate. 

That concludes my testimony. I would be happy to answer any questions about my 

testimony. 

21 Emst & Young, Tax risk and controversy survey: A new era of global risk and uncertainty, 2011. 

22 Testimony of Thomas S. Neubig before the Senate Conmlittce on Finance Subcommittee on Long-Term 

Growth and Debt Reduction, "Updating Depreciable Lives: Is There Salvage Value in the Current 

SystemT', July 21,2005. 

9 
42 

Chairman CAMP. Mr. Heenan, you are recognized for 5 minutes. 

STATEMENT OF TIMOTHY S. HEENAN, VICE PRESIDENT, 

TREASURY AND TAX, PRAXAIR, INC. 

Mr. HEENAN. Good morning. Thank you for inviting me today. 

I appreciate it. 

I would like to just start by commending you, Chairman, for 

tackling—and the rest of the committee for tackling this important 

topic of tax reform. We support the efforts and appreciate the time 

to talk about it here today. 

I would like to just start to give a little bit of a background about 

Praxair, not maybe a household name. We sell air. We sell the components in air. We have a diverse customer mix. We can sell to a 

food and beverage company for the nitrogen in your potato chip bag 

or the fizz in your soda. We also sell to big companies, steel companies, who use tons and tons of gases. So a very diverse customer 

group. 

We have about $11 billion in sales worldwide, and we are the 

largest industrial gas producer here in the United States. 

Importantly, we spend about $2 billion a year on new capital investment. We go through a very rigorous process. We sit at a table 

with the senior leaders on each new project, and they tend to be 

big projects, and we discuss capital investment, and we compare 

projects around the world. And for us cash is king. 

And to answer the question that was posed, in what way does 

financial accounting affect our business investment decisions, our 

answer is simple. It really does not affect our decisions. For us, it 

is about cash. Cash is king. 

You know, earnings will follow the cash. If we get more cash, we 

have more to invest, and the earnings will follow. So we do not 

focus on financial accounting. 

It is important to focus on earnings for other decisions in the 

business, but on the investment decisions, cash is king. So we use 

sort of a net present value cash flow model, and we don’t vary from 

it. 

I can tell you, Thursday this week we will go through 10 projects, 

and not one of those projects is going to say anything about earnings. All of them will talk about internal rate of return, which is 

a cash flow model we focus on. 

So while I support tax reform I think that we really have to take 

a close look at the targeted deductions that we may eliminate that 

pay for that tax reform. And specifically, you know, many folks 

here that have been testifying have mentioned accelerated depreciation. Under the current U.S. rules, that is a very important factor that helps influence our investment decisions. So if we are 

going to remove accelerated depreciation in favor of a lower rate, 

we really need to weigh the two very closely to see what it is going 

to do to investment decisions for companies like Praxair. 

So thank you, and I would be happy to take any questions you 

might have. 

Chairman CAMP. Well, thank you. 

[The prepared statement of Mr. Heenan follows:] 


srobinson on DSKB307YQ1PROD with HEARING
43 


srobinson on DSKB307YQ1PROD with HEARING73382.028.eps

WRITTEN TESTIMONY OF TIMOTHY S. HEENAN 

VICE PRESIDENT OF TREASURY AND TAX 

PRAXAIR, INC. 

BEFORE THE 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON 

THE INTERACTION OF TAX AND FINANCIAL 

ACCOUNTING ON TAX REFORM 

FEBRUARY 8, 2012 
44 


srobinson on DSKB307YQ1PROD with HEARING73382.029.eps

TIMOTHY S. HEENAN, PRAXAIR, INC. 

TESTIMONY BEFORE THE 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENT A TIVES 

HEARING ON THE INTERACTION OF TAX AND 

FINANCIAL ACCOUNTING ON TAX REFORM 

FEBRUARY 8. 2012 

Good morning Chainnan Camp, Ranking Member Levin and Members of the Committee. 

My name is Timothy Heenan. I am the Vice President of Treasury and Tax for Praxair, 

Inc., an American multinational and the largest industrial gases company in North and 

South America with 2011 sales of $11 billion. The company manufactures, sells and 

distributes atmospheric, process and specialty gases, and high-performance surface 

coatings. Praxair products, services and technologies bring productivity and 

environmental benefits to a wide variety of industries including aerospace, chemicals, food 

and beverage, electronics, healthcare, manufacturing, metals, among others. Praxair is 

headquartered in Danbury, Connecticut and its primary research and development facility 

is located in Tonawanda, New York. Praxair employs about 10,000 people in more than 

500 facilities across the United States. My testimony today is based on my experiences 

working as a senior tax and treasury professional at Praxair for the last seven years and 

before that as a tax advisor for Ernst & Young. 

I would like to thank this Committee for the opportunity to appear at today's hearing on 

the Interaction of Tax and Financial Accounting on Tax Reform. I would also like to thank 

the Chairman for his leadership and taking the important first steps toward comprehensive 

tax reform and the goals of rate reduction and simplification. As a threshold observation, 

U.S. competitiveness and job creation depend on the U.S. being an attractive place to 

invest. In this, our corporate tax code plays a significant role. 

Today's hearing is focused on how accounting rules affect how publicly traded companies 

evaluate tax policy. The answer to this question, however, depends on who you ask: If a 
45 


srobinson on DSKB307YQ1PROD with HEARING73382.030.eps

company's tax director is asked this question, he or she may prefer a lower effective tax 

rate at the expense of preserving certain "tax expenditures" since a lower rate will increase 

the company's accounting earnings per share ("EPS"). This should not come as a surprise 

since most tax directors are measured on their company's effective tax rate. If, however, 

this question is asked to the individuals who make the company's investment decisions, it 

is my experience that they will likely be much more focused on cash flow as opposed to 

accounting EPS. This response will be based on the recognition that cash t10w is the key 

factor in an investment decision. In encouraging cash flow, timing of deductions, such as 

accelerated depreciation, playa critical role. 

Praxair is a capital intensive manufacturer which has operations in over forty countries. 

Each year, Praxair's various business units from around the world compete with each other 

for limited funds for capital projects. Projects are selected for funding based on the 

project's future cash How using a net present value model. Various factors are used to 

calculate a project's future cash flow, including the tax profile of the country where the 

project will be executed. Cash flow is determined by a combination of a country's tax rate, 

special deductions, and timing items such as accelerated depreciation. Projects yielding a 

higher cash flow are selected over projects yielding a lower cash flow. Under the current 

U.S. tax rules, accelerated depreciation, in particular, has a significant impact on Praxair's 

investment decisions. 

Praxair's capita1 expenditures cannot be deducted in the year they are incurred. Rather, 

such costs are capitalized and deducted over time. It is important to note that these costs 

include more than the cost of machinery and equipment, they also include costs associated 

with labor and engineering. For financial statement purposes, Praxair deducts these costs 

pro-rata over the life of its projects. The U.S. tax code currently allows for "accelerated 

depreciation," permitting Praxair to deduct depreciation costs laster than for tinancial 

statement purposes. As a result, Praxair can deduct more of the cost of a capital asset in 

the first years of the asset's life. Shortening the capital recovery period of a U.S. project 

improves the company's cash flow and makes new domestic investments much more 

attractive. Better cash flow means more U.S. investment. More investment means greater 
46 

f 

Chairman CAMP. Thank you all for your excellent testimony. 

Now we will move into a question time; and, Mr. Fryt, Mr. 

Schichtel, and Mr. Heenan, I have a question for all of you. You 

were invited here today because you do represent capital-intensive 

businesses that could be asked to consider trading off a substantial 

amount of tax benefit if there was a comprehensive reform plan put 

forward that could alter pretty dramatically the corporate tax rate 

and reduce it somewhat drastically. The committee wants to understand better how businesses such as yours evaluate those tradeoffs 

that will be part of tax reform. 

Now, I understand that we are not talking about details today, 

but especially with respect to choosing the right base-broadening 

measures, could a revenue-neutral reform package that reduces the 

corporate rate to 25 percent and moves to a territorial system, 

could that improve the competitiveness of your companies? 

And if you each could take a few moments to answer that. 

Mr. FRYT. My answer would be yes. At 25 percent, I think that 

is close to the OECD average, which is about 25 percent right now; 

and given our international competition, that is about where we 

need to be at a minimum. You talk about base-broadeners and the 

tradeoff. There certainly is, as I mentioned in my prepared reVerDate Mar 15 2010 00:15 Feb 06, 2014 Jkt 073382 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 I:\WAYS\OUT\73382.XXX 73382

srobinson on DSKB307YQ1PROD with HEARING73382.031.eps
47 

marks, and that is something that we take into consideration. The 

cash flow effects are detrimental. There is no question about it. But 

lowering a tax rate overall to something around 25 percent, I think, 

would be well received. 

Chairman CAMP. Mr. Schichtel. 

Mr. SCHICHTEL. I agree with Mike, a resounding yes. I think 

if we can get to a 25 percent rate, or something close to that that 

is in line with the rest of the developed world, you will find the 

vast majority of the business community coming out in support of 

it. I know it is a challenge to get there. 

From our perspective as a company, our health and growth is 

tied inextricably to the growth and health of the overall economy. 

No question about it. That is the biggest driving factor in how well 

we do over the long run. Our view is that a significantly lower rate 

and a simpler Tax Code will redound to the benefit of the entire 

economy, will encourage overall more growth and development, and 

that will in turn increase the returns that we have to our shareholders and the opportunities that we have out there. 

Chairman CAMP. Mr. Heenan. 

Mr. HEENAN. I would like to give you an answer yes or no, but, 

really, I have been doing this a long time and the devil is in the 

detail. And, in our view, clearly all tax expenditures are not created equal. And, you know, to just focus on accelerated depreciation, a tax rate will affect both our old business and our new investment, and so we have a large—we are the largest industrial 

gas company in the U.S. We will certainly benefit from a rate reduction. 

But to your specific question on investment decisions, that is a 

future question. A rate benefit is not going to impact our future decision. And so when I look at something like accelerated depreciation, that is very focused on new investment. New investment will 

bring growth and jobs. 

So, I think we just have to be very cautious as to which tax expenditure we are using, and we are particularly focused on accelerated depreciation because we think it has a special place in promoting new growth, and we think with that will come jobs. 

Chairman CAMP. But if the right base-broadening measures 

were chosen, do you think a revenue-neutral package that reduced 

the rate to 25 percent would help the competitiveness, including a 

territorial system? 

Mr. HEENAN. Well, I can clearly say if accelerated depreciation 

remains the same and everything else goes, we could—— 

Chairman CAMP. From your point of view, I am asking your 

opinion. So if the right base-broadening measures were chosen, 

from your point of view, that it would be something that would increase the competitiveness of—— 

Mr. HEENAN. Absolutely. 

Chairman CAMP. The other—just to follow up, could you envision a package, each, the three of you, being designed that would 

lead employers to invest more and hire more American workers? 

Mr. FRYT. Absolutely. I think the package—well, I described in 

my prepared remarks the ideal one—maybe not a practical, but the 

ideal one would be some rate close to the OECD rate with 100 percent expensing. I think you would see tremendous new investment, 


srobinson on DSKB307YQ1PROD with HEARING
48 

additional global expansion, U.S. expansion, and job growth, absolutely. 

And even if you went with the base-broadeners that you were 

talking about, Chairman Camp, if you got down to a rate of around 

25 percent I think there is no doubt in my mind that also would 

increase growth. 

Chairman CAMP. Thank you. 

Mr. Schichtel. 

Mr. SCHICHTEL. I would love to keep our tax incentives like accelerated depreciation. I would love to see expensing extended as 

part of an overall tax reform that lowered the rate to 25 percent. 

But I don’t see how that is possible in a revenue-neutral fashion. 

I think for the short term, until we do have corporate tax reform, 

I think expensing, extending bonus depreciation is tremendously 

important and impactful. Certainly from our vantage point and our 

C suite’s vantage point—because I get calls all the time—it is tremendously important. 

That being said, if we all put everything on the table and we 

start working towards a targeted rate and a simpler code, I think 

we will see more growth, and for us that will definitely result in 

more jobs and more investment. 

Chairman CAMP. All right. 

I have a question for Ms. Hanlon and Mr. Neubig. 

In Congress, we measure revenue neutrality by looking at cash 

taxes over a 10-year period without using a discount rate. And that 

is very different how public companies calculate book earnings 

under GAAP, and it is even very different how public companies 

calculate cash flow benefits. But if this committee succeeds in designing tax reform legislation that is revenue neutral over a 10- 

year period the way Congress measures it but that in the aggregate 

increases companies book earnings, do you think that such a tax 

reform package would lead to more economic activity being located 

here in the United States and therefore more jobs for American 

workers? 

Ms. Hanlon, why don’t I start with you? 

Ms. HANLON. I guess the main thing I would say to that is that 

if you would, you know, remove the mitigating effect of financial 

accounting there seems to be no negative effect that would come 

from that. So to the extent that doing the tax side of it would increase jobs and investment, then releasing the mitigating effect 

from accounting could only help those incentives. 

Chairman CAMP. All right. 

Mr. Neubig. 

Mr. NEUBIG. I think the companies are going to be looking at 

a lot of different measures of taxes. And you mentioned that although it might be revenue neutral over a 10-year period from a 

government scoring standpoint it might be actually higher total 

taxes on the corporate community. I think there would certainly be 

concern about that having some adverse effect. There are certainly 

lots of benefits from a lower corporate tax rate, but they are going 

to be looking at the total tax burden in the U.S. So they impact 

the other—— 

Chairman CAMP. I am sorry, we are having microphone problems. 


srobinson on DSKB307YQ1PROD with HEARING
49 

Mr. NEUBIG [continuing]. Other tax base issues. So it really is 

the whole tax reform package that they will be looking at. 

Chairman CAMP. And to the two of you again, some commentators say that cash is king and that investors are sophisticated 

enough to sort of look through the differences between cash flow 

and book earnings. And how do you respond to the arguments that 

investors look through book earnings and see only cash? 

Ms. Hanlon, why don’t you start? Then I will go to Mr. Neubig, 

briefly. 

Ms. HANLON. This is a great question. It has been asked many 

times in accounting workshops when we present research on earnings management, for example. 

So I think the first thing to recognize is that accounting earnings 

are used for two purposes, both equity markets and contracting 

purposes. So, for example, debt contracts and compensation contracts and the extent to which those are written based on accounting numbers, you will see managers respond to those same incentives. And the equity markets and these contract writers they are 

not stupid or not savvy enough, I wouldn’t say, in using accounting 

earnings, because accounting earnings is generally kind of like a 

scorecard. In other words, there is research that shows that accrual 

accounting earnings can predict future cash flows better than current cash flows. So it is reasonable for these people to use accounting earnings. 

And, finally, the other thing is that investors may be savvy, but 

they are still only human. So there is a long line of behavioral finance research that shows investors have limited attention and 

limited processing ability to process very complicated information 

like you would find in an annual report of a complicated company. 

Chairman CAMP. All right. 

Mr. NEUBIG. There are differences across the different companies. And accelerated depreciation and the cash flow—— 

Chairman CAMP. Maybe if you could borrow somebody else’s 

microphone. 

Mr. NEUBIG [continuing]. Cash-constrained companies deal with 

an economic downturn. There are an awful lot of cash-constrained 

companies that can certainly benefit from the cash flow benefits 

from a number of the timing provisions. And so I think not all companies are alike. There are going to be a number of companies, as 

Dr. Hanlon noted, that do look specifically at the financial statement earnings and book earnings. I found that in terms of my discussions with a number of corporate executives. But, also, there are 

a number of corporations that do the type of project evaluations 

looking at the cash flow benefits. 

I would say that at the current time for companies that have access to capital markets interest rates are at a historic low. And to 

the extent that accelerated depreciation really is a zero interest 

rate loan from the Federal Government, the benefits of accelerated 

depreciation at the current time are modest for those that have access to capital. 

Chairman CAMP. All right. Thank you. 

And, Ms. Hanlon, just finally, you mention in your testimony the 

important point that some of the analysis that we have been talking about today doesn’t really apply to closely held businesses. 


srobinson on DSKB307YQ1PROD with HEARING
50 

Could you just explain how closely held businesses might analyze 

tax reform differently than publicly held companies? 

Ms. HANLON. Yes. There is a long line of literature in the accounting research that examines this exact book-tax tradeoff. And 

often what we will find, if we can get the data, we will line up public companies and private companies and essentially find that private companies are much more responsive to the tax incentives and 

tax reporting incentives than are public companies. And the idea 

is that the public companies have this financial accounting constraint. So it is probably true that private companies will respond 

to these incentives more than public companies will. 

Chairman CAMP. Thank you very much. 

Mr. Levin is recognized. 

Mr. LEVIN. Except for the last few questions, we have been really discussing broader issues of tax reform and not book and tax accounting issues. We may be relieved by that, because we need to 

look at it. They are not easy issues, and you are going to have to, 

I think, have a few seminars with us on that subject as we look 

at these broader issues. So, it is really the broader issues that have 

been mostly discussed here, and let me just say a word about that. 

There is no doubt we need to look at tax reform. There is no 

need, as I said earlier, to look at it with care and not simply grab 

ahold of a specific figure without looking at its consequences. 

Because, according to the Joint Tax analysis, when we asked 

them, they said, if the rate were reduced to 28 percent, half of that 

reduction would come from ending accelerated depreciation. So 

when people say they want the rate dramatically reduced but not 

at the expense of—expense in accelerated depreciation, that doesn’t 

really fit; and it was interesting in the testimony of the first two 

of you that you referred to that. 

For example, in testimony—you know this well, Mr. Fryt—you 

said, our investors applaud capital incentives like expensing, because our after-tax cash flow on a new capital investment can be 

up to 35 percent less than it would be otherwise in the first year. 

And of course that evens out. But it is kind of a broad embrace of 

the importance of that. 

And then I just—Mr. Schichtel, your testimony, if I might—you 

know it well. I will just read it. Because this is important for us 

to have a full, intelligent discussion of this vital issue. And this is 

on page 3: 

Given the capital intensity of our business, however, we rely 

even more on—let me just read above. 

Like most companies, we are strongly influenced by tax incentives that improve our reporting metrics, such as our reported income, effective tax rate, and our earnings per share. Items like the 

research credit and the Section 199 domestic production incentives 

are differences that permanently reduce our taxes paid and concomitantly our effective tax rate, thereby encouraging new investments. 

And let me just indicate, I was looking as we were reading over 

your testimony last night at Marty Sullivan’s analysis of winners 

and losers if there were a reduction in the rate to 30 percent with 

slower depreciation, repeal of the domestic production credit, and 

repeal of the research credit. This is his analysis, and I think all 


srobinson on DSKB307YQ1PROD with HEARING
51 

of us need to look at this and do other analyses. And it is really 

interesting, and it is not very surprising. 

The industries that benefit from that—and I will just read a few 

that apply to you, I guess—securities, insurance, retail trade— 

these are winners. Bank holding companies, real estate, other services, it diminishes as I am going down the line. Wholesale. Mining 

is essentially even, as is construction. 

And then those who are losers: food manufacturing, utilities, 

other manufacturing, chemicals, metals, minerals, and machinery 

manufacturing, transportation, Internet—I don’t quite understand 

that but—agriculture, technical services, computer and electronics 

very dramatically. Transferred equipment very dramatically. And 

electrical products most dramatically. 

So I think since the testimony has really mostly focused on these 

larger issues and not on the technical stuff that was headlined in 

the announcement of our hearing, I think your testimony today 

does underline the importance of our looking deeply into this issue. 

When we say everything is on the table, that doesn’t really settle 

what is left on the table, right? In a sense, it is somewhat easy to 

say, put everything on the table. We do that all the time here. And 

the real issue becomes what is taken off and what is left. 

So we welcome your testimony, and I hope that today’s hearing 

is another step towards our comprehensively looking at these 

issues so that we can come out with a proposed revision of the Tax 

Code that very much keeps in mind what our objectives are. 

And I go back to what I said in the opening. I do think that with 

the return of understanding of the importance of manufacturing we 

need to look at tax reform in terms of how we promote a continued 

growth in services, in agriculture, and the like but also in the industrial sector of the United States. And, Mr. Heenan, that is 

where you come from; and I think that somewhat motivates your— 

I won’t say hesitation. I think it is kind of a well-rounded response. 

Thank you. 

Chairman CAMP. Thank you. 

Mr. Johnson is recognized for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Mr. Fryt, how low would we have to get the rate before you guys 

could take over the Postal Service? 

Mr. FRYT. Do I have to answer that question? 

Mr. JOHNSON. Well, you are doing a good enough job right now. 

I have got a place out in New Mexico where you deliver to the door 

and the Postal Service doesn’t even come. 

Mr. FRYT. Well, if you ever have a problem, just give me a call, 

please, and I’ll help you. 

Mr. JOHNSON. In your testimony, you say the ideal reform 

would lower the rate to at least 25 percent, including incentives for 

investments such as bonus depreciation. However, you also say you 

are willing to put all base-broadeners on the table for a significantly simpler and reformed corporate Tax Code with a materially 

lower tax rate. What rate would that be if we were to give up all 

the other nicks? 

Mr. FRYT. It really depends, Mr. Johnson. It depends what is in 

the package. But, given our competition overseas, we think it 

would have to be something close to the OECD rate. If you get 


srobinson on DSKB307YQ1PROD with HEARING
52 

there, presuming that doesn’t continue to decline, I think, as Chairman Camp asked earlier, I think it would be a good place to be. 

Mr. JOHNSON. Well, does that mean R&D tax credit and those 

kind of things would be—we could eliminate them if we got the 

rate low enough? 

Mr. FRYT. I am sorry, sir? 

Mr. JOHNSON. If we got the rate low enough, would you go 

along with that? 

Mr. FRYT. Yes, sir. 

Mr. JOHNSON. Okay. You know, I had a meeting with some of 

your guys in Dallas. They said 23 percent. Do you like that number 

better than 25? I bet you do. 

Mr. FRYT. I do like 23 better than 25. Yes, sir. If you can make 

that happen, that would be terrific. 

Mr. JOHNSON. Mr. Schichtel, given Time Warner is a capitalintensive business, would you care to comment on that as well? 

Mr. SCHICHTEL. Yes. Thank you. 

We care tremendously about timing issues like accelerated depreciation. For us, it is enormous. But I think when you—well, we 

have crunched the numbers, and we have looked at all the different 

policy proposals that are out there. We clearly care about the impact on cash flow, and I think lowering the rate clearly does improve our cash flow over the long run. If you get to a low enough 

rate and I think somewhere around a rate that is consistent with 

the developed world, say 25 percent, I think it is a clear winner for 

us as well as the economy. 

Mr. JOHNSON. And you could get rid of all the other—— 

Mr. SCHICHTEL. Yes. 

Mr. JOHNSON [continuing]. Okay. I am glad to hear it. 

Mr. SCHICHTEL. I am not delighted to. I would love to keep accelerated depreciation, but I am a realist as well. 

Mr. JOHNSON. Ms. Hanlon, in his testimony, Mr. Heenan argues that promoting investment accelerated depreciation is perhaps 

a more powerful tool than lower overall tax rates. You, however, 

say with respect to targeted tax incentives such as bonus depreciation there is very little evidence that these policies have spurred 

any investment. Can you comment on that? 

Ms. HANLON. Yeah. My statement is based on the weight of the 

evidence in the literature. And, basically, there are papers that will 

show there is a timing effect. So firms will shift the purchase of 

equipment to a period that is earlier, say by in December instead 

of January. There is also evidence that firms will purchase a different class of asset. 

But what we can’t tell in the literature and what is very difficult 

to parse out is whether these are—you know, part of it is just timing, part of it is just shifting, and some of it could just be a change 

in reporting. So that, in other words, when you say a certain class 

of asset gets a certain benefit, they might just now record different 

assets differently. We can’t tell that in the literature, and the research that tries to look at aggregate effects really find very little. 

So it is just the weight of the evidence, a large sample. 

Mr. JOHNSON. Have you done any studies on eliminating all 

the incentives and just lowering the tax rate? 

Ms. HANLON. Not directly, no. 


srobinson on DSKB307YQ1PROD with HEARING
53 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Chairman CAMP. Mr. Davis is recognized. 

Mr. DAVIS. Thank you, Mr. Chairman. I am very interested in 

this discussion on both counts, having worked for many years in 

manufacturing before coming to the House of Representatives. 

First I would like to preface my question with I agree with the 

macro concern that Professor Hanlon talked about that a rate reduction overall is certainly more beneficial in the long term and 

certainly support that. 

But I would like to come back into a manufacturing or operations/capital investment question on trying to balance this out inside of or underneath the umbrella of strategy. 

I worked with many clients, I was discussing earlier three in particular, before some of the bonus depreciation issues came out after 

9/11 and in subsequent years where they were very reluctant due 

to market cycles to make investment in machine tool technology 

and other systems that would be very helpful to them. This is particularly smaller businesses, under $100 million manufacturing 

firms, but surprisingly a number of my clients in the Fortune 500 

had that same experience on a reluctance-based on market cycle, 

particularly with shareholder expectations in the long term. 

I guess the question that I would like to understand is how we 

address this issue of depreciation from a strategic standpoint within the long term. Bringing the rates down is certainly important to 

me from a tax perspective, but also having this incentive for investment is a bigger question. 

I guess considering the long-term, if we were able to work out 

a mechanism, and I would like to hear thoughts from all of you, 

but specifically Professor Hanlon and Mr. Heenan on this, since 

you have both been talking about this the most, if we were able 

to adjust depreciation schedules within the intent of the overall tax 

strategy that would provide the ability, knowing that the tax liability would be the same to your company in the longer term, but to 

do it on a more proportional basis. 

When there is a great year and the well is full of water, the idea 

of let’s go ahead and make this capital investment to be leaned up 

and ready for more difficult times, being able to control costs when 

you have got the ability to invest in those technologies, knowing 

that there will be a down cycle eventually. I am thinking heavy 

manufacturing, the energy industry, areas that I saw that were 

very reluctant to get involved and make these investments. Or, say, 

maybe if you had a great year, a small $50 million company can 

invest in a couple of $800,000 machine tools and write it off in one 

year but know they are going to take that. Certainly there would 

be a lower profit, but the idea of longer term is those jobs are protected and they become more competitive. 

Where this gets particularly challenging to me is looking at a lot 

of our international manufacturing. Contrary to a lot of the politics 

in Washington, we are very robust, very strong and competitive in 

manufacturing, but there is still this reluctance with many of the 

tier one and tier two producers to make these decisions, and if they 

could reduce it down, say, into a 2, 4, 7-year schedule, if they want 

to go to the longer term schedules, that is perfectly acceptable. But 

how would that work inside of this idea of rate reduction if we 


srobinson on DSKB307YQ1PROD with HEARING
54 

could manage that to keep things revenue neutral and what would 

the impact of that be from a wider standpoint? 

Mr. HEENAN. Just to get on your bonus comment and make 

sure I understand your question, were you saying, hey, maybe we 

slow down depreciation a little bit and then bring bonus in and out 

to help encourage investment? 

Mr. DAVIS. What I am talking about is allowing the manufacturing company who is getting ready to make these capital investments. And I am not talking about all asset classes. I think that 

would be a grave error and would just totally stir up the tax system. But some specific areas that are very critical to our strategic 

manufacturing economically is that the employer would simply 

have the ability to pick the schedule, or the company would pick 

the schedule that is most advantageous to them, and rather than 

have these kind of boom-and-bust cycles on policy, have that fit 

into the overall tax strategy, so that in a good year in one sector, 

say you can make the investment that maybe FedEx would not 

make based on what they are doing, or vice versa, but within those 

time frames. 

But coming back, how would you work that as well inside of the 

rate structure, keeping that lower rate because of the longer term 

implications? 

Mr. HEENAN. I think I understand your question. Just to focus 

on Praxair, we have, as I mentioned earlier, fairly large capital 

projects and these can take a couple of years before you start the 

process and finally sign somebody up and sell and implement it. So 

what we really need is a consistent process that we can follow, consistent rules. And, frankly, bonus has not been something that has 

been advantageous to us, because we have got—bonuses coming 

and going is not in the law today. We need something, whether it 

is the current system or another rate schedule, that we can depend 

on, because we have sort of a long cycle time and we have to think 

forward 2 and 3 years and make sure the law then is going to be 

the same as the law today. And if we can’t, as with bonus, we are 

not going to model that. 

When we sit around the table and make our investment decisions, we are not going to put something and say, well, you know, 

they may re-up bonus in a couple years. Let’s throw that in here 

in our decision on whether to invest. 

Mr. DAVIS. So that you are looking at predictability. 

Mr. HEENAN. We are looking for predictability. Accelerated depreciation has been a long time in our code, and it is in our sort 

of model today. Bonus is not. 

Mr. HERGER. [Presiding.] The gentleman’s time has expired. 

Mr. Rangel is recognized for 5 minutes. 

Mr. RANGEL. Thank you, Mr. Chairman, and thank you all for 

coming down and giving us this testimony. 

One of you congratulated Chairman Camp for moving in this direction, and if he were here, I would congratulate him too, because 

what we are doing is keeping the idea alive. But it just seems to 

me with the outstanding representation from some of the nations 

and the world’s most successful businesses, that while Chairman 

Camp has opened the door for reform, that it is going to be your 


srobinson on DSKB307YQ1PROD with HEARING
55 

responsibility to put your foot in that open door and don’t let it 

close. 

It is absolutely no profile in courage for all of us to say reduce 

the corporate rates and expand the base, but not my base. I came 

down here as a tax reformer, and, believe me, Earned Income Tax 

Credit, Low Income Housing Credit, whatever we can do for our 

veterans, whatever it is, we have allowed probably a half a trillion 

dollars to get involved in what they call extenders. Is there anyone 

here who doesn’t know what the extenders are? Or those tax provisions that expire, or at least we say they are going to expire, and 

all they want to do is to get them in the code. 

Someone said seeing tax law made is like seeing sausage made. 

You just don’t want to see it. 

Now, what I am suggesting is that if this outstanding group of 

corporations that you have listed, how often do you meet, this 

group that—what is the name of it? 

Mr. FRYT. RATE, Reforming America’s Taxes Equitably. 

Mr. RANGEL. Yes. Because our problem here is that the lobbyists represent the best tax interests of their clients. Reform is not 

on their agenda. If they came back to you vice-presidents and presidents and said, what a great talk I had with Ways and Means people, we will have to give up accelerated depreciation and a whole 

lot of other things, but wow, would this be a fairer system, they 

would get fired. Their job is to broaden the gap or to create one, 

temporarily, but never allow it to sunset. 

So what we do need are people that have the credibility that you 

guys have, and ladies, to get in the room and to find out what we 

can get away with as elected officials. Nobody is talking about getting rid of charitable organizations and churches for exemptions. 

There is a lot of money there. And, of course, if you talked about 

mortgages, you have got to narrow the amount of money, the number of deductions that are in there. Who is going to bite the bullet 

to get rid of them in order to have a fairer system? 

I am asking FedEx and Time Warner, what can you do to get 

people in a room to say we are not agreeing to anything, or we are 

saying this will be the impact economically. How can we take this 

the next step? Because we need a climate—I was here until 1986. 

We had Tip O’Neill. All he knew was how to get along with Republicans. Why, I don’t know, but that was the way Tip worked. We 

had Ronald Reagan, and he was blinded by party lines. And they 

were able, we were able to get what we thought at the time was 

reform. 

It is difficult to talk about reform. It is a question of whose ox 

is being gored. So what doesn’t surprise me that if you are paying 

35 percent tax, what does surprise me is that you are not outraged. 

Outraged. Don’t thank us. What are you going to do about it? Because you have got a great argument in terms of equity. But nobody is going to be out front saying that we are going to get rid 

of some of the darn things that we put in the code, some of which 

we have forgotten. And when we extend them, it is the whole package. And you can see some of the things that my colleagues are 

talking about just to pay for the holiday tax package. They have 

got imagination, but it is not good law. 


srobinson on DSKB307YQ1PROD with HEARING
56 

So, Mr. Chairman, I was trying to negotiate with you an extended time period. I know I wasn’t persuasive. But could one of 

you just say what you could do in terms of taking this to the next 

step? 

