U.S. GOVERNMENT PUBLISHING OFFICE

33–393 WASHINGTON : 2019

HOW TAX REFORM WILL GROW 

OUR ECONOMY AND CREATE JOBS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

MAY 18, 2017 

Serial No. 115–FC01 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

KEVIN BRADY, Texas, Chairman 

SAM JOHNSON, Texas 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

PETER J. ROSKAM, Illinois 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

PAT MEEHAN, Pennsylvania 

KRISTI NOEM, South Dakota 

GEORGE HOLDING, North Carolina 

JASON SMITH, Missouri 

TOM RICE, South Carolina 

DAVID SCHWEIKERT, Arizona 

JACKIE WALORSKI, Indiana 

CARLOS CURBELO, Florida 

MIKE BISHOP, Michigan 

RICHARD E. NEAL, Massachusetts 

SANDER M. LEVIN, Michigan 

JOHN LEWIS, Georgia 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

JOSEPH CROWLEY, New York 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

TERRI SEWELL, Alabama 

SUZAN DELBENE, Washington 

JUDY CHU, California 

DAVID STEWART, Staff Director 

BRANDON CASEY, Minority Chief Counsel 

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C O N T E N T S 

Page 

Advisory of May 18, 2017 announcing the hearing .............................................. 2 

WITNESSES 

John J. Stephens, Senior Executive Vice President and Chief Financial Officer, AT&T Inc. ...................................................................................................... 6 

Zachary Mottl, Chief Alignment Officer, Atlas Tool Works, Inc. ......................... 17 

David N. Farr, Chairman and Chief Executive Officer, Emerson Electric 

Co. .......................................................................................................................... 22 

Douglas L. Peterson, President and Chief Executive Officer, S&P Global 

Inc. ......................................................................................................................... 33 

Steven Rattner, Chairman, Willett Advisors LLC ................................................ 44 

MEMBER SUBMISSIONS FOR THE RECORD 

Assessing the House Republicans’ ‘‘A Better Way’’ Tax Reform .......................... 113 

J.P. Morgan .............................................................................................................. 128 

Goldman Sachs ........................................................................................................ 135 

Peterson Institute for International Economics .................................................... 142 

QUESTIONS FOR THE RECORD 

Questions from Representative Jason Smith of Missouri to Mr. Stephens ........ 171 

Questions from Representative George Holding of North Carolina to Mr. 

Peterson and Mr. Stephens ................................................................................. 171 

SUBMISSIONS FOR THE RECORD 

A Call to Invest in Our Neighborhoods (ACTION) Campaign, statement .......... 174 

AdvaMed Accel, statement ...................................................................................... 178 

Advisory Council on Historic Preservation, statement ......................................... 184 

Alliance for Competitive Taxation, statement ....................................................... 187 

America’s Health Insurance Plans, statement ...................................................... 190 

American Chemistry Council, statement ............................................................... 194 

American Council for an Energy-Efficient Economy, statement ......................... 202 

American Council of Life Insurers, statement ...................................................... 206 

The American Farm Bureau Federation, statement ............................................ 208 

American Forest & Paper Association, statement ................................................ 215 

American Legislative Exchange Council, statement ............................................. 217 

The American Made Coalition, statement ............................................................. 224 

Americans for Fair Taxation, statement ................................................................ 226 

Americans for Prosperity, statement ..................................................................... 229 

Americans for Tax Reform, statement ................................................................... 230 

Association for Corporate Growth, statement ....................................................... 236 

Basin Electric Power Cooperative, statement ....................................................... 239 

Beverage Industry, statement ................................................................................ 240 

Beer Institute ....................................................................................................... 240 

Brewers Association ............................................................................................. 240 

Wine Institute ...................................................................................................... 240 

WineAmerica ........................................................................................................ 240 

Distilled Spirits Council ...................................................................................... 240 

American Craft Spirits Association .................................................................... 240 

Bipartisan Policy Center, statement ...................................................................... 242 

Business Coalition for Fair Competition, statement ............................................ 252 

Business United for Interest and Loan Deductibility, statement ........................ 259 

Competitive Carriers Association, CCA and ITTA—The Voice of America’s 

Broadband Providers, statement ........................................................................ 263 

Center for Fiscal Equity, statement ....................................................................... 265 

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Centurion LV, statement ........................................................................................ 271 

Coalition for a Prosperious America, statement ................................................... 272 

Coalition for Fair Effective Tax Rates, statement ................................................ 278 

Regional Economic Models, Inc., statement .......................................................... 284 

AHA, NACUBO and NAHEFFA, statement ......................................................... 289 

Miscellaneous finance and housing agencies, statement ...................................... 292 

Council of Development Finance Agencies ......................................................... 292 

Education Finance Council .................................................................................. 292 

National Council of State Housing Agencies ..................................................... 292 

National Development Council ........................................................................... 292 

Performance Based Building Coalition .............................................................. 292 

Committee for a Responsible Federal Budget, statement .................................... 294 

CompTIA, statement ............................................................................................... 296 

CRANE Coalition, statement .................................................................................. 299 

Credit Union National Association, statement ..................................................... 302 

Douglas Holtz-Eakin, statement ............................................................................ 311 

Economic Policy Institute, statement ..................................................................... 347 

Edison Electric Institute, statement ...................................................................... 353 

Education Finance Council, statement .................................................................. 357 

Employee-Owned S Corporations of America, statement ..................................... 360 

Federation of Exchange Accommodators, statement ............................................ 363 

Freedom Partners, statement ................................................................................. 367 

FreedomWorks, statement ...................................................................................... 370 

Fuel Cell & Hydrogen Energy Association, statement ......................................... 375 

Gaspard Properties, LLC, statement ..................................................................... 384 

Global Infrastructure Investor Association, statement ........................................ 385 

Miscellaneous agricultural organizations, statement ........................................... 389 

Agricultural & Food Transporters Conference .................................................. 389 

Agricultural Retailers Association ...................................................................... 389 

American Farm Bureau Federation ................................................................... 389 

American Mushroom Institute ............................................................................ 389 

American Sheep Industry Association ................................................................ 389 

American Soybean Association ........................................................................... 389 

American Sugarbeet Growers Association ......................................................... 389 

Cobank .................................................................................................................. 389 

National Barley Growers Association ................................................................. 389 

National Corn Growers Association .................................................................... 389 

National Council of Farmer Cooperatives .......................................................... 389 

National Milk Producers Federation .................................................................. 389 

National Peach Council ....................................................................................... 389 

National Pork Producers Council ....................................................................... 389 

National Renderers Association .......................................................................... 389 

Panhandle Peanut Growers Association ............................................................ 389 

Southwest Council of Agribusiness ..................................................................... 389 

South East Dairy Farmers Association .............................................................. 389 

United Egg Producers .......................................................................................... 389 

United Fresh Produce Association ...................................................................... 389 

U.S. Canola Association ....................................................................................... 389 

U.S. Rice Producers Association ......................................................................... 389 

U.S. Sweet Potato Council ................................................................................... 389 

USA Rice Federation ........................................................................................... 389 

Western Growers .................................................................................................. 389 

Western Peanut Growers Association ................................................................ 389 

Western United Dairymen .................................................................................. 389 

Nation’s family farmers and ranchers, statement ................................................ 391 

Agricultural & Food Transporters Conference .................................................. 391 

Agricultural Retailers Association ...................................................................... 391 

American Farm Bureau Federation ................................................................... 391 

American Mushroom Institute ............................................................................ 391 

American Sheep Industry Association ................................................................ 391 

American Soybean Association ........................................................................... 391 

American Sugarbeet Growers Association ......................................................... 391 

California Association of Winegrape Growers ................................................... 391 

Cobank .................................................................................................................. 391 

Farm Credit Council ............................................................................................ 391 

National Barley Growers Association ................................................................. 391 

National Cattlemen’s Beef Association .............................................................. 391 

National Corn Growers Association .................................................................... 391 

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National Cotton Council ...................................................................................... 391 

National Council of Farmer Cooperatives .......................................................... 391 

National Milk Producers Federation .................................................................. 391 

National Peach Council ....................................................................................... 391 

National Pork Producers Council ....................................................................... 391 

National Potato Council ...................................................................................... 391 

National Renderers Association .......................................................................... 391 

National Sorghum Producers .............................................................................. 391 

Panhandle Peanut Growers Association ............................................................ 391 

Southwest Council of Agribusiness ..................................................................... 391 

South East Dairy Farmers Association .............................................................. 391 

United Egg Producers .......................................................................................... 391 

United Fresh Produce Association ...................................................................... 391 

U.S. Apple Association ......................................................................................... 391 

U.S. Canola Association ....................................................................................... 391 

U.S. Rice Producers Association ......................................................................... 391 

U.S. Sweet Potato Council ................................................................................... 391 

USA Rice Federation ........................................................................................... 391 

Western Growers .................................................................................................. 391 

Western Peanut Growers Association ................................................................ 391 

Western United Dairymen .................................................................................. 391 

Real Estate Roundtable, statement ........................................................................ 399 

ADISA—Alternative & Direct Investment Securities Association ................... 399 

American Hotel & Lodging Association .............................................................. 399 

American Institute of Architects ......................................................................... 399 

American Land Title Association ........................................................................ 399 

American Resort Development Association ....................................................... 399 

American Seniors Housing Association .............................................................. 399 

Appraisal Institute ............................................................................................... 399 

Asian American Hotel Owners Association ........................................................ 399 

The Building Owners and Managers Association (BOMA) International ....... 399 

CCIM Institute ..................................................................................................... 399 

Federation of Exchange Accommodators ............................................................ 399 

Institute of Real Estate Management ................................................................ 399 

International Council of Shopping Centers ........................................................ 399 

IPA—Investment Program Association .............................................................. 399 

Mortgage Bankers Association ............................................................................ 399 

NAIOP, the Commercial Real Estate Development Association ...................... 399 

National Apartment Association ......................................................................... 399 

National Association of REALTORS® ................................................................ 399 

National Multifamily Housing Council .............................................................. 399 

REALTORS® Land Institute ............................................................................... 399 

Heating, Air-conditioning and Refrigeration Distributors International, statement ...................................................................................................................... 409 

Statement ................................................................................................................. 417 

Residential Energy Efficiency Industry Leaders, statement ................................ 418 

Home Performance Coalition .............................................................................. 418 

E4TheFuture ........................................................................................................ 418 

Efficiency First ..................................................................................................... 418 

Building Performance Institute .......................................................................... 418 

Independent Community Bankers of America, statement ................................... 422 

Industrial Minerals Association—North America, statement .............................. 426 

Insured Retirement Institute, statement ............................................................... 428 

James DiCampli, statement .................................................................................... 431 

The Leadership Conference on Civil and Human Rights, statement .................. 434 

Leading Pointe Strategies, LLC, statement .......................................................... 437 

The Like-Kind Exchange Stakeholder Coalition, statement ................................ 438 

Louisiana Asphalt Pavement Association, statement ........................................... 442 

Missouri Health and Educational Facilities Authority (MoHEFA), statement .. 443 

Motion Picture Association of America, statement ............................................... 445 

Municipal Bonds for America Coalition, statement .............................................. 447 

National Alliance of Forest Owners, statement .................................................... 452 

National Association of Electrical Distributors, statement .................................. 453 

National Association of Energy Service Companies, statement .......................... 455 

National Association of Insurance and Financial Advisors, statement ............... 460 

The National Biodiesel Board, statement .............................................................. 464 

National Council of State Housing Agencies, statement ...................................... 468 

National Grocers Association, statement ............................................................... 475 

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vi 

National Low Income Housing Coalition, statement ............................................ 480 

National Multifamily Housing Council and National Apartment Association, 

statement .............................................................................................................. 490 

National Retail Federation, statement .................................................................. 500 

National Sporting Goods Association, statement .................................................. 501 

NRS, statement ........................................................................................................ 502 

The Power of Recognition, statement ..................................................................... 504 

The Patriotic Millionaires, statement .................................................................... 513 

Property and Casualty Insurance Industry, statement ........................................ 515 

American Insurance Association ......................................................................... 515 

National Association of Mutual Insurance Companies ..................................... 515 

Property Casulty Insurers Association of America ........................................... 515 

Reinsurance Association of America ................................................................... 515 

Public Citizen, statement ........................................................................................ 521 

Reforming America’s Taxes Equitably Coalition, statement ................................ 524 

End Citizen-Based Taxation, statement ................................................................ 528 

Retail Industry Leaders Association, statement ................................................... 532 

Rick Hohensee, statement ....................................................................................... 536 

Semiconductor Industry Association, statement ................................................... 543 

Small Business & Entrepreneurship Council, statement ..................................... 551 

Student Debt Reduction Coalition, statement ....................................................... 555 

TechNet, statement ................................................................................................. 562 

Polsinelli, statement ................................................................................................ 564 

The Advertising Coalition, statement .................................................................... 565 

ESOP Association, statement ................................................................................. 572 

MassDevelopment, statement ................................................................................. 575 

The Military Coalition, statement .......................................................................... 578 

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HOW TAX REFORM WILL GROW 

OUR ECONOMY AND CREATE JOBS 

THURSDAY, MAY 18, 2017 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

WASHINGTON, DC. 

The Committee met, pursuant to call, at 10:07 a.m., in Room 

1100, Longworth House Office Building, the Honorable Kevin 

Brady [Chairman of the Committee] presiding. 

[The advisory announcing the hearing follows:] 

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33393.001

(@ 

WAYS AND MEANS 

CHAIRMAN KEVIN BRADY 

Chairman Brady and Subcommitte Chairman Roskam Announce 

Hearing on How Tax Reform Will Grow Our Economy and Create Jobs 

House Committee on Ways and Means Chairman Kevin Brady (R-TX) and Tax Policy 

Subcomittee Chai.rman Peter J. Roskam (R-IL) announced today that the Full 

Committee will hold a hearing on how tax refonn will grow our economy and create j obs 

across America. The hearing wiU take place on Thursday, May 18, 2017 inllOO 

Longworth House Office Building, beginning at 10:00 AM. 

In view oftbe limited time to hear witnesses, oral testimony at this hearing will be from 

invited witnesses only. However, any individual or organization may submit a written 

statement for consideration by the Committee and for inclusion in the printed record of 

the hearing. 

DETAILS FOR SUBJ\USSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments 

for the hearing rec-ord must follow the appropriate link on the hearing page of the 

Committee website and complete the infonnational forms. From the Committee 

homepage, http://waysandmeans.house.gov, select "Hearings." Select the hearing for 

which you would like to make a submission, and click on the link entitled, ''Click here to 

provide a submission for the record." Once you have followed the online instructions, 

subntit all requested infonnation. ATIACH your submission as a Word document, in 

compliance with the fonnatting requirements listed below, by the close of business on 

Thm·sday, June 1, 2017. For questions, or if you encounter technical problems, please 

call (202) 225-3625. 

FORMATIING REQUIREMENTS: 

TI1e 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 yom· submission, but we reserve 

the right to format it according to our guidelines. AJ.1y subntission provided to the 

Comntittee by a witness, any materials submitted for the printed record, and any written 

comments in response to a request for written comments must confonn to the guidelines 

listed below. Any submission not in compliance with these guidelines will not be 
3 

f 

Chairman BRADY. The Committee will come to order. 

Good morning. And thank you all for joining us. And today our 

Committee is focused on a top priority for the American people, 

pro-growth tax reform that will create jobs, increase paychecks, 

and strengthen our Nation’s economy. America now has one of the 

most costly, unfair, and uncompetitive tax systems in the world. 

The need for pro-growth tax reform is urgent. 

Today’s high tax rates on American businesses drive good-paying 

jobs overseas. It makes it much more difficult for our job creators 

and our workers to succeed here at home. America’s burdensome 

international tax system destroys U.S. competitiveness and discourages investment in our local communities. Scores of loopholes 

give favored treatment to Washington’s special interests while millions of hardworking Americans haven’t seen a real pay raise in 

years. 

Here is the good news: President Trump is leading the charge for 

bold tax reform that will unleash the growth of jobs and paychecks 

nationwide, and he is calling on The House and the Senate to put 

forward our best ideas. Our Committee is ready to answer that 

call. 

Over the past several years, we have held roughly 40 full Committee and Subcommittee hearings on all aspects of tax reform. All 

of our Members, no matter what side of the dais you sit on, know 

that tax reform is an economic imperative. 

Now is the time to go bold. Now is the time to deliver real results 

for the American people. We welcome all serious solutions that will 

help achieve that goal. 


33393.002
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While there is no perfect way to tax, there are proven solutions 

to grow our economy and improve the lives of all Americans, especially the middle class. So let’s take a look at the numbers. Currently, we have the highest corporate tax rate in the developed 

world at 35 percent. For small businesses, it is worse. The rates 

can be as high as 44.6 percent. To unleash job creation, increase 

middle class paychecks, we know these rates have to come down. 

Washington must take less from American job creators so they can 

invest more in their businesses, their workers, and their futures. 

In addition to lowering rates, we also know that bold policies, 

such as full and immediate expensing, are incredibly pro-growth for 

jobs, for paychecks, and for our economy as a whole. According to 

estimates from the nonpartisan Tax Foundation, this provision 

alone, allowing businesses of all sizes to immediately write off their 

business investment in buildings, equipment, software, and technology, will grow America’s economy by more than 5 percent over 

the next decade, create 1 million full-time jobs, and raise wages 

and paychecks significantly. 

Finally, the numbers show us that businesses of all sizes are 

eager for tax reform. They are ready for the opportunity to innovate, to grow, and to hire new workers. Recently, the Business 

Roundtable surveyed a group of more than 120 CEOs about tax reform: 82 percent of them said tax reform will prompt companies to 

increase business investment, and three out of four said they will 

increase hiring. These CEO responses make clear that tax reform 

will create jobs, create paychecks, and grow our economy. 

But make no mistake: There are also consequences if we fail to 

act. Ninety percent of the CEOs said that delaying tax reform will 

harm the U.S. by causing slower growth, slower hiring, and slower 

capital investment. And more than that, delay would force all 

Americans to continue to live with a Tax Code that works against 

them, not for them. 

Take from Roger and Natalie Goertz, constituents of mine who 

own and operate a Mr. Rooter plumbing franchise in Montgomery 

County, Texas. Roger, who is a friend, and his wife, who are so 

deeply involved in the community, said: As a small business owner, 

I am scared to death each year in how I am going to have to pay 

into the government. That uncertainty is devastating, he says. It 

is kind of like trying to operate your business with one hand tied 

behind your back; sometimes you feel like both hands are tied behind your back. All small businesses know that feeling. 