Mr. FRYT. Absolutely, Mr. Rangel. First off, I would like to commend you and the efforts you have put forth in this whole effort. 

Mr. HERGER. The gentleman’s time has expired. Maybe, Mr. 

Fryt, you could respond by letter. 

Mr. RANGEL. I would ask unanimous consent to let our 

guests—— 

Mr. HERGER. Mr. Nunes is recognized for 5 minutes. 

Mr. NUNES. Mr. Chairman, I yield the balance of my time to 

Mr. Tiberi. 

Mr. TIBERI. Thank you. Very interesting comments. I do want 

to point out just for the audience and for the record, when the 

former chairman mentioned that nobody is talking about getting 

rid of the charitable contribution, that actually in the President’s 

prior three budgets, the President has capped the deduction on the 

charitable contribution at 28 percent. I just wanted to remind the 

gentleman from New York regarding the President’s last three 

budgets and what he proposed. Obviously it wasn’t adopted by the 

Congress, but there is one person in Washington who has talked 

about the issue in the context of reducing that charitable contribution. I wish Mr. Lewis were here, because he and I, as the chairmen of the Philanthropy Caucus, have both opposed that as cochairmen of the Philanthropy Caucus. 

But to the witnesses today, starting on the left, those of you who 

are vice-presidents of companies dealing with tax issues, can you 

tell me who your major competitor is and how the current Tax 

Code causes you to make decisions based upon investments? Starting to my left. 

Mr. FRYT. Sure. Well, the United States Postal Service. They 

don’t pay any tax. UPS. Their tax profile is fairly similar to ours. 

And we have several international competitors, DHL, TNT and others. As an example, DHL’s reported ETR, its effective tax rates 

over the last 10 years, have hovered around 20 percent vis-a`-vis 

our 36–37 percent. That is why I say us paying at what we are 

right now is a real competitive disadvantage because they have additional after-tax funds that they can continue to reinvest in their 

global networks that we don’t have. 

Mr. TIBERI. And they compete with you here and abroad? 

Mr. FRYT. Yes, sir. 

Mr. SCHICHTEL. Well, our main competitors are the two big 

boys, AT&T and Verizon, as well as the satellite companies, Direct 

TV and Dish. And then obviously we compete globally in the capital markets for investments. And as far as the impact on the communications industry, I think Verizon and AT&T are much more 

similar to us than maybe even the satellite companies, although 

the difference isn’t that large. We are all capital-intensive companies. 

And for us, tax reform is more about getting this economy stabilized and growing, because that is really where our growth is 

going to come from. 


srobinson on DSKB307YQ1PROD with HEARING
57 

Mr. TIBERI. So even though you don’t compete—I am trying to 

get more of an answer from you. I don’t want to put words in your 

mouth, but let me tell you what I am trying to do and then maybe 

you can answer. 

Even though you don’t have a, quote-unquote, international competitor, you are competing internationally for capital. 

Mr. SCHICHTEL. Yes. 

Mr. TIBERI. So the Tax Code impacts you how with respect to 

that? 

Mr. SCHICHTEL. Well, I think if you look at some of the analysis and research that has been done, companies with lower effective tax rates do have an advantage when it comes to garnering investment from the global capital markets. So from our vantage 

point, that clearly is an issue. Also from just the perspective of 

raising capital and also being able to invest more and grow our 

business, an economy that is more robust is going to help us on 

both fronts. 

Mr. TIBERI. So because capital is fungible and it can go anywhere in the world, it is going to go where—— 

Mr. SCHICHTEL [continuing]. It is going to go where they believe the highest return is at. 

Mr. TIBERI. On their investment. 

Mr. SCHICHTEL. Yes. 

Mr. TIBERI. So even though you are a company that is investing 

in the United States in terms of jobs, and more jobs in Ohio— 

thank you very much, that was just announced—even though you 

are a domestic company, domestic jobs, that international competition in terms of tax rate is very important to the growth of your 

business in America. 

Mr. SCHICHTEL. It is. And it is also very important to our customers. Our highest growth area is in the commercial services 

arena and our customers, small, medium and large, they do compete intensively in the global markets, and our success is tied to 

their success. 

Mr. TIBERI. Thank you. Praxair? 

Mr. HEENAN. Good morning. You know, I think in the U.S. we 

have—we are competing against Air Products, a U.S.-based multinational. Outside the U.S. we have Air Liquide and Linde, French 

and German companies. And when we look at the U.S., we are 

all—when we are doing business here, we are all competing at the 

same rate, but, as you said, you know, capital can move. 

So when we look at the foreign projects, you know, what we really want and I think we have today, maybe not perfectly, is to have 

a level playing field on the tax rates offshore. So if we are looking 

at a project in Mexico or France or Germany, we want to be on a 

level playing field with our competitors so that we can win our 

share of those projects. We are headquartered in Danbury, Connecticut. We have our R&D in Tonawanda, New York. That offshore growth comes back here to the U.S. So it is important for us 

to remain competitive on the offshore projects. 

Mr. TIBERI. Thank you, Mr. Chairman. 

Mr. HERGER. Mr. Brady is recognized for 5 minutes. 

Mr. BRADY. Well, thank you all for being here today. First, I appreciate the chairman holding this hearing. Secondly, I think the 


srobinson on DSKB307YQ1PROD with HEARING
58 

draft proposal on territorial and lower rates, the way it was laid 

out, has been a very positive and helpful movement toward fundamental tax reform. All the witnesses today have really opened up 

a lot of questions on how we move forward in doing it, doing it with 

the most pro-growth impact, weighing both the book and the accounting and tax-type requirements you are under. So I could ask 

all of you about a dozen questions. 

I wanted to ask our two business representatives from FedEx 

and Time Warner, both of you rightly make the case that in addition to lowering the corporate tax rate, that there is a need for capital investment incentives. And you are willing to put everything 

on the table; but recognize, looking at the last 40 and 50 years, the 

single strongest correlating driver for new jobs is private business 

investment. You are building buildings, buying software, new 

equipment and technology, jobs along Main Street, growth. 

So my goal is at the end of the day, I want the lowest possible 

tax rate, but I want the strongest possible pro-growth Tax Code, 

one that allows us to have the largest economy in the world, not 

until China catches us or someone else, but for the next 100 years. 

So I want to ask, as you are willing to put everything on the 

table, which I think is very important, what are the strongest, looking at the cost of capital in investment, what is the strongest capital investment incentive that ought to be considered to remain in 

the Tax Code? 

Mr. FRYT. From our perspective, I think 100 percent expensing 

permanent, on a permanent basis, would be extremely strong. Investment tax credit can be crafted in a similar manner. There were 

some issues with that in the past. But expensing works quite well. 

It doesn’t address the financial reporting-type issues that Ms. 

Hanlon was talking about earlier, but it still affects the cash flow, 

and it has a tremendous impact on our environment and other 

companies like us. 

Mr. BRADY. So 100 percent expensing would be the top. 

Mr. FRYT. Yes. 

Mr. BRADY. Mr. Schichtel. 

Mr. SCHICHTEL. For us the biggest driver when it comes to investments is a growing economy. So I think if we can get there, all 

else, all other problems will eventually improve and rectify and 

remedy. 

As far as immediate sort of short-term policy, clearly bonus depreciation expensing is tremendously important right now. We are 

being hit by the reversal of prior year benefits from bonus depreciation just as our economy is struggling to pick up a little bit of momentum. I think now is not the time to have those reversals take 

full effect. 

I think overall, if you can get to a low enough rate, it will encourage growth and it will more than make up for the loss of some of 

the tax incentives, including even accelerated depreciation. But 

that requires us getting to really a much more meaningfully lower 

rate, somewhere around 25 percent. 

Mr. BRADY. Clearly, we know what we can do to get to 28 percent. Getting down that final three points will be a thoughtful discussion. 


srobinson on DSKB307YQ1PROD with HEARING
59 

With what little time I have left, can I ask the other witnesses 

your thoughts on the strongest pro-growth Tax Code? 

Mr. HEENAN. Yes, just a little bit different than the profiles of 

some of the other companies. As I mentioned earlier, bonus depreciation really isn’t helpful for us because it comes in and out. If it 

were to become a permanent fixture in the Tax Code, we would put 

that into our decisions. 

Mr. BRADY. Which is what we are seeking, permanent tax provisions rather than temporary ones. 

Mr. HEENAN. Right. But I think we recognize that that would 

be extraordinarily expensive and we need revenues. So the current 

provision like that is accelerated depreciation, so that would be the 

one I think that, practically speaking, you might be able to keep. 

If you go to a permanent bonus structure, you are going to have 

a very costly solution there. We would be happy to take it, but I 

think it would really cost too much for the country. 

Mr. BRADY. We are running short. 

Mr. NEUBIG. When tax policy analysts look at permanent bonus 

depreciation or permanent 100 percent first-year write off, they 

generally argue you would need to repeal the interest deduction in 

order to prevent negative effective tax rates. So you would need to 

think about not only expensing, but also the impact on the interest 

deduction. 

Mr. BRADY. Thank you. 

Mr. HERGER. Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I want the audience and the witnesses to recognize that this is a day in which we 

have all gathered here with sober faces for holy pictures. We are 

all for tax reform. Everybody in this room is for tax reform. We are 

on the Ways and Means Committee. We do tax reform, right? 

Now, Mr. Johnson has asked you, have you studied how low you 

could get the tax rate if you eliminated business tax expenditures, 

and none of the witnesses—all of the witnesses said they haven’t. 

So I just want to enter—I am going to ask unanimous consent to 

enter into the record the study from Joint Tax, dated 27 October, 

2011, which talks about what you would really have to do if you 

are serious here. 

[The information follows:] 


srobinson on DSKB307YQ1PROD with HEARING
60 


srobinson on DSKB307YQ1PROD with HEARING73382.088.eps

(:Oltgtt:55 of tbe ~nittb ~tatt5 

MEMORANDUM 

TO: 

JOINT COMMlTIEE ON TAXATION 

~il~IJil1!1tOl1, Jil( 20515-6453 

'OCT 21 2011 

FROM: Thomas A. Barthold 

SUBJECT: Revenue Estimates 

The attached tables are in response to your request f(lt estimates of repealing or 

modifYing corporate tax expenditmes and an estimate of the lowest possible corporate income 

tax rate that could be enacted through legislation that is revenue neutral for C corporations in 

conjunction with the repeal or modifkation of these provisiolls. 

The attached tables generally follow the order of Table 1 pUblished ill Joint Committee 

on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCS-3-1O), 

December 15, 2010. Tax expenditures listed in that publication that primarily affect individuals 

or pass-through entities are excluded from the attached tables. A number of the tax expenditure 

items on the attached tables affect both C corporations and pass-through entities. 

Table #11-1 133 provides tile revenue effects Qfthe repeal or modification ofcel1ain 

corporate tax expenditure provisions, including the portion that is claimed by partnerships, S 

corporations, and other pass-through entities. Table # 11-1 134 includes only the revenues 

attributable 10 C corporntions and excludes the portion attributable to pllSs-through entities. 

Table #11-1 1.34, which excludes revenues attributable to activities conducted in pass-through 

entities, shows the lowest possible corporate income tax fate that is revenue neutral for C 

corporations. In both tables, not all provisions are estimated at this lime all.hough the estimates 

do include almost all ofthe major corporate tax expenditure provisions. 

As we have previously reported to you, it is not always obvious what tax rules would be 

appJi<:able when certain tax expenditures are eliminated. In the attached tables we have made 

some judgments. As another example, we have assumed that elimination oCthe tax expenditure 

related to the geological and geophysical costs of oil and gas companies would result in those 

costs being amortized and recovered over a seven-year period (Table #11-1 133, item H.20.). 

Please note that these estimates are very preliminary as we continue to upgrade our 

models relating to corpotate tax refoltl1. Also, note that the estimated revenue effects. ror some of 

Ihe reform provisions do 001 include efleets of anticipatory actions l.hat we expect taxpayers 

would take with sufficient advance notice of the refoltl1s. Further, while some major interaction 
61 


srobinson on DSKB307YQ1PROD with HEARING73382.089.eps

COllgms5 of tfJe ltuitdl 6tate5 JOINT COMMITTEE ON TAXA "ON 

t&1stjillgtOIl, m;t 205\5-6453 

TO: Page 2 

SUBJECT: Revenue Estimates 

effects are included in these estimates, such as interactions with rates, we have not yet estimated 

all possible interactions that may exist between provisions. 

Also please note that the estimated revenues attributable to C corporations are based on 

the current division of business entities among sole proprietorsbips, pass-through entities, and C 

corporations. Should a corporate tax reform proposal target only C corporations and leave the 

treatment oftax expenditures unchanged for other business entities, the revenue gains from C 

corporations will potentially be significantly reduced as business entities change their form or 

structure to minimize their tax liabilities. In addition, there are potentially significant 

administrative and compliance implications of partial repeal of tax expenditures that likely affect 

the revenue effect 

Should all oflne provisions which we have estimated in the attached table be repealed, 

the lowest top corporate income lax rate which achieves revenue neutrality for C corporations is 

estimated to be 28 percent. In estimating the revenue from the repeal or modification of each tax 

expenditure, and determining this revenue neutral rate, we have assumed that no transition relief 

is provided for any revenue raising provision. We have assumed that almost aU oftbe provisions 

would be effective for taxable years beginning after 2011. The estimated 28 percent tax. rate 

could chaoge as estimates are refined, if provisions are added Qr removed from the list, and as 

any transition relief is developed for revenue raising provisions. 

Finally, there are several provisions thaI do not change the total value of nominal 

deductions permitted to the taxpayer, but rather change the years in which such deductions may 

be claimed. For example, limiting depreciation deductions to the alternative depreciation system 

rather than the MACRS depreciation system changes the timing of deductions rather than the 

total nominal value of the deductions. The 10-year budget estimates for such provisions are 

significantly larger than the long-run effects where all vintages of investment are depreciated 

underthe new regime. Similarly, the estimate in Table # 11·] 134 (itemV.l8.b) regarding the 

rapeal of the inventory valuation method of the lower of cost or market value, shows that all the 

revenue raised from repeal accrues prior to fiscal year 2019, with little revenue estimated to be 

raised in fiscal year 2019 or thereafter. Therefore, we also emphasize that while we estimatetbat 

a rate of 28 percent would achieve revenue neutrality for C corporations within the lO-year 

budget window, this rate would not necessarily be revenue neutral under II longer budget 

horizon. 

Attachment Tables #11-1 B3and#Il-l134 

73382.090.epssrobinson on DSKB307YQ1PROD with HEARING

27-Oct-1l 2:11PM 

- COlPmittee on Ways Bnd Means 

#/1-1/33 

VERY I'RELIMIN

27-Oct-11 

ESTIMATED REVENU, EFFECTS OF CORPORATE TAX REFORM REVENUK RAISING !'ROVISIONS THAT REPEAL OR MODlFV TAX EXPENDITURES 

Provi!tion 

l. Gt:ueral Space, aod Technology 

1. Credit fur increasing research activlttes (sectioll41 ) .... 

2. Expcnsmg of research and eKperimemal expenditures .> 

II. Entrgy 

I. Credits for alternative technology vehIcles. , 

2. Credit for holders of clean renewable energy bonds 

(sections 54 and S4C) .. , 

3. Exclusion of energy conserwrtion subsidies provided 

by public utilities ... 

4, Credit for holder of qualified energy con:!>crvalion 

bond<i ...• 

5. Credn fur enhanced oil recovery costs ... 

6. Repeal credits for alcohol fuels. . 

1. Energy credJt (section 48).. _ 

a. Solar .. 

b. Geothemlill. 

c. Fuel cells .. d. Mlct"oturbines .. 

e. CHPpmperty ... 

f. Small wmd systems ... 

8. Credits for electricity productiOfl from renewable 

resources (section 45). 

a. Wind •.. 

b_ blOma."s. 

c. GeothermaL. . 

d, Qualified bydropower .. 

e. Solar (limIted to facilities placed m service before 

1/1/06) ... 

f. Small in igation power 

g. Municipal solid waste .. 

a OpenAoop biomass. .. 

Eff«ti\'e 

l)'ba 12131111 

t}ba 12131111 

ty"" 12!3J111 tyba 12131111 ty"" 12131111 tybal21>l111 tybal21311l 1 

sauaOOE 

lyba 12/31111 

tyba 12131/11 tyba 12131111 tyba 12131111 tyba1213lill tyba 12131111 tyba 12/31111 tyba 12131111 tyba 12/31lt1 

tyba t2f31ill 

ty"" 12/31111 tyba 12131/11 

tyba 12/31111 

tyba 1213111\ tyba 12/31/11 tyba 121J1I1l 

YlSul V tars 2012 - 1011 

[BillionsofDoJlors} 

2012 2013 2014 2015 20\6 2017 2018 10\9 2020 2021 201:1-16 

30.4 41.4 32.3 22.1 ILl 7.0 6.9 50 2.8 1.1 137.4 

III III [11 (II [IJ 

[I] [1] [II [II (1) [1) [IJ [I) [IJ [I) 01 

- - - - -- - -Presently UtiaWll1able - - - - -- - - - - - -- - - - -- - - - - - - - -- - - 

(I] [t] (I] [IJ [I] 01 01 0.1 01 0.1 0.1 

.• -- -- - - -. - - --- - -- -- - -- - -- - -- - - - - -- !Vo Effiet - - - - - - - -- - - - -- - -- - - -- -- - - --

-

__ N __ • ______ • ______ __ -- _ - Pre.fenliy Unavat!abJe - - -- -- - - -- -- - - - - - - - - - -- - ---

0.4 0.5 0.6 0.7 0.& 05 05 0.4 0.4 0.4 3.0 

--- ------- - - - -- - --- - - • Esllmale lndudedin ltem 11.7. 

--------------- - - - - - - • &INmate Included in Item IL 7 

-

_. -" - - - - -- _. - - - - - - - -- - - - - - -. - - - -Estimate Inciudni in Item l/.7. 

- _ - - - - - - - - -- - - - - - _ ... - - ----- - - - - - - -Estimate Indwiedin Item 11.7. 

, - - - Estlmdte Ind.Uikd In Item J/. 7. 

- --- - --- - -- -- - - -- - -- - - - ---

_. 

- - ---- - ESllmate JncltJt.ied In Ifem 1l.7. 

0.1 0.2 0.3 0.3 oJ 03 03 0.4 0.4 0.4 1.2 

_. 

--

_ ... 

--- -- - - - -- -- --- -_ ... - - - -- - Estimate Included in {{em II.B. - - - -- - .. - -- - -. - --- - ... - -_

---. _ - - - ¥ -- - - - _. - - - - -- -- - - .. -- - - -Estimate Included in lum Il8_ - - - - - - --- - - - -.- - -- -_. _. - .. - 

• . - - - - Estimate Included in Item I/.B. 

• - - - EsUmate Included JTJ Item II 8. 

- - - - Estimate IncJULkd in Item 1/.8. 

______ .. __ N .. __ __ .. __ ... 0'. __ .... _ .. _ ....... Estimate Included in Item fl.8. 

_ 

-- - - -- - _- ... - ---- - - -- .. -- - - - .. - .. - - -- Estimate Included in Item II.B. 

- -_ - - - __ " _____ -- - ----- - --------- ---Estimate lnclwkdinltem 118. 

73382.091.epssrobinson on DSKB307YQ1PROD with HEARING

ProvisiOli 

9. Credtts for in dean coal facilities .. 

10 Coal production c:rewts: 

a, Refined coal 

b. Indian Ci)aL 

11 Credit for the prodUttlOl1 of energy-efficieTU 

appliances 

12. CTed.it 101' dean·fuel vebicle refueJmg property ... 13. New energy etfiGient bomes r..1"edit .. , 14 Credit for Investment In advanced energy property .. 15. ExclUSion ofrnterest on Stare and local government 

qoalified private activity bonds for energy production 

facilities. 

16. DeductIOn for expenditures on energy-efficiertr 

Efftc:tnrt 

tyha 12JJ.lJll 

lyba 12/3f111 

tybat2J31111 

tyba 12131111 

tyb312131111 

tyba 12131111 

tyb.,2131111 

tyba 12/31111 

commercIal building property... t)'ba 12131/11 

11. Repeal expcn..,ing ofoi! and gas exploralJoo and 

development costs... Cpo-In 12131/11 

18. Repeal percentage depletion fOl" oil and natural gas 

weDs.. Iyba 12(31f11 

19. Repeal percentage depletion for ooal and bard mmeral 

fossil fuels .. < tyba 12131111 

20. Increase geological and small integ:rat:ed geophysical 

amortlZ1ll:ion penoo for independent producers to 

seven years apoia 12131111 

21. AmortIZation of air pollution control faciliues.. tyba 12131111 22. DepJ"eClB.tion reoo'Yety periOds fOf" energy specific items 

a, MACRS for certain energy property 

Page 2 

2012 20U 2014 2015 1016 11)17 2018 2019 2020 2021 2012-16 

- - - -No Rl.'l'efUle Effect - - - - - - - - - - " - - - -"" - - - - - 

___ ___________ 

• 

___ 

• 

_________________ /1.''0 Revenue bjfect--"- _________ • __ A _ A_ ______ • - 

- - - - - •• - - - - _ .. -- - - --- - -- - - - -- Presently Unavailable - -" - - -- _. - - - - - - - - - - - - - _. - 

0.4 0.3 0.1 01 [I] [I] [3] III [3] 0.9 

.- - --- - -" - - - - - Estimate /ncludedln /tem XlVI. 

0.2 0.2 [3] [3] [3] (3) [3J [JJ [3) [lJ 03 

[0 1.5 14 13 1.1 0.9 05 02 02 02 63 

0.6 09 10 10 11 1.1 1.2 1.2 L3 1.3 4.1 

0.1 0.1 0.1 0.1 01 0.1 0.1 0.1 OJ 0.1 0.6 

[lJ 0.2 0.2 0.2 0.2 0.1 0.1 00 0.0 0.0 0.8 

02 02 02 01 0.1 0.1 0.1 0.1 01 0.1 0.8 

(solar, willd. etc.)." lyOO 12/31111 ,- -- - -_. _ •• - - - -- _ •••. ,. - Estimate Included in ltemXIIl.2, 

b. MACRS for smart electric distribution 

tyba 12131/1 I ---- -- ------------ ----------------Eslllffatelndude4",llemXIV.2. 

c. IS-year MACRS fot" certain electric transmission 

pr-opcrty tyb.a 11131111 - -- --- - - - - -- - - _. - - -, - -- -" -" -." • Estimale lncludedm IteM - -- - --- -- ---" - - -- - - - - - - -

d. 15-yeru-MACRS for natural gas distribution line .. , tybil 12!3lJll _ •••• --- - ---- -" - - -. ------ - -Mt",rate /nclru:JNm Item ;r.1V2. 

23 Electton to expense SO percent of qualified property 

used 10 refine hquid fuels ... 

ilL Natural and Eoyirooftu!bt 

1 Special a]loW<lnoo for certain reuse and 

recyclmg property .. 

2. Expensmg of expIoratl0n and development costs, 

nonfuelmmcral:;' 

3. Exces.s of percentage over cost depletion, nonfuel 

"""",ai, 

4. Expensmg oftunbcr-grmo.·ing costs ..... 

tyba 12131111 

ryba 12131111 

tyba 12(lJIII 

,yba 12131111 

tyba 12tJIlII 

--- - - - - - - - -- - - - ----- ••• - • -

____ 

- --EsltlMle Included in ItemXIV.2. ---

01 0.1 01 « 1 01 0.1 0.1 0.1 

0.1 0.1 01 0.1 0.1 0.1 0.1 0.1 

0.1 01 0.' 

0.1 0.1 0.4 

73382.092.epssrobinson on DSKB307YQ1PROD with HEARING

Page 3 

Provision- Elf«rive 2012 2013 2014 201S 2016 2017 2018 201. 2021 2012-16 

5. Special rules for mining reclamation reserves ... lyba l2/3IJl1 -- - -_. - PreSerdJ)' Unavadllble - -, -,. ------. --- - - -- -- ---- _

6. Impose fun tax rate on nuclear deconunissioning 

fese(Y(: funds... , 

7. Ex.clusion of contributions in aid of construction for 

water and sewer uljJilil!S. 

g, Exclusion of earnings of certal11 environm.ental 

settlemertt funds 

9. AmortizatIOn and expensing of reforestation 

expenditures 

IV. Agriculturt" 

I. ExpenSing of soil and water conservation 

tyba 12/31111 0.1 0.1 0.1 0.1 01 01 0.1 01 tyba 1213l/11 • - ___ ' - - _w •••• __ • __ • _. _ Presently (jt1O'JoiIable 0 __ _ 

tyba 12/3lJlI .. - -- •. ___ 0 __ " - ____ A ___ •• --- - __ 

tyba 12ill.fll - -.- __ • - - - --- - - __ -" --_ - - - - - -- - - - -- - - -. PrestHl(Y UlltNarlable--

expenditures.. tyba 121] Ill} 

1. Expensing of tile costs of raising dairy and breeding 

cattle... tyba Ill3 Iffl 

3. Exdn.sion of cost-sharing payments... tyba J2/3l/11 

4. Exclusion of can cella bon oi"fudebtedness inooroeof 

5. Five-year carryback. period for net operating losses 

attributable to farming ... 

6. E>.:pensing by f8Jl1leE"S. for fertilizer and soil 

conditioner 0lS1.$ 

V. Commerce aud Housing 

A, 

J. Repeal the exclusion of interest on all State and local 

go\'tmment quatirled pri .... ate activity bonds, ' 

2. Repeal dle credil for low-income housing .. 

3. Repeal the rdIabilitation credit .. 

tyoo 12/31111 t)1>a 121}1I1i 

1);'012131111 

bia 12131/12 - - - - - -- -- - - -- ¥. -- - - ---- - - - £stimale lncludedm Item XIV 1. 

caa 12131/12 0.2 0.6 • .5 2.5 3.6 48 6.0 caa 12/31112 0.1 0.4 0.5 0.1 08 0.8 

01 

7.2 

0.9 

0.1 

84 

0.9 

4. Depreciation of rental housing in ex(:ess of altemat.ille 

depreciation <;ystem tyba 12/}1111 .,. - -PresenJl)/ - -- _. -- -- _. 

B. Other Busmess and Commerce; 

I. Exdusioo ofmterest on State and :local govertunenl 

small-issue-quaIified private actr.<ity bonds... bi&. 12i31f12 . --_. - - --- -- - ------- -- • • &tlinal€ Includ£dmltemXIVI 

2. lS·year reoo\-'eI)' period for retail motor fuels outlets... tyba 12131111 

3. Repenl the speciaJ rules for non-dealer lfl:stallmcnt 

sales... N/A 

4. Repeal the deferral of gain on like-kmd exchl'mgcs... _ 

5. Expensing Wlder section 179 of depreciable business 

property . 

6. Amortization ofbusme:ss startup costs ... 

eca 12JJII12 

tyba 12131111 

tyoo 12131111 

01 0.2 04 0..6 1.1 19 2.9 4.4 6.6 

0.5 

48 

17 

24 

73382.093.epssrobinson on DSKB307YQ1PROD with HEARING

ProvisiOll 

7. Reduced ra1.'es on fIrSt $10,000,000 of corporate 

taxable income" 

8_ Exemptii.ll1S from imputed interest rules ... 

9. Expensmg of magazine circulation expenditures ..... 

10. Special rules for magazine, paperback book, and 

rewrdn:tums" 

II. Repeal the completedconttact rules method .. , .< 

12. Cash accounting, other tban agriculture ... 

13. Credit lOr employer-paid FICA tllXe5 on tips. 

14. Repeal the deduction for income attnbutable to 

domestiC production activities , 

15. Credit for (he cost ofcar:t')·ing dii.1iUed 

spirits in wholesale inventories ... 

16. ExpensingofcoslS toremovearcbitecluraland 

transportation barriers to Ihe handicapped and elderly. 

17 Ordinary gain or loss treatment for sale O( exchange 

of Fannie Mae and Freddie Mac preterred stock by cert.ain financial institutions ... 

IS, Inventory methods and valuation: 

a Rqx:.alla."t in [1rS1 out... 

h. Repeal lower of cost or market .. 

c Specific identification for homogeneous: pn:Klucts .. , 

19 ExclusIOn of gain or loss on sale or exchange or 

Brownfield property ... 

20. Income rerognition rule for gain or loss from section 

1256 contracts . 

2 L Net alternative minimum taX attributable to net 

p ..... 

Effttti...e- 2812 2013 2014 2015 2016 2017 2018 2019 2020 2U21 2012-16 

Iyba i2/31/l! - •••• ---- -- - - _. -- -. - --- ---- - .. ".- --PresentlyUlfCWaiJahle -- - --" 

tyba 12131(11 

.yba 12131/11 

tyba 12131i1l 

sooda 12131112 

wba 12/11 III 

.yba 11111/11 

tyba 12l} 1111 tyba 12/31111 

- -. - - - - - - --- - -- ---- - - - - - -- -- -- -- -- - - -- Presently Unavauable - - - - - -- - - -- - -- -- -- -- - - - - - - - - - 

0.9 2.1 2.3 2.4 2.5 15 0.7 0.7 OS 7.7 

-. -. __ - _______ • __ "". _______ • ______ - __ --i'resentlyU.navaiiable - ____ •• ____ - - __ - - ______ . _

07 0.1 0.7 08 08 08 0.9 0.9 0.9 09 1.6 

4.3 n.9 14.7 1$6 16.5 11.6 18.6 19.7 20.9 22.1 65.0 

lyba IV31/11 - --,,* ••• -- ------". --- ... ------- - - •• - .--PresenllyUfkno.a#able - _______ .". ___ • __ • ___ • - ___ ••• 

tyba 1213J11 J - - -- - - ---- ------ - - - -- - -- --- - - - - -- - - - Unavailable -- - -. - - .. - - -- .. --- --

.yha 12131112 

'yha 12131112 

tyba 12131111 tyha 12131111 tyba 12131/11 

3.9 01 

69 

08 

73 

09 

7.5 

0.7 

7.9 

0.3 

85 

01 

8.9 

[IJ 

9.2 

(I] 

9.6 

[U 

----

__ 

•• 

_ 

•• _- - --- .... - -_ .. - -- - -. _____ '0 __ PresentlyLI1UI'o."'adl.Jble. -- - - ----.•. _ ••• ---

- --

.. 

- - - - - -- - - -_ .. -- - - -- -- _ .. -- _ .... -- - _ ... - Presently llnavai/able -- _ •. - - - - - .. - -. - - - - .. -

25.5 

2.4 

operating loss limitation....... tyba 12131/11 

22. Exclusion of mierest on State and locaJ qualified 

pnvate activity bonds fOr gr(Xl1 buildings and 

sustaillablede$ign projects tyba 12131/11 - - - - - -. - - - - - - - - - - - - - - - _ - - -- - . - Estimate Included in Jt#!m .XIV.i, 

23, Repeal MACRS and apply ADS in the depreciation of 

buildings otber than rental housing,.. ppisa 12131111 . - - - - - - - - - - - - - - - _. - - - • - - - - - - - - - - - • EsiillUJte Included in item XlV.2. 

24. Repeal MACRS and apply ADS UI thedepreciablln of 

equipmenL ppi-sa 1:2.131/11 - - - - - - - - - - - .... -- - - - - - - - - --- 0- -- - EsUmale/ncluded tn Item XlV 2 

25. Inclusion of income arising from business indebtedness 

discharged by the reacquisition of a t1ebl instrument 

26. 5-year .carrybac:k. of general business credits ... 

C Fmanciallnstltutions: 

1. Exemption of credit WlKm income .. 

tyba 12131111 

.yba 12/31/11 

• -_ .. - - - - Presently Unavailable __ .. - - - - -_ .. _ ... M .. -

- - -_ .. - - .... Presently Vnavaltable -- ----

tyba 12131111 - -_ •• - - -- - - _ .... - -- -- .. - - - - - - - - - .. --- -- - -- Prestntly UnavQllable 

73382.094.epssrobinson on DSKB307YQ1PROD with HEARING

Provisklo 

D. Insuran(:eCO-tnpanies: 

1. Expand pro rata mterest expense dIsallowance fOf 

wmpany-owued Ilfclnsu:rance, .... , 

2. Smalllifu insurance oompany taxable: income 

adjust:.rut:nL. " 

J- Special treatmenl onife insur3Ilcc company resel"WS . 4. Special deduction for Blue Cross and Blue Shield 

compatues. 

5. Tax-exempt sta1us andelectioo to be taxed only on 

mvestment income for <:ertaln small property and 

£8sua1ty insurance compame5, .. 

6. Interest rate and dlscoWltmg period assumptions fur 

reserves of property and casualty insurance 

companies ... 

7, Proration for propert} and cm:ualtymsuflmce 

compames .. __ _ 

VI. TUDSportatioB 

t Defcrral of ta.x: on capita1 construction funds of 

shipping companies 

2. F.xclusiooofinterest on State and local 

qualified private activit) bonds for highway projects and nriHruck transfer facilities ... 

3. High-speed intercity rail vehicle.speed requirement 

for exempt high-speed rail facihty bonds, 

4. Exc1usion (If interest on State and local government 

private actIvit}! bonds for pnvate airports, docks, and 

mass-<oounuling facilities ... 

VII. Community and Regional DevelopmtDt 

t:ffecUv(: 

121 

tyba 12/31111 tyb.12131111 

tyba 12/31111 

tyba 12131111 

tyba 12131111 

2012 

01 

0.2 

Page 5 

2013 2014 

0.2 0.4 

0 .. 0.4 

2015 2016 2017 2018 2019 2020 2021 UJl2-16 

os 06 0.8 0.9 10 11 12 19 

••. PresenJ/y Unavar/ab/e • --

• w. _ PreSRtillyUnovailablR ____ _. ___ •• 0_. _'0 0 .. _ .... _. 

0.5 0..5 0.5 0.5 0..6 0.6 0.6 2.0 

• 0 •• '. __ • _ ••• Urun·alfable 

tyba 12131/J I - -_. _ .. _w_ - __ -- -- _ ... -- - _. -- -- ---- - Pre$1imtiy UntzT;adahle -- - - -- • __ • __ - - -- -- - --- - - - •• --

tybo 1213111 ) 

tyba 12:1:3111 J • - - - - -- _w_ - __ -- --. - --- 0- - - - - _____ - -Esllmate incfud(:'d In Ite",XlV ___ ._. - - - ____ - - _____ 0- _. __tyba 12131111 

hia 12131/12 - -- _ -- - -- --. - - --- -- _w - -- -. --- --- - - - Est{rmtle lncludedm ItemXJVI. 

1. Ertlpowermenl zone tax incentives... . tyba l2!3lfJ t 

2, New markets tax credit.., tyba 12/31111 

3. Repeal the Dist:ricl-OfColumbia tax incentives N/A 

4. Credn for Indian reservation etnpwyrnent..., . tyba 12131/11 

5. Exclusi(m of interest on State and toeal government 

quaIifiedprivale ocu",ty bond .. for sewage, water, and 

hazardous waste facihties .. 

6_ Issuance ofreooveJ)' zone economic de""elopment 

bonds .. 

7- )ssuiUlreoftribaJ eronomic development bonds ... 

&. Butld America bond,> ... ,. 

hia 12/3li12 . - - - - -- - - - --. - -- -- - - - - -- - --- - - --Bslimattlncluded in Item XlV. t. --- ---- - --- -- -- - -- - -- -

tyba 11131f1l - --_ .. ".- .-- -- _. -- - -.- - PresentlyUnavai/able----· H -- - ---- - - ---

tyba 12/31111 _. - •• - -_ •• -"" _ - - __ 4 __ •• _ •• _" _. - --futimafe/ncludedin Item XIV. f. ___ • ___ • < 0_ 

tyba 12131111 

73382.095.epssrobinson on DSKB307YQ1PROD with HEARING

Proyi5ioa. 

9. Eliminate requirement that fmancial institutions 

allocate interest expense attributable to tax--exempt 

interest. 

to. Disaster Relief 

3. Gulfopporrunjty 2one ... 

b. Midwest 

c, Natiortal disaster reheL", 

VIII. Education. Training, Employmmt. JIDd Social St:nrices. 

A. Education and Training: 

I. Exclusion of on Sate and local government 

qu-dlified pnvate uctivity bonds for student loans, 

2:. Exdusmu of interest on State and local govemmmt 

qualified private activity bonds for private nonprofil and qualified public educational facilities ... ,. 

.1 Credit fot holders of qualified zone academy bonds ... 

4. Deduction tor charitable contributions to educational 

institutions- .. 

R EmpJoyment: 

1, Repeal. deduction for dJwlends paid to an employee 

stock o_""hlp plan 

2. Deferral of taxation on spread on acquiSItion of stock 

under incentive stock option plans ... 

3 Deferral oftax.ahon on spread on employee stock 

purchase plans ... 

4. Disallowance of deduclion for excess parachute 

paytnCnts (appliOlble if payments 10 a disqualified 

individual are contingent on a change of control of a 

corporation and are equal to Of" greater than three 

times the indiVidual's annuaHzed includlbie 

compensation) 

5 limits on deductible compensatioo",. 

6. Work: opporrunity ta.x credit.. 

7, Credit for retention of oertain newly bired workers ...... . 

C. Social Smrices; 

I. Credit for emplo)'er-provided dependent care ,".' 

2. Deduction for Charitable contrIbutions other thun firr 

oo.ucation and health ... 

3, Credit fOT disabled access expendlturCL . 

Page 6 

Em'ctive 2011 lOU 2014 2015 2016 2017 2018 2019 2020 2021 2012-16 

tyba 12131/11 - - - - --- - - - -- - - - - - - --- - -- - - - - --- -- - -- - Presently tyba 1213l!1l _ •. - - - ---- ----- --- -- - ------ - -Presently Unavailable tyba 12131/11 __ - __ -- -. ____ ____ • - - Unavmlabk - - - - ---tyba J2f3f!11 - - - -. - - - - -- - N - - - - - -- - - - - - - --•• -- - - - Unavmlahle - - - --- --

bia 12131111 .• - ... - _. •• _ N _.-

bia 12/31/12 ,- - - 4 - --- ¥ Estimate Jncluded mllemX1V.J. - - - - - _ •• - - - - -, 

tyba 12131111 w __ _____ ___ • ___ ¥ __ • ___ ____ " N - - _"0 PrCtlent(v lJnatJoilable- _. ___ .. __ .. tyba 12/31111 - _ .. - .. - _ .... - - - - _ .. - - - - -- - -- --- -.- .. - - - - - ¥ - Presenzly Unavadahk -.-

dpaDOE 

tyba 12131/11 tyba 12131111 tyba 12131111 

tyb.12131111 tyba 12/31/11 

tyba 12131111 

tyba 12131111 

04 04 06 06 0.1 

-

_. ¥ .. _ .. - .......... -- _ ..... - _ .. -. -.- - - - .. -- - -- _ .. ?rest!rrfly llnavaiiabJe - - .... -. 

-." _ .. - .. - .. - .. - _ .. " -- - -"".""" _ ............... Pusently Unavailable 

.... 

-

.... 

- - Provhion Expires December- 31, 2M 1 

• _ ... __ .. _o¥ __ _ .. ____ N_ .... ---PrQVislU1ZExpfres Decembir3/, 

PI 13] [3J [31 [3] [31 [3J [3J 

.. ¥ - - "-- .. - - - ........ - - - ...... - - _ .. - - -" - -- -- .. - - - PrefU!n1Jy {lnavaiJabJe 

PI 

0.& 

[3J 

tyba IZf31/11 

tyba 12131111 • ...... - - - ...... .... - -" .. - - ...... - .. .................. - - " .. Presenl{J' UnavaIlable - - ........... - .... - .... - - ... 

2.7 

.oj 

73382.096.epssrobinson on DSKB307YQ1PROD with HEARING

Pf(}vision 

lX.H('altlt 

1. r..xclUSIOR of interest on Stale and local government 

qualified activity bonds for private nonprofit hoSpital 

fac!lliles .. 

2. Deduction for charitable contributions to health 

orgallllations .. 

P,,",7 

EffediYe tOI1 20U 2014 Z()15 2(116 lOl7 2013 2019 1010 20n 2012·16 

bia 12131.111 - - - - - ",--- -. - - - - - - _ -- - -- _ - _.- -.- - lncludi:dinltemXJV.l 

tyba 12/31/11 

3. Credit fOI orphan drug resew.ch. tyba 12iJ 1I1l ___ _ - • - - ______ - - .• ___ - - - - - - - •• __ - - w Presently Unavwlable - - - - • -" - - - - - - - - --

4. Premimn subsidy fll.COBRA continuation C(l"-emge, tyba 12/31111 - --- _. - - ---- - --- -- - -.- - -- -- - - - -- - - -- -- PresenJiy 

5. TucreditfotsmaJl businesses purchasing: employer 

IllSllrance... tyba 12/31111 

X. Medkart 

I Exclusion ofMedlcare - exdUSlOn of CCJ:taln 

subsidies to employers who mamtain prescnptlOO dnlg 

pJans for Medk'OO:' enrollees... tyba 12/3111 t 

XI. [dcome- s«urity 

1. Exclusion of disaster mitigalion payments. tyba 12131/11 

XII. Gt'neral Purpose Fitnl Assistance 

I. Exclusion of mterest on publIc putpO<re State and local 

bonds", tyba 12/:3ffll • -- ---- - v __ - --_._- - --- - -. - _. -" - - -_. Prcscntly UlldWJiiabie--

XIII. VdeMlQs Bentfits and S€'nict$ 

L £xdllSion of interest OIl State: and local qualified 

private It(,1i1,1ty bonds for veterans' housing. bia 12/3t112 '- ---. - - - --- ---.-.-- --- - -- --- ----- - estimale lrtclutkd In /tem.\"WI. 

XIV. General ('orponk l'ax ProvjsiuRs 

I. Eliwinate excllJ$lon of mtere!t on private aCfJVlty 

bonds bia 12J3 f/12 0.1 0.2 0.4 0.7 10 13 16 

2. Repeal MACRS and apply ADS ,. . tyOO 12131/11 19.5 56.6 82.0 918 95.1 96 I 794 72.9 

XV. Reduction ill Corpol"8te RAte to 28% ................ __ ............. tyba 1:2/3l!U -40.5 -'5.3 -71.0 -75.8 ·77.0 -76.0 -77.0 -76.4 

XVI. Interactioa With Corporate Ratf: Cbange ................. .. -J2.9 -24.7 -28.1 -28.4 -27.1 -Ui.ll -J4.7 ·lJ.7 

NET TOTAL ............................................................... " ..................... . 5.6 33.4 47.3 45.2 4Il.J 4Ui 28.3 24.6 

Joint Comminee on Taxation 

... --.----.. 

---

NOTE Del1lils may not add to louds due 10 roUDding 

[ugeruitmdPootnolnjor table Jt.Jl-J lJj appear onIhe jhlJiJwmgpage} 

19 H 14 

67 I 635 3450 

-78.2 -80.4 -329." 

-23.2 -23.3 -IJI..} 

20.0 18_0 

73382.097.epssrobinson on DSKB307YQ1PROD with HEARING

Legend aDd F0lJ1D()tes for Table #11-1 133: 

Legend for "Etrectiw" column 

apoia = amounts pmd or IDCUITed after 

bla = bonds ISSUed after 

caa = credits allocated after cpo!a = rosts patd or inCl:lITtd after 

[1] Gain of less thanS50 million. 

Page 8 

OOE = dak of enaclment 

eca -::: exchanges. romtnencmg. after 

djUI dividends jUlid after 

NfA = not applicable 

[2] Effective for contracts issued after Decenlber 31, in taxable years ending after thal date". 

of less tInm SSOmiltiQn. 

ppisa = property placed m SeJV1U: after 

saua -= sales and uses after sooda = sales or other dispoSitions after 

tyba = taxable years beginning after 

73382.098.epssrobinson on DSKB307YQ1PROD with HEARING

27·Oct·il 2-13PM 

- COOImitke on Ways and 'leHDS-

#11-1 134 

VERY PRELIMIN

27-Dc1-1i 

ESTlMHEP REVENUE EFFECTS OF CORPORATE TAX REFORM REVENtl[ RAISING PROVISIONS TliAT OR MODIFY TAX EXPENPITlIRES: 

PORTION OF R£VENUE THAT IS A ITRIBUTABLE 1'0 C COPORA TlONS 

Fisal Yean. 2012 - 2021 

[Blliwns o/Doflars) 

Provision Effttrive 2012 lOU 2014 2(115 2016 2017 2018 2019 2020 2021 2012-16 

1. GeDtral Sdenc:e. SpH(C't aDd T«buology 

I. Credit for increasing research activities (section 41 ).. tyba 12/311J I 

2. ExpensiJlgofresearchandexperimentalexpenditures... tybu12/3f111 289 39.3 30.7 21 10.5 6.6 6.5 48 2.6 LI 130 5 

U. Energy 

1 Credits for alternative tcthnology vehicle&",. tyba 12/'31/11 

2. Credit fOr holders of clean renewable enetgy bonds 

(sections 54 and 54C) , tyba 12/3 Lit t [I] [lJ (I] [I] (I] [I] [I] (I] [I] {IJ 0.1 

3. Exclusion of energy oonscrvatJan subsirucs provided 

by pubhc utilitles,", 

4, Credit for holder of qualified energy conservation 

bondS 

5 Credit for enhanced od recovery costs ... 

6. Repeal credits for alC4.iboi fuels ... 

7. Energy credit (s¢'...1ion 48) ... , , 

Solar .. 

Geothemlal 

c Fuel cells. 

MiCToturbincs .... 

e, CHP property ... 

f Small wind systems", 

8; CredIts for electricity production from renewable 

rcS<lurccs {section 45) .. ,,, < .......................... . 

a Wind .. 

b CJosed·loop 

c GeothennaL. 

d, Qualifted hydropower"" 

e, Solar (limjLed 10 rucilities pla<:ed in ServIa: bef"Qre 

1111(6). 

f $mall irrigation power... 

!- Mw}i<;ipaJ solid Waste .. " 

lL Open-iO(.1p biomass .. , 

tyb.12I31/11 

IJ'ha 12i:l1/11 

tyha 12131/11 

saua OOE 

lJ'oo 12131111 

tyoo 12i31/11 

lJ'oo 12i:l111l lJ'oo 12i31/11 lJ'oo 12131111 lyb.12i31/11 

Iyba 12131111 

[1) [1] (I} [I} (I} 0.1 0.1 0.1 0.1 0.1 0.1 

•• 

_ 

•• -

_ -Prestnlly Unavailable __ __ _ ___ .... _ A - - - - _ •••• 

- .--- - - ---- - - - --- -- --- _. _ .. _".- --- -- _. Presently Unamliable - -- _ •• - - - - - - - - _. - - - - - _. - 

-.- .--- -- - _ ..• - -- .• _ ••••• - -- •• -.---- -- Pre,wmr/y l}navailable· - •.•. - •. - - .. - .. - .. -- --. -- ..

_.- - •• - - - --- - - _. - - -- - - - - -- _. - -- --- - -Presenlly UnavaIlable _ ••• _ •. - _ •• _ ••• - -_. ---.-.. _

-. - - -- --- - - -- .. -- .• - --- -- - .---- -- - - - - -Presently Unavallable-

-. - - - - - - - - •••• - - - - - •• - - - - - - - - - - - - - - - - - UnavaIlablE' - - - " - - - - - - - - - - - - - - - - - -. - -

-.-. -- - - ---. -- - _. _ .• -_ •• - - .-. ---- - --. -Presently Vn(fwnlable -.-. - .... 

tyba 12f3lfll 

tyba 12/Jlfll 

tyba 12/31111 - - _. --. - - -. -. _. _. -- - - - -- 4 -Present(v UiftlVtlilable - _ ••• _ •• -- _ •• - .. -. - -

IJ'ba 12131111 

lJ'oo 12/31111 

tyba 11/3111 t . --- •.... -- ._. - - -., - •• - - --- -- - PreM'nt/y Unavailable ----•. -- ..•• - - .. -. - - - .-. ---.-tyba 12131/11 -. -. _. - - _.* _ .. -_ .. -_ ----- .. UlUTllailable _______ • ___ w __ •• - •• - -.-. - tyba 12/11111 ••• - _ ••• -_. - - - -_. - - -- _.- -. --_ •• - - - Presemt}' t/tUllUtlahJe· ----. -- - ---- -. - -. -- - - - tyba 12/31111 • -_. -- -- _.- •• ---.- _. - -- - -." -"- + _. - UlUTllailable _. N. - --. -- -- - - -. - -- --•• -- - 

73382.099.epssrobinson on DSKB307YQ1PROD with HEARING

Page, 

Provision Effnlin 2012 16lJ 2014 lOIS 1016 WI7 2018 1019 2(126 21)21 21)12-16 

9. Credu.ll for IDvestnleDl'i in clean coal facilitres .. _ 

10 Coal production crerllts: 

a Refined coal 

b, InruanooaL 

11 Credit for the production of energy -efficient 

. 

12. Credit for clean-fuel vehicle refueling property" 13 New energy ellicient homt:S credit... 

tybalVll!II 

tyba 1l!J1I1l 

tyba 12'31111 

tyba 1l!Jlfll tyba 12/31111 tyba 12'31111 

"-- ¥ -- - _.- Presentl)' Untwadable ---- - - _ •.. - ---

- - .• Ptesentl} U/UllIai/able - - - - - - - - - _. -- - -_. - _. - - - 

14 Credil for illveslmcnt in advanced energy property. tyba 11131/11 -----.-- .•• - .• ----. - ------ -------- - --- Presently Ul'IaVailllble --- - __ A - _______ - __ - __________

15. Exclusion of on S£a1e and local government 

qualified private actiVll;Y bonds for energy producuon 

facilities. tyba J2131fll ,--- -.- - -- -_. - - ----- - -"-- - -- -- -- - - ESlimafe fnc/w;kdi" IlemX/V I. - - - ----

16. Dedu('tion for expenditures on energy-effiCient 

commerCla] building pmpm)' ... 

17. Repeal expellSlIlg of 011 and gas exploration and 

de."e1opment oosts 

18. Repeal percentage depletion fur oil and natural gas 

wens 

{9, Repeal percentage depletion for coal and hard mineral 

tYba 12131111 

cpola 1213 III 1 

tyl1a 12/31111 

fossll fuels tyba 12!3ll11 

10. Int.'tease geological mid integrated geophysical 

amortization penod for independent producers to 

se .. en)'ears. apoi&I2J3l!11 

21. AmonizatlOnofair JXlIlUllOlI control fucilities. tyba 12131/11 

22. Depreciation recovery periods (or etle(gy specific Items: 

a Five-year MACRS forU'ltain energy property 

u 

U 05 U 

0.1 0.1 0.1 

m 0.1 

M M U U RI 01 

U 0.5 M M M 06 

0.1 01 0.1 0.1 RI 01 

U 0.1 0.1 [il [lJ m 

- - - -' - /'n:semly UJuwailahle • - -

0.1 31 

O? D 

01 M 

m M 

('10131. wind., etc.)." tyba 12/.3110 "-- ------ --. - --- - - _ -_ • ___ --- - - - -_ Estt.nUlte lncluded inltemJ.'W2 .•• ___ ••• __ • __ • ., • ___ ., _ • .

b IO-year MACRS fOr smart electriC distribution 

property.. tyba i20llll .---- ------ ----- ----- -- ---- - -. -., __ - £,stimat(> /ndlltkd in Itt'mX1V.2 

cIS-year MACRS for certain elecrric transmission 

property.... tyba 12/3111l 

d, 15-year MACRS fornarural gas distrtbution line... tyba 12/31/11 -., - --- -.-., - - •• -- - -- ._- --.,. -- - • .,. - - F.slimale Included in ItemXU<2 

23, Election to expell5e 50 perceot of qualifled pmpeny 

used to. refme liquid fuels" tyba 12131/11 - -----., - - -.--., - -- -_. - --- --- -.- - - - _ • .,.,., Presently U"avmlahle - - - - - -.-., - - - -_ -. __ 

III. 'Natural ResOurces and EOl,irooOlent 

L depreCiation allowance for rertain reuse and 

rct),dlng property, 

2. F..-xpen'iing of exploration and development 'COsts, 

nonfUeI mine-mis.. 

3. Excess of percentage over cost depletion., nonfuel 

mll1erals.", 

4. Expensing ofumbef·growmg costs. , 

tyba 12131111 ". - - - ---- - - ---- -- -- - _. --- - - -. -----E.rumate fn.cludedl11 Item.\1v..2, - --- • ., --tyba J2131J1 J tyha 12131111 

tyba l2J311l1 

73382.100.epssrobinson on DSKB307YQ1PROD with HEARING

P_3 

Provision Effective 2012 20iJ 2014 2015 2016 2017 2018 2019 2020 2021 2012-16 

5. Special rules lor mining reclamation reserves...... tyba 12131/11 

6 Impose full tax rate on nuclear deoommiSSl{)mng 

reserve funmL tyba. 12/3 JIll 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,) 05 

7 Exclusion of -contributions in aid of construction for 

water and sc"cr utilities: .... 

8. Exclusion of earnIngs of certain envtrOtunental 

settlement fund ... 

9. Amortilalwn and expensing of reforestation 

expenditures,. 

IV. Agriultut'f! 

1. Expensing of soil and water conservation 

expenilltllr(s ..... 

2. Expensing of the costs of raising dairy and breeding 

cattle.-

3. Exclusion of cost-sharing payments .. 

4. Exclusion of cancellation of indebtedness income of 

fanntt$ 

5. Fi ..... e-year carryback period for nel operating losses. 

attributable to farming ... 

6. Expensingby farmers for rertllu:c:r and soil 

condilloner costs .... 

V. Commrrrl." and Housing 

A. Hou!.ing 

1. Repeal the exdusiOllof mtereston all Stale and local 

govetnmenl qualified pnvate activity bonds ... 

2, Repeal the credlt for low-income housing . 

3. Repeal tlJe rehabilitation credit 

4. Depreciation of rental housing in exi;eSS of alternative 

depreclatlon system, .. 

B. OUter Business and Commerce 

I. Exclusion of Interest on State and local government 

small·lssue qualified private .acli1;lty bonds 

2. 15 .. year recovery period for retail motor fuels outlets .. 

3, Repeal the specIal rules for non-dealer lnstaUmenl 

sales. 

4_ Repeal the deferral of gain on hke-kind exchanges.," 

5. Expensing under section 179 of depreciable business 

prop"rty"" , 

6. Amonization of business startup costs . 

tyba 12131/11 .... ,.". - .. - + - ••• _. - -_ •• - -" - -" ... .. Unavailable. "" _ •••• *._-

tyba 12131/1 t - - -- -" - - - -_ ••• --- _ ••• -_.- - -- -- -- - - - _ •• Presently Unavailable _. -. _. _. -, tyba 1213111 I _. - - - _. - - - - - _ ... - - - - -. - - - - - - - - _. - - - - _ .. Presenlly Unavailable .. - - -

Iyba 12131111 Iyba 12131111 Iyba 12/3(111 

tyba 12131111 

Iyba 12131111 

bia 12/.31112 

caa 12/3lf12 caa 12/31/12 

tyba 1213)/11 

. - --- -. - - -.- _. _. --- •• - - - _ .• - - - - --- - Estimate Included in ftemXIV I 

0,2 0,6 1.4 24 H 45 51 0,1 03 04 05 0,6 0.6 0.7 

-" -- - - - - - -- -. - - Presently Untn'ailable --

-

_. 

- -- - -" - - - - - - - _. --." - - •• Estimate IncludeditlltemXIV.1 

68 

07 

80 

07 

bia 12/31112 

tyba 12/31111 . -- Unavarlable--· -- -- - - --- --- -- -------

4.5 

13 

N/A ·---Pre.$ent(y UlUJ.VaihJbk -- --------.-----" - --- - --- _ •• 

eca 12/31/12 

tyba 12131111 

tyba 12131/11 

0.1 02 04 Ob 10 1.7 2,6 3& 56 23 

73382.101.epssrobinson on DSKB307YQ1PROD with HEARING

Page .1\ 

Provision Effective ID12 2013 1014 2015 2016 2017 2018 2019 20ID 2021 2012-16 

7_ Reduced t3tes. on fJfst $10,000,000 of cOfporate 

taxable Income ... tybal2rJIII I 

K from imputed interest rules." ... lyba 12131111 ---- - --- _. - - - -- -- - -- - - - -- - -- PresiUUIy Unavailable ---

9. Expensmg ofmag.azjne cm:uiatlon expenditures", 

]0. Special ruJe::; for magazine, paperback book, and 

tyba 12/311L1 ---- - •• -.--. - - Present(v Unavat/abte - -". - -_ •• -

rec(lnirelums. 

11. Repeal the completed contract rules method.", 12. Cash accounting, -other than agriculture .... 

Ct Credit fOf FICA laxes on tips. 

14. Repeal the deduction for mcomt: attributable: to 

domestic production activities ... 

1$, Credil for the cost of canying distilled 

tyba 12/31/11 

sooda 12131112 

tyb.12i31ill 

l)'ba12131111 

Iyba 1213 Jill 

spirits in wholesale inventories.... tyba 12/31/11 

16. E;i;pen!';mg of costs to remove ardutectural and 

transportation bamers. to the handicapped and eIOOI)l .. _ tyba 12/3 IIII 

17. Ordinary gain or loss treatment for sale orcxcbange 

of Fannie Mae and Freddie Mm; prefened stock. hy certain finat:lciaf institutions 

18. lnvenooty methods and 

a. Repcallast in first out... , 

b. Repeal lower of cost ot market. .. 

c. Specific idcntrficatiotl for homogeneous prorlUCl!L __ 

19. Exdusion of gain or loss on sale Otexcbange of 

Bro\\'Jlfield propeny. 

20. hlcome recogllltion rule tor gain or loss from section 

1256 contracts .... 

21. Nel alternative minimum tax attributable to net 

operating IOS5 limitation.,. 

22. Exclusion of interest on State and local qualified 

private actiVity bonds for greerl buildings and 

sustainable deilgrt PfC!je<:ts ... _ 

23. Repeal MACRS and apply ADS m the depreciation of 

buildings other than rental housing .. .-

24, Repeal MACRS and apply ADS in the depreciation of 

equiprnent 

25. InclusIon of income arising nom busmess indebtedness 

discharged by the reacqUISition ofa debt instrument. 

26. carryback of general business credit. ... __ 

c. Financial Iil$tltutions 

I. Exemption of credit union Income 

'yba 12131111 

tyba 12/31i12 

tyba 121311J2 tyba 12/31111 

tyba 12/31/1 I 

tyba 12131111 

tyba 12/3111 I tyba 12131111 

PPlS" 12131111 

pplS3. 12131/11 

tyba 12131111 

tyba 12131/1 I 

tyba 12f31fll 

0.9 2,1 2.3 2.4 2.5 1.5 U.7 0.7 0.8 77 

• ---_ •• - .. -- --_.' - -. Presemly (..It/available· --- - - -<- •• ._--- _ 

04 0.4 0.4 0.4 05 05 0.5 0.5 06 0.5 2.1 

33 10.8 11.4 121 12.8 136 14.4 IU 162 I7J 50.4 

. - - - Presently UnuvOi/ab/e "' .. - - ............... - "- - - - - - •• 

- -- - - -- -- - - -- -- -- -- - - - - - - - -- - -- UnavQJlabie - - -

3.5 0.1 

6.2 0.8 

65 

09 

6.7 

0.7 

7.1 0.3 

7.7 

01 

8.0 

tIl 

8.3 

[I] 

8.7 

[I] 

22.9 

24 

•• Una\-'(Jllab/e - - - - _ .. - - - - - _ ... - .. - - .. - - - - - - _ •

_. 

-- --

_. --. - E.. .. timate InclwkdinltemX1Vl, ... 

'. - - -."."" -. -- _ ... - - l:.slimale Int..'iudedm !lemXIV2. ... 

.... - _ .. _ .. -- - -- .. -. _. .. -. --- - - .. - - Est/matI! Incluikd m/tem XIV 2_ 

... 

-- -_ .. ____ ... __ - -__ .... 0. ___ .. __ . _. Presently UnavaJlable ...... 

.. Presently Unavailable - - .... -

73382.102.epssrobinson on DSKB307YQ1PROD with HEARING

Provi!iron 

D, Insurarux Companies.: 

I Expand pro Tllla mterest expense dl:sa11Qwance for 

company-o",'l1ed life tnsurance .. , .. 

2. Small life lnsurance company taxable income 

adjustment 

3. Special tJc&mcnt of life InSllrance company reserves. 

4. Special deduction fOf Blue Cross and Blue Shield 

compames .. ,. 

5. Tax-exempt status and election to be taxed only on 

investment inrome for certatn small property and clkSualty insurance companies .. 

6. Interest rate and discountmg penod a&.umptions for 

reserves of property and casualty iusW'mlce 

companies 

7. Prorauon f-or property and casualty insurance 

wrnpanics 

VI. Transportatinn 

1. Deferta! of tax on capital construction funds of 

shipping comparues .. 

2. ExclUSIOn ofinterest on State and local govcmment 

q'lmhtied private activity bonds for highway projects aJld transfer facilities 

l fhgb-speed ioterclty rail vehicle speed requm.'m.ent 

for exempt high-speed rail fucility bonds" 

4. of interest on State and loJ.:al government 

prl\lUle adivity bonds for private airpons, docks, and 

faCilities ... 

VII. Community Mud ()evelopment 

I. Empnwetroent 7.()ne tax incenti,,·es ... , 

2. New markets tax credit. 

3. Repeal the District ofCoiumbia tax incentives ... , . 

4. Credit for Indian reservation employment... 

5 Exclusion of1fitete!o1 on State and 1m;a1 government 

qualified pri\'ate actiVity bonds for Sewage, water, and 

hazardous wa!o1e fadliticL. 

6. I ssuance of recoveI)' zone economic development 

bond$ ... 

7. Lssuance oftJibal ewnomjcde .... eloptnent bonds. 

8. Build Amt'Tica bonds ... 

Effrctin 

[2l 

tyha 1213111] tyb. 12131/11 

tyba 12I3111J 

tyba 12I3l1IJ 

tyba IW Illl 

tyba 12/31111 tyba 12/31111 

tyba 12131/11 tyba lW1I11 

bi812l3l!12 

tyba 12131/11 

tyha 12i3 tIll 

NIA 

tyba 12/31/11 

bla 121.3lJ12 

tyba 12J31111 tyba 12/31/11 tyba 12/jIlII 

Pogo 5 

2012 2013 2014 201.S 2ot6 2017 2fH8 2019 2020 2021 2011-16 

0.1 02 04 0.5 0.6 0.8 0.9 1.0 l.l J.2 19 

--- - -Presently Unavailable, -- - -- -

- - --- -- - -- - -- - - --- --- P"(i!senIly Unavailable 

0.2 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.6 0.6 2.0 

- - - - Presently {Jnavculable __ • __ ______ _______ ___ N - - - 

- - - - -- - - -- -- - --- ------ - - ---- - - - - Estlmale lncfw;ledm ltemJ.1V.J - -- - - - - - - - -- - -- - - --- - - - - - Estimaie Included iii 

. - - -- - -- - - - - - -- - -- - - -- -- - - -- - - - - - Estunate lrrcludedm Item XlV. J 

- - - - - - - - - - - - . - - - - - - - _ -. - ,- - - - - - - - "Presently Unavailable - - - - - - - - -

- - - -

_. 

-- - - - - &Iirno.te [lU:ludedm Item XIV I. 

- - -

_. 

-- - - - - - - - - - - -

_. 

-- -

_. 

-- - - - - -- Estlmale l"cludedm Item XIV.] 

- - - - - - ProVIsion Expired --

73382.103.epssrobinson on DSKB307YQ1PROD with HEARING

Provision 

Q. Eliminate requirement that financial insfitutlons 

a110catt interest expense attributable to tax-exempt 

interesl 

10. Disa.'iter Relief: 

a, Gulf opportunity lOne .. 

b. Midwest. disaster relief. .. . 

c. National disaster relief. ..... . 