In today’s hearing, we will hear from more business leaders, real 

live business leaders about exactly what is needed to get jobs, paychecks, and the economy moving again. 

Our witnesses are top-level executives from American companies 

of all size, from 80 workers to 80,000 middle class workers. Their 

expertise will help us understand how different proposals will impact America’s job creators, workers, and our families. Since releasing our House Blueprint for Tax Reform last June, we have received thousands of comments from businesses and thought leaders, feedback we take very seriously. We look forward to the expert 

guidance our witnesses will provide today. We thank you all for 

being here to lend us your insight. 

5 

Again, there is no perfect way to tax. But there are proven ways 

to grow our economy. With today’s hearing, we will take a critical 

step toward putting these ideas into action for the American people. 

With that, I will now recognize Ranking Member Neal for his 

opening statement. 

Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman, for holding this important 

hearing and highlighting the need for tax reform. We all agree the 

Tax Code is broken. It is far too complicated and certainly in need 

of repair. Our current tax system isn’t working for families and 

businesses alike, and we all agree that any revisions to the Code 

should promote economic growth and create jobs for working families. 

However, we should reject ideology and work together to reform 

our tax system for the 21st century. According to a recent Pew 

study—based on fact, not opinion—the share of adults living in 

middle-income households in the United States fell from 62 to 59 

percent from 1991 to 2010. Aggregate household income has also 

shifted from the middle- to the upper-income households. Pew’s research found that 49 percent of U.S. aggregate income went to the 

upper-income households in 2014, up from 29 percent in 1970. And 

for middle-income households, the share of income was 43 percent 

in 2014, down from 62 percent in 1970. 

Wealth is now concentrated at the top, and I assume there is 

broad agreement on that issue. We can disagree on how that happened but not to miss the point greater concentrated wealth at the 

top is a reality as we proceed to this discussion. 

Income stagnation is a real challenge and one that needs to be 

addressed in tax reform. This is in part why working families sent 

a strong signal to Congress last November. 

They haven’t received a pay raise in years. Their bills are piling 

up, and they are concerned about uncertain financial security. Put 

simply, too many feel forgotten and left out by their government. 

Tax reform should be about moving the dial to help middle class 

families prosper. That means focusing on job creation and helping 

families with day-to-day costs, like housing costs, grocery bills, and 

childcare. It also means helping working families to buy their first 

home, to send their children to college, and help care for their elderly parents. And, of course, it also means helping families save 

for retirement, and that means protecting the tax incentives in the 

Code for retirement savings. 

Our focus should be on making sure that when our American 

families sit down around the dinner table, they can look across at 

their spouse, or their partner, and their children and know that 

things are going to be all right. That is not the case in too many 

homes across the country today, and that needs to be addressed. 

That is why Democrats are committed to ensuring that middle 

class tax reform is the true winner in any tax reform proposal. The 

American people don’t believe that massive tax cuts for millionaires 

and billionaires grow the economy. The American family knows 

that tax reform that provides middle class tax relief and asks corporations and the wealthiest Americans to pay their share is what 

will grow our economy. 

6 

We will oppose any tax plan that simply helps the rich get richer 

and does nothing for those who really need our help. And all of us 

should oppose any tax reform that results in a greater burden on 

the middle class. The Trump tax plan currently fails to meet this 

standard, and I hope the Administration will move back to the test 

that was set out by Secretary Mnuchin for tax reform, which he 

stated, quote, ‘‘There will be no absolute tax cut for the upper 

class.’’ 

Furthermore, the tax reform, if it is to be successful, must be 

done in a responsible manner. To that end, words like dynamic 

scoring and supply-side economics are thrown around a lot these 

days. But make no mistake, tax cuts do not pay for themselves and 

anything to the contrary is a nonstarter. 

However, as we consider tax policy and economy-wide effects, I 

would argue the importance of considering the macroeconomic effects of other policy changes, including an acknowledgment that robust investment in our Nation’s infrastructure would have significant growth effects throughout our economy. 

I also think that we should think about using the revenue from 

a deemed repatriation tax to pay for infrastructure and for other 

productive investment purposes. 

In conclusion, we have a unique opportunity to sit down and 

work together on tax reform. After all, we all agree that the current system is inefficient and underproductive. I stand ready to 

work in good faith on tax reform with our Republican allies and 

friends in Congress and also the Administration, and only if we do 

and make the effort to assist the middle class. 

Thank you, Mr. Chairman, for calling this hearing. We look forward to calling our witnesses as they join us today. And we look 

forward to a continued and productive conversation. 

Chairman BRADY. Thank you, Mr. Neal. 

Today’s witness panel includes five experts: John Stephens is the 

senior executive vice president and CEO of AT&T, Inc.; Zach Mottl 

is the chief alignment officer at Atlas Tool Works, Inc.; David Farr 

is chairman and CEO of Emerson Electric; Douglas Peterson is 

president and CEO of S&P Global; and Steven Rattner is chairman 

of Willett Advisors LLC. 

The Committee has received your written statements, and they 

will all be made part of the formal hearing record. We reserve 5 

minutes to deliver your oral remarks. 

Mr. Stephens, we will begin with you. And, again, welcome. 

Thank you for being here. 

STATEMENT OF JOHN J. STEPHENS, SENIOR EXECUTIVE VICE 

PRESIDENT AND CHIEF FINANCIAL OFFICER, AT&T INC. 

Mr. STEPHENS. Thank you, Chairman Brady and Ranking 

Member Neal. And thank you, Members of the Committee. I appreciate the opportunity to be in front of you today. 

I am John Stephens. I am the chief financial officer of AT&T, 

and I sincerely appreciate this opportunity to discuss the importance of enacting comprehensive corporate tax reform with you 

today. 

AT&T is a company with a 140-year heritage of research and innovation that includes eight Nobel Prizes and more than 15,000 

7 

patents and pending patents worldwide. We employ more than 

200,000 people here in the United States. And over the past 5 

years, we have invested more in the U.S. economy, than any other 

public company, right at $135 billion. 

One of the biggest issues facing this country is how to unleash 

economic growth which has underperformed for the last decade. We 

can and should do better. The key driver of U.S. economic growth 

is private sector investment. When investment increases, so does 

economic activity, hiring and wages. And when more people are 

working and making more money, they have more money to spend. 

However, private sector investment in the U.S., measured as a 

percentage of GDP, is at its lowest level in generations. It is not 

surprising that the U.S. economy has been marred in sluggish 

growth for nearly a decade. If we are serious about robust growth, 

then we must get serious about jump-starting private sector investment. And the best way to do that is to fix our broken, last-century 

corporate Tax Code. 

Achieving competitive corporate tax rates is likely the most effective catalyst available for public policymakers to increase capital 

investment, create jobs, and increase wages. 

Lowering the corporate tax rate will also make the United States 

more competitive globally. We can respond to foreign countries that 

have implemented modern tax policies to aggressively compete for 

our jobs and our investment. 

We have a once-in-a-generation opportunity to comprehensively 

update the Code for the 21st century and put the U.S. back on top. 

First, we need to reduce the top corporate tax rate. This is the 

quickest, most straightforward way to jump start investment in our 

country. We will bring our tax system in line with other developed 

countries. By reducing the rate, simple economics will drive companies to invest more in America rather than elsewhere. 

Secondly, policymakers should allow for the full expensing of capital investments. This is an effective way to quickly stimulate the 

economy. The tax foundation estimates that this policy change 

would create the equivalent of one million full-time jobs. One hundred percent immediate expensing removes the negative effects of 

taxation on investment. And we know it works. Bonus depreciation, 

a provision with bipartisan support from this Committee, allowed 

accelerated depreciation that positively affected our investment decisions in those years. Plain and simple, we at AT&T invested more 

under bonus depreciation than we would have otherwise done. 

The ability to fully expense investment would do even more to 

incentivize AT&T and companies throughout the United States to 

accelerate investment. And more investment directly means more 

jobs. 

We recognize that any comprehensive corporate tax reform will 

involve tradeoffs. That is clear. But the key word is ‘‘comprehensive.’’ Any plan being considered should be judged in totality, not 

just by a single provision. 

For example, one area I know the Committee has looked at is 

eliminating interest expense deductibility. Viewed in isolation, that 

provision would be extremely problematic for me. But I understand 

that it may be necessary as part of a broader solution. If the Committee plans to eliminate interest deductibility, I would encourage 

8 

you to utilize reasonable transition rules that do not penalize past 

choices companies like ours have made under a vastly different tax 

system. This would not only give companies appropriate time to adjust their capital structures to the new system but also allow them 

to immediately increase their investment in response to a lower 

overall tax rate. 

Chairman BRADY. Mr. Stephens, thank you for your testimony. 

Five minutes always goes faster than it appears on paper. So we 

will return during the questioning period for you. 

Again, thank you for being here. 

[The prepared statement of Mr. Stephens follows:] 

9 


33393.003

STAT EMENT OF .JOHN STEPHENS 

Senior Executive Vice President and Chief Financial Officer 

AT&T Inc. 

Rearing on How Tax Reform Will Grow Our Economy and Cr eate J obs 

United States House of Representatives, Committee on Ways and Means 

May 18,2017 

Thank you, Chairman Brady and Ranking Member Neal, Members of the Committee. 

I am John Stephens, Chief Financial Officer of AT&T, and l appreciate the opportunity to 

discuss the importance of enacting corporate tax refom1 with you today. 

AT&T is a company with a 140-year heritage ofillllovation that includes 8 Nobel Prizes and 

more than 15,000 patents and pending patents worldwide. We employ more than 200,000 people 

in the United States, and over the past five years, we 've invested more in the U.S. than any other 

public company - nearly $135 billion. 

One of the biggest issues facing the country is how to unleash economic growth, whi ch has 

underperformed for the last decade. We can and should do better. 

The key driver of US-economic growth is private-sector investment. When investment 

increases, so does economic activity and hiring. And when more people are working, they have 

more money to spend. However, private-seclOr investmem in the U.S., measured as a percentage 
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of the nation's Gross Domestic Product, is at its lowest in generations. 1 It is not surprising then 

that the U.S. economy has been mired in sluggish growth for nearly a decade. 

If we're serious about robust growth, then we must get serious about jump-starting private sector 

investment. And the best way to do that is to fix our broken, last-century corporate tax code. 

Achieving competitive corporate tax rates is likely the most effective catalyst available to our 

public policy makers to increase capital investment and create jobs. 

The current tax code 

Our current tax code is outdated. It has been over 30 years since major tax reform was enacted. 

As a result, our 201h century tax code fails to reflect the realities oftoday's 21 " century global 

and internet-focused economy. We no longer live in a world where the U.S. can set a corporate 

tax rate without considering what our international competition looks like. Countries are 

vigorously competing against each other to attract investment and jobs, but the U.S. has done 

little to retain its competitive advantage. When tax reform was passed in 1986, we were 

competitive with other OECD countries, but over the last 30 years, tax rates in other countries 

have moved from about 35% to about 20%. This puts the U.S. at a real disadvantage. We 

thereby have saddled our economy with the highest corporate tax rate in the developed world, 

which is exacerbated by our system that taxes companies in the U.S. on their worldwide 

income. 2 

1 Restoring Investment in America 's Economy, Robe11 D. Atkinson, Infonnation Technology and Innovation 

Fotllldation, June 2016. 2 Tax Foundation, "The U.S. Has the Highest Corporate Income Tax Rate in the OECD," Januaty 27, 2014. 
11 


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Lowering the corporate tax rate will make the United States more competitive globally. We can 

respond to foreign countries that have implemented modem tax policies to aggressively compete 

for jobs and investment. Tax reform will also propel domestic investment and job creation by 

businesses of all sizes. Reform would increase productivity and GDP, which was just 1.6 

percent in 20163 and 0. 7 percent in the first quarter of 20174 

Our current tax system also harms workers; they bear up to 75% of the corporate tax burden 

through lower wages. 

5 And a study commissioned by the Business Roundtable estimates that 

over a I 0-year period a I 0-percentage point reduction in the corporate tax rate would have 

reduced the number of U.S. companies and subsidiaries sold to foreign acquirers in OECD 

countries by 1,3006 That represents hundreds of thousands of jobs moved offshore. 

With meaningful tax reform, we can expect to see more companies stay in the U.S. rather than 

relocate to countries with lower tax rates. A lower corporate tax rate would give companies less 

incentive to execute these inversions. It would also reduce the risk of foreign companies taking 

control of American companies. 

3 Bmeau of Economic Analysis, U.S. Department of Commerce, "National Income and Product Accounts, Gross 

Domestic Product: Fomth Quarter and Annual2016 (Third Estimate), Cmporate Profits: Fourth Quatter and Annual 

2016," March 30, 2017. 4 Bmeau of Economic Analysis, U.S. Department of Commerce, "National Income and Product Accounts, Gross 

Domestic Product: First Quatier 2017 (Advance Estimate)", Aptil 28, 2017. 5 The Business Rmmdtable, "Tax Reform: Advancing America in the Global Economy," October 2015, page 6. 6 EY, "Buying and Selling: Cross-border mergers and acquisitions and the US corporate income tax," prepared for 

the Business Roundtable, March 2015, page 18. 
12 


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Elements of tax reform 

We have a once in a generation opportunity to comprehensively update the code for the 21" 

century and put the U.S. back on top. 

First, we need to reduce the top corporate rate. This is the quickest, most straight forward way to 

jumpstart investment in our country. It will bring our tax system in line with other developed 

countries. By reducing the rate, simple economics will drive companies to invest in America 

rather than overseas. 

Second, policy makers should allow for full expensing of capital investments. This is an effective 

way to quickly stimulate the economy. 7 The Tax Foundation estimates this policy change would 

create the equivalent of I million full-time jobs. 8 

Rather than providing industry-specific tax credits or grants that can be cumbersome to 

administer and allow policy-makers to pick winners and losers, I 00% immediate expensing 

removes the negative effects of taxation on investment. And we know it works. Bonus 

depreciation, a provision with bipartisan support from this Committee, allowed accelerated 

depreciation that positively affected our investment decisions in those years. Plain and simple, 

we invested more under bonus depreciation than we otherwise would have. The ability to fully 

expense investment would do even more to incentivize AT&T- and companies throughout the 

United States -to accelerate investment. And more investment results in more jobs. 

7 Tax Fotmdation, "Why Full Expensing Encourages More Investment Than a Corporate Rate Cut," May 3, 2017. 8 Tax Foundation, "Options for Refonning America 's Tax Code," 2016, page 77. 

4 
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We recognize that any comprehensive corporate tax reform will involve trade-offs. But the key 

word is "comprehensive." Any plan being considered should be judged in totality, not just by a 

single provision. For example, one area I know the Committee has looked at is eliminating 

interest deductibility. Viewed in isolation that provision would be extremely problematic, but I 

understand that it may be necessary as part of a broader solution. If the Committee plans to 

eliminate interest deductibility, I would encourage you to utilize reasonable transition rules that 

do not penalize past choices companies made under a vastly different tax system. This would 

not only give companies appropriate time to adjust their capital structures to the new system, but 

also allow them to immediately increase their investment in response to the lower overall tax 

rate. 

I'd encourage all companies and interested parties to join the conversation so that you, our 

legislators, hear all sides to this important debate. With open dialogue, we can find a 

comprehensive solution that works. 

The results of corporate tax reform 

We are confident that these reforms will encourage businesses to step up their capital investment 

plans. In fact, the Business Roundtable, an association of CEOs ofleading U.S. companies, 

recently released the results of a survey of its CEO members on the topic of corporate tax reform. 

The results make it abundantly clear that businesses are ready to step up their investment and 

hiring in the U.S. if Congress enacts comprehensive tax reform. That will have a demonstrable 

positive impact on the overall pace of economic growth. 

According to the survey, a significant majority-71%- of Business Roundtable CEOs believe 

that tax reform is the single most effective action Congress can take to accelerate economic 
14 


33393.008

growth over the next year. 9 The CEOs overwhelmingly agree that successful tax reform will 

lead to more jobs. Seventy-six percent of the respondents said they would increase hiring if the 

United States tax system is reformed. 10 And 82% said they would increase capital spending, 

making investments that lead to even more hiring and broader economic growth. 11 This is an 

important ripple effect that will magnify the positive impact of tax reform. 

The CEOs also see significant negative consequences of inaction. Roughly 90% of respondents 

said that delaying tax reform for an extended period will lead to lower rates of hiring, growth and 

investment. 12 Another 57% said that they would delay capital spending, the investment that 

drives jobs and growth, if tax reform is delayed. 13 And 56% said they would delay hiring. 14 

I can tell you what tax reform would mean for AT&T. A lower corporate tax rate would give us 

an incentive to step up our investment in technology and next-generation networks. We could 

rethink the pace of our fiber and wireless build outs, including our buildouts of next generation 

broadband networks that will fuel the exploding "Internet of Things." Over the past five years, 

no other public company has invested more in this country than AT&T, and with comprehensive 

tax reform, the levels of investment can go even higher. 

And tax reform will generate economic growth. Companies throughout the U.S. would likely 

see an increase in revenues. As those companies become more open to new investment, we 

9 Business Rmmdtable, ~ew CEO Survey: Tax Refonn Will Lead to More Jobs and U.S. Investment," May 4, 

2017. 

10 1d. 

t t Id. 

t2Id. 13 Id. 

t4Id. 

6 
15 


33393.009

would expect to see an increase in their spend with their vendors, including AT&T. This is the 

most exciting aspect of tax reform; it will give us the opportunity to grow our top line. 

And with investment and increased revenues come jobs. We already employ more than 200,000 

people in the United States. And we're the nation's largest private employer of full-time union 

employees. A significant uptick in investment accompanied by more business from other U.S. 

companies would require that we employ people in new jobs. And, not only that, our vendors 

and contractors would also need to increase their hiring. Again, that's the important effect of 

investment- it spurs additional investment throughout the economy. 

That is why the biggest beneficiary of tax reform- and the growth it will stimulate- is the 

American worker. An expanding economy increases demand for labor and pushes wages higher. 

Economists project that even a modest modernization of the tax code would raise American 

wages by 3.8 percent or more over 10 years. 15 And it would grow GDP by 2.2 percent over 10 

years. 16 

15 The Business Roundtable, "Tax Refonn: Advancing Ametica in the Global Economy," October 2015, page 9. 

16Id. 