VIII. Education, Training. Em ploym-Cl1t. *nd Social Senir'(5 

A. Education and lrainmg" 

l. Exclusion of interest on Sate and local government 

qualified private activity bonds for student loans." 

2, ExclUSIOn of interest on State and local gO\IClllment 

qualified private activity bonds for private nonprofit 

and qualified publIC educational facilities. 

3. Credit for holders-of qu.aJiIltd zone academy bonds .. 

4. DeductIOn for charitabJe contributions to educational 

institutions.... . .......................................... . 

e. Employment: 

I. Repeal deduction for divtdends paid to an employee 

stock ownership plan (ESOP). , 

2. Deferrul of taxation on spread on acquisition of stOCk 

under incentive option plows." 

3. Deferral of taxalion on spread on employee stock 

purchase plans. 

4. Disallowance of deduction for excess parachute 

payments (apphcable. if payments to a dlsquahfied 

individual are conti.ngent on a change ofconfrol ofa 

corporation and are equal to Of' grealer than three 

times the individual's annuallZed includible 

compensation), 

5. Limits on deductible compensation ... 

6. Work. OpportunilY tax credit 

7. Credit for retention of certain newly hIred workers. 

C. Social Services: 

I. Credit for employer-provided dependem care ... , 

2. Deduction for charitable contnbutions, other than for 

Page. 6 

Effectil't 2012 2613 

tyoo 12/31111 - - - - ---- - ---

tyoo 1U31fll tyba 12131/11 

2014 2015 2016 2017 2018 2019 2020 

• •. - - - - - Presenlfy f,.}rUIwliJablt' . - - • , • 

- - - - - - - Pr(!}"emt,... Unavailable - - - - •• -

tyb.12131/11 ------------ • -. Unavailab/tT- _. - - - •• 

bia 12/3lJ12 •• - - - - - -_. - •• - - _. - -- _. _. - -.-- -_. - - Estlmale lncluded lti Item XlV l. 

bia 12131/12 .- - -_. - - - _. -- _. _. _. -. - - - - _. --- ----- Estimate Induded in Item Xlv. I. 

tybal2IJ1/11 

tyoo I2IJI/II 

dpaOOE M 0.4 0.6 06 0.6 0.1 0.7 0.7 0.8 

2021 2012-16 

n.s 2.7 

tyba 121.11/11 -_. - - - ---- •• -. - -- -_. __ - - -- - --- --- - - _. Unavailable - - - - -- - -- -- - - - -- - -- - - _. -- -. - - - 

lyba 12131/1l - -- - - -.-. - --. - - M - -- - - - - -- - -- - - - - _. - - --Presenr!}' tJnavailabJe - -- - -.-----. - - - - - - _. - - -- - - - - - _

lyOO 12131/11 

tyOO 12131/11 tyba 12111111 tyOO 12131/11 

lyba I2IJ 1/11 

Presently UftaVaiJahJe - - - - - - - - • - • - • 

- Presently' Unavailable - - - - - - - - - - - - - - - _ .. --

.-- --- - - -- -- - - - - -- --. -- - - - - -- --- - Provision Expires Decembt"l' 31. 

M - - PrQvlslOn Expires December 31,201 I 

[IJ [3J [31 [3) [3J [3J [3J [3] [J) [3J -(I,] 

education and health". tyba l2/31111 

3. Credit fur disabled accessexpendllUTeS .. " tyba 12/31/11 - - - - - - - - - - - - -. --- - __ - - - -- --. - - -- - -.- _. Presently Unavailable- - - - - - - -- -. -- - - - - -. 

73382.104.epssrobinson on DSKB307YQ1PROD with HEARING

Page 7 

Provision ... :rrecti ..... e 2012 2013 1014 201S 2016 2017 2018 2019 2020 2021 20l2-14 

IX. Hultb 

I ExclusIOn !)fnUen!slOn Stare and local government 

qualified actIVity bonds fOT pflvate nonprofit hospital 

facilities, 

2. Dcduf;:tion for;;:;hal'lIahle CQntributions to heaJlh 

bia 12/311l2 - - - Estimate lndudedinltemX1V/, 

orgaoi1ations tyba 12/311tJ - - _.0" .",. ---- --- --- ------- -.--- -- -Presenlly VnavailabJe - - - --_._.- - - -- - - --

3. CredIt for orphan drug research. 

4, Premium subsidy for COBRA continllation ;;overage 

5 Tax credit for small busmesses purdusing c:mployer 

J;yba 12/3J/11 

ryha 12131/11 

msllnUl(Z tyw 12131/11 - - -- - - - - ---- - ------. - - -- --- - - - -Presently ljnavOlJabk· 

X. Mediut'e 

t E'lIdll'\lOff of Medicare benefits - exelusion of 

subsidies to anpIQYer:s who mamtain prescnptlOn drug 

tyba 12131111 

XI. Income 

I. Exclusion of disa<;'lcr mlligation payments. tyba 12f31111 

XJL Ge-nt'ral Fiscal Assishloce 

1 Exclur.ion of interest on Pl1bhc pill'JK'lst State and local 

government boruiL.. . tyba 12131111 

XIII. Vetenlns Bemelits and Snvl<-f,S 

I. Exclusion of interest on State and local qualifiedpmate 34.1iVlty Wilds for veterans'boustng.. bia 12131/12 

XIV. General Corporate Tn: 

I. ElJminate cxcitl<;ion of inter cst on private activity 

bonth... bl.il 12131112 

2. RepealMACRS andappJy ADS.. tyba 12131/11 

xv, Reduttion in Corpt){ate Rate tn28% ................................ _.... tyba IV.JUl. 

XVl. Interaction With Corporate IUk .•.•..•. _ ........ .. 

NETTOTAL ...................................................................................... . 

Jomt Comnlltteeoo Taxation 

.. ----".---.. "--...... "---.. -

NOTE; Details rna}' not add to lOla1s due to rounding. {Legendalld f(JO/lwlesfor table #JJ-/ lJ4apPuJTonlhejallIJWmgpagej 

01 

136 396 

-40.5 -65.3 

-ll,9 -24.1 

-5.5 1.6 

-- - ESIITnalP /ndtlJ'kd in XIV I 

0.1 04 0.1 l.0 L3 I .• 

574 643 66.6 673 556 51.0 

-71.0 ·75.8 -77.0 -76.0 -77.0 -76.4 -28.2 -:!S .• -26.8 -24.1 -13.1 

14.0 '.1 3.S 4.5 -4.0 -5.9 

19 2.1 

470 44.5 

-78.2 ..... 

-21.l -21.3 

-9.3 -11.0 

14 

241.5 

-32'J.6 

-Ut.l 

30.0 

73382.105.epssrobinson on DSKB307YQ1PROD with HEARING

P-" 

I..f'gend and Footnote, for Tablr 1111-1 IJ4: 

Legend tOt "Effective" column: 

apofu "" amounts paid or incurred a1tetbia = bOOds issued after caa = credits allocated after 

cpol3 = costs paid or incurred after 

[l J Gain ofless than $50 million. 

OOE "'" date of 

eea = exchanges commencing after 

dpa = d1Vl&:ruis paid after 

NlA = not applicable 

121 Btlective lOr CQntrat1.S- issued after December J I, 2011. in taxable years emling after Ihal. dale. 

pp!Ss = property placed in setvict after 

saua = sales and uses aller 

sooda = sales- Of other dispositions after 

tyba = taxable years beginning after 
78 

Mr. MCDERMOTT. Now, that study suggests that roughly half 

of the cost of a 7-point reduction, that is from 35 down to 28, would 

come from the repeal of accelerated depreciation. Yet all the companies have said this is very important, don’t take away our accelerated depreciation. So you want to retain that. So that means you 

can only finance about a 3 percent reduction, 3.5 percent. 

This report says that if you are going to bring it down to 28 per- cent, you are going to have to come up with $960 billion, of which 

$506 billion comes from the depreciation reduction. And I wonder 

what you would actually support, because, as Mr. Rangel suggested, tax reform in 1986 occurred after Ronald Reagan came in 

in 1981 and played golf with Tip O’Neill and Rostenkowski for 5 

years, and it was before the global economy had really taken hold. 

So we are talking about a new world that we are trying to reform 

now than the one they were reforming in 1980. 

So give me your views of what we should do. What are the things 

that are most important that you are willing to give up or shift off 

on to somebody else? 

Mr. NEUBIG. Yes, Congressman McDermott. We looked at the 

Joint Committee on Taxation’s revenue estimate from October and 

we looked at the provisions they estimated and scored in terms of 

base broadening, and they represented $209 billion out of the total 

corporate tax expenditures of $545 billion. So it was only 40 percent that they actually scored. There was another $185 billion of 

non expiring non-international corporate tax expenditures that 

they had not yet estimated. 

So I am actually relatively optimistic that when you really take 

a hard look, that you can get down to 28 percent and even possibly 

25 percent. 

When I look at the 1986 Tax Reform Act and I look at the base 

broadening that occurred from tax expenditures, it was only 60 percent of the base broadening. Forty percent of the corporate base 

broadening in 1986 was not from tax expenditures. I think the tax 

staffs at Treasury and elsewhere, if they look hard, will be able to 

find additional base broadeners beyond just the tax expenditure 

list. 

Mr. MCDERMOTT. Do you have that list, that 189 billion you 

talk about? Can you tell me what are the pieces in there we would 

have to get rid of? 

Mr. NEUBIG. I can’t. I don’t have those with me. But we have 

gone through the entire JCT revenue estimating list, and they have 

lots of provisions that are not yet estimated and we have linked 

that to the tax expenditure list, and 40 percent of the estimated tax 

expenditures have not yet been estimated. 

Mr. MCDERMOTT. I would appreciate and I think everybody on 

the committee would appreciate if you would give us what your estimate is. Anybody else have any ideas how to do this? 

Mr. HEENAN. I think I would just like to maybe echo Member 

Levin’s comments. Sort of a quick-fix answer is difficult to give. I 

do think we have to look line-by-line at each of the expenditures 

and balance that. We need to weigh it against the benefits of a tax 

rate reduction. And certain expenditures are going to be more important towards growth, and that will equal jobs, and we will want 

to retain those. And others I think we can look at and throw away. 


srobinson on DSKB307YQ1PROD with HEARING
79 

So I think everything should be on the table, and we have to 

have a very serious conversation about which ones we want to take 

out and which ones we want to keep. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

Mr. HERGER. Mr. Reichert is recognized. 

Mr. REICHERT. Thank you, Mr. Chairman. I want to try and 

get three quick questions in, so no speeches, I will just start with 

the questions. 

Try to think of these questions in terms of jobs. We all want tax 

reform and we want to energize the economy, but we want to get 

people jobs here, of course, in the United States. So Ms. Hanlon 

and Mr. Neubig, there are numerous provisions in the Tax Code 

that have the effect of providing preferential treatment to particular business behaviors or particular sectors of the economy. Do 

you agree that the primary objective of tax reform should be to address these kinds of distortions in tax law? 

Mr. NEUBIG. Well, I think tax reform really should have the 

goal of trying to make our tax system much more pro-growth, simpler and fairer. In 2010, the House as part of the expiring provisions included a provision, that was not ultimately enacted, that 

required the Joint Committee on Taxation to look at all of the expiring tax provisions and do an analysis in terms of the cost-benefit 

analysis, and who the beneficiaries were. And I think it is that type 

of analysis that really is important in terms of looking at all these 

provisions that Congress has previously enacted. Some of them 

very well may be worth keeping as part of tax reform. Others, if 

a thorough analysis has been done, may be outdated and should be 

eliminated. 

Ms. HANLON. I agree with Tom. I think the fairer, simpler approach would be the best approach to take. And what I hear most 

companies saying actually is that they are willing to make these 

trade-offs, they are willing to put things on the table. They would 

rather not, but they are willing to do it if it would get them to a 

lower rate. 

We conducted a survey of tax executives and we asked them 

point blank, we said, does the U.S. corporate tax rate hinder your 

competitiveness? And almost 80 percent of them said ‘‘yes,’’ unequivocally. So I think these things are very important, and I think 

a permanent lower rate, a stable tax structure that is predictable, 

I think that is the best way to go. 

Mr. REICHERT. So the cost-benefit analysis, a thorough review 

of pro-growth policies, a simpler Tax Code and a fairer Tax Code 

equals jobs. Would that be accurate? I see nodding heads, but I see 

Ms. Hanlon hesitating. 

Ms. HANLON. I am not hesitating. 

Mr. REICHERT. Just say ‘‘yes.’’ 

Ms. HANLON. It certainly wouldn’t hurt job creation. That is for 

sure. 

Mr. REICHERT. Okay. The second question, according to Mr. 

Fryt’s written testimony, since 95 percent of the world’s population 

and 70 percent of its purchasing power is today outside the United 

States, it goes without saying that global markets are a critical 

component of the future growth and success of the United States 


srobinson on DSKB307YQ1PROD with HEARING
80 

businesses. How does the success of U.S. global businesses impact 

jobs in the United States? 

Mr. FRYT. I think we are a great example of that, Mr. Reichert. 

Also in my written testimony I included some statistics about our 

growth since 1989 when we first got into the international—started 

growing our global network in earnest, and our U.S. team member 

count, for example, has grown from 56,000 members to 245,000 

members today. It is symbiotic. Our global growth and U.S. growth 

have increased in tandem as our global network has grown, and we 

have seen that with our customers as well. 

As you pointed out, 75 percent of the world’s purchasing power 

is outside the United States today. That is a huge market and it 

is increasing. And that seems to me to be something that we need 

to tap into very effectively in this country to address even some of 

our revenue issues. 

Mr. REICHERT. Anyone else like to comment? 

Mr. HEENAN. Yes. I would reiterate those comments. Praxair, 

as I mentioned earlier, our headquarters are in Danbury, Connecticut, our R&D is in Tonawanda New York. When we grow globally, when we win projects globally, we get jobs here. Those folks 

are working on those projects. It is not as good as a project here 

in the U.S. in terms of how many more jobs you get, but it is adding jobs. So global competitiveness is critically important. 

Mr. REICHERT. One of the things we struggle with here in this 

committee and Congress is we want to see United States trade, 

right? Ninety-five percent of our market, as we said, is outside this 

country. We can’t all buy American here in the United States. We 

want other countries to buy American. 

My time is up but I want to ask your help. Please deliver the 

message that trade is good for our global economy. The global economy good for the United States economy, equals jobs. Thank you. 

I yield back. 

Mr. HERGER. Mr. Boustany is recognized. 

Mr. BOUSTANY. Thank you, Mr. Chairman. I want to clarify 

something that came up during Dr. McDermott’s line of questioning, and that is the Joint Tax analysis that was done. Mr. 

Neubig pointed a couple things out, but I think this bears emphasis, reemphasizing these facts about that specific report. 

First and foremost, the estimates are not complete, and, secondly, they are not comprehensive. In fact, only 60 out of 150 

measures have been scored, and those are preliminary, and that 

gets us to a rate of 28 percent. So I am optimistic that we can actually get to a lower rate once we have a full analysis of all these 

measures. So I think we need to keep that in mind, that the Joint 

Tax analysis is not comprehensive at this stage, and incomplete, 

and our committee will have to continue to work to get to that 

point. 

Professor Hanlon, we have all been very concerned about the 

vast number of temporary provisions in the Tax Code and the uncertainty it has created. Oftentimes these get renewed retroactively. It creates a lot of problems certainly from a compliance 

standpoint. But I would like you to elaborate on how do you deal 

from a financial accounting standpoint with these, and talk about 


srobinson on DSKB307YQ1PROD with HEARING
81 

some of the problems that therein lie with these temporary measures. 

Ms. HANLON. The temporary provisions I think cause similar 

difficulties on the tax side and the book side in a way that they 

are just unpredictable. So it is hard for companies to plan. It is 

hard for them to make long-term investments given these fits and 

starts in the Tax Code. And the accounting just will fall out in the 

sense accounting just accounts for whatever happens. 

But, again, it is hard for them to predict what that effective tax 

rate will be, and they are benchmarked often on that effective tax 

rate to other companies and so forth. So I think it is just unpredictable for them. It is hard to make investment decisions when things 

are in flux like that. 

Mr. BOUSTANY. Thank you. And, gentlemen, you all are looking 

at this from the private sector. You have to deal with this. Could 

you comment on investment decisions and just the general uncertainty that arises as a result of these temporary provisions? 

Mr. SCHICHTEL. Uncertainty is definitely a huge impediment 

to investment and to I think rational growth and overall development of the economy. It is very difficult for my boss, Irene Esteves, 

the CFO, and for our COO and CEO to figure out what we are 

going to do over the long term, and try to figure out how to analyze 

the impact of tax policy from both a book and tax perspective, 

much less explain it to our investors and our analysts. So it is always an issue that is brought up each quarter on our earning calls, 

and it is always brought up by the analysts when our investment 

relations folks are meeting with them. 

Mr. MCDERMOTT. Would the gentleman yield? 

Mr. BOUSTANY. I will yield to you. 

Mr. MCDERMOTT. My understanding that the Joint Tax study 

that I talked about and that you responded to, the chairman said 

that they should only analyze domestic tax expenditures, not international ones, because he intended to use the international ones for 

reform of international tax structure. I don’t know that there is a 

single domestic tax expenditure still left on the table, unless you 

do. 

Mr. BOUSTANY. We need to recognize that we have incomplete 

information at this time, and just to proceed cautiously based on 

that. Thank you. 

Mr. Neubig, in your testimony you pointed out in the growth of 

intangible assets, and this is clearly a new area or an expanding 

area that we need to be looking at as we go forward, clearly lowering the corporate tax rate would bring down effective rates for 

both classes of assets, tangible and intangible. 

Elaborate a little bit on the difficulties in applying appropriate 

tax policies to intangible assets. Can you further elaborate on that? 

Mr. NEUBIG. Well, I think the economy has clearly changed 

from 1986. In addition to globalization, what we have seen is a 

very significant increase in the amount of intangibles in terms of 

the programming, the copyrights, the patents, the R&D. Recent 

Federal Reserve Board economic studies showed that investments 

in intangible assets were as large as the investments in property, 

plant and equipment. When you look at the companies, they are 


srobinson on DSKB307YQ1PROD with HEARING
82 

concerned about both intangible investments and their tangible investments. 

So a lower corporate tax rate is a positive effect for both of those 

investments. In fact, the really high returns that are earned by the 

U.S. companies that are doing that type of R&D, they will benefit 

significantly from a lower corporate tax rate. It has also the benefit 

of trying to keep those intangibles in the U.S. versus offshore. 

Mr. BOUSTANY. Thank you. Anybody else want to comment on 

that issue? 

Mr. HERGER. The gentleman’s time has expired. 

Mr. Neal is recognized. 

Mr. NEAL. Thank you very much, Mr. Chairman. The common 

theme this morning of the testimony that has been offered is really 

twofold. You are certainly asking for a lower rate, but, just as importantly, you are asking for greater certainty on how we go forward. 

I just have been reading Bruce Bartlett’s book, and I always find 

how liberating it is for former staffers to leave the Hill and then 

to write what they deem to be a more truthful version of events. 

And David Stockman, as we all know, has taken the same position, 

divorcing himself from what commonly happens here in terms of 

embracing theology as opposed to the reality of trying to administer 

government. 

Mr. Schichtel, you indicated that the U.S. has lost 46 Fortune 

Global 500 company headquarters between 2000 and 2011. Why do 

you think those companies specifically moved outside of the United 

States? And perhaps just as importantly, were tax considerations 

the only reason for those companies leaving? 

Mr. SCHICHTEL. I don’t think taxes are the only factor or the 

only driver. I do believe that lower tax jurisdictions and the ability 

to produce greater returns for their shareholders have played a 

huge role in driving a lot of companies overseas. 

Mr. NEAL. And the other panelists? 

Mr. NEUBIG. Congressman Neal, I was the author of that analysis of the Fortune Global 500. I don’t think we found any U.S. 

companies actually leaving the U.S. That is talking about the number of companies that happen to be in the top 500 around the 

globe. 

What we are seeing is there are an awful lot of large companies 

from the BRIC countries that now are among the top 500, and they 

are now larger than a number of U.S. companies. So it wasn’t that 

companies were actually leaving, at least in terms of this particular 

study. It is that we are definitely in a global environment where 

our U.S. companies are competing much more with companies from 

other countries, not only in Europe, but also in China, Brazil and 

India. 

Mr. NEAL. All right. Production can happen anywhere now, 

right? How about the other panelists? 

Mr. FRYT. Mr. Neal, I know there have been instances. I think 

the Chrysler merger a few years ago with Daimler-Benz was driven 

at least in part by tax considerations, and, as you know, that was 

one company that did end up with headquarters overseas. And certainly in the nineties, early 2000s, we saw some expatriations. 


srobinson on DSKB307YQ1PROD with HEARING
83 

Some of that was driven by tax considerations. Perhaps not all of 

it, but I do think it was a major consideration. 

Mr. NEAL. Mr. Heenan? 

Mr. HEENAN. I echo the comments. The rules now in terms of 

leaving the United States are pretty harsh. I think Congress has 

taken care of that movement for tax purposes offshore, and it is 

more, as Mr. Neubig said, you just have offshore companies are 

getting bigger is what you are seeing. 

Mr. NEAL. Ms. Hanlon? 

Ms. HANLON. I would agree with all these things. I think tax 

is one factor. The research is quite clear that investment is attracted to lower tax rates, but it is only one factor. There are a lot 

of other things that companies consider. Acquisitions do happen 

generally where the foreign acquirer will acquire the U.S. company. 

Oftentimes because of the tax considerations you wouldn’t want to 

acquire—a U.S. company wouldn’t want to acquire a foreign—it 

would be hard for them to acquire a foreign company and then pull 

that foreign company into the U.S. tax system. And this also depends on the type of business, what is the investment, how much 

tax drives where the investment goes based on the tax rates. Some 

companies just have to go where their customers are, but more intangible-based companies can move around more easily. So taxes 

will be a more important driver for those types of companies. 

Mr. NEAL. Mr. Neubig, maybe you could speak to the phenomena of Japan in the sense that stagnation has paralyzed that 

economy for decades. If we were sitting here just 15 years ago, the 

argument we are currently making about China would have been 

the argument that we were making about Japan. Are you arguing 

that it is their tax rates that have kept them from growth? 

Mr. NEUBIG. There are a lot of similarities. In the 1980s, Congress was facing not only intense competition from Japan, but also 

large deficits. I was impressed in 1982 and 1984 leading up to the 

1986 Tax Reform Act, that Congress did address the deficits. It did 

show that there could be some tax increases, which set up I think 

the right dynamic for a revenue-neutral corporate and individual 

tax reform in 1986. 

Clearly Japan’s high corporate tax rate, that now is going to fall 

below the U.S. as of April 1st, I think was a factor in terms of the 

Japanese companies not being as successful in the world markets, 

in addition to all the other problems that occurred in their lost decade. 

I think a lower corporate tax rate can definitely be helpful in 

terms of economic growth. But when I look at the top 50 economies 

in the world, the U.S. as of April 1st will have the highest combined corporate tax rate. 

Mr. HERGER. The gentleman’s time has expired. 

Mr. Price is recognized. 

Mr. PRICE. Thank you, Mr. Chairman. We are all here interested in not just tinkering with the number to tinker with the 

number. We are interested in getting our economy growing as rapidly as possible so that people can get back to work and realize the 

benefits of their labor and their own dream. I would suggest that 

the deficit spending at the current level is a huge drag on the economy, but that is not the topic for the discussion today. The topic 


srobinson on DSKB307YQ1PROD with HEARING
84 

is tax policy. And I want to focus on hopefully three issues very 

quickly. One is the rate, two is the cost of compliance, and three 

on a potential alternative. 

We talk about the corporate rate being the highest in the industrialized world after April 1st. That is just astounding. All we are 

doing is punishing businesses who are trying their best just to stay 

in business here. So that is a disincentive to expand or to create 

a business here. 

I am not so certain that getting to 25 or 28 percent or whatever 

the OECD average is, isn’t just a break even, isn’t just a wash. If 

folks are looking at their balance sheet and they are saying well, 

if it is 25–28 percent, and that is the average of OECD countries, 

industrialized nations, then everything else being equal doesn’t 

make a whole lot of difference. 

Wouldn’t it be better for us to have a much lower rate than the 

average of the OECD countries, Mr. Fryt? 

Mr. FRYT. I couldn’t agree with you more, Mr. Price. Actually 

the most destructive tax that can be levied from an economic 

growth standpoint is the corporate income tax. OECD has a good 

study on that. In an ideal state, you just take it to zero. You would 

get rid of it. Make the business community more productive. 

But to your point of 25 percent, if that is what it was, you know, 

you have to add to that the State rate as well, 3 to 4 percent, so 

you are at 28–29. But at least it is a lot closer than where we are 

today. Maybe good old American ingenuity can bridge that gap. I 

don’t know. But it is a fair point. 

Mr. PRICE. I have great faith in American ingenuity if we don’t 

stifle it from here, and that is one of the concerns that I have. 

Isn’t zero percent really the greatest pro-growth rate for business 

and job creation? 

Mr. FRYT. I would argue it is. 

Mr. SCHICHTEL. I agree. 

Mr. PRICE. Come on down. MIT? 

Ms. HANLON. Yes, I think the lower the better. 

Mr. PRICE. And zero percent would be the most pro-growth policy we could have as it relates to business. 

Ms. HANLON. Yes. 

Mr. NEUBIG. I think there are important government services 

that are provided—the highways, the airports, defense—and so I 

am not so sure a zero rate is what would necessarily be the best. 

Mr. PRICE. But for pro-growth policies as it relates to businesses, isn’t zero percent the best? 

Mr. NEUBIG. Again, I think businesses are looking at more than 

just the tax rate. They are looking at all the factors that will make 

the American economy successful. So I guess I am not convinced 

that a zero rate is the optimal rate. 

Mr. PRICE. Well, let me ask you then about the cost of compliance, the cost of compliance of our current code. Do you have any 

sense about what that is and how that challenges you in your business? 

Mr. NEUBIG. It clearly is very significant. And in addition to the 

39.1 percent marginal statutory rate, you have also got to factor in 

the very high cost of compliance and the cost of uncertainty in our 

current U.S. tax system. I don’t have the exact figures. I know 


srobinson on DSKB307YQ1PROD with HEARING
85 

some other academics have made those estimates. But you clearly 

have a benefit by simplifying and making more certain the code, 

that in combination with a lower corporate tax rate and those simplifications, could be very significant. 

Mr. PRICE. Do you have a sense about the magnitude of the cost 

of compliance? Is it another percent? Is it another 10 percent? 

Mr. NEUBIG. I have seen some estimates that the efficiency 

costs, including compliance costs, could be as large as the entire 

corporate income tax. 

Mr. PRICE. As large as the tax itself. Astounding. So which 

brings me to the alternative. What would a consumption tax, doing 

away with the business tax, what would a consumption tax do for 

your businesses and for job creation and the economy? Mr. Fryt, do 

you have any thoughts on that? 

Mr. FRYT. From a very high level, I think a consumption tax is 

probably preferred to the corporate income tax because the corporate income tax in effect penalizes work, productivity. A consumption tax penalizes consumption. Whether it is realistic or not 

is a different—— 

Mr. PRICE [continuing]. Or incentivizes savings and allows consumers to make their own choices, things like that. 

Mr. FRYT. Correct. 

Mr. SCHICHTEL. I agree with Mike’s overall statement, but I 

think it requires a great deal of study and analysis because of the 

impact on prices and the impact on consumers, consumers that 

have limited discretionary income to buy our services as well as 

others. Also there is an element of regressivity that would need to 

be addressed. But overall it certainly should be something that is 

considered. 

Mr. PRICE. Thank you, Mr. Chairman. 

Mr. HERGER. Mr. Smith is recognized. 

Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 

panel today. 

It is always interesting as we try to work with these issues, I 

don’t think anyone is pretending that they are simple or that we 

have got an easy answer here. But I do want to reflect a little bit 

on, I guess, the interrelated nature of a lot of these businesses. I 

won’t ask whether Time Warner uses FedEx or UPS. That is not 

what I am getting at here. 

Mr. SCHICHTEL. We do use FedEx. 

Mr. SMITH. You do. Okay. Nonetheless, is there any concern— 

knowing that FedEx, for example, is a consumer of manufactured 

products and that the manufacturing industry domestically has a 

bias in favor of the R&D tax credit, I would understand—is there 

any concern that maybe the products or services that you use within your own companies and outside your own companies would 

have an adverse impact if we don’t get this right? 

Mr. FRYT. Absolutely, Mr. Smith, and I think you have put your 

finger right on one of the pressure points here, is that our current 

Tax Code has so many different provisions that attempt to direct 

economic activity one way or another. My personal feeling is we 

leave it up to the economy and the business community and try 

and minimize that as much as possible. 


srobinson on DSKB307YQ1PROD with HEARING
86 

You mentioned about manufacturing having R&D or 199. In effect, FedEx is part of the manufacturing business as well, but we 

are not generally categorized as a manufacturer. But we are in the 

distribution chains for a lot of manufacturers, but we don’t qualify 

for 199, for example. Why did that line get drawn quite that way? 

But it is those kinds of issues, I think you are exactly right. 

Mr. SMITH. Anyone else? 

Mr. SCHICHTEL. I think you are right. I mean, all of our businesses are interconnected in one fashion or another. It just depends 

on the degree of separation. That being said, I agree with Mike 

here as far as the complexity and the inability to predict what is 

going to come from all these various different tax policies, and also 

a very real concern as far as fairness. 

You have a situation here, if we can move away from this level 

of complexity and all of the different provisions, you can have a situation where fairness really fits in nicely with the overall free enterprise market and let the economy decide, let markets decide 

where things should go. 

Mr. SMITH. Mr. Heenan. 

Mr. HEENAN. I think our sole focus should be about growth and 

how do we get growth and jobs. So I think sometimes there is a 

difference between equal and fair, and we should be focusing on 

growth. So while I think lower tax rate certainly for us would put 

more cash in our pocket to spend on new investments, some of the 

targeted tax expenditures that are out there may have a bit more 

leverage than a lower tax rate. So we have to look at that very 

closely and we ought to do it. What is right, I think, is what promotes growth and jobs, and that might not be equal, but it is probably fair for the country overall. 

Mr. SMITH. Okay. Thank you. I yield back. 

Mr. HERGER. Mr. Kind is recognized. 

Mr. KIND. Thank you, Mr. Chairman. I want to thank the panelists for your testimony today. It is always very illuminating and interesting. Let me just raise a couple of concerns and get your reaction on a few things. 

Sometimes we are not really comparing apples to apples. I think 

everyone is in agreement that the goal should be to try to expand 

the base, lower the rates, and simplify the Tax Code. And if the 

goal is 25 percent, according to the OECD countries, that doesn’t 

take into consideration the VAT systems that they have in place 

right now to supplement lost revenue from the lower corporate 

rates. There is no discussion about a possible VAT in this country 

in order to obtain that lower level. So if we are going to do this 

in a deficit-neutral fashion, we are going to need a way to pay for 

it as well. 

Here is one of the concerns I have been raising consistently. The 

best we can do on the corporate side, eliminating every tax expenditure, every tax credit, is moving from 35 to 28 percent rate. Would 

that be sufficient, Mr. Fryt and Mr. Schichtel, a 28 percent rate 

and eliminate every expenditure on the corporate side? Would that 

be enough to make us more competitive globally? 

Mr. FRYT. I don’t think it would, Mr. Kind. 

Mr. KIND. Mr. Schichtel. 

Mr. SCHICHTEL. I agree with Mike. 


srobinson on DSKB307YQ1PROD with HEARING
87 

Mr. KIND. Well, then we are going to need to figure out a way 

to pay for the additional 3 percent to get to 25. If the proposition 

here is that we are going to go to the pass-through side, where a 

majority of entities are structured in this country, I don’t think 

they are going to be that enthusiastic for pass-through entities, 

small business owners, S corps, individuals, to pay a higher tax 

rate in order to pay for lower corporate tax rates in this country. 

That ain’t going to sell politically in this country. 

So we are going to have to find a different revenue source, then, 

in order to get to the 25 percent rate if the goal is to make this 

deficit neutral. That is where it is going to get difficult. And that 

is why you don’t have a detailed plan from the majority on what 

specifically they are proposing, because they know they are going 

to have to get into those weeds immediately overnight and the political push-back is going to be tremendous. 

Now, I wanted to pick up on what Mr. Price was addressing, because I think it is very intriguing. Here are the numbers from last 

year. The Federal Government collected total revenue of roughly 

$2.3 trillion from all the revenue sources. Of that, $181 billion was 

on the corporation side. Roughly 7 percent of Federal revenue was 

collected on the C side. That is roughly 1.2 percent of GDP. So we 

are tying ourselves up into knots trying to figure out a way to 

lower the rates when we are talking about roughly 7 percent of 

total Federal revenue to begin with. 

Maybe we should explore further, just eliminating the corporate 

rate entirely. But we are going to have to pay for it, and that again 

is going to be the rub of how we do it. 

Mr. Price talked about the consumption tax. I don’t want to do 

it in a regressive fashion. My fear is that a consumption tax is 

going to be very regressive. It is going to hurt low-income families 

that have to spend every dollar that they earn through that consumption tax. So maybe there is a different way that we could 

maintain progressivity and pay for it through some form of wealth 

tax. 

I don’t know how many of you had a chance to see the New York 

Times op-ed page today, but David Miller I thought wrote a very 

interesting article. Did anyone see Mr. Miller’s article today? It is 

called ‘‘The Zuckerberg Tax.’’ 

Now, Zuckerberg, obviously, is going to get about $28 billion 

worth of shares, most of which he will never pay a dime of tax on. 

And what Mr. Miller is advocating is why not mark to market 

those shares a given year and have him pay taxes on it, rather 

than waiting until it is realized, which may never occur in his lifetime, and if he passes it on to his heirs, they may never realize 

those gains from the shares. This I think is one of the reasons why 

we have huge wealth disparity in our country, because it favors 

those who are accumulating wealth through shares primarily that 

never get realized. They are able to borrow off those shares in 

order to maintain their living standards. 

So maybe there is a way for us to explore trying to eliminate the 

corporate tax rate entirely, given the small percentage of revenue 

it ultimately brings to the country, helping our country be more 

competitive, but keep progressivity in the Tax Code and make it 


srobinson on DSKB307YQ1PROD with HEARING
88 

fair, and start exploring ways to tax wealth to a greater extent to 

pay for lower or no corporate tax rates in this country. 

Now, what I am recommending would probably put you guys out 

of business. You guys would lose your jobs as far as corporate tax 

is concerned. But what I am hearing from you is the lower the better, and maybe zero might be ideal. That would be a real gamechanger around here, rather than us going through this kabuki 

dance with these hearings with no detailed proposals because of 

what that is ultimately going to look like. 

And then further my last concern is, listen, if we even get to 28 

percent by eliminating all the expenditures on the C side, what is 

that going to do to domestic manufacturing, who rely very heavily 

on depreciation for R&D, for 199 manufacturing tax credit. Is that 

going to help domestic manufacturing or hurt domestic manufacturing if we take those expenditures away from them, and will that 

leave us less competitive in our ability to make things and invent 

things and create things and to grow things in our own country 

here? 

So those are some of the issues that we are raising. And maybe 

you guys can help us try to figure out a way of supplementing lost 

corporate tax revenue and get to a zero rate, but let’s keep it progressive and fair ultimately. 

Chairman CAMP. The gentleman’s time has expired. Ms. Jenkins is recognized. 

Ms. JENKINS. Thank you, Mr. Chairman, and thank you for 

holding this hearing. As a CPA who used to practice in this area, 

this has been a real delight to have you all here this morning. I 

am not sure I have had this much fun in the year that I have been 

on the panel. So thank you. 

Chairman CAMP. I am glad the gentlewoman is redefining fun. 

Ms. JENKINS. This is good stuff. And since the focus of the 

hearing has been on those areas of book and tax differences and 

where they diverge, do you all have some suggestions as far as reform goes to address that, because it appears what we have been 

talking about to this point has been to move towards having less 

differences in book tax, and you all have touched on it briefly. 

So can everyone on the panel just let me know your thoughts on 

the idea of book tax conformity? 

Mr. FRYT. To some degree I think there is some benefit there. 

I would caution about going to the extreme and putting control of 

the tax revenues in the hands of accountants, FASBs, with all due 

deference to the CPA, ma’am. But to the extent you get simplification out of that process, yes, I would agree with that. 

Ms. JENKINS. Okay. 

Mr. SCHICHTEL. I agree that I certainly wouldn’t want to see 

control ceded to the FASB as well as efforts to achieve conformity 

with GAAP and international standards, because I don’t think they 

are necessarily reflective of real economic lives. I think when you 

look at different industries and different classes of assets, the lives 

that we have for tax purposes are much more consistent with reality than what you see from a GAAP reporting perspective. 

Mr. SCHICHTEL. But I do believe that if we move towards 

greater reform in a low enough tax rate that some of the differences—the large differences between book and tax would have 


srobinson on DSKB307YQ1PROD with HEARING
89 

to be eliminated in order to fund that. And that consistency probably would be beneficial overall. 

Ms. HANLON. This is a great question. 

I think one thing to notice is that book-tax differences, when we 

talk about them in this arena, it is not that all of them cause problems, it is just that the permanent kind are better than the temporary kind because that allows you also to increase your accounting earnings. 

I have done a lot of research on book-tax conformity, actually, 

and I think it is a bad idea. The first thing is accounting is very 

conservative in their rules, so that means we make expenses, we 

accrue expenses very early before they actually happen in cash 

flow, for example, bad debt expense and so forth; and I think the 

Tax Code generally has not favored such treatment. 

Also, there is a lot of evidence in the literature that book-tax conformity would reduce the information that is contained in financial 

accounting earnings. The rules are set up for two different purposes, and basically accounting earnings are made—the rules are 

set in order to inform stakeholders. And the evidence based on the 

1986 Tax Reform Act, when a certain set of reforms were required 

to increase their conformity, the international evidence and several 

other studies basically show that the information that is in accounting earnings will go down if you conform those earnings. 

I also share the concern about who would make the rules after 

the conformity would happen, if it would be Congress, FASB, or the 

International Accounting Standards Board; and I think that would 

be very hard for the U.S. to handle, the International Accounting 

Standards Board determining our tax base. 

So I think there is a lot of reasons why book-tax conformity 

wholesale is a bad idea. I think there are certain things that are 

different between book and tax that we could look at, but I think 

wholesale book-tax conformity is not a good idea. 

Mr. NEUBIG. I would agree with Dr. Hanlon’s comments. 

Just as an example, the discussion about moving to IFRS has impacted in terms of some of the discussions about U.S. tax reform. 

Because if you move to IFRS then LIFO would not be allowed, and 

so it would automatically eliminate the current ability of some 

firms to use last-in, first-out accounting. There clearly are different 

goals for the accounting rules. As the tax writing committee you 

have different goals, including revenue, that are your objectives. 

Mr. HEENAN. I agree with most of what was said before me. 

I think really the accounting rules are there for something completely different than what our tax rules should be there for, our 

tax rules. It is to get revenue, but it should be done in a manner 

that promotes growth, investment, jobs, and those are just two 

completely different worlds, and so I would encourage us to keep 

them separate. 

Ms. JENKINS. Okay. I have just a few seconds left, so could 

businesses just quickly talk about—we talked about reforms and 

the challenges to reforms. Could you just briefly talk about if we 

do nothing the cost of inaction to your business if we keep the status quo? 

Mr. FRYT. Personally, I don’t think that is a good option. I don’t 

think the status quo is where we want to be. 


srobinson on DSKB307YQ1PROD with HEARING
90 

Mr. SCHICHTEL. I think we are seeing the results in the economy as far as what happens if you do nothing. I think taxes, although it is not going to be the only factor that drives economic 

growth, it is tremendously important. And I think our lackluster 

growth and difficulty in coming out of the recession are in part due 

to our overall tax structure and lack of competitiveness. 

Ms. JENKINS. Thank you. 

I yield back. 

Chairman CAMP. Mr. Paulsen, is recognized for 5 minutes. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

I have really enjoyed the testimony this morning, and I think it 

just follows on the heels of a full year of hearings we have had on 

tax reform. 

And the message has been pretty clear from the folks here today, 

as well as the folks that have testified in the past, about the need 

to provide certainty for companies that are investing their capital 

on a 5-year and a 10-year and a longer horizon, rather than dealing 

with these temporary tax extensions or provisions or extenders that 

can create a lot of difficulties not only for the companies planning 

but the accounting side of the equation as well. And the U.S. is trying to play catch-up now to make sure we have got a Tax Code that 

is competitive along with a fairness and a simplicity component. 

And it is important to focus on the competitive side and the progrowth side. So here is my question. 

I know that the United Kingdom in particular is moving with tax 

reform as well. Other countries are doing this. They have kind of 

staggered, kind of moved forward slowly, lowering their tax rates. 

Are we better off to sort of just rip the Band-Aid off, do this fast, 

lay out where we are going to be in the long term and take the 

pain, if you will, of what might be the effect in the short term of 

a year of some of the changes that will be out there? Or should we 

phase it in? Should it be gradual, as the United Kingdom or other 

countries might be doing? Which is the way to go? 

Mr. FRYT. I think there is a tension there from a business perspective, from my business’s perspective. And I think from our 

economy’s perspective it is better off doing it quickly, making a 

large-scale reduction in a corporate rate. There are some arguments to the other side that you save some revenues by ratcheting 

it down slowly over time, and maybe that helps you get to a revenue-neutral equation or solution. 

Mr. PAULSEN. Mr. Schichtel. 

Mr. SCHICHTEL. I agree. I think resetting the baseline, do it 

once and then move forward provides the predictability. There may 

be some items that you want to look at as far as transition rules, 

but I think overall it is time to just do it and do it now. 

Mr. PAULSEN. Mr. Heenan. 

Mr. HEENAN. I mentioned earlier we spend $2 billion in capital. 

We look at our projects; and, if we miss, it is a big deal. If we 

spend $2 million in the wrong place, it is a big deal. 

I commend Chairman Camp for taking on this difficult task. I 

would just say this is a big deal, and if we miss on how we do this 

we are going to regret it. So I agree that we should move quickly, 

but I think we really have to be cautious in looking at the specific 


srobinson on DSKB307YQ1PROD with HEARING
91 

expenditures and the specific way we do this. We don’t want to 

miss on this one as a country. 

Mr. PAULSEN. Mr. Neubig. 

Mr. NEUBIG. I guess two points. Phasing down the corporate 

tax rate is what has been done in Canada and the United Kingdom. If the alternative is not doing a lower corporate tax rate I 

think phasing down would be much preferable. 

In the case of the United Kingdom, they have a parliamentary 

system; and they have announced that they are going to get to a 

23 percent corporate tax rate by 2014, 2015. One interaction in 

terms of the financial accounting rules is they have not officially 

enacted the 23 percent rate. They are doing the reduction from 28 

to 26 and now to 25 in the current year on an annual basis; and 

part of that is an interaction with the book accounting. Because 

when you lower the corporate tax rate there are effects in terms 

of deferred tax assets and deferred tax liabilities. 

It is a benefit in terms of companies with deferred tax liabilities. 

A majority of the top 50 companies have deferred tax liabilities, so 

they would benefit. 

There are some companies that have deferred tax assets from 

loss carry forwards and some types of compensation. A lower corporate tax rate would reduce the value of those deferred tax assets. 

And so they have decided instead of you going from 28 to 23 in one 

fell swoop they were going to announce it, but they are going to 

enact it through Parliament over the next 4 years. 

Mr. HEENAN. If I could just add one quick comment that just 

came to mind. 

You know, one of the things about a—if we announced today a 

phased-in process, I think we have to be cautious about is does it 

really give us certainty. Other countries have announced phase-ins 

and the economy turns south or the revenues aren’t there and the 

phase-in becomes a freeze. 

So going back to the certainty theme, the challenge of a phasein is are we going to be convinced as businesses that that is going 

to be there in 2, 3, 4, 5 years? Will the phase-in really happen or 

will we sort of put it on hold when revenue needs overweigh the 

tax reduction? 

Mr. PAULSEN. Mr. Schichtel, did you want to close? 

Mr. SCHICHTEL. I think the one-time, non-cash impact from repricing our deferred tax liabilities and deferred tax assets will be 

largely a nonevent from the investor and market perspective. What 

they will look at is the long-term impact on cash flows and operations. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

I yield back. 

Chairman CAMP. Thank you. 

Mr. Stark is recognized. 

Mr. STARK. Thank you, Mr. Chairman. Thank you for the hearing, and thank the witnesses very much for their participation. 

I wanted to ask Professor Hanlon if she knew how much she and 

I had in common. 

Ms. HANLON. No I don’t, but I would like to hear it. 

Mr. STARK. Well, you will. If you dig out the 1953—long before 

you were born—catalog of the Sloan School you will find at the 


srobinson on DSKB307YQ1PROD with HEARING
92 

very bottom of the list my name as a teaching assistant. Now, you 

got there through a resume that is of accomplishment in academia 

that is outstanding. I got there in a somewhat different manner. 

Up until 1953, MIT had a perfect record of placing its graduates 

with General Motors and General Electric and all the companies. 

But they came to the end of the list in about September, and one 

Stark was still unemployed. Well, they solved that problem. They 

said, we will make him a teacher. 

And I must say you have improved the appearance of the Sloan 

School magnificently and made accounting look a lot more attractive than I remember it being from whatever was next to the window. And I want to thank you. 

But, in some more seriousness, I am concerned about some of the 

issues that we create tax expenditures for and their usefulness. 

And I am going to ask you—you may not know now, but you may 

know someplace in your literature—has anybody done any study as 

to the usefulness of whatever is created through these tax expenditures? 

And I give as the example the idea that Orville Redenbacher got 

the R&D tax credit to develop microwave popcorn. Now, you could 

make a case if it doesn’t stick in your teeth that maybe that was 

a good help to society. 

But, in all seriousness, I would love it if you know of or could 

dig out in the accounting research if anybody has done a study on 

what the actual usefulness, seriously, to society has been in many 

of these tax expenditure areas. And if you would be willing to 

spend a few minutes of your spare time and dig out something like 

that, I would sure love to have it. 

Ms. HANLON. I can certainly look at that for you. 

But I think the one thing that has been looked at in the literature is in an R&D study, for example, when they look at the 

data they might see what looks like an increase in spending. But 

what has been looked at is, is that really more R&D that results 

in more products or is it, say, a rise in the input prices. 

And there is actually one study that shows that all the increase 

in R&D spending actually goes to salaries R&D. So it is not more 

R&D. It is just paying the engineers more. You know, whether the 

input providers actually demand a higher price for the inputs when 

they know that the other party has an R&D credit. 

So that part has been looked at, and there is some mixed evidence on it. But I don’t know of a study, because that would take 

a researcher, you know—— 

Mr. STARK. Okay. I just thought you might have come across it. 

I would add that there are people who I think would have advantage of it. I hung around in the tax area with a guy named Steve 

Jobs probably before you were born, and he didn’t really pay much 

attention. I mean, he would take advantage, and he came to this 

committee to get some tax relief for giving computers away, but 

that didn’t stop him from developing the iPhone and all these gadgets my kids want regardless of whether or not he got the investment tax credit. He was just an innovative guy. 

And I suspect that is true of most innovators. They are going to 

go ahead and develop these things whether or not they get the 


srobinson on DSKB307YQ1PROD with HEARING
93 

R&D tax credit, so that perhaps we are not getting much bang for 

our buck in that area. 

Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. 

Mr. Berg is recognized. 

Mr. BERG. Thank you, Mr. Chairman. 

One of the most frustrating things for me out here is the uncertainty. And it seems like there is a lot of taxes that are short term. 

In fact, we miss a lot of deadlines and go back and reinstate tax 

incentives, et cetera, et cetera. So just to make sure I am not the 

only one that feels that way, my question for Ms. Hanlon is, do you 

think this instability in the Tax Code creates a problem, both a 

book and a tax problem? 

Ms. HANLON. Yes, I would agree that unpredictability and the 

uncertainty creates a lot of problems for companies when they try 

to make these long-term investments. I think a stable tax policy 

would be a lot better from both the tax and the accounting side. 

Mr. BERG. Well, I think I heard kind of those comments. I 

mean, whatever it is, if it is fair, if it is reasonable, hopefully lower, 

flatter, keep it there, and then we can make business decisions 

around that. So—and I know this has been a long hearing. My 

question, maybe if we could just go through and if there are some 

specifics that you could relate to the committee where you see the 

temporary nature of taxes creating a problem or the fact that certain incentives have expired and then gone back in and reinstated, 

if there is any specifics that anyone on the panel would have. 

Mr. Fryt, could you? 

Mr. FRYT. I think the biggest one in that regard right now for 

us, some of these extender—we actually have several of the extenders that apply to us, but the biggest one is probably expensing 

bonus depreciation, and that does have an impact. You know, if we 

had that in there permanently, or any of these—permanency and 

certainty I agree with you is almost paramount, as long as it is a 

good code, but it is very important to us. 

Beyond that, I don’t know that I would have any further comment. 

Mr. BERG. Again, I am just kind of looking for other examples 

that you see day in and day out that, again, are—you know, as we 

talked about, may be creating more cost and problems than really 

the incentive or disincentive was worth in the first place. 

Mr. SCHICHTEL. Definitely. It comes up all the time. 

I had a conversation with my old boss, who is now our president 

and chief operating officer, about some activities that do qualify for 

the Section 199 domestic production credit; and he was absolutely 

delighted and said, fantastic, we are going to bake this into our investment analysis and the return analysis. 

And I had to caution him and say, wait a minute. I think we 

need to be careful. You probably can count on it for the next couple 

of years. Beyond that, I am not so certain. 

Those types of issues come up all the time. Whatever we do, it 

needs to be permanent and consistent to allow my boss and the 

CEO and the rest of the team to make business decisions that are 

based on something that they can understand and count on. 


srobinson on DSKB307YQ1PROD with HEARING
94 

Mr. BERG. I believe that is one of the reasons why there is a 

lot of money sitting on the sidelines right now. People run their 

analysis, but they can only see clearly 1 year out or 2 years out 

and so have to put so much risk in the remaining 8 years or however long they do their analysis that it drives it from being a potential good investment to too much uncertainty. 

Mr. NEUBIG. Well, it is not just on the business side. A number 

of commentators have commented that we really have almost an 

entirely temporary tax system with so much expiring at the end of 

2012, tax rates not only for the top income earners but throughout 

the entire tax schedule, including number of tax credits that are 

also going to be significantly changed. So it is a very important 

issue. When there was the possible expiration at the end of 2010 

there was clearly activity that was occurring in late 2010 in anticipation of the rates and other things might be changing. 

Mr. HEENAN. I just echo all the same comments. I mean, certainty is going to help us a lot. 

Mr. BERG. I just have a rhetorical question. Is it better to address those issues that are coming up December, 2012, sooner or 

December 31st of 2012? 

You don’t need to answer that. I am assuming done in a logical 

process where people can engage in the debate makes more sense. 

I will yield back, Mr. Chairman. 

Chairman CAMP. Thank you. 

Mrs. Black is recognized. 

Mrs. BLACK. Thank you, Mr. Chairman. 

Now that all the questions have been asked and people have said 

how much fun they have had, I do start to question some of my 

colleagues about what their definition of fun is. But it has been 

very educational to have you all here today. Mr. Berg has been 

running in and out, in and out, and he comes in and asks my question last minute. Since I am the last one here, Mr. Chairman, it 

does not seem fair. 

But, anyway, all that aside, this has really been very helpful, 

and much of your written testimony has also been helpful. 

But I do want to add or just tag on to what Mr. Berg has said 

about the stability; and I want to go to one of the statements that 

you made, Mr. Fryt, that I thought was really very interesting. You 

said you wanted to compete on the merits of business and not on 

the Tax Code. So let me just take that a little further and ask you, 

with these temporary tax incentives, how you see those as affecting 

competitiveness. 

Because I will say, just as a sidebar, between the hearings that 

we have had in this committee this year, which have been very, 

very helpful, and then those business roundtables that we have 

had, I have a number of businesses say that, because of the complexity of the Tax Code, that not always are they aware of maybe 

some of those opportunities that they could possibly have and, 

therefore, they are not as competitive with someone else because 

either there isn’t that competition naturally in there for them or 

they don’t know about it. 

Could you talk about, especially since you have made that statement, Mr. Fryt, about how the temporary tax incentives do affect 

competitiveness? 


srobinson on DSKB307YQ1PROD with HEARING
95 

Mr. FRYT. You have hit a hot-button issue in our company. I 

cannot tell you how many times my CEO, CFO, and others in the 

executive management decisionmakers have lamented what my 

CEO likes to call an arcane Tax Code with all of these temporary 

extenders that come in and out and special provisions here that 

apply to us or maybe don’t apply to us and apply to others. 

Overall, there is no question in my mind they would like to be 

unburdened from all of that, do their business, conduct their business, take all of those, if we can, reduce the tax rate as far as we 

can, so that they don’t have to pay attention to any of that, pay 

the revenue that is appropriate, whatever is decided, and move on. 

That is our feeling. 

Mrs. BLACK. Thank you. 

Mr. Schichtel. 

Mr. SCHICHTEL. I agree. 

My title really could be changed to chief tax translator. It is a 

big part of what all tax directors do. And I think the complexity 

becomes even more of a challenge for medium-sized companies that 

may not have all of the resources that we have. 

Clearly, from a financial perspective, the compliance burden, the 

difficulty in dealing with all of it are a huge drag. I just went 

through another budget season, and it is always painful. And everyone is frustrated that we have to spend so much just to comply 

with the law, not even optimizing, I am just talking basic compliance. And then every time we have a transaction the level of risk 

and uncertainty and complexity in the law, it is just enormous. 

And, really, should tax be a high-risk area just because of the complexity and difficulty in applying laws? It certainly makes doing 

transactions more difficult, and I can’t imagine what it is like for 

companies that don’t have the kind of resources that we have. 

Mrs. BLACK. Ms. Hanlon. 

Ms. HANLON. I would agree with all these statements. I think 

the complexity takes a lot of time. 

As Tom was saying earlier with the compliance costs, they are 

very high. And I also agree with the small business. I think small 

businesses have a very hard time with complexity. They don’t have 

the internal tax departments. And what they really should be doing 

is focusing on their business, but instead they spend a lot of time 

worrying about how should they compensate themselves, how 

should they structure their business, where should they structure 

their business, in the U.S. or somewhere else, because of the Tax 

Code. And I think making a more simple, more fair system would 

help the U.S. 

Mrs. BLACK. Thank you. 

Mr. Neubig, do you have a comment? 

Mr. NEUBIG. Well, again, I think this is another example of 

where oftentimes the economists don’t give lower corporate tax 

rates the full benefit that would happen if there was a broader 

base and lower corporate tax rate. That uncertainty, complexity, 

and how lower corporate tax rates affect so many different business 

decisions really is very powerful. So when people talk about the 

bang for the buck in terms of a lower corporate tax rate, sometimes 

they worry about a lower corporate tax rate applying to old capital. 


srobinson on DSKB307YQ1PROD with HEARING
96 

But I think they really are missing so much of the power of a lower 

corporate tax rate that would also be simpler and more predictable. 

Mrs. BLACK. Thank you, Mr. Chairman; and if I just may make 

one final comment, since there are very few of us. 

What I continue to think about as we look at the complexity and 

the costs of the business, I think about how the service or the product—the cost of the service or the product is raised because of this 

complexity, and how ultimately it is the end user that has the cost 

borne. 

Thank you. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. 

Well, I very much want to thank all of our witnesses for a very 

good hearing this morning and for all of your time, all of your effort, all of your testimony. I appreciate it very much. 

I do just want to clear up a couple of items. 

There has been some question about a Joint Committee on Taxation estimate. I just for the record want to note I did not request 

the estimate. And, also, of the 90 remaining items, virtually all of 

them are domestic items. 

I just think we want to have the record to be clear on that. 

But, again, thank all of you for being here. 

This hearing is now adjourned. 

[Whereupon, at 11:30 a.m., the committee was adjourned.] 

[Member Submissions for the Record follows:] 

INSERT MISSING MEMBER SUBMISSION HERE 

f 

[Submissions for the Record follows:] 


srobinson on DSKB307YQ1PROD with HEARING
97 

American Council for Capital Formation 


srobinson on DSKB307YQ1PROD with HEARING73382.032.eps

Tax Reform: Possible Consequences of Trading Accelerated 

Depreciation for Corporate Income Tax Rate Reduction 

By 

Margo Thorning, Ph.D. 

Senior Vice President and Chief Economist 

American Conncil for Capital Formation 

Testimony submitted for the record for the hearing on 

"Interaction of Tax and Financial Accounting on Tax Reform" 

Committee on Ways and Means 

U.S. House of Representatives 

February 8,2012 

Executive Summary 

Determinates of U.S. Investment: Over the past three decades economics and finance 

experts have examined the question of whether financial variables such as cash flow and 

cash stocks have a significant effect on investment. Numerous economic analyses and 

surveys have concluded that fmancial factors are important in determining investment 

levels. For example, a 1998 empirical analysis by Professors Gilchrist and Himmelberg 

concludes that for the average fim1 in their sample, cash flow and cash stocks raise the 

overall response of investment to an expansionary shock by 25% relative to a baseline 

case where financial frictions (capital market imperfections) are zero. 

Accelerated Depreciation, the Cost of Capital, U.S. Investment and Jobs: If 

accelerated depreciation for equipment is repealed and replaced with economic 

depreciation which is generally longer than the current Modified Accelerated Cost 

Recovery System (MACRS), the cost of capital for new equipment will rise and 

investment is likely be as much as $ 191 billion lower in 2015 compared to the baseline. 

Each $1 billion decline in investment is associated with a loss of23,300 jobs. 

Bonus Depreciation and U.S. Investment: Since the 4th quarter of 2007, which marks 

the begim1ing of the recession, through the 4th qml.lter of 2011, US equipment 

investment has increased by 3.4%. Given the weakness of consumer demand during this 

period (real personal consumption expenditures increased only 1.8% during the past 4 

years) it seems likely that accelerated and bonus deprecation have played a major role in 

sustaining investment in equipment. 

Conclusions: As policymakers contemplate fundamental tax refonn they need to weigh 

carefully the possible consequences of eliminating accelerated depreciation in return for a 

lower corporate income tax. It may be well to consider "paying for" corporate income tax 

rate reductions with cuts to entitlements for upper income individuals rather than 

eliminating proven investment provisions such as accelerated depreciation. Another 

option would be to move toward a consumed income tax where all investment is 

expensed. 
98 


srobinson on DSKB307YQ1PROD with HEARING73382.033.eps

Tax Reform: Possible Consequences of Trading Accelerated 

Depreciation for Corporate Income Tax Rate Reduction 

By 

Margo Thorning, Ph.D. 

Senior Vice President and Chief Economist 

American Council for Capital Formation 

Testimony submitted for the record for the hearing on 

"Interaction of Tax and Financial Accounting on Tax Reform" 

Committee on 'Vays and Means 

U.S. House of Representatives 

February 8, 2012 

Introduction 

Chairman Camp, Ranking Member Levin, and members of the Subcommittee, my name 

is Margo Thorning, senior vice president and chief economist, American Council for 

Capital Formation (ACCF), * Washington, D.C. I am pleased to submit this testimony for 

the hearing record to outline some possible economic impacts from eliminating 

accelerated depreciation and reducing the corporate income tax rate. 

The American Council for Capital Formation represents a broad cross-section of the 

American business community, including the manufacturing and financial sectors, 

Fortune 500 companies and smaller firms, investors, and associations from all sectors of 

the economy. Our distinguished board of directors includes cabinet members of prior 

Democratic and Republican administrations, former members of Congress, prominent 

business leaders, and public finance and enviroll1nental policy experts. The ACCF is 

celebrating over 30 years of leadership in advocating tax, regulatory, environmental, and 

trade policies to increase U.S. economic grov<'!h and environmental quality. 

Background 

The majority of the witnesses presenting testimony at the February 8[h hearing cone lude 

that many in the corporate community would support giving up accelerated depreciation 

for new investment in exchange for a reduction in the corporate income tax rate because 

of the impact the income tax rate reduction would have on their financial statements. For 

example, testimonies by Thomas Neubig of Ernst & Young LLP and Michelle Hanlon of 

the Massachusetts Institute of Technology state that accelerated depreciation offers only a 

*Thc mission a/the Americall Council for Capital Formation is to promote economic grmvth through 

sound lax, environmental, and trade policies. For more in/ormation ah(m! the Councilor/or copies (~r 

this testimony, please eontoct the ACCF, 1750 K Street, N. w., Suite 400, Washington, D. C. 20006-

2302; telephone: 202.293.5811;fax: 202.785.8165; e-mail: iI1fo'(uc,-ci2Ig; website: lnnr.ace/org 

2 
99 


srobinson on DSKB307YQ1PROD with HEARING73382.034.eps

timing benefit while a lower corporate tax rate would reduce a company's effective tax 

rate and increase book net income reponed to shareholders (see 

http://}vaysandmeans.hollse.g()v!UploadedFiles!Ncubig T csti mony7SFC jl.df and 

http)!waysandmcalls,holisc.gov/UploadcdFiles/Hanlon T eslimol1 y 78FC .Rd£). 

Given the fragility and uncertainty of the U.S. economic recovery and continued high 

unemployment rate (currently 8.3%), it seems to me that the key question should be 

"What will giving up accelerated depreciation and reducing the corporate income tax do 

to U.S. investment and job growth?" rather than "How will financial reports to 

shareholders be impacted'}" In my testimony I present an alternative perspective, 

suggesting that the positive impact of accelerated depreciation on cash flow is likely to be 

an important determinant in the level of investment in new equipment and thus on the 

prospects for strong U.S. economic recovery. 

What Determines U.S. Investment? 

Over the past three decades, economics and finance experts have examined the question 

of whether financial variables such as cash flow and cash stocks have a significant effect 

on investment. Some studies conclude that cash flow is mainly relevant for situations in 

which capital market imperfections exist and access to external debt and equity is costly. 

Numerous other economic analyses and surveys have concluded that financial factors are 

imponant in determining investment levels. For eXalnple, a 1998 empirical analysis by 

Professors Gilchrist and Hinnnelberg concludes that for the average firm in their sample, 

cash flow and cash stocks raise the overall response of investment to an expansionary 

shock by 25% relative to a baseline case where financial frictions(capital market 

imperfections) are zero.' They note that "Consistent with theory, small firms and firms 

without bond ratings show the strongest response to financial factors .... Because bondrated finns account for 50% of aggregate manufacturing investment, our results suggest 

that the overall amplification of manufacturing investment {from cash flow and cash 

stocks} is somewhat less that 25%." 

Similarly, a recent analysis of a large number of Swedish firms during the 1989-2005 

period concludes that cash flow has a significant impact on investment and the effect is 

particularly strong for constrained firms, especially during recessions 2 

A survey of senior financial executives by the Manufacturer's Alliance in December, 

2006 found that cash flow was the most important factor affecting the level of 

investment, followed by expected profits and projections of market growth (see Table 1)3 

2 Ola :\lelander, "The Effecl "fCash How on Investment: An Empirical Test of the Balance Sheet 

Channel", see 

Donald Norman, "rhe Puzzle of IV1anufacturing Sector InvesITnent". Manufacturers Alliance/MAPl, see 

lillP.J !y;jV"YJl,,]gI.a.YS~.i211l11~l§~ C!l!}1.fQc!lo"!1!g.1i.v1 }Ln2imlfjJ~2JlQ.~ 1 Q'LI"ll;' 

3 
100 


srobinson on DSKB307YQ1PROD with HEARING73382.035.eps

Accelerated Depreciation, the Cost of Capital, U.S. Investment and Job Growth 

If accelerated depreciation for equipment is repealed and replaced with economic 

depreciation which is generally longer than the current Modified Accelerated Cost 

Recovery System (MACRS), the cost of capital for new equipment will rise and 

investment is likely to decline, relative to the baseline forecast. The benefit ofMACRS 

is its positive impact on cash flow, which occurs immediately as the investment is put in 

place. In an increasingly uncertain world in which markets, demand and production costs 

can shift almost overnight, the rapid payback from MACRS depreciation substantially 

reduces the risk premium for investment in equipment. Having the benefit of MACRS 

reduces the risk premium and the hurdle rate required to make new investment attractive. 