7 
16 

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We will have failed American businesses and American workers if we let this opportunity slip 

by. I look forward to continuing this important dialogue and continuing to move us toward 

meaningful tax reform. I welcome your questions. 

Thank you again Mr. Chairman for this opportunity. 

8 
17 

Chairman BRADY. Mr. Mottl, you are next up. Thank you, 

again, for being a witness. 

STATEMENT OF ZACHARY MOTTL, CHIEF ALIGNMENT 

OFFICER, ATLAS TOOL WORKS, INC. 

Mr. MOTTL. Mr. Chairman and Members of the Committee, my 

name is Zach Mottl. I am the chief alignment officer for Atlas Tool 

Works, a fourth-generation, family-owned, small manufacturer in 

Lyons, Illinois. I am here today representing not only my own company but also the 750 manufacturers who are members of the 

Technology and Manufacturing Association, TMA, in Illinois. These 

manufacturers, many in Congressman Roskam’s district, are proud 

to provide good-paying jobs and careers to about 30,000 people in 

the Chicago area. Most are like mine, small- to medium-sized supply chain companies that have survived NAFTA, weathered the 

China tide, and managed through the Great Recession. 

Through innovation, modernization, and cost control, we now 

produce more product than we did 20 years ago. Plus, we are 

poised to take advantage of the well-earned opportunity for reshoring. We are successfully competing against the best the world 

has to offer, and we are proud to help manufacture the wealth of 

America. 

However, in order to continue our success and grow while creating more good-paying jobs for Americans, we need your help. I 

am here today to testify in support of your work to comprehensively reform the U.S. Tax Code. I believe this is the best and fastest way to grow the U.S. economy and create more jobs in America. 

I would like to highlight two things: the opportunity for trade 

competitiveness through tax reform and the unique pain felt by 

small manufacturers due to excessive complexity and unfair treatment under the current Code. Today, the most difficult barrier to 

growth American manufacturers face is our self-inflicted Tax Code. 

Much of it, written decades ago, fails to account for today’s internationally competitive environment. 

I understand that many are going to argue for simply reducing 

the current rates. And this might be helpful in the short run, but 

I believe our economy and our citizens need and deserve permanent 

comprehensive reform that also improves America’s trade competitiveness. That is why the manufacturers I represent are so pleased 

that this Committee has placed border adjustability at the center 

of its tax reform efforts. Nearly every one of our trading partners 

currently use border adjustable consumption taxes, BATs, in the 

form of value added taxes, VATs, or good and services taxes, GSTs. 

These average 17 percent globally, and they act as tariff and subsidy replacements. 

Most European Union nations have VAT rates between 17 and 

22 percent, and every American exporter into the EU has to pay 

those rates to sell their product there. 

Now when Mexico agreed to NAFTA, they abolished most of their 

tariffs. But, instead, they raised the Mexican VAT to 15 percent. 

So they basically built a new tax wall for American products. 

India, it is now in the process of adopting a goods and services 

tax. 

18 

Furthermore, any country that wants to mimic a currency devaluation can increase their VAT and use the proceeds to reduce 

other domestic taxes. 

In reality, I believe tax policy and trade policy, they go hand in 

hand. And I believe that tax policy has far greater effect on trade 

than any trade agreement ever could. Good tax policy, one that encourages domestic production and exports is, in effect, good trade 

policy. Moreover, it is unilateral. We don’t need to negotiate with 

anyone. We don’t need to ask permission from any international 

trade body, and we don’t need to risk sparking a trade war. 

Remember, every one of our trading partners has already some 

type of a BAT system. So we simply need to change our tax laws 

and immediately American producers regain their edge, and the 

working men and women can get a tax break. In short, I want to 

get back to a world where American producers compete and win on 

price, quality, and service. 

The second point I want to highlight today is the importance of 

simplifying the Tax Code and reducing the overall rate. 

My company, it is like many small manufacturing businesses in 

America. We are often family owned. We usually own our own real 

estate, and we do not have a significant staff of tax experts. We 

work hard to be competitive, create jobs, and pay our fair share. 

Consider that small businesses have provided some of the fastest 

employment and output growth in the United States, but we receive some of the worst tax treatment under the Code. Usually, 

smaller manufacturers are paying the highest rates because we do 

not have the resources to develop a globally comprehensive tax 

avoidance plan. That is why I believe we must reduce the overall 

rate, offer a reduction in payroll taxes, and fund these reductions 

through BATs. 

It is also important to simplify the Tax Code and avoid 

disadvantaging small businesses, subchapter S and LLCs. These 

types report the taxes on the owners’ personal tax reform. The calculations, they are excessively complicated. 

My own family business, which together employ about 80 people, 

have three different tax structures: one C corp, two S corps, and 

one LLC to hold the real estate. 

TMA member companies like mine and tens of thousands of others throughout the United States, we are not looking for a handout 

or an unfair advantage. What we are hoping for is a level playing 

field from our Tax Code and the opportunity to earn our prosperity 

by, again, competing on price, quality, and service. 

All we are asking for from Congress is a permanent Tax Code 

that drastically improves our competitiveness through a move toward a more simplified and reduced tax system that places the emphasis on a border adjustable component. This reform will provide 

a level playing field so that we can dramatically increase good-paying American jobs and grow the American economy at a rate we 

have not seen in decades. 

Thank you for the opportunity to provide this input. I look forward to your questions. 

Chairman BRADY. Thank you, Mr. Mottl. 

[The prepared statement of Mr. Mottl follows:] 

19 


33393.011

05/18/2017 

US House of Representatives; Committee on Ways and Means 

Hearing on How Tax Reform Will Grow Our Economy and Create Jobs Across 

America 

Written Testimony of: Zachary Mottl 

Mr. Chairman and members of the committee, my name is Zach Mottl. I am the Chief Alignment officer 

for Atlas Tool Works, a fourth-generation family-owned small manufacturer located in Lyons, Illinois. 

I am here today representing not only my own company, but also the more than 750 manufacturers 

who are members of the Technology and Manufacturing Association (TMA) in Illinois. 

These manufacturers, many in Congressman Roskam's district, are proud to provide good paying jobs 

and careers to about 30,000 individuals in the greater Chicago Metropolitan area. The members ofTMA 

are small-to-medium sized supply chain manufacturers that have survived NAFTA, weathered the China 

tide, and managed through the great recession. Through innovation, modernization, and cost control, 

these manufacturers and others like them throughout our country, now produce more product than we 

did 20 years ago. Plus, we're poised to take advantage of the well-earned opportunity for re-shoring. 

American manufacturers are successfully competing against the best that Europe, Asia, and the world 

has to offer. We are proud to help manufacture the wealth of America. 

However, in order to continue our success and grow our manufacturing industry while creating more 

good paying jobs for Americans, we need your help. I am here today to testify in support of your work 

to comprehensively reform the U.S. Tax Code. I believe this is the best and fastest way to grow the US 

economy and create more jobs in America. 

I want to highlight two things: the opportunity for trade competitiveness through tax reform and the 

unique pain felt by small manufacturers due to excessive complexity and unfair treatment under the 

current tax code. 

Today, the most difficult barrier to growth American manufacturers face is our self-inflicted tax code. 

Much of it was written decades ago, and it fails to account for today's internationally competitive 

environment. I realize this will be hard and contentious work. Manufacturers understand that there will 

be those who argue for simply reducing current tax rates. While a reduction in tax rates may be helpful 

in the short run, I believe our economy and our citizens need and deserve permanent, comprehensive 

tax reform that also improves America's trade competitiveness. That is why the manufacturers I 

represent are so pleased that this committee has placed border adjustability at the center of its tax 

reform efforts so we can neutralize the border tax problems imposed on us by other countries and 

reclaim our competitive edge in international trade. 

Currently nearly every one of our international trading partners use "Border Adjustable" consumption 

tax systems (BATs), in the form of value added taxes (VATs) or goods and services taxes (GSTs), 

averaging 17% globally which act as tariff and subsidy replacements. 

A VAT is a consumption tax that is applied to companies at every stage of the production process, 

instead of just at the final sale like an American state sales tax. The big advantage of a VAT is that it is 

imposed on all imports and generally rebated on exports. Other domestic taxes, like income taxes, must 
20 


33393.012

be reduced to gain the trade advantage offered by any BAT regardless of the form, either a VAT or GST, 

but the income generated by BATs allow the taxing regime to shift towards more border adjustability 

while reducing other taxes. 

Most European Union nations have VAT rates between 17% and 22%. Every American exporter into an 

EU nation must pay those VAT rates to sell their product there. When Mexico agreed to the NAFTA and 

abolished most tariffs charged on U.S. goods, it raised the Mexican VAT rate to 15%, thus erecting a new 

tax "wall" so to speak against American goods. Under the leadership of prime minister Narendra Modi, 

India is now in the process of adopting a nationwide GST tax. 

Furthermore, a country can mimic a currency devaluation by increasing its VAT and using the proceeds 

to reduce other domestic taxes. Domestic producers and consumers receive no net tax increase. Exports 

are cheaper due to the VAT rebate combined with the domestic tax cuts. Imports are more expensive 

because the VAT is applied with no offsetting domestic tax reduction for foreign suppliers. 

Looking at the mechanics of these BATs combined with the understanding that over 150 of our trading 

partners use them, it's clear that the US is out of alignment with the rest of the world when it comes to 

globally competitive taxation schemes. What I mean is that most other countries have lowered tariffs, 

often times through trade agreements, but then replaced those tariffs by combining a border adjustable 

consumption tax increase with a cut in non-border adjustable, usually income, taxes while maintaining 

similar overall tax revenue. The shift from non-border adjustable to border adjustable taxes is their 

strategic secret, one that the U.S. government has not, in the past, figured out. The effect has been a 

major impediment to retaining and growing more manufacturing jobs in the USA and has resulted in the 

disenfranchisement of main street America on trade. 

In reality, tax policy and trade policy go hand in hand and I believe that tax policy has far greater effect 

on trade than any trade agreement ever could. Good tax policy, one that encourages domestic 

production and exports, is in effect good trade policy. Moreover, it is unilateral, meaning we don't need 

to negotiate with anyone, ask permission from any international bodies, or risk sparking a trade war. 

Remember, nearly every one of our trading partners already has some type of a BAT system. We simply 

change our tax laws and immediately American producers regain their advantage in the global economy. 

More specifically, creating a U.S. goods and services tax at perhaps 12%-15% while using the proceeds to 

fund the elimination of the payroll tax burden and reducing overall tax rates would be revenue neutral 

domestically but would cause a tremendous boost to our trade competitiveness. US labor costs would 

be reduced, workers would get an immediate raise, and the price of goods and services would be largely 

unaffected. In short, I want to get back to a world where American producers complete, and win, on 

price, quality and service, rather than tax regimes. 

Besides the importance of border adjustability to tax reform, the second point I want to highlight is the 

importance of simplifying the tax code and reducing the overall tax rate. 

My company is very similar to the other 750 TMA member companies in that we are all small 

businesses, we are all manufacturers, and we are often family owned. Usually we own our own real 

estate, and we do not have a significant staff of tax accountants or tax attorneys to help us. We work 

hard to be competitive, to create jobs, to do the right thing, and pay our fair share. However, what 

exactly is our fair share is not clear. 
21 


33393.013

Consider, for example, that smaller businesses have provided some of the fastest employment and 

output growth for the United States, yet receive some of the worst tax treatment under the current 

code. As a result, smaller American businesses pay some of the highest income taxes in the world. 

According to BLS and Census data, 98 percent of America's manufacturing firms are small. More than 

one in three Americans who work in the manufacturing sector are employed by a business which 

employs fewer than 500. In addition, most large manufacturing companies in the United States rely on 

small and medium-sized manufacturers as essential suppliers. However, the current U.S. nominal 

corporate tax rates are the highest in the developed world, higher than any other OECD member state. 

The OECD non-U.S. average rate is 25 percent, and is forecast to fall to 24.2 percent this year based on 

already enacted reductions, compared to the U.S. 35 percent nominal rate. 

I support the Committee's focus upon destination based business taxes. A destination based profit tax, 

through sales factor apportionment, should be considered in addition to a destination based cash flow 

tax. Sales factor apportionment, already in use by the states, would largely eliminate base erosion 

through profit shifting to tax havens because income is attributed to the tax jurisdiction where the final 

sale occurred. This would broaden the tax base by as much as 30% thereby enabling lower rates for all 

businesses. The rates could be applied across all business types. 

In addition, oftentimes, tax issues affect manufacturers of different sizes in different ways, usually 

smaller manufacturers, like the TMA member companies, are the only companies paying a higher tax 

rate because we do not have the staff or the resources to develop a comprehensive global tax avoidance 

plan like our larger peers who actually pay far less in taxes that we do. That is why I believe we must 

reduce the overall rate, offer a reduction in payroll taxes, and fund these reductions through BATs to 

avoid an unsustainable loss of government revenue. 

Additionally, it is important to simplify the required computations in order to avoid disadvantaging 

Subchapter Sand LLC businesses, many of which are small businesses. Subchapter Sand LLC businesses, 

both large and small, report taxes on the owner's or member's personal income taxes and the 

calculations are excessively complicated. My own family businesses, which together employ about 80 

people, have 3 different tax structures. One is a C corp, two areS corps, and one is an LLC. 

All of this is ridiculously complicated, given our small size. However, at the time each entity was set up, it 

made sense to do it this way and there was a valid reason. Now, as we have grown and laws have 

changed, this messy structure has become a burden. My family would like to transfer ownership to the 

next generation and, with the help of my sisters, become a woman owned business. However, because 

of the tax implications we are stuck and cannot do this prudent planning. We can't even move our fiscal 

year end so that all the companies share the same year end without triggering a massive tax liability. 

I'm sure if I was a much larger business with a staff specialized in this, we could perhaps figure out a 

way. Instead, we must deal with our situation and hope and pray that comprehensive tax reform, 

simplifying this whole mess, will occur sooner rather than later. 

TMA member companies, and tens of thousands of others like them throughout the United States are 

not looking for a hand out, or an unfair advantage. What we are hoping for is a level playing field from 

our U.S. Tax Code, and the opportunity to earn our prosperity by winning on price, quality and service. 

U.S. manufacturers are proud of our workforce, we are proud to lead the world in productivity, 

innovation and quality, and we will continue to innovate and control costs. All we are asking from 

Congress is a permanent tax code that drastically improves our competitiveness through a move toward 
22 

f 

Chairman BRADY. Mr. Farr, you are recognized. And welcome 

STATEMENT OF DAVID N. FARR, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, EMERSON ELECTRIC CO. 

Mr. FARR. Thank you very much. 

Good morning, Chairman Brady, Ranking Member Neal, and distinguished Members of the Committee. Thank you for the opportunity to appear before you on this critical U.S. economic growth 

issue. 

My name is David Farr. I am chairman and CEO of Emerson in 

St. Louis, Missouri. I serve as the current chairman of the National 

Association of Manufacturers, NAM, Board of Directors. 

Emerson is a $15 billion manufacturing company providing innovative products, solutions in industrial, commercial, and residential 

markets. And we have over 80,000 people and operations in more 

than 150 countries. The NAM, the Nation’s largest industrial trade 

association, is committed to a policy agenda that helps manufacturers grow and create jobs. We appreciate the current efforts to advance pro-growth and permanent tax reform. 

Manufacturers of the United States struggle to compete and win 

under a tax system with high tax rates and outdated international 

tax rules and a significant tax compliance burden. We have the 

best chance in over 30 years to advance significant tax reform and 

must take full advantage of this opportunity. It will enhance U.S. 

economic growth. 

Since the last major reform in 1986, manufacturers in the U.S. 

have innovated, but the Tax Code has not. With a combined statutory corporate tax rate that could top 39 percent, manufacturing in 

the United States faces the highest corporate tax rate among 

OECD nations. And this is a competitive problem. And top rates 

for manufacturers organized as passthrough entities can be even 

higher, and this hurts their investment opportunities. 

Over the past 3 years, Emerson paid $1.8 billion annually in 

taxes worldwide. More than half of that was paid in the United 

States. At an average effective tax rate of approximately 32 percent 

and a marginal tax rate of over 37 percent, Emerson pays real cash 

taxes here in the United States. 

A key NAM objective shared by Emerson is a top Federal tax 

rate of only 15 percent. We must also lower tax rates for passthrough entities including many smaller companies in the U.S. 

manufacturing supply chain. Lower rates will make manufacturing 

more competitive, encourage greater investment in the United 

States, and promote job creation, and stronger economic growth. 


33393.014
23 

Outdated and cumbersome tax rules for taxing international income represent another major problem. Emerson’s business is global. More than 52 percent of our sales in 2016 were outside the 

United States. As a U.S. company headquartered in St. Louis, Missouri, Emerson typically pays more in taxes on worldwide earnings 

than our foreign competitors. This is another competitive issue. 

Most developed countries have territorial systems, and their global 

companies pay little to no tax when they bring their foreign earnings back home. The United States, on the other hand, has a 

worldwide system, meaning global U.S. companies, where they do 

business they pay taxes, as well as in the United States when we 

bring the earnings back home. This added tax burden is a significant disadvantage when U.S. companies are competing for global 

business. 

To improve U.S. competitiveness, any tax reform plan should include a territorial system similar to those in other countries where 

our competitors are headquartered. This will increase U.S. jobs, exports, and strengthen U.S.-based suppliers and allow for the flow 

of capital back to the United States for investment right here in 

America. 

A tax reform plan must encourage long-term capital investment 

by allowing accelerated depreciation of newly invested assets, one 

of the most important being the full expensing the first year. Expensing lowers the after-tax cost to capital, can drive increased investment and economic growth along with job growth. 

As the head of a global manufacturing company headquartered 

in St. Louis, Missouri, I strongly support a robust R&D incentive. 

Continuous research and development is critical to ensuring that 

the United States remains a leader in global innovation and maintains Americans’ competitive advantage in technology. 

U.S. manufacturing want the United States to be the best place 

to compete and manufacture in the world. We want to attract direct foreign investment. A permanent tax reform that reduces the 

corporate tax rate to 15 percent, provides lower tax rates for passthrough entities, moves to a territorial system, maintains a strong 

R&D incentive, and includes faster capital cost recovery, will ensure we achieve this goal and improve our country’s competitiveness and ability to grow. 