While a lower corporate income tax rate would also make investment attractive, if 

MACRS is repealed, it seems likely that the slower payback period will raise the hurdle 

rates and slow the productivity enhancing investment in new equipment. 

Has Bonus Depreciation Helped to Stimnlate the U.S. Economy? 

Michelle Hanlon's testimony states that there is "little evidence" that targeted tax code 

provisions such as bonus depreciation (100% write off for new investment in the last 

quarter of 20 I 0 and 2011 and 50% for 2012) have spurred aggregate investment 4 Her 

testimony provides no empirical evidence for this claim and a look at the recent strength 

of equipment investment suggests otherwise. Since the 4th quarter of 2007, which marks 

the beginning of the recession, through the 4th quarter of 2011, U.s. equipment 

investment has increased by 3.4%, from $1,121 billion to $1,160 billion. Given the 

weakness of consumer demand during this period (real personal consumption 

expenditures increased only 1.8% during the past 4 years), it seems likely that accelerated 

and bonus deprecation have played a major role in sustaining investment in equipment. 

Repeal of MACRS, U.S. investment and job growth 

When evaluating a prospective investment, business analysts typically add a risk 

premium to the firm's cost of capital, ranging from 0 to 50 % and higher. Assuming that 

the repeal of accelerated depreciation increases the risk premium added to the finn's cost 

of capital by 30% to 40 % and using conservative estimates of the elasticity of investment 

in response to changes in the cost of capital, it seems likely that U. S. investment in 

equipment could decrease by 5% to 15% over 2012-2016 period compared to the baseline 

forecast. As a result, U.S. equipment investment, which averaged $1.1 trillion in 2011, 

could decline by between $60 billion and $180 billion in 2013 and by $64 billion to as 

much as $191 billion in 2015. This decline in investment would make it harder to restore 

strong job growth. ACCF research shows that each one billion dollar decrease in 

4 
101 


srobinson on DSKB307YQ1PROD with HEARING73382.036.eps

investment is associated with 23,300 fewer jobs and conversely each $1 billion mcrease 

in investment raises employment by the same amount (see Figure I). 

Are U.S. Depreciation Schedules More Generous than our Trading Partners'? 

The testimony presented by Tom Neubig of Ernst & Young LLP states that moving 

toward economic depreciation has been used by many OECD countries to help partially 

finance their reductions in corporate tax rates5 However a 2007 international 

comparison of depreciation and corporate tax rates for energy investments in the U.S. and 

11 of our major trading partners showed that U.S. firms faced slower depreciation 

allowances than our competitors 6 The study, prepared for the ACCF by Ernst & Y olmg 

LLP, found that in most countries and for most energy investments, the net present value 

of depreciation deductions was larger in other countries than in the U.S. (see Appendix 

II of the ACCF report). In addition, our trading partners have lower effective tax rates 

and lower corporate income tax rates for energy investments than does the U.S. (see 

Table 7 and Appendix I, Table 2)7 

How would Switching to a Consumed Income Tax Impact U.S. Investment, 

Economic and Job Growth? 

Over the years, many economic analyses have estimated that if the U.S. switched to a 

consumed income tax in which all investment was expensed, investment and economic 

growth would be enhanced. In an attempt to understand how such a system would have 

impacted the U.S. economy had it been in place in the 1991-2004 period, Dr. Allen Sinai, 

president and chief global economist of Decision Economics, used his large scale 

macroeconomic model to simulate the impact of a consumed income tax. The 

simulation modeled a system in which all saving is tax exempt, all new investment is 

written off in the first year, and interest expense is not tax deductible. The consumed 

income tax simulation shows strong increases in GDP, investment, employment, and 

federal tax receipts. If this tax system had been in place from 1991-2004, GDP would 

have been 5.2 percent higher every year, consumption and investment would have been 

greater, and employment higher by over 500,000 jobs per year (see Table 2). 

Conclusions 

As policymakers contemplate fundamental tax refonn, they need to weigh carefully the 

possible consequences of eliminating accelerated depreciation in return for a lower 

corporate income tax. As many practitioners will remember, the cut in the corporate rate 

to 34% in 1986 only survived five years, so there is no guarantee that a future rate cut 

will endure. It may be well to consider '"paying for" corporate income tax rate reductions 

with cuts to entitlements for upper income individuals (as suggested in the 

5 
102 


srobinson on DSKB307YQ1PROD with HEARING73382.037.eps

Bowles/Simpson tax reform plan) rather than eliminating proven investment provisions 

such as accelerated depreciation. Another option would be to move toward a consumed 

income tax \vhere all investment is expensed. 

Tax Treatment of 

6 
103 


srobinson on DSKB307YQ1PROD with HEARING73382.038.eps

Table 2: Inlernational COllIparir.on ol"lhe ElrecliH Tax Rate on Seleded Energ:y Imeshllenls, 2006 

Electric Generation Electric TransmissIon & 

Distribution Lines 

~---,----,----,-----,----~-

Petroleum Refining 

Source: '"International Companson of DepreClatlOll Rules and Tax Rates for Selected l:.nergy Investments, Prepared for the American Councli for 

CHpital FormHtion, Ernst and Young, May 2007 
104 


srobinson on DSKB307YQ1PROD with HEARING73382.039.eps

Table 3: Corporate Income Tax Rates, 2006 

Country Tax Rate I 

United States 39.3%9 : 

Brazil 34.0% I 

Canada 36.1% I 

China 33.0% i 

Germany 38.3% I 

India 30.0% : 

Indonesia 30.0% ! 

Japan 39.7% I 

Rep of Korea 35.0% : 

Malaysia 28.0%10 i 

Mexico 29.0% i 

Taiwan 25.0% I 

Source: OECD and Ernsl & Young Corporale Tax Guide 

Source: "International Comparison of Depreciation Rules and Tax Rates for Selected 

Energy Investments', Prepared for the American Council for Capital Formation, Ernst 

and Young, May 2007. 

8 
105 


srobinson on DSKB307YQ1PROD with HEARING73382.040.eps

Table 4 Economic Impact on the United States of Switching to a 

Consumption Tax in 1991 

Expensing business investment, removal of the business and 

personal interest deduction, and tax exemption of savings 

Average Average 

1991-1995 1996-2000 

Real GDP-Ievel (billions of 96$) 

Base 7,085.8 8,499.6 

Simulation of consumption tax 7,203.2 8,890.0 

(Difference in levell 117.5 390.5 

(Percent change in level) 1.7% 4.6% 

Business capital spending, total (billions of 96$) 

Base 684.2 1,092.0 

Simulation of consumption tax 824.9 1,495.6 

(Difference in level) 140.7 403.5 

(Percent change in level) 20.6% 37.0% 

Consumption (billions of 96$) 

Base 4,761.7 5,717.2 

Simulation of consumption tax 4.773.3 5,843.4 

(Difference in level) 11.6 126.1 

(Percent change in level) 0.2 2.2 

S&P 500 Price Index 

Base 449,1 1081,9 

Simulation of consumption tax 557.4 1370.5 

Difference 108.4 288.6 

(Percent difference in level) 24.1% 26.7% 

Employment (millions of persons) 

Total payrolls, base 111.8 125.8 

Total payrolls, simulation of consumption tax 111.8 129.3 

(Difference in level) 0.0 3.6 

Productivity (annual percent change) 

Nonfarm business, base 1.5 2.7 

Nonfarm business, simUlation of consumption tax 2.6 2.8 

Difference 1.1 0.1 

Total federal tax receipts 

Base 6210.5 8,853.2 

Simulation of consumption tax 5,745.5 8,821.0 

(Difference in level) -465.0 -32.2 

Average 

2001-2004 

10,113.1 

10.637.7 

524.6 

5.2% 

1.599.6 

2.168.8 

569.2 

35.6% 

6,746.3 

7.021.5 

275.3 

4.1 

1803.2 

2123.4 

320.2 

17.8% 

138.5 

140.9 

2.4 

2.3 

2.8 

0.5 

9.179.3 

9,607.7 

428.5 

Formation: HeH'" [he U.S. T1X C-udc Dl.scourngc'f Invc"fmC'nt" 

lnnuyattun, u'ling data fr'Jtn ABen Sinai, "MacfvC'cOJlUmetHc ~imulatinJl \Vlrh 

,~f the US. Ecc'n,Jmy," llnpHbhslwd srll~ty, 2001 

9 
106 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.041.eps

140 

120 

t .100 

q 

W r 80 

~~ 60 

40 

20 

0 

0 

Figure 1. Total Private Employment and Private Domestic Fixed Investment 

1980-Ql to 2011-Q4 

500 1,000 

y= 0.0233x+67.847 

R'= 0.9147 

2oo7-Q2 

Each 1 billion dollars decrease in 

investment is associated with a loss of 

1,500 2,000 

Private Domestic Fixed Investment 

(Billion $)* 

* Seasonaily adjusted atannual rates, BEA. 

*'" Endofquart8rs, BlS 

2,500 

10 
107 

American Enterprise Institute 


srobinson on DSKB307YQ1PROD with HEARING73382.042.eps

Statement Submitted for the Record 

House Committee on Ways and Means 

Hearing on 

"The Interaction of Tax and Financial Accounting on Tax Reform" 

Wednesday 08, 2012 

Aparna Mathur! 

Resident Scholar in Economic Policy Studies 

American Enterprise Institute 

Submitted February 22,2012 

The views expressed in this testimony are those olthe author alone and do no! 

necessarily represent those of the American Lnterprise institute. 

1 Phone _ 202.R62.6026; tax - 202.R62.5924; Email - Aparna.Mathur(a)ael.org 

Adelre,,- 1150 17'" StreetN.W .. Washington. D.C 20036 -
108 


srobinson on DSKB307YQ1PROD with HEARING73382.043.eps

I. INTRODUCTION 

Chairman Camp, Ranking Member Levin, and Members of the Committee, my name is 

Aparna Mathur, and I am a Resident Scholar at the American Enterprise Institute. Thank you for 

the opportunity to provide testimony on the important topic of tax reform. 

This hearing on the interaction of tax and financial accounting attempts to gauge how 

publicly-listed companies in compliance with financial accounting rules respond to tax policy. 

More specifically, what would be the impact of a corporate tax reform on the investment 

decisions of these companies. When we talk about corporate tax reform, there are mainly two 

types of major reforms that are discussed. The first is a reduction in the headline corporate tax 

rate. The second is a reform of the various deductions and credits that are allowed under the tax 

code, which are often discussed in the context of revenue raising. 

While reducing statutory rates would provide a benefit to existing investments and 

improve the valuation of the company from the point of view of the shareholders, expanding 

expensing and accelerated depreciation provisions would generate returns over the lifetime of the 

company by improving cash lows and thereby enhancing firm value. Both types of reforms are 

critical to firms that are deciding what new investments to undertake and which activities will 

generate the highest return. In economic terms, the user cost of capital, or the implicit annual 

cost of investing in physical capital, is determined by not only the headline corporate tax rate, but 

also other factors such as the rate of depreciation as well as the interest rate. Therefore, any 

changes to either the tax rates or the provisions affecting the return from capital, would lead to a 

change in the user cost, which would affect physical capital investments by firms. 

In the second section of this submitted record, I clarify the distinction between statutory, 

effective average and effective marginal corporate tax rates from the point of view of an investor 

deciding where to locate production in a global economy. Then in the third section I will proceed 

to describe how accelerated depreciation and expensing provisions offer as many, or more, 

benefits to the overall economy for each dollar of foregone revenue than statutory rate cuts. 

II. STATUTORY, EFFECTIVE AVERAGE, AND EFFECTIVE MARGINAL TAX 

RATES 

As is widely acknowledged, high statutory corporate tax rates in the U.S. make 

investments in the U.S. uncompetitive relative to other OECD economies. This has a negative 

effect on profitability and revenues in the U.S. as the limited availability of capital, or the lack of 

high quality capital and machinery, makes it tougher for workers to be productive. In research 

that we have done at the American Enterprise Institute, we show that this lower productivity of 

workers then translates into lower wages for the poor and middle class workers, employed in 

manufacturing jobs.' This is the reason why despite the fact that the U.S. bas one of the highest 

statutory corporate tax rates in the OECD (at 39.2 percent if we include state and local taxes), the 

U.S. collects some of the lowest corporate tax revenues in the OECD. 

In Table I in the Appendix, we show the distribution of corporate tax rates in the OECD 

for the year 2011. The top national statutory corporate tax rates in 20 II among the 31 members 

2 
109 


srobinson on DSKB307YQ1PROD with HEARING73382.044.eps

of the Organization for Economic Cooperation and Development (OECD) ranged trom 8.5 

percent in Switzerland and 12.5 percent in Ireland to 35 percent for the US. Hence within the 

OECD countries, the U.S. has the highest statutory rate of taxation at the national level. The 

picture changes only marginally when we add the sub national corporate tax rates to the top 

national rate. In the case of the United States, the average top statutory rate imposed by states in 

2011 added just over 4 percent (after accounting for the fact that state taxes are deducted from 

federal taxable income}-for a combined top statutory rate of 39.2 percent. Among all OECD 

countries in 2011, the United States' top statutory combined corporate tax rate was the second 

highest, after Japan's at 39.5 percent. In 2012, the United Stales will be left with the highest 

national and combined corporate tax rates in the world when Japan introduces a planned 5 

percentage point reduction to its top ratei

' 

The argument has often been made that the statutory tax rate is an imperfect measure of 

tax competitiveness because it does not take into account the breadth of the tax basei,'- While 

the statutory or headline rate may be an important factor for fum profitability, finns ultimately 

base decisions about where to locate investments and capital using some estimate of their future 

economic retunls from that investment. These returns are a function of not just the headline rate, 

but tax depreciation and expensing mles, research and development tax credits, the interest 

deductibility provision, and others. Thus the effective tax rate, which takes into account all these 

provisions, is an important factor in firm investment decisions. Research in economics has 

shown that capital flows from high tax to low tax countries, and that effective tax rates are 

responsible for driving these flows.' 

Countries that substitute high rates for a narrow base, such as the United States, will 

appear more uncompetitive on the basis of statutory rates alone. "Effective" tax rates resolve this 

issue by taking into account tax offsets, the present value of depreciations, and other deductions 

that narTOW the basei

" There are two principle ways to measure effective tax rates. As it turns 

out, the United States is nearly as uncompetitive based on these measures as it is based on 

statutory rates alone. 

One way to measure these effective tax rates is by means of the "effective average tax 

rate" (EATR). The simplest way to understand tile effective average tax rate is by means of an 

example. The United States has a federal statutory rate of 35 percent plus approximately 4 

percent from States and municipalities for a combined rate of 39 percent. It then allows for 

deductions from depreciation allowances, debt financing, loss offsets and expensing, which 

cause the actual tax liability to be reduced. For example, suppose a corporation is planning to 

build a new plant. The new plant is expected to generate $100 in profits over its lifetime, and the 

total amonnt of deductions is $50. ill other words, for $100 in profits the corporation is only 

taxed on $50. As a result, its taxable income is $50, and its tax liability is 39 percent of $50 or 

$20. In this example, the etIective average tax rate on the plant's income would be $201$100 or 

20 percent. A filln would find the EA TR useful when deciding which country to invest in with a 

new plant. Countries with high EATRs would lose, while capital would flow to the low EATR 

jurisdictions. 

2 Gordon, Roger II. & Hines, James .II, 2002. "lntcrn~l"ti~mal_ taAali.o~," J bndbook of PUbJl( E.CII!"lOn;Ji.:s, in: A. J. 

AUL'rbach & Iv1. Feldstein (cd.). Handbook of Public Economics, edition 1. volume .t, chapter 28, pages 1935-1995 

Elsevier. 
110 


srobinson on DSKB307YQ1PROD with HEARING73382.045.eps

Another related concept is the effective marginal tax rate (EMTR). This shows the tax 

liability on an additional dollar of investment. So, it would be particularly relevant for the scaling 

of projects. For instance, once a firm decides to build a plant, the EMTR would capture the tax 

liability on the marginal or additional investment of adding a machine to the production line. 

Suppose the machine costs $50. If the firm can deduct 50 percent of the cost of this machinery, 

and the firm expects a return of $66 over the lifetime of this machinery, then the marginal 

effective tax rate would be 0.39* ($66-$25)/$66 or 24 percent. 

In work with Kevin Hassett at AEI, we used the methodology described in a 1999 paper 

by Michael Devereux and Rachel Griffiths for calculating the effective average and effective 

marginal rates for investments in plants and machinery. Intuitively, the EMTR in this 

methodology is calculated as that tax rate which makes tile post-tax returns from the investment 

equal to the cost of the investment. In other words, the firm breaks-even on the last or marginal 

investment after allowing for taxes. The EA TR is calculated as the difference between the preand post-tax economic profits expressed as a fraction of pre-tax economic profits. Hence when a 

firm is deciding between locating a plant in one of two locations, it will compare the EATR to 

see what the average post-tax return is likely to be in both locations, and move to the location 

with the lower EA TR. On the other hand, when it has to decide whether to expand the scale of its 

project, it has to look at the EMTR on the marginal investment. 

Table 2 shows that relative to the other OEeD countries, the U.S. EATR is nearly 10 

percentage points higher than the average for all the OEeD countries. Therefore, not only is the 

U.S. much worse when we look at the statutory headline rate-it scores equally badly when we 

compare effective average tax rates. Further, the U.S. is only second in the OEeD when we use 

the EMTR to rank countries. 

As a check on our results, we compared our relative rankings to those obtained by the 

World Bank for a study done in 2009. The World Bank approximates tile effective rate using an 

alternative methodolot,y This approach considers a representative company in a typical year of 

operation and computes the taxes it would pay if located in different countries as a percent of its 

fmancial income using standardized fmancial accounting (a "book" measure of effective tax 

rate). In Table 3, we show the effective rates computed by the World Bank using the book 

method. While the actual value of the rates computed varies under our methodology relative to 

the World Bank methodology, as we may expect, there is little improvement in the U.S. position 

relative to other countries. 

A few papers, sllch as one by Kevin Markle and Douglas Shackelford, use actual tax 

liability data to approximate measures of the effective average and marginal rates.' The 

advantage of tax liability data is that it can account for all the different types of deductions, 

allowances and credits that may be specific to each company or industry. However, a 

disadvantage of this approach is that any firnl' s actual tax liability may be a function of it's 

specific tax planning strategies, whether it's a multinational with tax haven operations, whether 

it's more or less profitable than other fmns and so on. Therefore, tax liabilities may be finnspecific rather than country-specific. However, even using this measure, the paper concludes that 

Japanese finns faced the highest effective average tax rates over this period followed by U.S. 

3 http://paper~.sslTl.com!~ol.1/papers.cfrn?abstract_ld= 1770391 

4 
111 


srobinson on DSKB307YQ1PROD with HEARING73382.046.eps

multinationals. Further. while EATRs have been falling for the last two decades worldwide, the 

ordinal rank t1'om high-tax countries to low -tax countries has changed little. 

The United States' is cnrrently underperforming in global tax comparisons. The United 

States' top statutory tax rates will soon be the highest in the OECD, and the US. effective 

average and effective marginal tax rates are far above the OECD average. Any effOit at corporate 

tax reform is therefore incomplete withont a pnsh towards addressing not only the high statntory 

rates, bnt also the relatively high effective average and marginal rates. These rates are the best 

indicators for capital investors of their true tax liability-much more so than the statutory rates. 

For instance, by our calculation, for the US., the statutory rate is nearly 10 percentage points 

higher than the effective average rate llild nearly 17 percentage points higher than the effective 

marginal tax rate. This would be comfOlting if it were not for the fact that relative to other 

OECD countries, the US. is one of the worst performers on this score. The average effective tax 

rate for all OECD countries excluding the U.S. is 20.5 percent, while the effective marginal tax 

rate is 17.5 percent. The con'esponding values for the US. are 29 percent and 23.6 percent. 

Therefore, while much media attention has been focused on the statutory rates, reforming 

effective rates should clearly be an area of urgent concern for policy makers as well. 

In the final section, I provide a preliminary analysis of how effective tax rates are 

affected by either rate cuts or the introduction of permanent expensing provisions. 

111. AN ANALYSIS OF THE IMPACT OF EXPENSING AND STATUTORY 

RATE CUTS ON EFFECTIVE CORPORATE TAX RATES 

The most common refrain from tax-reform proponents is "Lower the rates; broaden the 

base" This mlliltra is repeated emphatically and often. However, it ignores one of the lowest 

hllilging fruits for corporate tax reform, namely, the immediate expensing of business 

investments. In this section, I briefly sketch a few of the benefits of allowing expensing, and then 

I attempt to compare the effect of expensing on marginal tax rates to the effect of statutory rate 

cuts. 

Expensing benefits businesses by increasing the present value of the deductions that are 

allowed tor investment costs. Whereas under depreciation provisions, investment costs must be 

deducted over time, under expensing investment costs are deducted immediately. With full 

expensing, the value of the deduction will exactly offset the present value return on the 

investment over its lifetime, so the effective marginal tax rate on investment will be zero. This 

will cause more investment to be undertaken, an expanded capital accumulation in the economy, 

and in the long run greater growth. The benefits of expensing are comprehensively described in a 

2010 Center for American Progress/Brookings Institution paper by economist Alan Auerbach 

from UC Berkley'; a Treasury Department Background Paper on business taxation from 2007;" 

and the forthcoming book on the "X-Tax" by my colleague Alan Viard and Robert Carroll from 

PricewaterhouseCoopers.'" 

For each dollar of revenue lost, expensing can sometimes provide more investment than 

statutory rate cuts since it only applies to new investments, not existing ones. In the long run, the 

5 
112 


srobinson on DSKB307YQ1PROD with HEARING73382.047.eps

cost of expensing would be negligible according to estimates by economists Gordon, 

Kalamokidis, and Slemrod (2004)."'ii The main costs from expensing will likely come from 

transition relief for existing investments. Given the benefits of lowering effective rates, which T 

desclibe above, it is illuminating to see how even partial expensing can provide substantial 

decreases in effective marginal tax rates. 

In Table 4, I use a calculator of effective marginal tax rates published by the 

Congressional Budget Office in 2007 to analyze the effect of a 50% expensing provision 

compared to a 10 percentage point statutory rate cut. Whereas the effective tax rate model that T 

describe above is extremely valuable for doing cross-country analysis, the CBO calculator is 

better suited to analyzing specific tax code changes for the United States. Compared to current 

policy, a statutory rate cut from 35% to 25% would lower the EMTR on total business 

investment from 24.2% to 20.8%. If we keep the current 35% top statutory rate and allow 50% 

expensing of business investment, then the EMTR for total business investment falls from 24.2% 

to 16.6%. 

Tf the goal of policy is to spur investment in the United States and raise revenues, we 

need to focus on lowering effective rates, rather than simply reducing the top rate. Therefore, the 

provision of expensing (or accelerated depreciation) is a valuable tool and should not be left out 

of the policy debate. 

6 
113 


srobinson on DSKB307YQ1PROD with HEARING73382.048.eps

TABLE 1: 2011 TOP STATUTORY CORPORATE INCOME TAX RATES 

Country Central Govt. Combined 

Switzerland 8.5 21.2 

Ireland 12.5 12.5 

Germany 15.8 30.2 

Canada 16.5 27.6 

Czech Republic 19.0 19.0 

Hungary 19.0 19.0 

Poland 19.0 19.0 

Slovak Republic 19.0 19.0 

Chile 20.0 20.0 

Greece 20.0 20.0 

Iceland 20.0 20.0 

Slovenia 20.0 20.0 

Turkey 20.0 20.0 

Estonia 21.0 21.0 

Korea 22.0 24.2 

Luxembourg 22.1 28.8 

Israel 24.0 24.0 

Austria 25.0 25.0 

Denmark 25.0 25.0 

Netherlands 25.0 25.0 

Portugal 25.0 26.5 

Finland 26.0 26.0 

United Kingdom 26.0 26.0 

Sweden 26.3 26.3 

Italy 27.5 27.5 

New Zealand 28.0 28.0 

Norway 28.0 28.0 

Australia 30.0 30.0 

Mexico 30.0 30.0 

Spain 30.0 30.0 

Japan 30.0 39.5 

Belgium 34.0 34.0 

France 34.4 34.4 

United States 35.0 39.2 

Average Excluding U.S. 23.3 25.1 

SOURCE: OECD 

7 
114 


srobinson on DSKB307YQ1PROD with HEARING73382.049.eps

TABLE 2 EATR EMTR and Statutory Rates 

i 2010 

! EATR 

2010 

EMTR 

2010 

Statutory 

Combined 

Australia 22.2% 17.0% 30.0% 

Canada I 25.5% 23.4% 29.5% 

-~1!ili~=~~~-:-.t~i~;~~o;L =·~I=i;~~=~.~~·~170o/;;- Czech i 

~_e.p.1:I!J!i(;.~_~~ .. J_.1~~~~_.~~~?c t2~.~ __ 12Q.i)'''.. 

Denmark I 19.9% 16.5% 25.0% .~.-.... ~.-.. ~~ .......... ~ .. -t.-....... - ~ .:- .... -~.~ ..... ~ ... - .. - .. -~ ... -~-..... ~ ~ 

Finland I 20.7% 17.3% 26.0% 

France ! 27.5% ._.?~8% ~ __ }_'±:.±~~ 

Gennany i 24.2% 20.7% 30.2% 

Greece 17.9% 13.4% 24.0% 

Hungary I 15.7% 13.4% I 19.0% 

Ireland i 10.9% 9.7% 12.5% 

Iceland I _ 15.0% 

Italy 24.3% 22.6% 27.5% 

Japan 33.0% 30.5% 39.5% 

Korea 18.1% 13.6% 24.2% 

Luxembourg I 20.1% 13.9% 28.6% 

Mexico 28.4% 27.7% 30.0% 

Netherlands 19.4% 15.1% 25.5% 

New Zealand I 

! - 30.0% 

Norway 24.2% 22.1~;Q 28.0% 

Poland 16.2% 14.1% 19.0% 

Portugal 18.3% 12.2% 26.5% 

Slovak 

Republic i 19.2% 19.3% 19.0% 

Spain 27.5% 26.3% 30.0% 

Sweden I 18.5% 12.6% 26.3% 

Switzerland 15.4% 10.9% 21.2% 

'"[Il£k,ey I 13.1% ~:~"- 20.0% 

United . ~~ I----~~.~ ... -

Kingdom I 22.3% 18.8% 28.0% ..... - .. -.~ .. ~-... ~ .. --.... -r--' .. --..:.:~+---.... - ... -

United States I 29.0% 23.6% 39.2% A~~r~;;:;;-~~~I----r---~-~I-----~ 

Excluding I 

u.s. ! 20.5% 17.2% 25.5% 

8 
115 


srobinson on DSKB307YQ1PROD with HEARING73382.050.eps

TABLE 3: Comparison with World Bank Calculations 

2009 EATR 2009 World Bank EA TR Estimate 

I Australia 22.2% I 25.9% 

Austria 20.8% i 15.7% 

I Belgium 22.3% 4.8% 

I Canada 27.1% : 9.8~·~ 

Chile 13.9% i 

Czech Republic 19.4°;'0 I 7.4% I 

~enmark 19.9% ! 21.9% 

J'inland 20.7% I 15.9% 

I France 27.5% I 8~2% 

I Germany 24.2% i 22.9% 

t~~e~:ry ___ .. 

1~()')I"-1 13.9% 

·~~~I 16.7% 

l Ireland !.0.9~1 11.9% 

iTceland 

.-

- 6.9% 

Italy 24.3% I 22.8% 

laf1<ln 33.0~{' I 27.9% 

Korea .!~J.'!IO.I 15.3% .. ~--~ 

Luxembourg 20.1% i 4.1% 

I Mexico 26.5% I 

Netherlands 19.4% ' 20.9% 

New Zealand - 30.4% , 

Norway 24.2% : 24.4% 

Poland 16.2% I 17.7% 

Portugal 18.3% i 14.9% 

i§lo!'~!<I3:~p.tI.bli~ 19.2% .2.0.0/".. 

I Spain 27.5% 20.9% 

I Sweden 18.5% i 16.4% 

1~\Yi.~~e~l<Jllc!._. 15.4% 8.9% 

f-.TlJ~I<")I_._... ... , .. - 13.1% 8.9% 

I United 

Kingdom 22.3% 23.2% 

United States 28.9% 27.6% 

i Average 

I Excluding U.S 20.6% 15.9% 

9 
116 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.051.eps
117 

Association for Financial Professionals 


srobinson on DSKB307YQ1PROD with HEARING73382.052.eps

February 22,2012 

The Honorable Dave Camp 

Chainnan, Committee on Ways and Means 

U.S. House of Representatives 

1100 Longworth House Office Building 

Washington, DC 20515 

Dear Chainnan Camp: 

Association for 

Financial Professionals'" 

The Association for Financial Professionals (AFP) 1 welcomes the oppOltunity to provide yon 

and the Members of the Committee on Ways and Means (Committee) with our thoughts on the 

issues addressed at the February 8, 2012, hearing on the interaction between tax and financial 

accounting on tax reform. AFP's Financial Accounting and Investor Relations Task Force2 

(Task Force) is pleased to offer our feedback based on input we continue to receive from our 

members. We hope that our comments will add to the discussion and we welcome the 

opportunity to discuss them in greater detail with your staff. 

The Task Force supports the Committee's mandate to evaluate the current corporate tax structure 

and make recommendations for improvement. Most AFP members agree that corporate tax 

reform is needed. We applaud your willingness to look at all aspects of the taxing policy, 

including the accounting rules, when considering your options. However, AFP's longstanding 

position is that Congress and the accounting standards setters should act independent of each 

other. 

Article I of the Constitution gives Congress, among other powers, the power to collect taxes arId 

make the laws necessary to ensure the execution of that task. Similarly, the accOlmting standar'd 

setters are charged with establishing and improving standards of financial accounting and 

reporting to provide decision-useful infonnation to investors and other users of financial repOlis. 

While the two processes often complement each other, they clearly have different objectives. 

Legislation should focus on tax refOTIll in terms of the overall economic impact to industries, 

i1movation, employment, and the national debt. The rules governing the accounting for taxes 

1 AFP represents approximately 16,000 finance and treasury professionals from over 5,000 corporations, including 

the forhme 1,000 and the largest middle-market companies. Our membership includes a significant number of 

corporate trCaf>.UfCrf>. who arc rcsponsible for thc protcction and managcmcnt of cOI}Joratc cash, cash flow 

requiremellls and I.:orporate il1vt':'5tmenls; and controllers and ('Fe}.;, who are responsible for Iheir l:orporate 

accounting, financial reporting and regulatory compliance. 

2 AFP's FAIR task force, a subcommittee of the G-oyernment Relations Committee, monitors the activities of the 

Financial Accounting Standards Hoard (I'ASH), the International Accounting: Standards Hoard (lASH), the 

Securities and Exchange COlllmi~slon (SEC) and other government and standard-selling entilies that affecl corporate 

accounting, financial reporting and investor relations. 
118 


srobinson on DSKB307YQ1PROD with HEARING73382.053.eps

Association for Financial Professionals 

lh.:: lmpad ofCorporatc fax Rc1tmn on Accounting 

february 22, 2012 

Page 2 nf:1 

created by the Financial Accounting Standards Board is a convention to repmi those legislatively 

enacted tax rules consistently. Thus, any changes Congress makes to the tax code that warrants 

an accounting change will be subsequently taken up by the Financial Accounting Standards 

Board (F AS B) for their independent review and due process. 