We operate in a fiercely competitive global economy, and we need 

a fiercely competitive tax system. And we need it now. 

Emerson and NAM are committed to working with you to advance this much-needed tax reform as soon as possible. 

Mr. Chairman and the Committee Members, thank you very 

much for having me here today, and I look forward to the Q&A. 

Thank you. 

Chairman BRADY. Thank you, Mr. Farr. 

[The prepared statement of Mr. Farr follows:] 

24 


33393.015

TESTIMONY OF DAVID FARR, CHAIRMAN AND CEO, EMERSON 

BEFORE THE U.S. HOUSE COMMITTEE ON WAYS AND MEANS 

Hearing on 

"How Tax Reform Will Grow Our Economy and Create Jobs Across America" 

MAY 18,2017 

Good morning Chairman Brady, Ranking Member Neal and distinguished members of 

the committee. Thank you for the opportunity to appear before you and for holding this hearing 

today on the important subject of tax reform. 

My name is David Farr, and I am chairman and CEO of Emerson in St. Louis, Missouri. 

also serve as the current chairman of the Board of Directors of the National Association of 

Manufacturers (NAM). I have been involved in manufacturing my whole life- 36 years with 

Emerson and over 30 years with my Dad's career with Corning Glass Works. 

Emerson is a $14.5 billion global manufacturing and technology company founded in the 

United States 126 years ago. Emerson has over 80,000 employees and operations in more than 

150 countries. Emerson provides innovative products and solutions for customers in industrial, 

commercial and residential markets. Emerson's Automation Solutions business helps process, 

hybrid and discrete manufacturers maximize production and protect personnel and the 

environment while optimizing their energy and operating costs. Emerson's Commercial and 

Residential Solutions business helps ensure human comfort and health, protect food quality and 

safety, advance energy efficiency and create sustainable infrastructure. 

Over the past 20 years, Emerson has employed a global approach to ensure that 

products sold in a country also are manufactured in that region as much as possible for speed 

and cost. I am proud to say that over 80 percent of products we sell in the United States are 
25 


33393.016

manufactured in the United States- a strategy we mirror across the globe and a crucial element 

of being a successful U.S. multinational company with deep U.S. roots and commitment. 

The National Association of Manufacturers (NAM) is the nation's largest industrial trade 

association and a voice for more than 12 million men and women who make things in America. 

The NAM is committed to achieving a policy agenda that helps manufacturers grow and create 

jobs. Both the NAM and I very much appreciate your current efforts to advance pro-growth , procompetitiveness and pro-manufacturing tax reform- it is truly needed to accelerate U.S. 

economic growth. 

Manufacturers like Emerson have been leading the charge for comprehensive tax reform 

for more than a decade. While we've seen some positive changes, manufacturers and other 

businesses in the United States still struggle to compete against our international competitors 

under an outdated tax system that includes very high tax rates for both corporate and passthrough businesses, arcane rules for taxing international income and a significant compliance 

burden. Tax reform is a critical issue for my company- and all manufacturers- and I believe we 

have the best chance in more than 30 years to advance permanent pro-growth reform. It is 

imperative that we take full advantage of this opportunity to improve our global competitiveness 

and grow the economy and increase U.S. manufacturing jobs. 

An NAM study, A Missed Opportunity: The Economic Cost of Delaying Pro-Growth Tax 

Reform, released in 2015, looks at the potential impact of a tax reform plan that includes lower 

tax rates for businesses, a robust capital cost-recovery system , a strong research and 

development (R&D) incentive and a territorial tax system. The study concludes that this 

multi pronged reform package would fuel the economy substantially and result in increased jobs 

and investment. Over a 10-year period, this plan would contribute more than $12 trillion in GDP, 

2 
26 


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add more than 6.5 million jobs to the U.S. economy and increase investment by more than $3.3 

trillion- and I believe this strongly as a CEO of a U.S. based manufacturing company. 

Emerson and other NAM members are optimistic that Washington will deliver on tax 

reform this year. The NAM Manufacturers' Outlook Survey for the first quarter of 2017 showed 

that manufacturers' optimism rose to a new all-time high in the survey's 20-year history. The 

rising confidence stems in part from the belief that Washington policymakers will act on progrowth tax reform as well as much-needed regulatory relief and a significant infrastructure 

package. Indeed, business leaders are cautiously optimistic that pro-growth policies from 

Washington will allow the country to emerge from the most sluggish expansion seen in the 

years since the Great Recession. 

Lower Tax Rates for Businesses 

The last major overhaul of the U.S. tax code was in 1986. Since then , manufacturers in 

the United States have innovated, expanded and evolved but the U.S. tax code has not kept 

pace. In fact, manufacturers in the United States now face higher tax rates on business income 

than their competitors in all relevant competitor nations. With a combined (federal and state) top 

statutory corporate tax rate that could exceed 39 percent, manufacturers in the United States 

face the highest corporate statutory tax rate among the 35 industrialized nations of the 

Organisation for Economic Co-operation and Development (OECD), far higher than the average 

OECD statutory tax rate of 23.75 percent. 

Meanwhile, top statutory tax rates for some manufacturers organized as pass-throughs 

are even higher- in some cases, more than 40 percent. 

Emerson is a large U.S. taxpayer. Over the past three years, we paid an average $1.8 

billion annually in taxes worldwide. Of that, more than half (approximately $1 billion) was paid in 

3 
27 


33393.018

the United States at an average effective tax rate of approximately 32 percent and with a 

marginal rate on each additional dollar of income we may earn of over 37 percent. These high 

marginal and effective tax rates, and the impact they have on our global competitiveness and 

ability to grow, invest and create jobs in the United States, are one of the major reasons that 

Emerson is so engaged in the tax reform debate- we need it to compete and win every day. 

A key NAM objective in tax reform , which is shared by Emerson, is to create a national 

tax climate that enhances the global competitiveness of our nation's manufacturers and 

encourages investment and job creation in the United States. An important step to achieving 

this goal is to adopt a top federal statutory corporate tax rate of 15 percent, which would make 

our nation's manufacturers much more competitive in the global marketplace, encourage 

greater investment in the United States and promote U.S. job creation and overall economic 

growth. 

Similarly, we also must lower the tax rate for the two-thirds of manufacturers that 

currently pay taxes at individual tax rates as pass-through entities. Indeed, pass-through 

companies are the most common business form in the United States and include many 

companies in the manufacturing supply chain as well as customers of manufacturers like 

Emerson. 

For more than 60 years, many manufacturers and other business owners have chosen 

to organize as S corporations or other pass-through entities to benefit from comprehensive 

liability protection and a single level of federal taxation. Since pass-through business income 

currently is taxed at individual tax rates , many pass-through manufacturers today pay marginal 

tax rates upward of 44 percent, when you take into account federal, state and local taxes. A 

lower tax rate for pass-throughs will allow these business owners to stay competitive, reinvest at 

4 
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greater levels in their business and retain and create jobs and support large corporations like 

Emerson. 

Modernizing International Tax Rules 

Outdated rules for taxing international income represent another major problem with the 

current tax code. Emerson's business is global. More than 52 percent of our sales in 2016 were 

outside the United States, and most of our major competitors are domiciled abroad. Since 

Emerson is headquartered in St. Louis, the company pays more in taxes on worldwide earnings 

than our foreign competitors. This makes it harder for Emerson to compete in the global 

marketplace and also means we are prone to being outbid by our foreign competitors for 

acquisition targets due to their much lower tax rate and bills. 

Despite the benefits of global competitiveness to the U.S. economy, our nation's tax 

laws clearly make it more difficult for global U.S. companies to thrive and compete in the 

worldwide marketplace. Most developed countries have territorial tax systems that enable their 

resident multinational companies to pay little or no additional "home country" tax when they 

bring back foreign earnings as a dividend to the parent corporation allowing them more funds to 

invest locally. In contrast, the United States has a worldwide system that taxes income 

regardless of where it is earned. Thus, global U.S. companies like Emerson generally are 

subject to taxes in the foreign countries where they are doing business and in the United States 

when they bring foreign earnings back home. 

This added tax burden on global U.S. companies represents a significant disadvantage 

when U.S. companies are competing for business in a global marketplace. When U.S. 

companies cannot compete effectively abroad, where 95 percent of the world's consumers are 
29 


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located, the U.S. economy suffers from the loss of both foreign market share and the significant 

U.S. based jobs that support foreign operations. 

Thus, any tax reform plan should include a modern territorial international tax system. 

Territorial systems are now the international norm. Almost all our large trading partners have 

territorial systems that tax income earned within their borders but do not tax foreign profits that 

are repatriated back into their own economies. Adopting a tax system that is comparable to tax 

systems in other industrial countries is critical to the ability of manufacturers in the United States 

to compete in the global marketplace. A territorial tax system will impact jobs at U.S. operations, 

increase exports from manufacturers in the United States, improve the efficiency of supply 

chains and make U.S. based manufacturing more competitive and better positioned to win. 

In addition , a territorial system would allow for the free fiow of capital back to the United 

States from foreign operations for reinvestment in the domestic economy. The current top 

federal marginal corporate tax rate of 35 percent, even though it is partially offset by foreign tax 

credits at lower tax rates imposed outside the United States, often results in a high U.S. tax 

charge on earnings repatriated from foreign subsidiaries. This additional charge causes what is 

often referred to as the "lockout effect" preventing foreign earnings from being brought back to 

the United States and encouraging investments abroad rather than in the United States. 

Spurring Investment 

Meanwhile, although business investment has been slowly picking up in recent months, 

investment levels in the United States are not where they should be. It is critical that any tax 

reform plan encourages the capital investment needed to ensure durable economic growth and 

job creation increasing U.S. productivity and competitiveness. 

6 
30 


33393.021

One of the most effective ways to spur business investment and make manufacturing in 

the United States more competitive is through a strong capital cost-recovery system. Recent 

data released by the Bureau of Economic Analysis reinforces the role that a healthy 

manufacturing sector plays in strengthening the nation's economy. Manufacturing in the United 

States is in the midst of a recovery, but for the nation to benefit fully from this resurgence, 

manufacturers need tax policies that promote increasing investment and allow them to compete 

in today's global economy. 

For example, a robust capital cost-recovery system would have a very positive impact on 

capital spending and productivity. Indeed, the positive economic impact of expensing capital 

equipment is well recognized throughout economic literature. The cost of capital to a firm 

includes three components: the price of capital equipment, the cost of financing the equipment 

and the tax treatment of the investment. Expensing lowers the after-tax cost of capital and 

increases the number of profitable projects a firm can undertake, helping to spur investment, 

productivity and growth. 

Manufacturers of all sizes take into account the tax impact of cost-recovery mechanisms 

on projected cash fiows in making investment decisions. For manufacturers large and small , 

cash fiows are managed carefully to support key growth objectives, and cash flow is critical 

when access to credit is difficult, especially for small and medium-sized manufacturers. 

Comprehensive business tax reform that includes pro-investment provisions will help drive the 

increased growth our economy needs. 

Encouraging Innovation 

As the head of a large global manufacturing and technology company, I know 

firsthand how important it is that any tax code overhaul maintains a robust R&D incentive to 

7 
31 


33393.022

allow the United States to remain a leader in global innovation. Manufacturers account for more 

than three-quarters of all private-sector R&D in the United States. The United States has been a 

leader in promoting R&D for more than 30 years but has slipped behind in recent years as more 

and more countries have provided more robust R&D incentives- we must regain our global 

innovation leadership. 

A top NAM priority, one that Emerson strongly supports, is to ensure manufacturers in 

the United States are the world's leading innovators. The tax treatment of R&D, including the 

current deduction for R&D expenses and a strengthened R&D credit, is critical to achieving this 

goal. A strong R&D incentive is the only way to keep the United States competitive in the global 

race for R&D investment dollars. The United States must maintain and expand our innovation 

leadership. 

Conclusion 

Emerson and indeed all manufacturers want the United States to be the best place in the 

world to manufacture and attract foreign direct investment. There is no doubt that the U.S. tax 

code is a significant negative drag on economic growth and competitiveness. Comprehensive, 

permanent business tax reform that reduces the corporate tax rate to 15 percent, provides lower 

rates for pass-through entities, moves to a modern territorial international tax system, maintains 

a strong R&D incentive, and includes a robust capital cost-recovery system will go a long way to 

attract this investment and economic growth and our country's competitiveness. 

Manufacturers appreciate the magnitude of effort required to reform America's tax code 

and we are committed to working with you and your staff to advance much-needed reform as 

soon as possible. Making comprehensive business tax reform a near-term top priority will 

promote investment in America, enhance the global competitiveness of U.S. manufacturers and 

8 
32 

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33393.023

other businesses in the United States and ensure durable economic growth well into the future. 

Thank you for inviting me to testify before you today as I am passionate about U.S. 

manufacturing and making sure the United States wins on the global playing field. I am happy to 

answer your questions. 

9 
33 

Chairman BRADY. Mr. Peterson, welcome. And you are recognized. 

STATEMENT OF DOUGLAS L. PETERSON, PRESIDENT AND 

CEO, S&P GLOBAL INC. 

Mr. PETERSON. Thank you. 

Good morning. Chairman Brady and Ranking Member Neal, 

thank you for inviting me to speak. I am grateful for the opportunity to share my perspective on how tax reform can help U.S. 

companies of all sizes that are competing in the global marketplace. 

I am Doug Peterson, president and chief executive officer of S&P 

Global. Our commitment to transparency, integrity, and superior 

analytics has been at the forefront of U.S. economic growth since 

our founding over 150 years ago as a small business. Beginning 

with the expansion of the Nation’s railroad system to the rise of the 

world’s most liquid and resilient capital markets to the growth of 

digital information technology, S&P Global’s essential intelligence 

has remained independent and guided important decisions 

throughout U.S. history. 

Today, I want to thank the Committee for all the work you have 

been doing to reform the Tax Code. 

I offer you my continued support as you move through the legislative process. 

My message to you today is twofold. 

First, we need to reform the U.S. tax system, including lowering 

the corporate tax rate, to level the playing field and putting in 

place a more competitive international system. 

Secondly, we need a permanent, comprehensive fix that will promote investment, innovation and growth in the U.S. economy to 

support American companies and American workers. 

S&P Global competes on an international level. While we have 

grown significantly since our inception, we have kept most of our 

intellectual property in the U.S., which means we pay a large majority of our taxes in the U.S. Since the U.S. currently has the 

highest statutory corporate tax rate among the countries in the 

OECD, at 35 percent, we have a much higher effective tax rate 

than our international competitors. For example, Canada has 

dropped its corporate rate from 36 percent to 26 percent, and the 

United Kingdom will have a rate of 17 percent by 2020. In fact, 

throughout S&P Global’s history, we have consistently paid an effective tax rate of over 30 percent. While many of our competitors 

pay in the low teens, this high rate hurts our ability to compete 

against companies located in countries where corporate tax rates 

lower their overall costs. 

With a less competitive international system, U.S. companies 

face an uphill battle. Currently, when foreign companies establish 

in a country with a territorial tax system to sell goods into the 

U.S., they pay little, if any, corporate tax here. In addition, foreign 

companies may pay little to no corporate tax when they return 

profits home. In contrast, U.S. businesses that sell goods and services to foreign customers are taxed fully in the U.S. And more than 

$2.5 trillion in profits from U.S. companies is offshore today, something that doesn’t happen under other tax systems. 

34 

The basis of our Tax Code was designed after World War II when 

our economy was geared toward manufacturing and agriculture. 

The last rewrite, in 1986, occurred before the internet and the information economy, which introduced new innovative business 

models. The emergence of technology, advanced manufacturing, 

modern agriculture, the growth of intellectual property, and the 

globalization of markets, are all new features of our economy. The 

Tax Code, though, has not evolved with the economy. The result is 

a highly unfair system that undermines competitiveness. The tax 

inequities that advantage foreign competitors over their American 

counterparts can be traced to this antiquated code. It is time for 

a change. For decades, the United States has been the birthplace 

of innovation and new business formation. We should use this opportunity for comprehensive, permanent tax reform to ensure it 

continues to be the engine of growth for small businesses, startups, 

and other American job creators. Today, we are losing ground, and 

we should be leading. 

I hope Congress will seize this moment and enact substantial 

changes that will foster investment, growth, and jobs in the U.S. 

Thank you for the opportunity to provide this testimony, and I 

look forward to having a discussion with you today. Thank you 

very much. 

Chairman BRADY. Thank you, Mr. Peterson. 

[The prepared statement of Mr. Peterson follows:] 

35 


33393.024

U.S. House of 

Representatives 

Ways and Means 

Committee Hearing 

"How Tax Reform Will Grow Our 

Economy and Create Jobs" 

Testimony of 

Douglas L. Peterson 

President and Chief Executive Officer 

S&P Global 

May 18, 2017 

S&PGlobal 
36 


33393.025

S&PGlobal 

Chairman Brady and Ranking Member Neal, thank you for inviting me to speak 

today. And thank you to the enlire Committee for your efforts to modernize the 

U.S. tax code. 

I'm grateful for the opportunity to share my perspective on how tax reform is 

essential for U.S. companies to better compete in lhe global marl<etplace. 

S&P Global is the Worldwide Provider 

of Essential Intelligence 

S&P Global is a leading provider of ratings, benchmarl<s, analy1ics and data to 

lhe capijal and commodities marl<ets worldwide. 

S&P Global's insights and commitment to transparency, integrity, and superior 

analy1ics have been at lhe forefront of U .S. economic growth since lhe company's 

founding over 150 years ago. Beginning with the expansion of our nation's 

railroad system, to lhe rise of the world's most liquid and resilient capijal mar1<ets, 

to the growth of digital information and technology, S&P Global's essenlial 

intelligence has remained independent and has guided important decisions 

throughout U.S. history. 

Two of our flagship p roducts, lhe S&P 5000> and lhe Dow Jones Industrial 

Average®, are widely accepted as the leading measures of U.S. equity marl<et 

performance. Our research, products. and insights offer American investors, 

their families, coworkers. and friends the critical information needed to make 

informed financial decisions. 

In addijion to employing thousands of Americans across our great country, we 

wor1< extensively with businesses of all sizes to help them invest and grow, as well 

as slate and local governments, to help facilitate investment in schools, roads. 

bridges, and other public works. There is bipartisan agreement about the 

challenges facing our country's aging infrastructure, and we hope to continue to 

bring our data, in-<lepth analytics, and unique ideas to lhe table to worl< with 

Congress to address those issues. 
37 


33393.026

S&PGlobal 

U.S. Tax System is Uncompetitive 

Globally 

Currently, the U.S. has the highest statutO<)' corporate tax rate among the 35 

counllies in the OECD. lmportanUy, other countries are attempting to lure our 

businesses-and their tax revenues-abroad. A recent Congressional Budget 

OffiCe (CBO) analysis demonstrates not only the high statutory corporate rate in 

the U.S., but also the changes that have been made to tax rates in other G20 

countries while the U.S. has stayed static. This study. which encompasses the 

2003-2012 timetrame, shows how almost every country around the world has 

been incentivizing corporate investment through tower taxes. For example, during 

this timetrame, Canada dropped from 36 to 26% and China from 33 to 25%. The 

United Kingdom will have a 17% corporate tax rate by 2020. 

Figure 1 

Top ~tutCHY (Ofporate ln<ome Tax Rates in G20 Covntries. 2003 and 2012 

- --· ·-· -..... . ... ---------<1 -------- ··------------

-.... -·-- -· ------------ $0uiJIICOIIN 

.... .__. --··------ -· 

~:::==================,.., : 

o ~ ~-----------------------------" ~ tl ~ ~ n » » ~ • • ~ u 

Wtot'~ lt.IOOtC OI!Itt ~OMt--IO'UG .,..,.....,MOIN~-[(_...,~._tlld 

-............. ~-IIIIGI IJ<lli...-IJIItfolllltMI200J:II'IIflOQ._ 

6lO•GiouP0120. 

Sourte C 80 ~•m•bonaf CompariS<lM Of Corpcnle lneome Tax R..tes. March 20 17 
38 


33393.027

S&PGlobal 

According to our research, the other countries where our competitors domicile 

their business and intellectual property have significantly lower corporate tax 

rates compared to the U .S., as seen in the chart below. 

Figure 2 

United States Ireland U.K. Singapore 

Corporate 19% 

35% 12.5% (17%in 17% Tax Rate 2020) 

LocaJ income Yes No No No taxes 

VAT/GST Sales/Use 23% 20% 7% Taxes 

S&P Global's Tax Rate is Twice That 

of its International Competitors 

S&P Global is a U.S.-headquartered company, but, like so many others, we 

compete at the international level. While we have grovm significantly since our 

beginnings, we have maintained ownership of most of our intellectual property in 

the U.S. We therefore have a much higher effective tax rate than our intemabonal 

compet~ors do. In fact, throughout our history, we have consistently paid an 

effective rate ol over 30%, while many of our competitors pay in the low teens. As 

an example, we paid an effective tax rate o/30.1% in 2016 and $683 million in 

taxes. Because our greatest asset is our people, not machines or real estate, we 

are unable to avail ourselves of deductions and write-offs in a tax code that was 

'M"itten for a different time and a very different economy. 

Figure 3 

S&P Global Reported 

Effective Tax Rate 

2016 

30.1% 

2015 

30.1% 

Figure 4 

Cash Income Taxes Paid 

2016 

$6&1MIIIIOf'IPald 
39 


33393.028

In 2016, even though 60% of our revenues were domestic, our U.S. tax base 

was 70% of our income because of our U.S.-based intellectual property. Over 

the last five years, S&P Global has paid $1.8 billion in taxes in the U.S. 

Figure 5 

Domestic vs. Foreign Source 

Revenues 

Ftgure 6 

Domestic vs. Foreign Mix of Income 

~ 

.s: j

E ;=34,000 

.000 u' ' · ·1 ~ l.OOO - - J 

: 1,000 

'"'" 201!1 1014 1016 JOIS 20U 

a Domestic opcr.~tioM • ~ore &n o-pu.Jtiom a OOm-Mtkopenttlons a Forefa:n operations 

At this unique moment in time, our country has the opportunity to put aside 

political differences and enact tax reform that not only brings the tax code into 

the 21st Century, but also ensures that America remains the best place in the 

world to do business. 

It Is Time to Level the Playing Field 

The U.S. federal tax code was last updated over 30 years ago, in 1986. Its 

structure, however, is rooted in the post-World War II era. We have a markedly 

different economy today. For example, who could have foreseen the ub qu~o s 

nature of technology in the way we conduct business today? Intellectual 

property is more important than ever to our global economy. And the pace of 

technological change is only accelerating. 

Figure 7 

Evolution of U.S. Economic Acti'vity 

US GOP (Value Added by Industry) 

1950 1986 2016 

Private SeMce-providing 47.9% 00.0% 69.2% 

Manufacturing 26.8% 18.1% 11.7% 

Othef 12.0% 14.3% 12.9% 

Agriculture & Related 6.6% 1.6% 0 .9% 

Construction 4.3% 4.3% 4 .2% 

Energy 2.6% 1.5% tA% 

N«Et Figures. fl'liiY not .eMf to 1(M)'Ir. clue to rounding 

S&PGlobal 
40 


33393.029

S&PGlobal 

Ftgure 8 

US GOP (Value Ad de by Industry) 

,.,. 

... 

""' ... 

... 

-

"" 

• Conuf\IC1iofl 

SOUtce Bureau Of Eeonom.c AI:IMty 

Figure 9 

Evolution of U.S. Employment 

US Labor Force (% of total} 

Private SeMce.providing 

Manufacturing 

Oilier 

Agriculture & Related 

Construction 

Energy 

Not&. Flgur.s may not add to 1~ due :0 rounding 

1950 

41.6% 

26.7% 

11 .6% 

13.6% 

4.5% 

1.7% 

1986 2016 

57.6% 69.7% 

17.1% 8.4% 

16.4% 15.1% 

3.0% 1.6% 

4.8% 4.5% 

0.8% 0.4% 
41 


33393.030

S&PGlobal 

Ftgure 10 

us Labor Foi'Cle (%of total) 

; ~ ~ ; ~ ~ ; ~ ~ ; ~ ~ ! ~ ; ~ ~ ~ ~ ~ ~ ~ ~ • Private service-prowid!l\8, • Manvfact\l!ins • Oth~ 

$clutuo_ SurNU of l.-bor St¥.1ltlta. StlouiS FREO. and Census Bureau 

We must make adjustments that reflect the growth and development of our 

dynamic economy in order to keep up with the quickly evolving competitive 

global market Three primary elements are critical to help ensure that U.S. 

companies can better compete in the global marketplace. These include: 

Lower Rates 

A tower corporate income tax rate must be part of any tax reform plan. 

Our country's high statutory rate hinders the ability of U.S. companies to 

successfully compete on the global stage. A tower tax rate would not only help 

curb the exit of U.S. companies from our great country but 'NOUid also create a 

powerful incentive for others to move here. 

Competitive International Tax System 

A tax reform effort must also resun in a level playing field for American 

companies. Currently, foreign companies established in a country with a 

tertilorial tax system that sell goods in the U.S. pay little-to-no corporate tax 

when the profrts retum to the home country. In contrast, U.S. businesses that 

sell goods and services to foreign customers are taxed when their profrts are 

returned to be reinvested in the U.S. This discourages reinvestment of profrts 

generated abroad into the United States, a dynamic that simply doesn't exist for 

the international competitors of U.S. companies. 
42 


33393.031

S&PGlobal 

This unfair playing field is tilted further against U.S. companies by borderadjusted taxes such as Value Added Taxes (VAT) that have been enacted in 

more than 130 countries around the world. Foreign companies can sell goods 

and services from a VAT country into the U.S. without paying VAT in the source 

country and without any border-adjusted tax upon import to the U.S. In contrast, 

goods and services produced in the U.S. and sold into a VAT country bear a tax 

upon importation at rates that can reach 20%. 

This does not benefit American businesses, the communities in which they 

operate, their employees, or their families. 

Modernized Tax Code for America's Evolved Economy 

Since the tax code was last reformed, the American economy has changed 

dramatically in terms of the products it makes, the markets it sells into, and the 

skills it requires. The emergence of technology, the growth of intellectual 

property, and the globalization of markets are all new features of our economy. 

The tax code, though, has not evolved with the economy. The result is a highly 

unfair system that undermines competitiveness. The tax inequities that now 

exist between companies, and the inequities that advantage foreign competitors 

over their American counterparts can be traced to an antiquated code. 

It's time for a fresh start to American tax policy-one that levels the playing field 

for all American firms-and ensures that no firm ("old" economy or "new'' 

economy, manufacturing or service) is disadvantaged vvhen competing. 
43 

f 


33393.032

S&PGlobal 

Restoring Growth and Competitiveness 

to the U.S. Economy 

In a recent survey by the Business Roundtable, 71% of CEOs who responded 

idenUfied tax reform as the best way to accelerate U.S. economic growth. This 

overwhelming response demonstrates the potential and the importance of 

reforming our tax code. 

figure 11 

CEOs: Tax Reform IS the Best Way to Accelerate Growth 

Qvestlon- Thoebe-stWattOacc:eleratt U.S.e<:onoml(growthln the next 12 months would be bj: 

..... ,. 

source. BRT ceo Tax Refotm SU'Ve)' 2011 

Bl'l O.<iness 

Ftoundublt 

The U.S. remains a "lax outlier." Our tax system is antiquated, unfair, and 

hinders our ability to compete on a global scale. II is time for a change. The 

current system is stifling our economic growth. We are losing ground at a time 

when we should be leading. II is incumbent on us to seize this moment and 

enact substantial changes that will eliminate concerns for businesses about 

growing, investing and Innovating in the U.S. 

I hope this Congress will seize this moment. 

Thank you for the opportunrty to provide this statement at such an important 

lime. I welcome any questions you might have. 
44 

Chairman BRADY. Mr. Rattner, you are recognized. Again, welcome. 

STATEMENT OF STEVEN RATTNER, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, WILLETT ADVISORS LLC 

Mr. RATTNER. Thank you, Mr. Chairman and Ranking Member 

Neal for having me here today. I speak as someone who has spent 

35 years in the private sector as an investment manager meeting 

with companies, analyzing companies, investing with companies, as 

well as having spent time in the Treasury in the early part of the 

Obama Administration. And I would certainly concur with what 

every single previous speaker has said about the need for comprehensive tax reform after 30 years of neglect. 

However, in my opinion, any major tax legislation should meet 

several important tests. First, it should be deficit neutral given projections for rising fiscal gaps. Secondly, it should be fair and certainly not diminish the progressivity of our system. Thirdly, it 

should be growth- and investment-enhancing. Fourthly, it should 

improve our international competitive position. 

On that basis, the proposal by the Administration falls short in 

several important respects. 

While the President’s focus on tax reform is laudatory, his 1-page 

plan includes far more detail on how the Administration would cut 

taxes than how it would pay for those reductions. Based on the information provided, nonpartisan researchers have estimated that 

its net cost could be $5 trillion to $6 trillion over the next decade. 

Without adequate offsets, these tax cuts would drive up interest 

rates, the deficit, and the Federal debt. And I would note that the 

deficit is already rising again. 

These projected deficits would be substantially exacerbated by 

the Trump plan. Again, before incorporating the Administration’s 

plan, the Committee for a Responsible Federal Budget forecasts 

that the ratio of debt to gross domestic product, already at a historic high of just under 80 percent, would rise sharply and could 

reach 89 percent by 2027, above every previous high, except for a 

short period after World War II. The Trump plan would drive this 

ratio to an astounding 111 percent by 2027 even as we continue to 

deal with the effects of an aging population. 

To counter these concerns, the Trump Administration appears to 

be resurrecting discredited supply-side theory that high deficits resulting from tax cuts don’t matter because faster economic growth 

will quickly close the gap. That is not what happened following the 

Reagan tax cut of 1981. And by the end of Reagan’s tenure, roughly 

two-thirds of his tax reductions had been reversed. Nor is it our experience following the tax cuts pushed through by President George 

W. Bush in 2001 and 2003. 

To pay for the Trump plan, we would need average growth of 4.5 

percent per year. That has not happened on a sustained basis in 

modern history and is highly implausible in the future given our 

current aging and productivity trends. For its part, the nonpartisan 

Congressional Budget Office projects approximately 2 percent 

growth for the next decade. Treasury Secretary Steven Mnuchin 

believes that annual growth of 3 percent is attainable from the 

Trump plan. I know of no independent economist who thinks that 

45 

is possible. And even if it were, the result would be about $2 trillion of additional revenues, far short of what is needed. 

Secondly, on fairness: Given the economic strains on middle and 

working class Americans with which we are all familiar, it is critical that any tax reform plan be focused on helping these Americans. However, the details of the Trump plan unassailably contradict Secretary Mnuchin’s assertions that there would be no net 

tax cut for the rich. The plan includes lowering the top rate on 

earned income, eliminating a 3.8-percent levy on investment income, and doing away with the estate tax and the alternative minimum tax. Yes, some deductions are to be eliminated, most notably 

for State and local taxes. But when the Trump Administration provides enough information for experts to score the proposal, I have 

no doubt that the rich will be the big winners. 

Gary Cohn, the Director of the National Economic Council, has 

argued the increase in the standard deduction qualifies Mr. 

Trump’s plan as a middle class tax cut. The problem is that a family of two or more pays less tax under current law than it would 

under Mr. Trump’s plan because of the availability of both the 

standard deduction and personal exemptions, which Mr. Trump 

said in the campaign he would end. 

Thirdly, regarding growth and investment: While the large tax 

cuts could be viewed as enhancing short-term growth, the size of 

Mr. Trump’s tax cuts, a lack of progressivity, will quickly overwhelm the positive benefits. Most importantly, rising interest rates 

will soon squeeze out private investment. The Tax Policy Center 

has estimated that his plan would reduce GDP by half a percent 

after a decade and 4 percent after two. 

Fourthly, it should enhance our international competitive position. I would agree that the need for corporate tax reform is without question. While the stated rate for U.S. companies is 39 percent, many pay far less because of the use of avoidance techniques. 

As a result, the average corporate tax rate is 10 to 15 percent— 

10 to 15 points lower less than the statutory rate. That is unfair 

to many stakeholders. What should be done is a thorough elimination of abusive practices, such as transfer pricing, in return for 

lowering of the standard rate to 25 percent, which is in line with 

the OECDs unweighted average. 

I would like, during the questions, to talk more about issues like 

the trapped cash that were referred to in the earlier comments. 

But, for the moment, I would close by simply agreeing, again, that 

a comprehensive tax bill is long overdue. But it needs to be deficit 

neutral, and it needs to be fairer to the average American as well 

as reforming our corporate tax system. 

Thank you very much. 

Chairman BRADY. Thank you, Mr. Rattner. 

[The prepared statement of Mr. Rattner follows:] 

46 


33393.033

Steven Rattner 

Chairman and Chief Executive Officer, Willett Advisors LLC 

Testimony Before House Ways and Means Committee 

May 18, 2017 

No one can doubt the need for comprehensive tax reform. It has now been more than 30 years 

our revenue code was last thoroughly overhauled. Since that time, many loopholes and methods 

of achieving avoidance have crept into the system. And the policies and practices of our global 

competitors have also evolved, in many cases to our detriment. 

However, any major tax legislation should meet several important tests: 

I) It should be deficit neutral, given projections for rising fiscal gaps 

2) It should be fair and certainly not diminish the progressivity of our system 

3) It should be growth and investment enhancing 

4) It should improve our international competitive position 

On that basis, the proposal by President Trump falls short in several important respects. 

1) It should be deficit neutral, given projections for rising fiscal gaps 

While the President's focus on tax reform is laudatory, his one-page plan includes far more detail 

on how the administration would cut taxes than on how it would pay for those reductions. Based 

on the information provided, non-partisan researchers have estimated that its net cost could be $5 

trillion to $6 trillion over the next decade. Without adequate offsets, these tax cuts would drive 

up interest rates, the deficit and the federal debt. 

Even before incorporating the administration's tax proposals, the federal deficit- after having 

declined dramatically since the financial crisis- is again on the march upward, as a result of 

entitlement spending and interest costs rising faster than revenues. 
47 


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These projected deficits would be substantially exacerbated by the Trump plan. Again before 

incorporating the administration's plan, the Conuniltee lor a Responsible Federal Budget 

forecasts that the ratio of debt to Gross Domestic Product - already at an historic high of j ust 

under 80% would rise sharply and could reach 89% by 2027, above every p•·evious high except 

for a short period after World War II. 

TI1e Trump plan would drive this ratio to an astounding I I 1% by 2027, even as we continue to 

deal with the effects of an aging population. 
48 


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To counter these concerns, the Trump administration and its supporters appear to be resurrecting 

the disct·edited supply side theory that high deficits resulting from tax cuts don' t matter because 

faster economic growth will quickly close the gap. 

That's not what happened following the Reagan tax cut of 198 1 (and by the end of Reagan's 

tenure, roughly two-thirds of his tax t•eductions had been reversed). Nor is it our experience 

following the tax cuts pushed through by President George W. Bush in 2001 and 2003. 

To pay for the Tnnn p plan, we would need average growth of 4.5% per year. That hasn' t 

happened on a sustained basis in modem history and is highly implausible in the future giveu our 

current aging and productivity treods. 

For its part, the non-partisan Congressional Budget Office projects approximately 2% growth for 

the next decide. 

Treasury Secretary Steven Mnuchin believes that annual growth of 3% is auainable from the 

Trump plan. I know of no independent economist who thinks that is possible. And even if it 

were, the result would be about $2 trillion of additional revenues, far short of what is needed. 
49 


33393.036

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2) It should be fair and certainly not diminish t he progressivity of our system 

Given the economic strains on middle and working class Americans with which we are all 

familiar, it is critical that any tax refonn plan be focused on helping these Americans. 

However, the details of the Trump plan unassailably contradict Secretary Mnuchin's assertions 

that there would be no net tax cut for the rich. This includes lowering the top rate on eamed 

income, eliminating a 3.8% levy on investment income, and doing away with the estate tax and 

the alternative minimum tax . 

Yes, some deductions are to be eliminated, most notably for state and local taxes, but when the 

Trump administration provides enough infonnation for experts to "score" the proposal, I have no 

doubt that the rich will be the big winners. 

Gary Cohn, director of the National Economic Council, has argued that the increase in the 

standard deduction qualifies Mr. Trump's plan as a "middle-class tax cut." 
50 


33393.037

The problem is that a family of two or more pays less tax under current law than it would under 

Mr. Trump's plan because of the availability of both a standard deduction and personal 

exemptions, which Mr. Trump said in the campaign he would end. 