Wnile the topic of your hearing was on the impact of corporate tax reform and accounting, a 

great deal of time was spent discussing corporate tax reform as it pertains to the current tax rules 

on repatriated earnings. AFP's longstanding position on taxing repatriated foreign earnings is 

that Congress' action should include permanently reducing the tax rate to a percentage that 

would incent companies to return foreign earnings to the U.S. 

Because companies can currently choose when to repatriate foreign earnings, and therefore when 

to pay u.s. taxes on those earnings, the lost tax revenue or opportunity cost of this tax treatment 

is extremely low. Tn fact, a reduction in the current tax rate would likely increase tax revenue in 

the U.S. both in the short- and long-term because there would no longer be such a strong 

incentive to keep those funds offshore to avoid paying the high U.S. taxes. Additionally, the 

likely inflow of capital into the U.S. would stimulate capital investment and hiring, contributing 

to economic recovery in tlle short run and economic growth in the long-tenn. 

Recently, AFP conducted a membership survey soliciting their views on taxation of cash that is 

repatriated from overseas operations. Twenty-six percent of survey respondents indicate that 

their organizations made fewer investments in U.S. operations as a result of the tax placed on 

cash repatriated from U.S operations. Two-thirds of respondents that work at organizations that 

have non- U.S. based operations indicate that the tax on repatriated foreign earnings at current 

rates have little to no impact on the decision to continue and/or establish operations outside of 

the U.S. Conversely, nearly two-thirds of survey respondents from similar organizations state 

that the same tax has discouraged their organization from repatriating cash back to the U.S. and 

using it to invest in corporate growth (i.e., capital investments, hiring more workers, research & 

development). 

A majority of financial professionals tie a reduction in the taxes imposed on repatriated cash 

from overseas operations to increased capital investment and employment in the US., with a 

greater impact resulting from a permanent reduction in the tax, Sixty-one percent of survey 

respondents link even a temporary reduction on the tax levied against repatriated cash to greater 

capital investment and/or hiring in the US. However, seventy-four percent of the respondents 

foresee a similar positive outcome from a permanent tax adjustment 

As you know, President Obama recently announced his plans surrounding corporate tax reform. 

AFP applauds the Obama Administration's willingness to examine all options when deciding the 

best course of action needed to repair our nation's current tax system, We strongly encourage 

White House staff to work with your Committee to consider comprehensive changes that would 

incent companies to bring back their foreign eamings and invest those resources in the U.S. A 

tax policy that continues to harm the competitiveness of the U.S. will only encourage companies 

to furtl1er expand tlleir investment and hiring in other countries. Therefore, AFP strongly 

encourages changes to the corporate tax system that would incent companies to retum foreign 
119 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.054.eps
120 

Center for Fiscal Equity 


srobinson on DSKB307YQ1PROD with HEARING73382.055.eps

Comments for the Record 

House Committee on Ways and Means 

Hearing on the Interaction of Tax and Financial Accounting on Tax Reform 

Wednesday, February 8, 2012, 10:00 AM 

By Michael G. Bindner 

Center for Fiscal Equity 

Chairman Camp and Ranking Member Levin, thank you for the opportunity to submit these 

comments for the record to the House Ways and Means Committee. Our COimnents are in the 

context of our tax reform plan, which has the following four elements: 

A Value Added Tax (VAT) to fund domestic military spending and domestic 

discretionary spending with a rate between 10% and 13%, which makes sure very 

American pays something. 

Personal income surtaxes on joint and widowed filers with net annual incomes of 

$100,000 and single filers earning S50,000 per year to fund net interest payments, debt 

retirement and overseas and strategic military spending and other international spending, 

with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would 

also pay taxes on distributions from estates, but not the assets themselves, with 

distributions from sales to a qualified ESOP continuing to be exempt 

Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income 

cap, which allows for lower payment levels to wealthier retirees without making bend 

points more progressive. 

A VAT -like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT 

with additional tax expenditures for family support, health care and the private delivery 

of governmental services, to ti.md entitlement spending and replace income tax filing for 

most people (including people who file without paying), the corporate income tax, 

business tax filing through indi\~dual income taxes and the employer contribution to 

OASI, all payroll taxes for hospital insurance, disability insurance, unemployment 

insurance and survivors under age 60. 

We have no proposals regarding environmental taxes, customs duties, excise taxes and other 

offsetting expenses, although increasing these taxes would result in a lower VAT. As we have no 

proposals in these areas, we will ignore the financial accounting implications of these taxes. 

The impact of VAT adoption on financial accounting is well documented, with a wealth of 

working models in every other OECD nation to draw upon. The complexity of any financial 

accounting depends on the complexity of the VAT itself. Broader based taxes require simpler 

accounting structures and will be generally more stable, with exceptions yielding complexity in 

reporting and accounting and inviting more complexity as entrenched interests demand more 

benefits to further game the system. 
121 


srobinson on DSKB307YQ1PROD with HEARING73382.056.eps

Accounting for Employee-paid Old Age and Survivors Insurance will be no more complicated 

than current law, while accounting for the income surtax will be greatly simplified. The only 

complexity win be accounting for sales to a qualified ESOP, which win continue to be tax 

exempt Tfsurtax rates remain stable, the only source of complexity ,,~ll be annual adjustments 

for inflation. 

American competitiveness is enhanced by enacting a VAT, as exporters can shed some of the 

burden of taxation that is now carried as a hidden expOlt tax in the cost of their products. 

Accounting systems in a VAT system will also have to account for zero rating at the border and 

the treatment of imports as entirely taxable to the importer. The NBRT will also be zero rated at 

the border to the extent that it is not offset by deductions and credits for health care, family 

support and the private delivery of governmental services. As it is similar to a VAT, it will begin 

with the same base, but will require additional accOlmting structures to take into account the 

exclusions which make it more like an income tax and less like a V A T. These exclusions are the 

reason for a separate tax. 

Accounting for a continued health insurance exemption is well developed. Accounting for 

services to retirees will be more complicated. While purchases for health care would be VAT 

and NBRT exempt, base medical wage costs would also be exempt for NBRT purposes, but not 

necessarily for the VAT, unless these services are contracted, in which case V AT would be 

collected by the vendor and the NBRT would be embedded in their costs. NBRT offsets for 

employer provision of social and educational services will follow similar rules, although services 

provided by non-profits will be VAT exempt, although the NBRT will still be embedded in any 

contribution. 

Establishment of personal accounts as an offset for Old Age and Survivors Insurance will require 

complex accounting rules, however the benefit of such accounts is that the majority of these 

funds will be invested with the employer and accounting rules should be only slightly more 

complex than those required to deal with non-employee investors, although procedures to avoid 

older retirees spending down all of their assets and the creation of annuities for non-employee 

widows will add complexity. 

Consolidation of the child tax exemption, the child tax credit and the ElTC, while making them 

refundable, will aid both taxpayers and employee companies, who will simply report credits paid 

to each employee with their tax filing, with a copy to each employee, so that the government 

may also send a copy which employees can compare to verifY honest employer reporting and 

payment This should be no more complex than cun·ent accounting to process W -2 and 1099 

forms. 

Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT 

credit The accounting system must be able to capture this event when it occurs. It must also be 

able to adjust changes to NBRT and V AT rates and for Child Tax Credit adjustments for 

inflation, as well as expansions used for counter-cycle stimulus. 

Tn testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility 

of including high income taxation as a component of a Net Business Receipts Tax. The tax fonn 

could have a line on it to report income to highly paid employees and investors and pay surtaxes 

on that income. 
122 


srobinson on DSKB307YQ1PROD with HEARING73382.057.eps

The Center considered and rejected a similar option in a plan submitted to President Bush's Tax 

Reform Task Force, largely because you could not guarantee that the right people pay taxes. If 

only large dividend payments are reported, then diversified investment income might be undertaxed, as would employment income from individuals with high investment income. Under 

collection could, of course, be overcome by forcing high income individuals to disclose their 

income to their employers and investment sources - however this may make some inheritors 

unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it 

is preferable to leave filing responsibilities with high income individuals. Relying on a separate 

personal income surtax for higher income individuals also reduces complexity for employers, 

who would not have to include systems to calculate surtaxes on higher income employees and 

dividend payees internally. 

Our proposal seeks to bring long term stability to the tax debate, including consensus on who 

pays the income surtax and by how much. As the invited witnesses stated, stable tax policy is 

the best way to help finns minimize complexity in accounting for tax refonn (although once the 

national debt is entirely paid off and overseas military commitments either ended or entirely 

funded by host countries, provisions to collect funds for the income surtax can be suspended 

when the surtax sunsets. 

Thank you for the opporhll1ity to address the committee. We are, of course, available for direct 

testimony or to answer questions by members and staff 
123 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.058.eps
124 

Equipment Leasing and Finance Association 


srobinson on DSKB307YQ1PROD with HEARING73382.059.eps

=LFA 18?5 K Street NW 

Suite 900 

Washington, DC 20008 

Written Submission of William G. Sutton, CAE 

P ?O? .?38-3400 

President and CEO of the Equipment Leasing and Finance Association 

before the U.S. House Committee on Ways & Means 

Hearing on the Interaction of Tax and Financial Accounting on Tax Reform 

February 21, 2012 

Chairman Camp, Ranking Member Levin and distinguished members of the committee, I write to 

provide additional information to members of the House Committee on Ways & Means as a follow-up to 

your hearing on the interaction of tax and financial accounting on tax reform held February 8, 2012. This 

submission discusses how equipment financing is influenced by tax and accounting policies and 

highlights proposed changes being considered to lease accounting standards by the International 

Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Board (FASB) that will 

impact the treatment of equipment leases. 

Background on ELFA 

The Equipment Leasing and Finance Association (ELFA) is the trade association that represents 

companies in the $628 billion commercial equipment leaSing and finance sector, which includes financial 

services companies and manufacturers engaged in financing capital goods. This represents over half of 

the estimated $1.2 trillion U.S. annual expenditure for capital equipment acquisition. ELFA members are 

the driving force behind the growth in the commercial equipment finance market and contribute to 

capital formation in the U.S. and abroad. Its over 550 members include independent and captive leasing 

and finance companies, banks, financial services corporations, broker/packagers and investment banks, 

as well as manufacturers and service providers. ELFA has been equipping business for success for more 

than 50 years. For more information, please visit www.elfaonline.org. 

ELFA members provide credit every business day to nearly every business and state and local 

government sector in the country. ELFA members finance the acquisition of all types of capital 

equipment, including commercial and corporate aircraft; rail cars and rolling stock; trucks and 

transportation equipment; vessels and containers; construction, agriculture and off road equipment; 

medical technology and equipment; IT hardware, software and capitalizable services; emergency 

communications; public transit; police and emergency vehicles; school buses; energy management and 

conservation equipment; and virtually every other type of equipment. 

Business Use of Leases 

Generally, leases are transactions involving equipment or other property acquired by a lessor and leased 

under an executory contract to the lessee. Leasing is such a pervasive activity in U.S. business that all 

companies lease equipment and real estate, some to greater extents than others, as a means to acquire 

the use of an asset without the burdens of ownership. Equipment financing can help mitigate the 

uncertainty of investing in a capital asset and may enable a business to achieve its desired return, 
125 


srobinson on DSKB307YQ1PROD with HEARING73382.060.eps

increase efficiency, save costs and apply capital to more pressing needs of its operations. Our members 

offer flexible choices that can work with the diverse objectives of most businesses. 

Leasing equipment provides advantages to both lessors and lessees. As owners, lessors have the ability 

to utilize significant tax credits, grants and accelerated depreciation deductions. Lessees can take 

interest payments as business tax deductions, create greater certainty in budgeting by setting 

customized rent payments to match cash flow, gain the ability to avoid equipment obsolesce, and 

provide services relating to installation, maintenance, de-installation and disposal of the equipment. The 

tax treatment under the Internal Revenue Code and the accounting treatment under current GAAP for 

lessees generally match, as rents are expenses for book purposes and rents are tax-deductible expenses 

for tax purposes. Only when there are uneven rents are there timing differences, but they are usually 

minor. The tax and accounting method treatment of leases make leases desirable for both lessors and 

lessees to utilize in their strategic business planning. 

Proposed Changes to Lease Accounting Standards 

A major convergence project currently under consideration by the IASB and FASB makes significant 

changes to GAAP for lessees by accelerating lease expenses for book accounting purposes. As proposed, 

leases would be capitalized resulting in an accounting asset and liability on balance sheets. Rent 

expense will be replaced by the straight line amortization or depreciation of the asset and imputed 

interest on the liability. This recasting of the lease transaction will produce a front ended expense 

pattern that will cause non cash book expenses generated by the executory lease contract to depress 

book earnings and equity capital. It will also cause a temporary difference for income taxes and create a 

significant deferred tax asset. The loss of capital from the front ended book expense pattern and the 

resulting deferred tax balance will in essence cause a permanent reduction in equity capital unless the 

lessee discontinues its leasing activities, which is virtually impossible for most companies. 

This proposed change in GAAP would distort the financial presentation readers offinancial statements 

will observe, giving the impression that the lessee is undercapitalized and has a deferred tax asset that 

may never be recovered in the future. A number of organizations and other stakeholders, including the 

ELFA, have recommended the proposal be revised so that the reported lease cost is equal to the average 

rent expense as under current GAAP so that the accounting reflects the economic effects of the lease. 

The most-effected industries are retail, transportation and banking--all key industries in the us 

economy. The loss of equity and the resulting deferred tax asset created by the proposed accounting 

will undoubtedly change lessee behavior (for example the first year cost under a 10 year lease will be 

28% higher than under current GAAP) causing them to make uneconomic decisions. Investors will be 

confused by the new accounting and share prices may be impacted. 

Additionally, the current proposed revenue recognition rules ignore tax benefits in lease investments, 

distorting the earnings pattern. Tax benefits are as much a part of revenue as cash from rents, yet taxes 

are ignored. The result of this is already evident, as no large leveraged leases have been closed since the 

project began as investors assumed the accounting treatment would be adverse. The lessees in long 

lived assets have suffered as alternative structures are more costly. Lessor behavior will change under 
126 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.061.eps
127 

Fiscal Associates 


srobinson on DSKB307YQ1PROD with HEARING73382.062.eps

WRITTEN STATEMENT SUBMITTED FOR CONSIDERATION BY 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON THE INTERACTION OF 

TAX AND FINANCIAL ACCOUNTING ON TAX REFORM 

HEARING DATE: FEBRUARY 8, 2012 

SUBMITTED BY GARY A. ROBBINS 

PRESIDENT 

FISCAL ASSOCIATES 

713 Rose Square 

Alexandria, VA 22314 

703-413-4371 

garobbins@mindspring.com 

FEBRUARY 17, 2012 
128 


srobinson on DSKB307YQ1PROD with HEARING73382.063.eps

GARY A. ROBBINS 

PRESIDENT, FISCAL ASSOCIATES 

'VRITTE1'I STATEME1'IT SUBMITTED FOR CO;'olSIDERATION BY 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING 01'1 THE INTERACTION OF 

TAX AND FINANCIAL ACCOUNTIl'\G ON TAX REFORM 

Hearing Date: February 8, 2012 

T am the president of Fiscal Associates, a consulting firm specializing in the economics of 

taxation. For 16 years, I was an economist in the Office of Tax Policy and the Office of 

Economic Policy at the Treasury Department. In total, I have spent more than 45 years building 

economic models and in analyzing how changes in taxes and other factors affect business capital 

investment decisions and how those decisions affect overall economic gro\\1:h. 

The Committee has asked for information on "the interaction between tax policy and 

accounting mles so that we [can 1 make informed decisions about which policy choices will help 

employers grow and create jobs." The Hearing Advisory suggests that "comparing a rate cut 

with expensing requires consideration of the impact of tinancial accounting considerations on 

business investment decisions." 

The purpose of this submission is to address two questions. First, do companies make 

investment decisions based on the actual impact the project will have on the company's net 

worth or on how the project will be presented by accountants on the financial statements? 

Second, will a tax reduction spread across both old capital investment and new capital 

investment (such as a cut in the tax rate) yield as much new investment and GDP growth as a tax 

reduction focused solely on new investment (such as first-year expensing or accelerated 

depreciation)? 

How Is The Investment Decision Made? 

The answer to this question is found by looking at how business investment planners 

actually do their jobs. For years, all business schools have taught some variant of "wealth 

maximization" as the method that should be used in the analysis of new investments. The reason 

is simply a matter of mathematics. No other method will yield a more accurate result or better 

inform the decision to make or forego a capital investment. 

2 
129 


srobinson on DSKB307YQ1PROD with HEARING73382.064.eps

Given that wealth maximization is what is taught, what is used in the field in actual practice? 

A 2001 study by John Graham and Campbell Harvey ofOuke University surveyed businesses 

about how investment decisions are actually made. [ They state: 

It is a major tenet of modern finance theOlY that the value of an asset (or an entire 

company) equals the discounted present value of its expected future cash nows. Hence, 

companies contemplating investments in capital projects should use the net present value 

rule: that is, take the project if the NPV is positive (or zero); reject ifNPV is negative. 

But ifNPV has been the dominant method taught in business schools, past surveys have 

suggested that internal rate of return (IRR) was for long the primary corporate criterion 

for evaluating investment projects. For example, a 1977 survey of 103 large companies 

reported that fewer than 10% of the firms relied on NPV as their primary method, while 

over 50% said they relied mainly on IRR. Although the two measures are similar in 

several respects (and will lead to the same "go-no go" decision if the same hurdle rates 

are used), the critical difference is that IRR is a ratio while NPV is a dollar measure of 

value added . 

.. . most respondents cited net present value and internal rate of return as their most 

frequently used capital budgeting techniques; 74.9% ofCFOs always or almost always 

used NPV and 75.7% always or almost always used IRR. As noted earlier, however, large 

companies were significantly more likely to use NPV than were small finns. 

It seems clear that potential financial statement presentations by accountants have little 

innuence on capital investment decisions, in either practice or logic. Rather, most firms --

especially large firms -- use discounted cash now to make such decisions. Similarly, the 

COlfunittee should be persuaded by how its tax policies affect the net present value of potential 

capital investments, not by how such policies affect financial statement presentations. 

Which Tax Policy Is Best? 

This question is addressed by looking at two alternative reductions in business tax burdens. 

As suggested by the Hearing Advisory, the two options considered are either (1) to reduce the 

business tax rate or (2) to provide more rapid cost recovery. 

The controlling issue is as follows. Will first-year expensing be more helpful to GOP and 

jobs growth than a rate cut that has the same static revenue cost? 

A tax policy change that increases economic activity and maximizes GOP growth is one that 

decreases the cost of producing output, thereby allowing the price of the output to be lowered 

and more units to be sold. On the assumption that labor costs and the purchase prices of capital 

goods are constant, the tax policy change must, therefore, focus on lowering the tax component 

in the cost of capital investment. Perforce, the preferred tax policy choice is the one that most 

reduces the cost of capital investment and most increases GOP growth per dollar of revenue cost. 

I John Graham and Campbell11arvey, "The Theory and Practice of Corporate Finance: Evidence from the Field"', 

Journal C?fFinancial r.'coflomics. Vol. 60 (2001). 

3 
130 


srobinson on DSKB307YQ1PROD with HEARING73382.065.eps

The following Impact Table illustrates that first-year expensing is superior to a rate cut with 

a comparable revenue cost. As explained in the Technical Analysis, similar results obtain when 

an acceleration of depreciation is compared to a rate cut. 

TheTaxB-eciuction 

First-Year Expensing 

Rate Cut 

Impact Table -- Two Tax Cut Alternatives 

Annu,,1 

~Mlitlll Q!lJJ!!lt ~!!I) 

Cost I'ric.e Incr~a.se 

Reduction Reductio" ($8) 

1_3~-o 0.5% 121.0 

1.0% 0.3% 88.5 

21 COSl in lhe len-year budgel window. 

Annultl ~J!!'.lI~r 

Revenue Revenue 

Co~t($Bl2/ DoHar 

33.7 $ 3.59 

33.7 $ 2.63 

The relatively poor performance of the rate cut alternative in the Impact Table is not 

surprising, nor is it unique to the analysis here presented. It has long been understood that a 

dollar of tax reduction spread across both old and new capital investment (as in the case of the 

rate cut) will boost GDP growth substantially less than a dollar of tax cut concentrated on new 

capital investment by means either of first-year expensing or accelerating depreciation. 

Rate cuts can, however, play an important role. A large benefit to GDP and jobs growth can 

be obtained by the combination of first-year expensing and reduced tax rates. This is the 

preferred tax policy from an economic growth perspective. 

The least efficacious tax policy is to "pay for" a lower tax rate by reducing presently 

allowable depreciation deductions. According to our analysis, the GDP growth rate would tend 

to be reduced, not increased. 

The analysis underlying the Impact Table, how it was constructed, various of its 

implications and other relevant comparisons are explained below. 

Technical Analysis and Other Comparisons 

We need to create alternative policy changes to determine if it is better to offer a rate cut 

rather than more rapid cost recovery or other direct incentives for new investment" We will look 

at a "rate cut" which lowers capital cost by one percent, $33.7 billion. The rate cut applies to 

both old and new capitaL 

We will compare two related cost recove1Y alternatives to the rate cut Both alternatives 

will concentrate the revenue cut on investment, new capital, rather than all capital as the rate 

reduction does. The first alternative will spread the cut evenly across the life of each asset to 

portray "improved cost recovery allowances". The second will provide the cut immediately to 

equipment investment in order to porrray bonus or "immediate expensing"-

4 
131 


srobinson on DSKB307YQ1PROD with HEARING73382.066.eps

All three plans have the same cumulative budget cost. The differences arise in timing 

and in impact on the finn's decision to invest. The table below shows the pattem of benefits and 

the budget costs the three altematives. The "rate cut" will provide a uniform benefit (one-fifth of 

the total benefit) to capital invested in each of the last five years. The "improved cost recovery" 

will provide a unifonn benefit (one-fifth of the total benefit) to new investment for each of the 

years of its use. The "immediate expensing" will provide the total benefit at the time of 

investment. 

5 
132 


srobinson on DSKB307YQ1PROD with HEARING73382.067.eps

Three Capital Tax Reduction Plans 

Revenue Benefit and Cost by Year 

Year Benefit Revenue cost in year: 

Over 

Bought Life 0 2 3 4 5 

Rate cut benefitting old machines as well as new. Full cost from year zero. 

-4 6.7 6.7 

-3 13.5 6.7 6.7 

-2 20.2 6.7 6.7 6.7 

-1 27.0 6.7 6.7 6.7 6.7 

0 33.7 6.7 6.7 6.7 6.7 6.7 

33.7 6.7 6.7 6.7 6.7 6.7 

2 33.7 6.7 6.7 6.7 6.7 6.7 

3 33.7 6.7 6.7 6.7 6.7 

4 33.7 6.7 6.7 6.7 

5 33.7 6.7 6.7 

6 33.7 6.7 

Cost in year 33.7 33.7 33.7 33.7 33.7 33.7 33.7 

Cost recovery with uniform savings for new machines year 0 and after. 

-1 0.0 NONE 

0 33.7 6.7 6.7 6.7 6.7 6.7 

33.7 6.7 6.7 6.7 6.7 6.7 

2 33.7 6.7 6.7 6.7 6.7 6.7 

3 33.7 6.7 6.7 6.7 6.7 

4 33.7 6.7 6.7 6.7 

5 33.7 6.7 6.7 

6 33.7 6.7 

Cost in year 6.7 13.5 20.2 27.0 33.7 33.7 33.7 

Immediate bonusfor new machines year 0 and after. 

-1 0.0 NONE 

0 33.7 33.7 

33.7 33.7 

2 33.7 33.7 

3 33.7 33.7 

4 33.7 33.7 

5 33.7 33.7 

6 33.7 33.7 

Cost in year 33.7 33.7 33.7 33.7 33.7 33.7 33.7 

6 
133 


srobinson on DSKB307YQ1PROD with HEARING73382.068.eps

For simplicity we have assumed that all capital has a fixed economic life of 5 years and that 

replacement is nnifonn, one-tifth each year. The "Benetit Over Life" colnmn shows the amonnt 

of the reductions in the tax burden received by assets purchased in a particular year for each plan. 

Negative years indicate purchases before enactment of the policy change. The "Cost in Year" 

row shows the revenue cost of the govemment by year for each alternative. 

We can use the table to look at both permanent and temporary policies. The rate cut 

expenditures fill the columns. A temporary rate cut just eliminates the columns to the right of 

the last year of the policy. The cost recovery fills the rows and temporary policies eliminate 

rows below the last year ofthe policy. The expensing example fills one cell. 

New projects (investments) are the detenninants of growth. Benefits to new investments 

reduce the income an investment must return to be undertaken. Increases in the retum to old 

investments cannot change what has already occurred and therefore do not affect growth. 

The first thing we see is that the benefit to the finn for the rate cut and the improved cost 

recovery are identical for capital put in place in year zero and after. Looking across each row we 

see that the benefit under each plan is the same for each year of purchase and year of use. We 

can conclude that the incentive to investment will be identical in the case of a pemlanent change 

in either. The cumulative revenue costs of the two plans are identical but the improved cost 

recovery costs less in the early years. This is because the rate cut provides a benefit to 

investment put in place before the policy change. The improved cost recovery costs $67.4 less in 

the first four years. 

Over a fixed budget window, the cost recovery plan will deliver a greater investment 

incentive per dollar of revenue cost. The average cost over a 10 year budget window for the cost 

recovery plan is $27 billion versus $33.7 for the rate cut. 

The third alternative demonstrates the incentive effect of an expensing approach. The 

cumulative benefit going to new projects for expensing is identical to the other two alternatives 

and the 10 year budget window cost is equal to $33.7. The expensing plan, however, provides 

all the benefits at once instead of spreading it over a number of years. This means that expensing 

will reduce capital costs by more than the others and thereby reduce the price of output by more. 

Temporary policies would also favor the expensing plan. For a temporary one-year cut the 

expensing plan will deliver about five times as much incentive per dollar as the rate cut. The rate 

cut delivers only $6.7 in benefit to the year zero projects while the expensing delivers 533.7. 

The rate cut delivers 20% as much benefit to new projects as the expensing plan in the first year. 

This percentage rises by 10% per year until year 5 where the rate cut provides 60% ofthe benefit 

of the expensing plan. The efficiency of the rate cut continues to rise as the temporary period is 

expanded. A temporary, 10-year rate cut yields 80% of the benefit of the expensing plan, 90% 

by year 20, and 95% by year 40. 

Using the two different types of investment approaches allows us to observe that cuts which 

are stretched out over time have a lower incentive effect than those given earlier. This is the 

rationale for the just-expired bonus depreciation. In general, more rapid cost recovery schedules 

lead to higher growth as they reduce the return necessary to undertake a project. Proposals that 

call for the lengthening of tax lives or limiting the amount of write-offs in the early years of 

depreciable assets lead to lower investment and growth. Finally, proposals that call for rate 

7 
134 


srobinson on DSKB307YQ1PROD with HEARING73382.069.eps

reductions to be paid for through reductions in the rate of cost recovery will lead to lower 

investment and growth for the reasons given above. 

We should also point out that accounting reports would show that the permanent rate cut and 

cost recovery changes would have the same impact on the firm's balance sheet after year 4. The 

total revenue benefit would be the same. Accounting repOits of a temporary policy change might 

somewhat blur the advantage of the superior cost recovery relative to the rate cuI. Because they 

generally do not deal at the new project level, accounting reports might not recognize any 

difference between a temporary expensing and temporary rate cut. Their general intent is to give 

the potential investor a bird's eye view of a finn's long- run operation and growth. 

To estimate the economic impact of the proposals, we set out an approximate breakdown of 

the components of U.S. business output in 2008. This provides a method to directly compare the 

impact of the reductions in dIe tax burden on prices. The table below shows factor costs and 

private business output for 2008. 

Structure of US Private Busiuess Output (2008) 

Baseline Factor Payment 

Cost 

Factor ($Billions) Percent 

Labor 6,431 65.6% 

Capital 3,370 34.4% 

Equipment 1,424 14.5% 

Other Capital 1,946 19.9% 

Total 9,800 100.0% 

One can lower the tax on all capital income through a rate reduction. The rate reduction 

applies to production using both old and new capitaL We will look at a rate reduction which 

lowers the capital cost for each category by one percent. The table below shows the revised cost 

structure. 

Permanent Rate Reduction Equal to 1 % of Capital Cost 

New Cost Percent 

Factor Reduction ($Billions) Reduction 

Labor 0 6,431 0.0% 

Capital 34 3,336 1.0% 

Total 34 9,767 0.3% 

Total capital costs have fallen by 1 % but more importantly the cost of using new capital has 

fallen by 1 %. The marginal cost of production is determined by the cost of using the last unit of 

8 
135 


srobinson on DSKB307YQ1PROD with HEARING73382.070.eps

each factor of production. The marginal cost of using new capital drives the marginal cost of 

production just as does the marginal cost of labor. As is seen in the table, the marginal cost of 

output has fallen by 0.3% because of the 1% reduction in the marginal capital cost. 

We will adjust this example to make it more comparable to the cost recovery alternatives. 

We will limit the rate cut to the income on equipment. We accomplish this by reducing the tax 

base by a percentage of the return on equipment. All we have done is apply the entire rate cut to 

the equipment category, leaving the impact on the cost of capital and the price reduction 

unchanged. We will use this as the rate cut example. 

As we saw in the prior analysis the cost recovery example provides the same anlOunt of 

price reduction as the rate cut. TIle patterns of reductions in the tax burden are the same for both 

plans. This means that we can use this economic analysis for both examples. 

Will producers pass the cost reduction on to buyers? It seems highly likely that they will. 

Some producers will see the opportunity to expand market share and cash in on the higher profit 

rate. In essence the profit margin has jumped by 1% of the return to capital which is a large 

percentage change on a normal margin of something like 5%. As soon as one of the existing 

producers or even a new entrant begins the price reduction, the rest will have to follow or lose 

their position in the market. 

If we assume that households and investors spend the same amount of money as they would 

have before the change, the quantity of goods and services will increase by as much as the price 

has gone down. Output initially expands vvithout any additional income because prices have 

fallen. 

Finally, we need to provide an estimate of the impact of the expensing plan to the rate cut 

and cost recovery plans. Using Conunerce Department estimates of the stock of and investment 

in business equipment, we estimate a reduction of3.2% in the factor cost of new business 

investment versus a 2.4% reduction under a rate cut plan. 

Expensing Plan for New Equipment 

New Cost Percent 

Factor ($Billions) Reduction 

Labor 6,431 0.0% 

Capital 3,197 1.3% 

Equipment 1,379 3.2% 

Other Capital 1,946 0.0% 

Total 9,755 0.5% 

The 3.2% reduction in the cost of using new equipment lowers the marginal cost of 

production by 0.5%. As before, we can expect the price reduction to be shared with purchasers 

of output through nOffilal competitive forces. The lower price wi II result in a larger quantity of 

output which will increase income and again expand output and income. 

9 
136 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.071.eps
137 

Institute for Research on the Economics of Taxation 


srobinson on DSKB307YQ1PROD with HEARING73382.072.eps

Jm~Uttite faJ:' Reseal'eh O'n me 'i$oltomies af l'axaUaR 

IRIiEr'f ' 

Statement of 

Stephen J. Entin 

Submitted to the House Committee on Ways and Means 

for the Record ofthe Hearing of February 8, 2012: 

"Interaction of Tax and Financial Accounting on Tax Reform" 

I am currently President and Executive Director of the Institute for Research on the 

Economics of Taxation. I served as Deputy Assistmll Secretary for Economic Policy in the 

Treasury Department for eight years during the Reagan Administration. 

The Committee is seeking to determine how financial accounting practices might affect 

its efforts to reform the income tax, encourage investment, and promote economic growth and 

job creation. 

The short answer is that the effect of tax policy changes on business balance sheets and 

income statements should not be the determining factor in the design of a sound, pro-growth tax 

reform. Accounting concepts can distort the impact of proposed tax changes. AImual and 

quarterly reports based on GAAP can misrepresent gains as losses. They can confuse business 

executives and policy makers as to which policy changes are most effective at encouraging 

investment and hiring. 