3) It should be growth and investment enhancing 

While large tax cuts could be viewed as enhancing short-term growth, the size of Mr. Trump's 

tax cuts and lack of progressivity will quickly overwhelm the positive benefits. 

Most importantly, rising interest rates will soon squeeze out private investment. Last year, for 

example, the Tax Policy Center estimated Mr. Trump's $6 trillion campaign tax plan would 

reduce the GDP by 0.5% after a decade and 4% after two. 

The lack ofprogressivity in President Trump's proposal will also affect growth. In 2015, a study 

on income inequality by the International Monetary Fund found that increasing the income share 

of the top 20% results in lower growth because of the propensity of the wealthy to save rather 

than spend. Furthermore, a study by Brookings Institute last year found there is no guarantee tax 

cuts will increase long-term economic growth. 

4) It should enhance our international competitive position 

The need for corporate tax reform is without question. 

While the stated corporate rate for U.S. companies is 39% (including state and local taxes), many 

pay far less because of the use of avoidance techniques. As a result, the average corporate tax 

rate is 10 to 15 points lower than the statutory rate. 

That is unfair to many stakeholders. What should be done is a thorough elimination of abusive 

practices (such as transfer pricing) in return for a lowering of the stated rate to 25%, which is in 

line with the OECD's unweighted average. 

The President's proposal, on the other hand, again goes way too far and gives up too much 

revenue for too little. His proposal to cut the corporate tax rate from 35% to 15% alone would 

cost us $2.2 trillion over the next 10 years. 

The administration has proposed extending the corporate rate to the so-called "pass throughs," 

corporate entities that are taxed as individuals. While I am sympathetic to the goal of having all 

true business activities pay the same rate, I am not aware of any effective method of avoiding the 

creation of yet another loophole, the ability of high-income individuals to convert what should be 

wage income taxed at full ordinary rates into business income that would be taxed at a lower 

rate. 
51 

f 


33393.038

Three last points on business and investment income taxation: 

To ensure deficit neutrality, I would not lower levies on interest, dividends and capital gains as 

the administration has proposed but would raise them as it is these individuals who will 

indirectly benefit most from a reduction in corporate tax rates. 

In 1986, President Reagan equalized the top marginal and capital gains rates. This prevented the 

wealthy from getting special treatment and did not cause investment to fall. 

The Trump administration also wants to move to a territorial tax system, in line with most other 

developed countries. There are certainly benefits associated with such a step but it could also 

inadvertently create more incentives for companies to move offshore. It is a complicated issue 

that deserves further study. 

Finally, much attention has been focused on the $2.6 trillion of profits earned by American 

corporations but "trapped" overseas. While we should not be overly optimistic about the 

economic benefits of repatriation, I would be supportive of allowing repatriation at a modest tax 

rate if those revenues were used to address our critical infrastructure needs. 

Conclusion 

As I said at the outset, a comprehensive tax bill is long overdue. However, in my opinion it 

should be deficit neutral using conventional scoring methodologies. It should focus on reforming 

and simplifYing our excessively complicated system while enhancing our international 

competitiveness. 
52 

Chairman BRADY. And we will begin questions. 

So, fixing our broken Tax Code only occurs once in a generation. 

It is important we do this right. 

The goals the House Republicans developed for this once-in-ageneration opportunity is, first, rather than a Tax Code designed 

merely to wring money from you, we already have that one, we 

want a Tax Code built for growth, literally designed to grow jobs, 

grow paychecks, and grow the U.S. economy, and, as we are doing 

that, leapfrog America from nearly dead last among our global competitors into that top three and keep us there. That means designing a Tax Code where our local businesses can compete and win 

anywhere in the world, especially here at home. And so we are 

going all in on growing middle class jobs and growing middle class 

paychecks. 

So let’s begin with a bipartisan issue. For years, here in this 

room and back at home, we have heard from our businesses, large 

and small, about the importance of investing back into their workers and into their future. That is what led us, Republicans, Democrats, together, to support issues like what we call bonus depreciation and Section 179, the small business expensing. It is all about 

rewarding businesses for investing in buildings, equipment, software, and technology. 

But we want to go bolder. And, as you know, the House blueprint 

calls for a shift from an onerous business income tax to a U.S.- 

based simpler cashflow tax system. And at the heart of that, we 

would provide for a full and immediate write off of all that new 

business investment. And that investment, by the way, not only is 

the key to middle class and Main Street job growth, it is key to 

making our workers more productive. That is what drives wages. 

That is what drives America to the lead pack and having the 

strongest economy on this planet. 

So I want to start with our witnesses. 

So can you explain how having access to full and immediate 

write off of your business investment will lead you to invest more 

in growth and jobs both for you and for customers, for example, 

and businesses who are making those investments themselves? 

Mr. Stephens, we will begin with you. 

Mr. STEPHENS. Thank you, Mr. Chairman. 

Very directly, just as it has with bonus depreciation over the last 

few years for our company, we would invest more with immediate 

expensing. We would take the dollars saved on that tax return and 

invest those in more capital. When we do that, we invest in research, we invest in technology, we invest in productivity. For us, 

that means building out more broadband. For us, that means building out more fiber optics. Those provide jobs: not only the engineers 

who design and the researchers who develop those new 5G-type 

systems, but our proud employees who actually construct those and 

who build those and who maintain those. And so they are going to 

have better jobs. They are going to have higher wages. And, therefore, the entire ecosystem is going to be better off. 

I will also tell you it will have a direct impact on our property 

tax liabilities. So the State and local and county governments will 

get more revenues because we do pay property taxes—— 

Chairman BRADY. Yes, sir. 

53 

Mr. STEPHENS [continuing]. Sales taxes on all that investment. 

So it is a virtual cycle of economic growth that comes out of additional business fixed investments. 

Chairman BRADY. Does it also make your customers—many are 

small businesses and other businesses—you know, buying this 

technology, really upgrading your equipment, your computers, all 

your technology can be expensive. So being able to write that off 

immediately, does that help small businesses be able to invest 

more in the types of technologies you are offering? 

Mr. STEPHENS. Certainly. You know, many of our vendors, 

many of the people in our supply chain are small businesses. Many 

of them are diverse businesses. So they would be immediately 

helped. It would help them generate the business. And, you know, 

from a perspective of being what I think most would consider a 

large business, small businesses are some of our best, most wonderful customers. We want small business in this country to succeed. 

It is good for the demand on our services. 

Chairman BRADY. Absolutely. 

Mr. STEPHENS. So this is a complimentary situation, not one 

that is in different views. We want small business to have that opportunity to succeed in this environment. 

Chairman BRADY. Thank you. 

And so that leads to the family-owned business, who both invests 

in your plant, but customers were buying your products as well. 

Mr. Mottl, from your standpoint, the ability to write off those 

new investments going forward both for you and your customers, 

what is that impact? 

Mr. MOTTL. Well, that is really important for us, Mr. Chairman. 

Since 2015, my company has invested $3.5 million in new equipment and new plant. Right now, we are doubling the size of our 

plant, putting on an addition right now. All of those types of 

things, immediately expensing them, that would really help us. 

You know, for our sales, our sales are just under $10 million. So, 

from a perspective of a percentagewise, we are really investing in 

the future; we believe in it. And I think that an accelerated depreciation would certainly help us continue to do that. 

Chairman BRADY. Thank you, Mr. Mottl. 

Mr. Farr, manufacturing, if you want to stay competitive, you got 

to reinvest all the time in your business. 

Mr. FARR. Right. 

Chairman BRADY. It is expensive. And your customers are reinvesting; they are buying those products. So how, for the first time 

in history, all businesses of all sizes immediately being able to 

write off from their taxes that business expense, what impact does 

that have? 

Mr. FARR. It has a significant impact on our returns, obviously 

drives a higher level return from the standpoint of cashflow, gives 

our cash back to us, which gives us more money to invest down the 

road. We have invested over the last 5 years over $3 billion in capital. 

Capital drives growth. Capital drives productivity; it drives jobs. 

But having a return on that, obviously at a higher level, and the 

cash coming back into the corporation gives us more money to inVerDate Sep 11 2014 09:20 Feb 13, 2019 Jkt 033393 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33393.XXX 33393
54 

vest in capital, people, and growth, and that will drive faster economic growth overall. 

Chairman BRADY. Thank you, Mr. Farr. And that sort of illustrates the power of a simpler cashflow system that really focuses 

on that. 

Mr. Peterson, your insight, sort of looking, you know, at a broader range of the economy, but the technologies and services that you 

sell as well, what is the impact of being able to immediately write 

those down and capture that cash, make those new investments? 

Mr. PETERSON. What is most important for us is that it would 

allow us to keep those jobs in the U.S. Today, there is a competitive environment because other countries around the world have 

such low tax rates. In fact, there are countries calling on us. We 

receive relationship management calls from other countries, from 

Singapore, from Ireland, where they come visit us to ask us to 

move those jobs to those countries. They are high-paying jobs that 

require economists, quants, mathematicians, people designing new 

intellectual property. They want that intellectual property overseas. These types of tax changes will allow us to continue to develop our products and services in the U.S. We will invest in the 

U.S. 

In the last 21⁄2 years, we have invested in large operations in 

Charlottesville, in Texas, in Colorado, and in New York. And this 

would ensure that we would continue to do those investments in 

the United States. 

Chairman BRADY. Thank you, Mr. Peterson. 

Mr. Rattner, thank you for bringing your criteria forward on progrowth tax reform. Bringing those solutions and principles is extremely helpful. So your viewpoint, you work and see many clients, 

whether they are in manufacturing or technology, small or large 

businesses, investment growth, you know, growth that comes from 

that investment and incentives. 

So your view on unlimited, immediate, all size business investment, and those productive investments, what impact do you see 

from this provision? 

Mr. RATTNER. Thank you, Mr. Chairman. 

First, I would certainly concur with others that the rate of investment in this country is below what it should be. 

Secondly, I would certainly concur with the notion that if you 

gave someone, for example, immediate write off of all of their capital expenditures, that they would invest more. That is fairly obvious. If you give somebody money to do something, they are likely 

going to do more of it. 

But I think that the focus on this provision is excessively narrow 

in terms of what is affecting investment in this country. When I 

spend time talking to CEOs in companies, sure, if you lower their 

taxes they might invest more. But they also are faced with the fact 

that demand in this country is quite weak because personal incomes have been quite weak because wages haven’t gone up. And 

so they are investing more money in other parts of the world where 

they see faster growth and more demand, and so I think the question of investment in this country has to be viewed more holistically in the context of, how do we get growth here? And this may 

be one piece of the final solution, but it is not the Holy Grail. It 

55 

is not going to singlehandedly solve the investment challenges in 

this country. 

Chairman BRADY. Thank you, Mr. Rattner. I agree. We have to 

take tax reform in a comprehensive way and put together a number of pro-growth provisions, but the investment part of this is key 

to middle class growth. And the estimates of the House blueprint 

are that it will raise the average after-tax wages of a family of four 

by $5,000, again, helping create the demand that helps grow our 

economy as well. 

So thank you all for those responses. 

Mr. Neal, you are recognized. 

Mr. NEAL. Thank you, Mr. Chairman. 

Mr. Rattner, let me begin by taking a moment to thank you for 

your leadership and to recognize the success of the automobile restructuring that took place during the midst of the recession. 

I remember having extensive conversations with individuals like 

Mr. Levin at the time. And our greatest fear was that, if that industry entirely collapsed, the R&D would have been moved offshore 

permanently and trying to get it back would have been near impossible. So I think we begin by thanking you for what you were able 

to do to help turn around that industry and also to thank you for 

your government service. 

And as I noted in my opening statement, Mr. Rattner, my priority for tax reform is the middle class. The middle class has contracted in the United States over the past two decades, while those 

at the top have done better than ever before. That is not a statement that comes from a Democratic manifesto; it is from the Pew 

Foundation and many think tanks across the country. 

Working families did send a strong signal last November. They 

are frustrated by stagnant wages. They are tired of a Tax Code 

that favors the big- over the medium-sized incomes across the 

country, and the greater concentration of wealth, again, at the top. 

They are anxious about a very uncertain financial future. And the 

true winners of tax reform must be middle class Americans and 

their families. 

In your testimony, Mr. Rattner, you agreed with the position that 

was offered that it is critical that any tax reform plan be focused 

on helping middle and working families. 

Would you please provide us with some suggestions that you 

might have? And I hope that you will also have a chance to touch 

upon the need for greater retirement savings incentives in our 

Code for the very families that I have just described. So addressing 

income stagnation and retirement savings and rising income inequality is a big problem in America. Based on your experience, 

Mr. Rattner, we would like to hear from you. 

Mr. RATTNER. Thank you, Congressman Neal. 

I think any tax reform package needs to be a balance. It needs 

to address a variety of needs. We have talked a lot in the first part 

of this about investment, but you have now talked about the situation with the average American. 

I don’t believe, in response to Chairman Brady’s comment, that, 

while there certainly would be indirect effects on average Americans of investment tax benefits, I don’t believe that that is the 

56 

most direct way to help them. I think it is, frankly, a kind of a 

form of trickle-down. 

I think when you look at the tax proposal that has been made 

by the Administration, you will see that it is very unbalanced. It 

has not yet been scored, but President Trump’s campaign proposal 

was scored, and 83 percent of his tax plan would have gone to the 

top 20 percent of Americans, who would have gotten an average of 

a $25,000 tax cut. The middle class average American would have 

gotten a $1,000 tax cut. That is not my view of what a fair and 

balanced tax plan would look like. 

So I think part of the equation is to give middle class Americans 

more of a tax cut so that they can go out and spend and they can 

help get our growth rate up to a higher level. 

With respect to the question of retirement savings, that is a 

whole another subject, but we have a huge problem of retirement 

savings in this country. 401(k)’s and IRAs have created some benefits, but they have also led to a vast amount of undersaving by 

Americans, who are facing a really tough time in retirement, and 

I think we need to think about a fairly comprehensive restructuring of that whole program. 

Mr. NEAL. Thank you. 

Chairman BRADY. Thank you, Mr. Neal. 

Mr. Nunes, you are recognized. 

Mr. NUNES. Thank you, Mr. Chairman. 

I think it is safe to say that all of you have expressed some level 

of support for moving to a cashflow system. And one of the opportunities that we have during hearings like this—and this being one 

of the first hearings that we are going to have of multiple hearings, 

I think, over the course of the next few months—is having folks 

like yourselves be able to speak before the American people here 

in Congress, but begin to talk about, you know, switching from an 

accrual system to this cashflow system with full expensing and all 

of the benefits that that will do for the American people in terms 

of not only growth in the economy but also wage growth. 

And why don’t we just start with you, Mr. Stephens. Having a 

big company, one of the largest companies in the United States, the 

opportunity to go from a complicated accrual accounting system, 

where I am sure you have an army of lawyers and tax accountants, 

switching to a cashflow system like this, I think this is going to 

give your folks that work with you some real opportunities to get 

away from trying to navigate the complicated Tax Code and begin 

to look at where best to invest money for your company. 

I don’t know if you could expand on that and explain some of the 

opportunities this will give you. 

Mr. STEPHENS. Certainly simplification of the process and the 

simplification that might be required to provide some balance to 

comprehensive tax reform would be very helpful. You are right: We 

file over 250,000 tax filings a year here in the United States. And 

yes, we do have a large collection of professionals who work hard 

to make sure we live up to all those laws. 

Quite frankly, from our perspective, the provisions of a lower 

rate and incentive to invest in capital would be the most effective 

way for us to increase our investment and, through that, hire more 

people, generate more jobs through our supply chain, and generate 

57 

more research with technology development and, quite frankly, improve the wages of our employees and, quite frankly, of their peers 

who work for other companies. And as that goes through the system, it would generate demand for our services, and that is the real 

answer for economic growth. 

As peer companies that are represented today from all sizes invest, they would put demand on our services. They would put demand for labor and for wages. And you would see growth of a significant level, we believe, for all. And then for us, it would generate 

on the top line. 

So, yes, there would be simplification, but we are a large company. We have resources. That simplification aspect is really much 

more beneficial, I think, to the small- and medium-size businesses. 

And they are very important to our company because, you know, 

they make up some of our best customers. 

Mr. NUNES. I think that is a great transition, because sitting 

next to you is a small-business man from Illinois. 

Mr. Mottl, welcome. I have a district that has a lot of small businesses. And I think having you here today sitting next to one of 

the largest companies in the United States really shows how we 

can get big businesses in America and small businesses in America 

to agree that moving to a cashflow system like this would be very 

beneficial. 

And so could you walk us through just kind of the opportunities 

that moving to this system would give a small business like yours, 

Mr. Mottl? 

Mr. MOTTL. Absolutely. Thank you. You pointed to the relationship here. I would like to point out AT&T and the telecom industry 

was one of the biggest customers of my company for almost a hundred years. You know, we built a lot of the components of the 

phone network. So the supply chain relationship that we are talking about is so important. If my big customers are healthy and they 

are buying parts and pieces and product from me, I am happy. You 

know, that is tax reform for me, making my big customers competitive and able to do business in the U.S. 

I think, in relation to the tax that we are talking about, the 

cashflow tax, you know, I have seen some models that maybe have 

a little concern for small businesses, but I would just ask you to 

consider maybe thinking about a border adjustable profit tax as 

you move through that. It is very similar to what you are talking 

about, but maybe would focus more on profits and cashflow. But either one of the models is a great improvement. And, again, anything that simplifies, reduces, and gets my customers happy and 

doing business with me, it is a great tax reform for me. 

Thank you. 

Mr. NUNES. Thank you, Mr. Mottl. 

I have got a few seconds left, Mr. Farr. 

Mr. FARR. I agree. Having healthy small business is very important. They are key suppliers of ours. If I can redirect money from 

tax compliance and doing tax forms to engineering and new products and innovation, that will obviously grow the economy because 

that is productive assets which go into growing the economy and 

making new products and helping America be competitive. So that 

really allows us to redeploy where our assets go into productive 

58 

parts of the economy. I am not saying tax lawyers aren’t productive, but I would rather make a new product. 

Chairman BRADY. We know that, Mr. Farr. 

Mr. NUNES. Thank you very much. 

I yield back, Mr. Chairman. 

Chairman BRADY. We would never say that. 