It is best to think of the financial accounting presentation as a public relations 

communication between the business and the public, including its shareholders. This has, or 

should have, nothing to do with policy fonnulation, because it is of no relevance to economic 

growth and job creation. 

Instead, policy work should be based on the actual effect of tax policy on a business's 

after-tax cash flow from new investment. This is the approach taken by businesses to make their 

investment decisions, and is the real driver of investment, productivity, and wages. If you want 

businesses to expand their investment and hiring, that is the button you must push. That should 

be your concern as you develop a pro-growth tax reform. 

Institute for Research on the Economics of Taxation (IRET) 

1710 Rhode Island Avenue, N.W., 11 lh lloor, Washington. D.C. 20036 

Phone: (202) 463-1400 Inlemet: www.iret.org Email: sentin@ire\.org 
138 


srobinson on DSKB307YQ1PROD with HEARING73382.073.eps

How busiuesses make iuvestment plans 

Business schools throughout the world teach students the optimal means of determining if 

a proposed investment will add value to the business (and to the economy) or subtract tram it. 

The most common method requires the student to determine the net present value of the 

investment. The calculation compares the present value of the revenue expected each year from 

an investment, after taxes, with the present value of the costs incurred each year in association 

with the investment, using a discount rate appropriate for the riskiness of the investment and the 

alternative investment opportunities of the business. If the present value is equal to or greater 

than zero, the investment is viable. If several investments are viable, they may be ranked from 

the highest to the lowest in present value to determine which should be done first. 

A related approach is to determine the internal rate of return that equates projected 

revenues and costs. If this expected rate of return matches or exceeds the minimum "hurdle rate" 

that the business expects to be able to earn on other projects, also known as its "cost of capital" 

or "service price," then the project is viable. If the two methods - present discounted value and 

internal rate of return - employ the same discount rate, and the rate is unvarying over the time 

span, they yield equal results. If the discount rate is apt to vary over the time frame, the present 

value approach is more accurate. 

Finance texts stress that, in both methods, costs are to be expensed in the year they 

happen. They are not to be treated as if they were spread over the life of the asset, as with 

depreciation. Depreciation rules are used only to calculate each year's tax liability, not to value 

the cost of the investment. Thus, neither method has anything to do with accounting 

presentations, which pretend that only a portion of an investment expense is current, and the rest 

is spread over future years. Business students and executives in the real world understand the 

time value of money, while the tax system and the accounting rules that employ depreciation 

is'llOre it 

Surveys show that businesses generally employ these present value or internal rate of 

renJrn valuation methods to formulate their investment plans. That is, businesses are being run 

by people with business school training in the right way to measure such things.! Consequently, 

a tax change that raises the discounted present value of a new investment, at the margin, will 

expand investment and the amount of capital the firm creates and employs. By contrast, a tax 

change that has no impact on the calculated value of additional investment will not spur added 

capital formation. Tax rebates or retroactive tax cuts on investment already in place would raise 

a business's cash, and be gratefully accepted, but they would not cause the firnl to increase future 

investment 

The same business finance courses instruct budding stock analysts and fund managers in 

how to evaluate the worth of a company or its stock The value of a company is the present 

value of its projected cash flow, using the same discounting method as when valuing an 

investment project That includes ignoring depreciation and expensing costs in the year they 

OCCUI. 

Sec John Graham <:Ind Campbell Htlrvcy, ''The Theory and Practice of Corporate Finance: Evid'-''llCC [rom 

the Field", Journal ofFtnancial Economics, Vol. 60 (2001). 

2 
139 


srobinson on DSKB307YQ1PROD with HEARING73382.074.eps

Expensing and corporate tax rate reduction 

The tax system is biased against capital intensive industries, distorting the methods of 

production and the mix of output. Depreciating assets over time for tax purposes understates 

costs. The capital consumption allowances lose value due to the time value of money and 

inflation. (See Table I.) The understatement of costs is larger for long lived assets, and is made 

worse by inflation. The understatement of costs is matched by an overstatement of business 

income, and a higher effective tax rate on such industries. This depresses the present value of a 

proposed investment as calculated by business school methods and investors throughout the 

business community. 

Table 1 

Present Value of Current Law Capital Consumption Allowances per Dollar 

of Investment Compared to Expensing (First-Year Write-Off) 

Asset lives: 3 Yrs 5 Yrs 7 Yrs 10 Yrs 15 Yrs 20 Yrs 27.5 Yrs 39 Yrs 

Present value of firstyear write-off of $1 of $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $100 

investment: 

Present value 0% $0.96 $0.94 $0.91 $0.88 $0.80 $0.74 $0.65 $0.55 

---- --- -- ------- - - - - - -- - - - - - -- ----- ---------- ----- -------- of current law 

write-off of $1 if 3% $0.94 $0.89 $0.85 $0.79 $0.67 $0.59 $0.47 $0.37 

---- ------- -- ---- -- -- - - -- - ------_. ---- ---------- inflation rate is: 5% $0.92 $0.86 $0.81 $0.74 $0.60 $0.52 $0.39 $0.30 

Assumes a 3.5 percent real discount rate. 3-20 year assets placed in service in first quarter of the year, 27.5 39 

year assets placed in service in January. 

One of the goals of tax reform should be to move toward immediate expensing of capital 

outlays, at least for equipment. For structures, the Committee should consider a "neutral cost 

recovery system" in which the delayed pOliion of the write-off is augmented annually by a real 

increase of about 3 percent plus inflation, to create the sanle present value as expensing but 

without any major near-term cost to the federal budget. These changes would encourage a more 

efficient use of resources and more efficient mix of output. The artificially beaten-down 

manufacturing sector and other capital intensive sectors would gradually recover aod expand 

relative to the service sector. The policy would also be an efficient way to encourage investment 

from the point of view ofthe federal budget. It would concentrate the tax reduction on new 

investment, and lower the cost of investment more per dollar of static revenue loss than other 

types of tax reliet~ such as a corporate tax rate cut. 

Some businesses would prefer a cut in the corporate tax rate, if a choice must be made. 

They are generally finns that earn their returns on non-depreciable assets, or short-lived assets, 

or intangible assets. Lowering tile corporate tax rate would be good for growth for such 

industries, and for capital intensive sectors too, but would not redress the bias against the capital 

intensive industries. The corporate tax rate should be reduced in addition to, not instead of, 

expansion and extension of expensing. 

3 
140 


srobinson on DSKB307YQ1PROD with HEARING73382.075.eps

Consider a business producing a standard sort of product through the use of machinery in 

a highly competitive industry in which extraordinary profits have been competed away. The 

present value of the earnings on its capital is just equal to or a very small bit higher than the cost 

of the capital it employs. In that situation, immediate expensing of its investment will roughly 

equal its eamings, and its net profit and net tax payment over time will be roughly zero, which is 

the correct result. If, instead, we retain depreciation, then matching the appropriate tax collection 

by means of reducing the tax rate would require a zero tax rate on the overstated income. 

Tn contrast, a business which relies mainly on intellectual capital or intangibles, with little 

depreciable capital, might prefer a corporate tax rate reduction. Its income is correctly measured, 

and all it cares about is the tax rate. Also, businesses with extraordinalY profits (economic 

profits or quasi-rents) have returns in excess of costs even with expensing of capital outlays. 

Such profits ought to be yielding taxes to the government. They arise from patents. superior 

R&D, brand loyalty, better service or management, etc. The costs incurred in eaming such extra 

income are generally expensed as wages and salaries of researchers, managers, and people with 

the human capital to make the business unusually successful, and the returns should be taxable. 

Such businesses might prefer a reduction in the corporate tax rate to expensing. There is nothing 

"Tong with lowering the corporate tax rate to make such finns more globally competitive, but 

that should be done in addition to correcting the bias against capital intensive businesses. 

Trading expensing for rate cuts: bad for GDP and jobs 

Several tax reform proposals have urged the lengthening of asset lives to pay in static 

terms for a reduction in the corporate tax rate. Do not trade away longer asset lives for a lower 

corporate tax rate. That would exacerbate the tax bias against capital intensive industries, 

especially those with long-lived assets. It would probably result in a higher cost of capital 

(higher "service price" or hmdle rate), a smaller capital stock, lower wages, and less 

employment. 

Adopting longer asset lives would depress the economy and fail to yield any of the 

estimated "static" revenue to pay for the rate reduction. Indeed, it would reduce revenue. Such a 

trade is both unnecessary and unworkable. Making expensing pennanent and lowering the 

corporate tax rate have little near term cost and, longer term, recover their cost by raising 

revenue from other taxes as they expand the economy. Both are good for the federal budget over 

time. However, expensing has less initial cost and a more powerful revenue retlow under current 

tax rates and the mix of assets that make up the capital stock. 

Table 2 displays the effect of altering expensing and the corporate tax rate. 

4 
141 


srobinson on DSKB307YQ1PROD with HEARING73382.076.eps

Tax options 

Table 2 

EFFECT OF EXPENSING FOR EQUIPMENT AND 

CUTTING THE CORPORATE TAX RATE ON GDP, CAPITAL STOCK, 

LABOR INCOME, SERVICE PRICE, AND FEDERAL REVENUE 

(Effects and revenue estimates are modeled at 2008 income levels.) 

l' 2' 3' 

GDP 2.71% 2.33% 2.26% 

Private sector GDP 

Capital stock 

Wages 

Hours worked 

Million jobs 

Service price 

Corporate 

Non-corporate 

Total 

Static revenue ($ billions) 

Dynamic revenue ($ billions) ,. 

% revenue regained from economic change ., 

* Tax options: 

1: 100% expensing of equipment for all businesses 

2: 100% expensing of equipment for corporate sector only 

3: cut corporate tax rate to 25% 

2.81% 

7.64% 

2.29% 

0.51% 

0.71 

-5.56% 

-1.94% 

-4.49% 

-34.2 

48.7 

243% 

.. Tax rate decrease raises GDP to the point of gaining revenue. 

2.41% 2.34% 

6.54% 6.34% 

1.97% 1.91% 

0.44% 0.42% 

0.61 0.59 

-5.58% -5.58% 

0.17% 0.17% 

-3.87% -3.87% 

-20.2 -51.6 

51.3 19.1 

353% 137% 

• Case]: The current provision for] 00% expensing of equipment would raise GDP by 2.71 % 

over time, if made permanent. Its static revenue cost of 534 billion would be converted to a 

dynamic revenue gain of$49 billion, a 243% reflow of revenue (at 2008 income levels). It 

focuses the tax reduction on newly acquired capital equipment, and is of particular interest to 

new or rapidly growing businesses. Eventually, all capital is replaced, so even established 

businesses gain as their stock of equipment rolls over. 

• Case 2: The corporate sector's share of the expensing provision would boost GDP by 2.33%, 

or about 86% of the total expensing provision. Its static cost is $20 billion. Growth returns 

about S7] billion, or 353% of the static cost, for a net revenue gain of $51 billion. 

• Case 3: A reduction in the corporate tax rate to 25% would generate a 2.26% rise in GDP, 

about the same as the corporate expensing provision. It would have a higher static cost, about 

$52 billion. generate a similar $7] billion dollar reflow, or 137% of the static cost, and net the 

government a gain of $19 billion. The higher static cost is due to the application of the lower 

corporate tax rate to returns on existing capital as well as new capital. This approach favors 

established or slow growing businesses, or those with more investment in structures than 

equipment. 

5 
142 


srobinson on DSKB307YQ1PROD with HEARING73382.077.eps

Giving np corporate expensing in exchange for a lower corporate tax rate in the range 

shown would yield roughly offsetting GDP effects, but cost more revenue on both a static and 

dynamic basis_ It might please established businesses in the short run, but would not be as 

focused on rapid growth_ The trade should not be neceSSaIY, because neither provision costs 

revenue after growth effects are considered_ If Congress insists on relying solely on static 

revenue estimates, a lower short term revenue impact might be had by phasing in the corporate 

rate cut If expensing must be altered, it could be replaced by a "neutral cost recovery system" in 

which the deferred portions of the depreciation write-off are augmented each year by an 

appropriate interest rate, such as inflation plus the long term real return on capital of about 3%_ 

The present value of the deductible business cost for the investment would be preserved at 100 

cents on the dollar_ 

Historical evidence of the need to cut the cost of capital 

Accelerated depreciation, corporate tax rate reductions, investment tax credits, and lower 

tax rates on capital gains and dividends act to reduce the cost of capital at the margin and spur 

growth_ By contrast, taxes that are not at the margin, or not much at the margin, such as the 1975 

Ford tax rebate, the 2001 rebate-like refund reflecting the 10% tax bracket, and the more recent 

stimulus rebates, make little difference to production and employment 

'ThelastrecessiQn andthe Ilusi1 tax cuts, Chart I tracks the effect of the 200 I and 2003 

tax cuts on GDP_ There was a very slow "jobless recovery" from the 2000-2001 recession in the 

first two years after the 

2001 tax reduction_ The 

individual marginal rate 

cuts were phased in so 

slowly that there was little 

initial incentive effect It 

was not until the 2003 tax 

cut that there were 

significant incentives for 

saving and investment Tn 

that year, the capital gains 

and dividend tax rates were 

reduced to 15%, lowering 

the double taxation of 

corporate income; 

expensing, introduced in 

2002 at 30% of equipment 

spending, was boosted to 

50% of equipment outlays 

Chart 1 Real Private Investment 

And 2001, 2002, and 2003 Tax Cuts 

1.100 ,--~~~~---,-~~----,---~~~~-.-~~~~~~----, 340 

1,050 

o 

~ 1,000 

~ '0 950 

" "5 

o 900 

m 

850 

Nonresdidential 

Structures 

Right Axis --> 

320 

300 i 

280 ~ 

"0 

2600: " 

o 240 § 

'" 220 

800 L--~~~~--'----~~--L~~~~-'--~~~~~~-' 200 

2000 2001 2002 2003 2004 2005 

Quarter 

Data Source: BEA, Nat/ona/lncome and Product Accounts, Tabfe 5.3.6, accessed vIa www.bea.gov. 

for corporate and non-corporate businesses; and the rest of the individual marginal tax rate cuts 

were brought forward_ Estate tax relief helped too_ After 2003, investment in equipment rose 

rapidly, and job growth accelerated_ More recently, the expensing provision was increased to 

100% for equipment as a counter-cyclical tool. It would be more effective ifmade pemlanent, 

which is also good tax policy_ 

6 
143 


srobinson on DSKB307YQ1PROD with HEARING73382.078.eps

The Tax Refonn Act of 1986 (TRA86). TRA86 raised the net tax at the margin on 

capital and rednced it for labor. We estimate that, on balance, it slightly reduced potential output 

by about 0.6 percent. The business provisions alone would have reduced GOP by 2.3 percent, 

while the lower individual tax rates would have increased GOP by 1.5 percent2 The bill would 

have been a modest positive for the economy if Congress had followed the Treasury refonn plan 

as submitted, but it did not. Treasury had recommended indexation of depreciation allowances 

for inflation. That would have helped to reduce slightly the required service price or "hurdle rate 

of return" that capital must earn in order to be a feasible investment, in spite of the longer assets 

lives and repeal of the investment tax credit that were part of the bill. Congress dropped the 

indexing provision, and the hurdle rate went up, discouraging investment. 

TRA86 cut the corporate rate 12 points from 46% to 34%, but offset about halftlmt 

reduction by eliminating provisions that were already mitigating some of the corporate tax at the 

margin (loophole and preference closings). TRA86 cut the top individual tax rates from 50% to 

28%, with a 33% rate bubble to recapture the benefits of rates below 28%. These cuts lowered 

the top tax rate on dividends to 28% or 33%. However, TRA86 also raised the top tax rates on 

capital gains irom20% to 28% or 33%. TRA86 raised taxes on capital in other ways. It 

eliminated the investment tax credit. It switched from ACRS (accelerated cost recovery system) 

to MACRS (modified ACRS). with longer asset lives, especially for long lived structures, which 

went from 31.5 years to 39 years. Passive loss rules were tightened on real estate, and upper 

income taxpayers were limited in their access to TRAs. TRA86 is not a good model for a progrowth fundamental tax refonn. It moved away from a neutral tax base toward a more-inclusive 

and more anti-investment version of the broad-based income tax. 

The 1981 Reagan tax cuts and the 1962 and 1964 Kennedy cuts. President Reagan's 

Economic Recovery Tax Act of 1981 cut asset lives, increased the lTC, and lowered tax rates on 

capital gains and dividends along with individual marginal income tax rates. It was enacted too 

late. and phased in too gradually, to avert the 1981-82 recession, but produced an unusually 

strong recovery in 1982-1986. Had it remained in full effect, we estimate that it would have 

increase long term GDP and labor income by over 12 percent. Subsequent tax increases in 1982, 

1983, and 1984 would have held the GDP gains to about 10 percent. Taken together, the Acts 

reduced the service price of capital by nearly 13 percent3 

President Kennedy cut asset lives by switching from Bulletin F lives to Guidelines and 

implemented an investment tax credit (lTC) of up to 7 percent in 1962. In 1964 and 1965, his 

income tax plan reduced the corporate tax rate from 52 percent to 48 percent, and cut marginal 

individual income tax rates across the board. About two-thirds of the reduction in the service 

price of capital and about 55 percent of the economic gains came from the investment incentives 

and corporate rate cut. Growth was strong following the Kennedy cuts. They reduced the 

Stephen 1. [ntin, 'The Reagan IJra Tax Policies," IRET Polity Bulletin, No. 102, November 11. 2011, 

available at http://iret.org/pubiBLTN-102.PDf . 

., Ibid. 

7 
144 


srobinson on DSKB307YQ1PROD with HEARING73382.079.eps

service price of capital by nearly II percent. We estimate that they would have raised long term 

GDP by nearly 8 percent had they not been interrupted by the Johnson surtax4 

Proposals to avoid 

Wvden-Coats and Bowles-Simpson The Wyden-Coats bill (fornlerly Wyden-Gregg) and 

the Bowles-Simpson Commission emulate TRA86. They would cut tax rates on businesses in 

exchange for higher tax rates on capital gains and dividends. and much slower tax depreciation 

of plant, equipment, and structures. They cnt taxes on labor income where the gro'l'<th benefits 

are small, and on balance raise taxes at the margin on capital income where the adverse effects 

are large. They are heavier on the penalties and lighter on the rate reductions than TRA86, and 

would do even more damage to GDP and employment. For example, we estimate that WydenCoats would reduce GDP by 4.32%. A small estimated revenue increase of $33 billion would 

turn into a revenue loss of$105 billion 5 

Wyden-Coats would revert to asset lives of the old Guidelines system from 1962, but 

make them even worse with straight line depreciation instead of double declining balance. The 

bill would raise the tax on capital gains and dividends from a maximum of 15% to 22.75%. 

Expensing would end for large firms doing most of the nation's investment. Businesses would 

not be allowed a deduction for the inflation portion of their interest costs, but lenders would be 

taxed on the full amount of interest received. The bill would increase the standard deduction to 

2.5 times its current level. The top individual rate would remain at 35%. The graduated 

corporate tax rates with a top rate of 35% would be replace by a flat 24% rate. The depreciation 

changes and the higher tax rates on capital gains and dividends would make the bill a strong 

negative for the economy, in spite of the rate cuts and enlarged standard deduction. 

How accounting rules can distort appearances. 

Consider a business that is carrying unused tax credits on its books. Perhaps these credits 

are investment tax credits that have remained unused because he business was not profitable at 

the time the investment was made" The unused credits are an asset on its balance sheet, 

according to the accounting rules, because they will lower futnre tax liabilities when the 

company becomes profitable. Suppose Congress were to eliminate the corporate income tax 

going forward, without making such unused credits refUIldable. The accountant would report the 

loss of an asset, marking down the company's value on the balance sheet. Tn reality, the 

company's future income tax liability is reduced more by the permanent elimination of the tax 

than it would have been by the credits. The company's value, the discoUIlted after-tax profit 

stream, is higher, not lower, in spite of the loss of the credits. The accounting convention turns a 

genuine gain into an apparent loss. However, the amount of future taxes saved by the 

elimination of the tax is not counted under accounting rules, because the future profits and taxes 

that would have been owed are unceltain. Trained stock analysts, mutual fund and pension 

managers, and thoughtful investors are not fooled by the accounting misdirection. 

Stephen J. Entin, "Economic Consequences Of The Tax Policies Of The Kennedy And John~on 

Administrations," TRFT Policy Rulletin, No. 99, September 6, 20 II, available at http.liirct.orgipub/fiLTN-99.PDr. 

~ Stephen I. Entin and Michael Schuyler, 'T.conomic Consequences Of The \\lyden-Coats Tax," IRFT Policy 

HlIlletin, ).Jo. 100, Octoher 2R, 2011, available at http://iret.orgipuhmLTN-100.PDf. 
145 


srobinson on DSKB307YQ1PROD with HEARING73382.080.eps

Suppose the credits in the example are unused foreign tax credits. Suppose the United 

States were to reduce the U.S. corporate tax rate below that of nearly all other nations or were to 

moye to a territorial tax system to enhance the competitiveness of U.S.-based companies 

producing here or abroad. In either case, the existing foreign tax credits would be of no use 

(unless the legislation made them refundable in the transition), because there would be no future 

US. tax owed on the foreign income. The accounting mles would declare that the business had 

suffered a loss of an asset. In reality, its future after-tax income stream would have been 

increased, as would the present value of the business, neither of which is reported on the balance 

sheet by the accountants. The balance sheet is not telling the whole story. Knowledgeable 

obselVers are not fooled. 

Could a business care more about accounting than real profits? 

Would business executives ever wish to give up a permanent improvement in after-tax 

income and the value of the company to protect a rosy picture being painted by the current 

accounting mles? Perhaps, if they are !lying to hide something from their shareholders, and if 

they assume that the shareholders are not capable of seeing through the mse. I recall a real world 

exanlple. 

The late 1970s was a time of high inflation. Depreciation allowances are not adjusted for 

inflation, and the cost of plant, equipment, and buildings allowed for tax purposes greatly 

understated the true cost of these investl1lents in that period. The result was an overstatement of 

business income, sometimes even turning real losses into apparent accounting profits and taxable 

income. The consequence was a rise in the effective tax rate on the real earnings ofbusinesses. 

The effect of the inflation was greatest for capital intensive industries with long-lived assets, 

such as steel mills, power plants, dams, and transmission lines, commercial and residential rental 

stmctures, etc. The lower real after -tax returns on inves!lnent were discouraging investment and 

depressing productivity and real wages. 

Dr. Charles Schultze was the Chairman of President Carter's Council of Economic 

Advisors. He was on a panel with several business leaders, including CEOs of a steel firm and 

an electric utility. The topic of the discussion was the state of the economy and policies to fight 

stagflation. I was on the staff of the Joint Economic Committee at the time, and was in the 

audience. During the question and answer period, I asked Dr. Schultze if indexing depreciation 

allowances for inflation might more nearly reflect the replacement cost of the capital, offset 

some of the disincentive to invest caused by the inflation, and help restore real growth and wage 

gains. He replied that the idea was sound economics, but that the Administration would be 

concerned about the near term effect on the federal deficit, and not support the policy at that 

time. 

The utility executive interjected that he did not want replacement cost accounting for 

depreciation in any event. TIle steel executive asked, "Why ever not?" The utility executive 

said, "Because if my shareholders ever found out that we are actually losing money instead of 

making money, they would have my head'" The steel executive retorted, "Really? What has 

9 
146 

f 


srobinson on DSKB307YQ1PROD with HEARING73382.081.eps
147 

United States Steel Corporation 


srobinson on DSKB307YQ1PROD with HEARING73382.082.eps

TO: 

FROM: 

SUBJECT: 

Transmittal SI.IPRlelllent 

The Committee on Ways and Means 

U. S. House of Representatives 

Scott Salmon 

General Manager. Governmental Affairs 

United States Steel Corporation 

901 K Street, NW, Suite 1250 

Washington, DC 20001 

(202) 783-6797 

SRSalmon@uss.com 

Hearing on the Interaction of Tax and Financial Accounting on Tax Reform 

Attached please find a written statement to be included in the official record of the full committee 

hearing held on February 8,2012 on the Interaction of Tax and Financial Accounting on Tax 

Reform. Please direct questions concerning this statement to the name and address listed 

above. 
148 


srobinson on DSKB307YQ1PROD with HEARING73382.083.eps

WRITTEN STATEMENT SlJBMITTED FOR CONSIDERATION TO: 

COMMITTEE ON WA YS A~D MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON THE INTERACTION OF 

TAX AND FI:\ANCIAL ACCOU~TI~G ON TAX REFOR1\l 

HEARING DATE: FEBRUARY 8, 2012 

SUBMITTED BY GREGORY A. ZOVKO 

VICE PRESIDEl'IT & CONTROLLER 

ON BEHALF OF 

U~TTED STATES STEEL CORPORATTO~ 

600 Grant Street 

Pittsburgh, PA 15219 

412-433-1166 

GAZovko@uss.com 

FEBRUARY 22, 2012 

2 
149 


srobinson on DSKB307YQ1PROD with HEARING73382.084.eps

GREGORY A. ZOVKO 

UMTED STATES STEEL CORPORATION 

WRITTEN STATEME~T SUBMITTED FOR CONSIDERATIO~ TO: 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARIXG OJ\" THE INTERACTION OF 

TAX AND FINANCIAL ACCOlJNTI"\G ON TAX REFORM 

Hearing Date: February 8, 2012 

United States Steel Corporation ("U. S. Steel") is an integrated steel producer of 

flat-rolled and tubular products with major production operations in North America and 

Europe. An integrated producer uses iron ore and coke as primary raw materials for steel 

production. According to World Steel Association's latest published statistics, we were 

the eighth largest steel producer in the world in 2010. U. S. Steel is also engaged in other 

business activities consisting primarily of railroad transportation services and real estate 

operations. 

U. S. Steel appreciates the opportunity to add to the discussion on tax reform that 

occurred during the February 8, 2012 Hearing on the Interaction of Tax and Financial 

Accounting on Tax Reform. My written testimony is based on my experience as the Vice 

President and Controller for U. S. Steel. Among my current responsibilities, I am 

responsible for both the preparation of our financial statements and for the financial 

evaluation of capital projects. 

Congress has the goal of making the United States a more attractive venue for 

investment, promoting economic growth and job creation, and simultaneously reducing the 

deficit. We are encouraged by proposals for a reduction in the corporate tax rate to induce 

new capital investment. Reducing the corporate tax rate to 25 percent would provide a 

substantial incentive for the expansion of business in the U.S. and help make our company 

more competitive internationally. 

Furthermore, the retention or enhancement of accelerated depreciation when 

combined with a reduction in the corporate tax rate would be a powerful tool to promote 

investment in the U. S., something that the country sorely needs. While current tax 

3 
150 


srobinson on DSKB307YQ1PROD with HEARING73382.085.eps

deductions and credits will have to be carefully examined to determine if any should be 

changed or eliminated in order to achieve a lower tax rate, we believe that a reduction in 

the corporate tax rate should also be accompanied by the retention of accelerated 

depreciation to best encourage new capital investment, fostering economic growth and 

employment in the U.S. 

While we would generally expect a tax rate reduction to increase net income and 

earnings per share in our financial statement, that impact will not necessarily translate 

into increased cash flows for capital intensive industries if accelerated depreciation is not 

retained. Cash flow is the lifeblood of a business and investors are very focused on cash 

flow generation and liquidity in addition to net income and earnings per share. Cash flow 

and liquidity considerations are major components of investment decisions and provide 

businesses with the confidence to continue to invest in projects that will grow America's 

manufacturing base. Corporations cannot focus solely on book earnings; cash flow is a 

critical measure of a company's financial viability and accelerated depreciation obviously 

increases cash flow in the early years of an investment. 

U. S. Steel requires significant capital investments for its steel manufacturing and 

mining facilities in the United States. The net present value of future cash flows is the 

most important criterion in determining if a discretionary capital investment should be 

made. We evaluate the present value offuture income taxes on earnings from the 

investment, as well as the present value of future income tax savings from depreciation 

on the investment. While a lower federal income tax rate will reduce the present value of 

tax on fUUlre earnings, that benefit may be more than offset by the reduced present value 

tax savings from future depreciation deductions. Accelerated depreciation has a 

substantial impact on all ofU. S. Steel's investment decisions and is built into our models 

for evaluating the success of capital projects. 

The availability of cash also determines how much we can invest and when we 

can invest it. Many job-creating, domestic investments may be delayed if cash flow is 

limited. Non-discretionaty projects mandated by statute or regulation would by 

definition occur regardless of the cash flow analysis, but discretionary value added 

projects require an extensive analysis of the net present value cash flow. We are 

currently pursuing a promising large capital investment program with spending in 2011 

4 
151 


srobinson on DSKB307YQ1PROD with HEARING73382.086.eps

and 2012 approaching $1 billion for each year. We are currently building new coking 

facilities in Pennsylvania and Indiana, and pipe mill facilities and a continuous annealing 

line in Ohio. We have also received all the permits required to expand and modernize an 

iron ore mine and pelletizing plant in Minnesota and have several dozen other projects 

under consideration for facilities in Michigan, Alabama and elsewhere. These planned 

investments will create thousands of constmction jobs and hundreds of permanent jobs. 

These projects will result in billions in goods and services being bought from local and 

national suppliers. Some of these and nlhlre projects may not be as viable if accelerated 

depreciation is changed or eliminated. Some may view accelerated depreciation of less 

importance in the current low interest rate environment, but current interest rates may not 

be appropriate for judging long-term projects, especially for cyclical industries such as 

the steel manufacturing industry. Instead, we look at an "all-in" cost of capital that 

reflects both long-term interest rates and the cost of equity capital. 

Making accelerated depreciation a constant tool for capital investment would 

enable companies to take this benefit into consideration when deciding what capital 

projects to undertake and when to undertake them. One reason some companies have 

responded to accelerated depreciation less enthusiastically than anticipated is due to the 

fact that recent proposals to further accelerate depreciation (the so-called "bonus 

depreciation" provisions) have been sporadic and enacted or extended very late in the 

year and thus have only provided an incentive for short term projects. Most large scale 

projects are planned for years ahead, where the one year at a time extension of bonus 

depreciation provides very little incentive due to its uncertainty. 

Other countries with lower tax rates than the U.S. still encourage capital 

investment to fuel growth. For example, Canada has made investment more attractive by 

reducing the corporate tax rate and providing for accelerated depreciation. Canada has a 

lower federal corporate tax rate than the U.S. (the Canadian corporate rate in 2012 is 

15%, which, when combined with provincial rates is approximately 25%), and they allow 

accelerated depreciation. For example, most machinery and equipment has a 30~o 

depreciation rate applied against the unrecovered capital cost. At this rate, over 83%, of 

the cost can be written off over 5 years. Even if the U.S. corporate income tax rate is 

reduced to be closer to the Canadian rate, if accelerated depreciation is eliminated in the 

5 
152 

Æ 


srobinson on DSKB307YQ1PROD with HEARING73382.087.eps

U.S., manufacturers with operations in both countries will still have a tax incentive to 

invest in Canada rather than in the U.S. Continuing or enhancing accelerated 

depreciation would help make the U.S. a more desired location for new capital 

investment. 

A lower overall tax rate would benefit both old and new investment equally. 

However, accelerated depreciation provides a strong incentive to undertake new capital 

expenditures by providing a faster return on capital investment. Thus, to the extent that 

accelerated depreciation is repealed to reduce the tax rate, new investment is actually 

penalized since it bears the full burden of that cost while the corresponding "benefit" is 

split between new and existing investment. 

A lower tax rate combined with accelerated depreciation provides a strong 

incentive for businesses like U. S. Steel to invest heavily in domestic capital projects, 

thus creating new jobs and expanding the U.S. economy. 

As the Committee nuther analyzes the best way to structure corporate tax reform, 

I encourage you to consider the benefits of maintaining and further enhancing accelerated 

depreciation. Accelerated depreciation directly results in new capital investment, an 

essential part of economic recovery and job creation. We welcome the ability to further 

contribute to tile tax reform discussion. Thank you for the opportunity to address the 

Committee. 

6