Mr. Levin, you are recognized. 

Mr. LEVIN. Thank you. 

And welcome to all of you lawyers and nonlawyers. 

You know, I think there is general agreement we need to look 

at the corporate tax structure, and the Obama Administration did 

so. And I think the question is, how, and in what environment? 

I just want to read from a new report, just a couple months old, 

from the University of Chicago Booth entity, and I quote: ‘‘I find 

that the stimulative effects of income tax cuts are largely driven by 

tax cuts for the bottom 90 percent and that the empirical link between employment growth and tax changes for the top 10 percent 

is weak to negligible over a business cycle frequency.’’ 

And then I will continue reading: ‘‘If policymakers aim to increase economic activity in the short to medium run, this paper 

strongly suggests that tax cuts for top income earners will be less 

effective than tax cuts for lower income earners.’’ 

‘‘Overall, the results not only suggest some skepticism for ’trickle 

down’ economics, but they also provide evidence that supply-side 

tax policies should do more to consider the relative efficacy of tax 

cuts targeted lower in the income distribution.’’ 

So I just want to mention that when we talk about comprehensiveness, just let’s keep in mind whom we are trying to benefit. 

Jobs. There is much talk on the Republican side about the middle 

class. The Trump proposal is the opposite of that. 

Also, I just want to make a comment. Mr. Stephens, one of your 

statements: Our current tax system also harms workers; they bear 

up to 75 percent of the corporate tax burden through lower wages. 

I just suggest there be some caution because corporate tax profits 

have increased dramatically while wages have stagnated. And I 

think there is much doubt, if I might say so, about that reference. 

Let me just say a word about bonus depreciation. We tackled 

that a couple years ago. And CRS made clear that the efficacy of 

bonus depreciation depended on its being temporary. And that is 

why it was enacted in the first place, as a boost during a recession. 

And so when you essentially adopt it in a nonrecession period, the 

CRS casts immense doubt on its efficacy over the longer run. 

And I mention this because I think we need, on a bipartisan 

basis, to take a hard look at these issues and not kind of just put 

them out there as if they are some kind of a magic wand because 

CRS essentially says it is not. And, indeed, Dave Camp left bonus 

depreciation out of his proposal all together. 

I want to ask each of you quickly: None of you except Mr. 

Rattner have talked about the impact on the deficit and how we 

pay for a corporate tax reform. Are you concerned about this, or are 

you among those who say, ‘‘Let it flow; if the deficit increases, it 

will essentially bring about economic growth’’? 

Just quickly, there is just a minute. Are you worried, each of you, 

about paying for corporate and other tax reform? 

59 

Mr. STEPHENS. Representative Levin, I can start. Certainly, we 

are as a member of the group of companies that operate here in 

the United States and part of our—and this is our home. Absolutely. That’s why in our comments we talked about trade-offs. 

Mr. LEVIN. Okay. 

Mr. STEPHENS. In comprehensive reform, there will be tradeoffs. We understand that. And that is just something that we are 

going to have to work through so that we come up with a complete 

and workable package. 

Mr. LEVIN. Mr. Mottl, are you concerned? 

Mr. MOTTL. Yes, Representative, but I want you to have your 

cake and eat it too. I have given you the opportunity to, with the 

goods and services tax, to pay for the corporate tax cut and give 

working Americans an immediate boost to their paycheck. So I 

hope that answers your question. 

Mr. LEVIN. All right. 

Mr. FARR. Congressman Levin, I would say, yes, I am concerned 

about the deficit as an individual taxpayer and a CEO, and I look 

for tradeoffs back and forth to make sure we do this right for the 

economy on a balanced basis. So I think it is very important. 

Mr. LEVIN. Mr. Peterson. 

Chairman BRADY. Thank you. All time is expired, Mr. Levin. 

Mr. LEVIN. Okay. 

Chairman BRADY. So I would point out the House Republican 

blueprint, as designed, balances in the budget counting on economic growth is properly measured. 

Mr. Tiberi, you are recognized. 

Mr. TIBERI. Thank you, Mr. Chairman. 

I want to echo your comments, Chairman, earlier about full expensing and how important it is, and that is why I have been an 

advocate of 179, making 179 expensing permanent, bonus depreciation. I am not going to take the bait and ask someone to respond 

about bonus depreciation because I think that was covered as well. 

Business investment, as all of you know, declined last year for 

the first time since the recovery began. Not a good sign. So before 

I ask my question, I want to thank you all for sharing your experiences, but one of the things in Mr. Stephens’ and Mr. Farr’s testimony that struck me as so important is the underlying debate in 

letting the perfect be the enemy of the good is the cost of delay. 

You know, we can pick apart any piece of this, but the cost of 

delay is so important. And how do we put a cost to that delay? And 

as the rest of the world has reformed and lowered rates and taken 

our jobs, we continue to let the perfect be the enemy of the good. 

I would like each of you to comment, if you could, in terms of 

jobs, in terms of economic growth, in terms of investment, what is 

the cost of delaying? We have been talking about tax reform here 

on this panel for years now, and yet we continue like the perfect 

be the enemy of the good. 

Mr. Stephens, what is the cost of delaying this again? 

Mr. STEPHENS. Lost wages for our working class today. It is 

underemployment. It is participation rates in the workforce that 

are at historically low levels. 

Mr. TIBERI. And middle class workers are probably the bulk of 

your employees. 

60 

Mr. STEPHENS. By far, the bulk. We are the largest, we believe 

we are the largest union employer in the country. We have over 

120,000 representative workers. We are proud of them. They do 

great work for us. They would be the largest beneficiaries of the 

additional capital investment, because they are the ones who do 

much of that work. 

Mr. TIBERI. So your headline is the cost of delay impacts the 

middle class worker. 

Mr. STEPHENS. Absolutely. 

Mr. TIBERI. Thank you, Mr. Stephens. 

Mr. Mottl. 

Mr. MOTTL. Absolutely. Delay cannot happen. You know, we 

saw what happened with the markets yesterday because they are 

concerned people, we are not going to get things done here. So, you 

know, I have invested all that money in my business, and I am expecting to get a return on it and be able to pay back the investors, 

my family, and the bank. So I need my customers to be healthy. 

I need tax reform right now. My employees need it as well. They 

want to start saving and getting ready for the future. 

Mr. TIBERI. Mr. Farr, thank you for your investment in Ohio, 

by the way. 

Mr. FARR. Thank you very much. We are moving ahead- because 

I am assuming this body will get true tax reform done- in Ohio, 

with a $100 million investment there right now. But the cost of 

delay means lack of innovation, less new products, less jobs, and 

it is that simple. We just look at how much growth is going to be, 

and we pare it back based on delay. And every time it is delayed, 

we push that investment out. And so it does have a real impact on 

people, how we hire, investment, new products. 

But I firmly believe that we will get tax reform, and that is why 

we are moving forward in Ohio, Wisconsin, and down in Texas and 

Missouri right now, because I think that this body understands the 

importance of getting real tax reform in the first time in over 30 

years. So we are betting on you that you are going to get it done. 

Mr. TIBERI. Mr. Peterson. 

Mr. PETERSON. The cost of delay is also the cost of investment. 

If the delay is to not get a lower rate and not to get a territorial 

system, we are going to see more companies looking for some sort 

of inversion, not bringing their cash flow back from offshore. 

Just recently, one of the companies in our industry did a $3.3 billion offshore investment with their offshore cash. We have no 

chance of getting any of that cash back to the United States. 

Mr. TIBERI. Great point. 

Mr. Rattner, don’t ruin the picnic now. 

Mr. RATTNER. I am sorry, I didn’t hear. 

Mr. TIBERI. Don’t ruin our picnic. 

Mr. RATTNER. I am not going to ruin your picnic on this one. 

Chairman BRADY. Thank you. 

Mr. RATTNER. We can all agree on that on your question. I 

don’t think there is any—there is a lot of disagreement probably on 

exactly what we should do, but I don’t think any reasonable person 

could disagree that sitting where we are sitting now, having done 

nothing really for 30 years in terms of comprehensive tax reform 

has cost us millions of jobs, billions of dollars and so on. And every 

61 

day when I pick up the paper and read about another company either moving itself or moving its jobs overseas, it really upsets me, 

because I think we could be doing something about that right now. 

Mr. TIBERI. Thank you, sir. 

Mr. Chairman, I yield back. 

Chairman BRADY. With that agreement, we ought probably stop 

the hearing at this point, just so you know. Thank you very much. 

Mr. Lewis, you are recognized. 

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

Mr. Rattner, I want to join Ranking Member Neal with thanking 

you for your service, for your service to our country. 

Mr. Rattner, I am very concerned about fairness and values in 

comprehensive tax reform. Some have said this is a once-in-a-generation opportunity. I think we must take our time and we must 

do it right. We must get it right. 

As we consider tax reform, do you think it is important to consider the impact on working families and future generations when 

we consider reforming the tax policy? 

Mr. RATTNER. Yes, I do. I think it is important. As I said, I 

think it is just as important as getting comprehensive tax reform, 

removing the loopholes and avoidance techniques, both for individuals and for companies, as well as getting the corporate tax system 

fixed. I think it needs to be fair, and I think it needs to have a 

positive impact for the average American. 

I think to have a $51⁄2 trillion tax bill that involves a $1,000 tax 

cut for an average American making $50,000 a year doesn’t seem 

fair to me. I think there needs to be fairness. 

As I said earlier, I think the comments on business investment, 

which I understand why they are being made, affect the supply 

side principally of more investment, more factories. That is all 

good. But we also need to do things on the demand side of putting 

people in a position to earn higher wages so that they can go out 

and spend more and get the economy growing faster. 

So while I do share the view that we need comprehensive tax reform, I am very troubled by the proposals that are on the table, 

both from the Administration and the House blueprint that the 

chairman has referred to a few times in terms of a balance of, not 

just fairness, but also of stimulating every part of our economy, not 

just the investment side of our economy. 

Mr. LEWIS. Do you have any recommendation what we should 

be doing? 

Look at the panel. Just look. All White men. Where are the 

women? Where are the minorities? Where are the low people? 

Would you like to respond? 

Mr. STEPHENS. Representative Lewis, from AT&T we take 

great pride in the diversity of our employee base, our customer 

base. We have been recognized by many, many industries for our 

accomplishments. We have a longstanding supplier diversity program. We spent close to $15 million—— 

Mr. LEWIS. Sir, I appreciate that, but I don’t see any African 

American, Latinos, Asian Americans, or Native Americans. I don’t 

see any women here speaking up or speaking out of what they 

need, what they want. 

62 

Our country is a very diverse country. Our forefathers and our 

foremothers all came to this great country in different ships, but 

we are all in the same boat now, and we should look out for each 

other and care for each other. 

I yield back. 

Chairman BRADY. Thank you, Mr. Lewis. I think we agree on 

that point and recognize that our Democratic colleagues on the 

Committee have an opportunity to bring witnesses to this table as 

well. I think it is important for us. 

Chairman BRADY. Yes. And made that choice. And I think it is 

important, if I may. 

Mr. LEWIS. Mr. Chairman, would you yield? 

Chairman BRADY. Not at this time. 

Mr. NEAL. Mr. Chairman, would you yield? 

Chairman BRADY. Yes, I will. 

Mr. NEAL. Mr. Chairman, the breakdown of the witnesses, 

which is a pretty good discussion, I think we would all agree it is 

helpful, but the breakdown of the witnesses four-to-one is not representative or reflective of the proportions of representation on the 

Committee from the two political parties. 

Chairman BRADY. So it is traditional to take this type of approach. My only point is this: I think it is important as we talk 

about middle class workers, as we invite our witnesses here, we 

recognize they represent a diverse group of Americans that Mr. 

Lewis has championed beautifully for over the years. 

Mr. NEAL. Mr. Chairman, does the gentleman yield? 

Chairman BRADY. Not at this time. 

So, Mr. Reichert, you are recognized. 

Mr. REICHERT. Thank you, Mr. Chairman. Thank you for your 

testimony today. Bottom line is we are trying to create a Tax Code. 

You have all touched on it, all the members of the panel, that 

would allow job growth, create jobs, increase paychecks, grow our 

economy, and help hard-working Americans. 

We all agree the Tax Code is broken. It is too complicated. So 

I want to touch on a question that Mr. Tiberi highlighted, and I 

will also tie it back to Mr. Lewis’ point, if I could. 

So, Mr. Peterson, you talked about the impact of our outdated 

Code on your business, and I just would like you to elaborate just 

a little bit more on what an updated code would mean for you, and 

more I think importantly, what it would mean for your employees, 

for the hard-working Americans that Mr. Lewis has referred to and 

others prior to my questioning, how is it going to impact your employees? And it has been mentioned a little bit, but if you can dive 

into that question for me. 

Mr. PETERSON. Thank you, Congressman. As I described before, and let me give a little bit more detail, we have been a company that has been around for 150 years. We have developed our 

products and services which create intellectual property. We don’t 

produce tangible goods. We produce goods and services. Our intellectual property is registered and owned in the United States, principally in New York. 

When we export our services, we pay full taxes on those goods 

and services in the United States and in the New York State. Our 

competitors have their intellectual property and intellectual capital 

63 

registered offshore, and they pay very low taxes. When they sell 

those products and services into the U.S., they do not pay those 

same taxes on their products and services. 

Second point, new companies that are being developed today, in 

the last 15 or 20 years, they begin their development of their company from scratch with a tax policy. And they register their intellectual property offshore. Immediately, they set up the employees 

offshore. They put a service center in Dublin or in Luxembourg or 

in Singapore. They own their intellectual property offshore, and 

then they sell it back to the United States, and they don’t pay 

taxes on it because the royalties go back to an offshore business. 

We compete against companies—— 

Mr. REICHERT. Okay. For Americans today that are watching, 

how is this going to help them with taxes? 

Mr. PETERSON. What it means for Americans today is if we reform this tax, the territorial taxes to a low rate, we will invest 

more in the United States. 

Mr. REICHERT. What does that mean for the American worker, 

investing more here in the United States? 

Mr. PETERSON. What that means is that we will create more 

jobs. 

Mr. REICHERT. Creating more jobs. Are they going to be higher 

paid jobs? 

Mr. PETERSON. There are all kinds of jobs. We have jobs all the 

way from lower-end jobs. We need people at all different levels—— 

Mr. REICHERT. These are not jobs just for White Americans, 

White older male Americans? 

Mr. PETERSON. These are jobs for people from all over the 

country and all backgrounds. 

Mr. REICHERT. Diverse Americans. Every American citizen, 

every American who is working in this country will benefit from 

this Tax Code. Is that correct? 

Mr. PETERSON. Every American—— 

Mr. REICHERT. All of you are nodding your heads. 

Mr. PETERSON. Every American—— 

Mr. REICHERT. It will be good for all hard-working Americans, 

correct? 

Mr. PETERSON. This is good for all hard-working Americans. 

Every time we start a new operation, we have to build facilities, 

we have to get it organized in that regional section. We hire all 

types of workers, and it is a great benefit for the entire spectrum 

of U.S. workers. 

Mr. REICHERT. Great. All of you agree? 

Mr. Farr, I would like to follow up on your comments about the 

importance of tax reform as it relates to U.S. competitiveness and 

economic growth. In your view, and I know we have had, you know, 

lower corporate rates, permanent, territorial, simplified, a little expensive, comprehensive. What is your, in your opinion, the best 

thing that we can do, the most important thing we can do when 

it comes to tax reform? 

Mr. FARR. From my perspective, the lower tax rate is the most 

important thing. And I know there is going to be a lot of tradeoffs 

pluses and minus relative to that lower tax rate, but I think it is 

64 

very, very important to have the lowest tax rate. That will help all 

employees. 

In the last 10 years, we have increased our wages year by year 

by year, but my employee base has lost a lot from higher taxes, 

higher cost of benefits, and so that is eaten away. So a lower tax 

rate will help them. 

Mr. REICHERT. In 20 seconds, the importance of permanence. 

Mr. FARR. Permanence is critical because I make decisions over 

3 years, 5 years, and 10 years. I don’t make a decision by a quarter. It is a 10-year horizon. 

Mr. REICHERT. You need certainty to help American workers 

keep their jobs, right? 

Mr. FARR. That makes a big difference. That is why I am betting to making those investments in Ohio right now, because I am 

certain you are going to do it. 

Mr. REICHERT. Great. I yield back. 

Chairman BRADY. Thank you. 

Mr. Doggett, you are recognized. 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you to our 

witnesses. 

This is a very troubling time in American history. Our national 

security has been jeopardized. Our democracy is threatened, while 

so many have remained silent about it. Hopefully, the appointment 

of a special counsel is a first step to seeking justice and to assuring 

Americans that our system of checks and balances is not entirely 

broken. 

The subject of today’s hearing is directly related to the willingness of so many to ignore a growing tower of Trump travesties. 

Some see Trump as the only ticket to more tax breaks, and they 

are willing to pay almost any price to get them. Today is also noteworthy as the first time ever, after almost an entire year, that anyone has come forward in a public hearing anywhere to justify this 

self-styled Better Way tax plan. 

Now, I certainly favor public policies, including tax policies, that 

are designed to encourage entrepreneurship and grow jobs here in 

America. And we know what some of those public policies are: that 

if we invest in our workforce where there are growing workforce 

shortages, in education, and job training for jobs that are going unfilled, we can become more competitive. Those are the very programs that President Trump proposes to slash. 

We know that if we have a competitive infrastructure instead of 

trucks backed up on our highways and trains on outdated systems 

like our competitors in Europe and Asia, we can be more competitive and grow our economy. But some of those are programs that 

President Trump proposes to cut and the rest of the ones that he 

has never gotten around to making a proposal on. 

And, of course, the best way to grow our economy at the least 

cost is comprehensive immigration reform, according to economists 

and business groups across the spectrum. But that doesn’t fit the 

ideological structure of this Administration. 

As for tax policies, well, apparently our Tax Code is outdated. It 

is full of loopholes. It doesn’t work very well, but the witnesses that 

are before us today are from companies that seem to have done 

pretty well under that system. And they tell us today that if they 

65 

pay less or no taxes every time they invest a dollar at home, they 

will begin investing more at home. Well, I question the logic of 

that. I think they offer many valuable insights, a number of which 

I agree with. 

I think that we need a tax policy that encourages jobs at home. 

And when the Chairman of our Committee tells us there are proven ways to grow our economy, I think what these hearings have to 

be about is to show us the proof that this particular Better Way 

tax plan will actually grow jobs. And that proof has to come from 

some people who come before this Committee who are not telling 

us basically that they think giving themselves a tax break is a good 

thing, because I think everybody will agree to that kind of conclusion. 

As far as what has been testified to here today, we do need a tax 

rate for corporations that is lower than it is today. Of course, if we 

lower the tax rate into the 20 percentile, that will be much more 

than many corporations are actually paying today. We need comprehensive tax reform that involves tradeoffs. The Tax Code is replete with tax loopholes, but we don’t have really a list of tax loopholes that would be close today, only vague talk of tradeoffs. And 

certainly, we don’t just need tax cuts, we need comprehensive reform. 

This is not the first tax cut that this Committee has considered. 

We have already approved in the House an almost trillion-dollar 

tax cut that will provide most of its benefits to the super rich and 

a few corporate interests like the pharmaceutical industry. 

Before his confirmation, Treasury Secretary Mnuchin promised 

that there would be no absolute tax cut for the upper class, but the 

one page, I guess it is shorter than a grocery list, that has been 

presented more recently by Mr. Mnuchin is chock-full of candy for 

those at the top and very vague promises for the middle class. One 

analysis of it suggests that the top 400 taxpayers will get $15 million each. 

We need to be working on a comprehensive tax reform that provides benefits to the middle class and that does not raise the national debt. The Committee has said that is their position. That has 

not been Mr. Trump’s position. And coming together on that will 

be critical as we move forward. 

I yield back. 

Chairman BRADY. All time has expired. Thank you. 

Mr. Roskam, you are recognized. 

Mr. ROSKAM. Thank you, Mr. Chairman. My friend from Texas 

just argued essentially that we needed a lower tax rate, and then 

implicitly criticizes the people that are coming advocating for a 

lower tax rate, but I digress. 

There is an old phrase that says this, that when the bulls fight, 

the grass loses. So who loses as we dither under the current Tax 

Code? The wealthy are not suffering today. Wealthy are doing well. 

It is the folks who are at the lower end of the economic spectrum 

who suffer if we wring our hands and lose a once-in-a-generation 

opportunity by pursuing a perfect Tax Code, which is a complete 

illusion. Perfect Tax Code is the unicorn of 2017. What we want is 

a good Tax Code. What we want is a Tax Code that Mr. Lewis can 

celebrate when he says, ‘‘Let’s get it right.’’ Okay. Let’s get it right. 

66 

So one of the things that we need to discuss and really litigate, 

publicly understand what it means to get it right, two of you, Mr. 

Mottl and Mr. Farr, mentioned in your testimony, and I am interested in exploring this, what is the value of permanence? What is 

the value of permanence? 

So we often talk in terms of, you know, renting things versus 

buying things. We put a premium on owning something. And it 

would seem to me that there is a real premium on permanence. All 

of you have been, you know, been exposed in terms of market 

places and so forth. 

So, Mr. Stephens, let’s start with you. A permanent tax policy 

versus a temporary tax policy, and put this in the context of all the 

anxiety that we feel and the debate around this place where we 

have these tax extenders and temporary policy that, you know, that 

fade off in 24, 36, 48, pick it, number of months. What is the value 

to you? And then further on down the line, because you told Mr. 

Reichert what happens down completely throughout the whole 

chain, how important is permanence? You got a minute on it? 

Mr. STEPHENS. Permanence is extremely important. The ability 

to look at, not as Mr. Farr said, a quarter or a year, but looking 

at 3- and 5- and 10-year plans, particularly in the investments that 

a company like ours make that are in infrastructure investments 

that provide benefits literally over decades. And so having that 

ability of permanence, knowing what the rules are, tell us what the 

rules are and we will abide by them, but knowing that and having 

that allows us to make consistent, significant, material capital investments that allow for the demand for jobs, demand on our suppliers, and, quite frankly, with the demand on those jobs, as you 

put more demand for more labor, wages go up. It is simple supply 

and demand. 

It is a consistent, it is a cycle that continues to repeat itself as 

they come back and buy more mobile services, as they buy 

more—— 

Mr. ROSKAM. Thank you. 

Mr. STEPHENS. So it is very important to have consistency and 

permanence with regard to the rules. 

Mr. ROSKAM. Mr. Mottl. 

Mr. MOTTL. Yes. Well, you know, I can’t speak enough about 

permanence. You know, businesses vote with their feet, right? You 

have to answer to your constituents. Most of them have a job. But 

a business doesn’t vote. It just leaves and takes its jobs. And, you 

know, you talked about the success of businesses. I have been 

fighting for my life, my business, for the past decade as my customers keep leaving this country. I get one industry figured out 

and we are doing great with them, and then they leave, and now 

I have got to find another and another. And it has been a tough 

battle for the last decade or longer. 

So I think a permanent Tax Code is so important to get my customers back in this country buying product from businesses like 

mine. 

Mr. ROSKAM. Mr. Farr, what would it mean for you and Emerson Electric if this Congress were to give a Tax Code that you could 

rely on beyond a decade, so—— 

67 

Mr. FARR. It means a lot to us because we make investments. 

The new facility we are putting in Ohio, we are replacing a facility 

that was built in the 1960s. So we are making a facility investment 

of $100 million that is going to last for 20 and 30 years. 

I have the world to invest in, and I have the choice to look at 

who offers the best incentives, who gives the most consistent tax 

rates. And from that perspective I look at this world. 

If you do a short-term, one-time accelerated depreciation impact, 

you will have a surge 1 year of capital and then it dies. That is 

not a long-term strategy relative to investing, and that is why, 

from my perspective, I need to think about 2, 3, 4 years. I am 

thinking about capital investments, right now, 3 years out and 

where I am going put that money. Where am I going to build that 

next facility for $100 million, $200 million? That is why I need a 

permanent tax rate, and I need it for at least 10 years, for my 

thought process. 

Mr. ROSKAM. Mr. Peterson, just quickly. 

Mr. PETERSON. Permanence creates certainty. Certainty reduces risk. 

Mr. ROSKAM. Mr. Rattner, even quicker. 

Mr. RATTNER. I agree. 

Mr. ROSKAM. Amen to that. I yield back. 

Chairman BRADY. And you got in under the wire. Well done. 

Mr. Thompson, you are recognized. 

Mr. THOMPSON. Thank you, Mr. Chairman. Thanks to all the 

witnesses for being here. I am glad that we are looking at doing 

comprehensive tax reform. I think it is extremely important. 

And this morning, I was just making some notes to myself, the 

things that I think are real important, and number one is comprehensive reform, and that is what this bill needs to be, not simply a tax cut bill. If we do a tax cut bill and we ignore the reform, 

we lose, and the American people lose. 

I think it needs to be paid for. And I think all the witnesses recognize the importance of that, but I think we need to pay for it in 

real terms, not just with there needs to be tradeoffs. We need to 

specifically pay for this. We can’t add to our national debt. And I 

think it is important that it is bipartisan. Big things that happen 

in Congress aren’t good unless they are bipartisan. And we have 

all experienced what happens when we try and do it some other 

way. 

And we need to make sure, as a lot of my colleagues have already mentioned, that we really hone in on, focus in on the middle 

class. That is extremely important. 

And then I added one bullet to my notes when I heard you, Mr. 

Mottl, speak, and your mention that the desire to lower the payroll 

tax. I wrote down that it shouldn’t hurt the middle class. And I 

think we need to remember that the payroll tax is how we finance 

Social Security. And unless you have got some way or the Committee has some way to ensure that Social Security stays strong, 

if we do tax reform that takes away the funding for Social Security 

that hurts all of our constituents, and I would hope that we all recognize how important the Social Security system is for all Americans. 

68 

You know, the middle class have been struggling. Incomes 

haven’t kept up with expenses. We all know that. I reference a recent study that was done by the University of Minnesota, the University of Chicago, Princeton, and the Federal Government, and 

they found that a 27-year-old man today is making 31 percent less 

than he would have made in 1969. They go on to say that he is 

unlikely to make up the difference in his lifetime. 

So as we turn to tax reform, we really have to focus on those 

middle class folks. These numbers, these numbers don’t jive, and 

especially if you juxtapose that with some of the numbers that 

many of our corporate leaders are bringing home. It is not equitable, it is not fair, and it needs to be addressed in our bill. 

And tax cuts that are not tax reform are wrong. And tax cuts 

that aren’t paid for don’t generate this panacea that some think 

that it does. We know from the 1980s, we know from the early 

2000s, and we know what is happening right now in Kansas that 

tax cuts don’t automatically pay for themselves, and we have to 

recognize that. 

Mr. Rattner, I have a question for you. Can you explain how 

these large increases to the debt, even for policy that we might otherwise all agree that is good policy, can become a drag on the economy as a whole? 

Mr. RATTNER. Sure. There have been many, many studies of 

this done that as the size of the Federal debt goes up and the interest burden on the Federal Government goes up and the crowding 

out of private capital occurs, because interest rates rise as the Federal Government borrows more and more, all of that is absolutely 

a drag on economic growth in this country. 

It seems like the whole panel agrees that whatever this Committee does on taxes needs to take account of its impact on the deficit, and that is where honestly I have a little bit of a problem with 

what I have been hearing, because I hear we would like to do this, 

this, and this, but I haven’t really heard how we are going pay for 

all of that. 

And the second thing, if I can just make one other comment, that 

I was struck by Congressman Doggett’s comment. I think that we 

are looking at this in a little bit of isolation. Of course, as I said 

in my opening remarks, if you cut depreciation, there will be more 

investment. How much more? We don’t know. Will it be enough to 

pay for it or will it justify it? We don’t know. But we also really 

need to think about this compared to other ways we could, in effect, 

spend this money. Would the money be better spent on infrastructure? Would it be better spent on job training? Would it be better 

spent on education? Because the amount of money the Federal 

Government has for any of these things is limited, and we need to 

make sure it is spent effectively and look at it across the entire 

continuum. 

Mr. THOMPSON. Mr. Rattner, can you just further explain, if 

we cut taxes for the rich and for corporations and we pay for that 

by adding to the national debt, what does that mean to the middle 

class families that we represent? 

Mr. RATTNER. Well, first of all, it is a matter of immediate fairness that you would be giving a benefit to the upper class and to 

business and very little, as I said earlier, to the middle class. But 

69 

secondly, we do, as I said in my testimony, have a problem of rising 

debt, and the middle class will simply have to end up bearing a 

greater burden of paying for that somewhere down the road in the 

form of higher taxes if we don’t keep our debt under control. 

Mr. THOMPSON. It would cost them money. 

Mr. RATTNER. It will eventually cost them money. 

Chairman BRADY. Thank you very much. All time is expired. 

Mr. Buchanan, you are recognized. 

Mr. BUCHANAN. Thank you, Mr. Chairman. I want to thank all 

of our witnesses. All of us have a diverse background that come on 

this Committee. I was in business for 30 years. I built two pretty 

good-sized companies. 

I did want to touch on—I think we all agree we need to be more 

competitive on the corporate rate, but I want to touch on passthrough entities and make sure they don’t get lost in the mix. You 

know, I have got a bill that I would like to see close to parity. 

When you look at corporate rates, at 35, they are not competitive, 

but on passthroughs it is as high as 44. If you add State income 

tax in States like California, another 12, 13 percent, it could be 57 

percent. It makes absolutely no sense. 

So I guess I would like to ask some of the panelists just your 

thoughts on lowering those rates where they are more competitive, 

getting it down to somewhat near the corporate rate, I don’t necessarily agree with 15 percent, but the difference that would make 

in terms of growth, in terms of jobs, and also in terms of raising 

wages. So I will start with the gentleman, Mr. Mottl. 

Mr. MOTTL. Well, yeah, absolutely. The passthrough issue is 

big, you know, and I think right now a lot of them are paying 

around 44 percent. And so, you know, if we go to 20, 25, you know, 

I think it is just important that it gets lower and closer to the corporate rate, that they are more similar and not so dissimilar and 

not so penalizing to the small business. 

But, you know, of course, on jobs, you know, the more we 

can invest, the more we can grow, the more we can hire. You 

know, I am involved in some training programs in the Chicagoland 

area, bringing folks out of the inner city, training them for good 

jobs. And we need this kind of growth. We need this kind of opportunity. And I think if you do the tax reform, you will see that. 

Mr. BUCHANAN. And one of the things that is always concerning to me, especially on passthroughs, a lot of people think 

maybe you have got 150 employees, you happen to make $800,000. 

The owners don’t take all that money out. They might take 150 

out. The balance of the money goes in to grow and expand the business. 

Mr. Farr, you represent a large industry. A lot of these entities 

are passthrough entities, subchapter S, LLCs. What is your 

thoughts by the fact that they can keep a little bit more of what 

they earned in the business, what difference is that going to make, 

from your experience? 

Mr. FARR. It makes a big difference. We have 30,000 people in 

the United States, across all the States, both Democrat, Republican, plants everywhere. We are very small business oriented. And 

we use small businesses supplied to us. If they are not healthy and 

they don’t have the money to invest, they are not going to have the 

70 

most productive equipment, their technology, their quality, and 

they will lose business as we take it elsewhere. So the small business tax rate needs to come down closer to the corporate tax rate 

so they have more money to invest to support us as we grow. And 

that has been one of the big issues the last couple years. They have 

not had the money to invest to keep up with us, so we are moving 

and looking for other people to supply us. And that is a big issue 

for these people. 

And I also want to agree that, you know, make a comment that 

we employ not only high-priced people, we employ low-priced people. We have all different levels of people employed across this company. 

Mr. BUCHANAN. Well, I know in the State of Florida, I think 

93 percent of the enterprises are passthroughs type entities. 

Mr. Stephens, would you like to add to that? 

Mr. STEPHENS. I think, quite frankly, the competitiveness issue 

applies across the board. High tax rates makes them less competitive, gives them less money to invest, gives them less opportunity 

to generate jobs. All that is good for the overall economy and for 

a large company. It is good for the small business vendors, suppliers, and customers to be very healthy. 

Mr. BUCHANAN. There is actually something out, I think, in 

the last 10 years or lately, we have got more businesses closing 

than opening, so we have got to have a Tax Code that doesn’t penalize people. 

Mr. Rattner, would you like to add? Again, if you disagree with 

it, my thought is it is 44 percent, can be up to 44 for a lot of 

passthroughs, and if you put State income tax, New York, or I am 

sure Illinois has got a substantial tax, it is a big number. What are 

your thoughts? 

Mr. RATTNER. Respectfully, Congressman, I would make a couple of other points. Certainly, lower taxes are good for everybody, 

if we can find a way to pay for it and if it can be fair. But with 

respect to passthroughs, let’s remember a couple of things. 

First, they chose to become passthroughs. They could have been 

become subchapter C corporations, but they felt that being a passthrough with a single level of tax was advantageous. 

Secondly, while by number the passthroughs are vastly small 

businesses, in terms of where the income is generated, I have seen 

studies that between 40 and 50 percent of the income is actually 

generated by either larger businesses or very wealthy individuals. 

I can tell you anecdotally that I have many friends in the hedge 

fund world, in the private equity world, in the investment management world who are structured as passthroughs for the reasons I 

said, and they certainly do not need a tax cut or deserve one. 

So I think, while I am sympathetic to the genuine passthroughs, 

I think the devil will be in the details of you structuring something 

that actually helps the people who need help without benefiting a 

lot of rich people. 

Chairman BRADY. Thank you. 

Mr. Peterson, just real quick. 

Mr. PETERSON. What I would add is it also makes the businesses much more attractive from a credit point of view. Small 

banks providing credit to small businesses is critical, and that kind 

71 

of cash being available and capital in the business helps that very 

much as well. 

Mr. BUCHANAN. Thank you. I yield back. 

Chairman BRADY. Thank you. 

Mr. Larson, you are recognized. 

Mr. LARSON. Thank you, Mr. Chairman. And I want to thank 

all the witnesses as well for your expert testimony. 

As Rich Neal has spoken, we are very concerned about what is 

happening to the middle class. As the chairman points out, this is 

a generational opportunity for all of us. And as Mr. Roskam said, 

so we want to make sure that we get this right. 

In fact, the last time generationally we took this up, and if you 

look out into the audience, it was labeled by one author, the battle 

at Gucci Gulch. And we don’t want to see a return to that. And so 

my first question—I have two—relates to all of you, and that is a 

commitment. Our most recent history in the Committee with respect to a major reform had to deal with health care. And we believe on this side strongly that we need to return to regular order 

and that we need to have witnesses like you and an open process 

throughout where both sides actually participate in the drafting. 

Because I think as many people have pointed out, without that, we 

are not going to get the permanency or the long-term consistency 

that you would like. 

And so I would ask you, all of you, and if you give just a yes or 

no answer, would you be in favor of more hearings open where we 

get in this arena of the vitality of ideas where we can exchange and 

work through these or do you think that this should end up in 

some closed-door process? It is a pretty easy answer. 

Mr. Stephens, we will start with you. 

Mr. STEPHENS. Respectfully, Congressman, my expertise isn’t 

in taxes and financial matters, so I will respectfully leave that to 

those to talk about the health care process. 

Mr. LARSON. But given that is your expertise, wouldn’t you like 

to see the open exchange of ideas? 

Mr. STEPHENS. I think I would hope that that is going on today 

and everyone appreciates open ideas. 

Mr. LARSON. Don’t you think we need more of that—it is going 

on today—Mr. Mottl? 

Mr. MOTTL. Mr. Larson, I couldn’t agree with you more. More 

information is always better, but I hope that is what we are having 

today. 

Mr. LARSON. Thank you. Thank you very much. 

Mr. Farr. 

Mr. FARR. I like more dialogue and, hopefully, I don’t have to 

be on another panel and be harassed, but thank you. 

Mr. LARSON. Well, hopefully, you don’t consider this harassment, but I do think—— 

Mr. FARR. It is special love, let’s put it that way. Special love. 

Mr. LARSON. Mr. Peterson. 

Mr. PETERSON. I am very pleased that today you have opened 

the process of starting hearings. I think getting more and more 

data and analytics out about the impact of the different tax proposals is critical, and how you do that is also valuable and more 

transparency on the process. 

72 

Mr. LARSON. Mr. Rattner, let me give you a special thanks. Not 

only as others have mentioned with respect to the automobile industry, but your charts and graphs, which have been very illustrative in townhalls that I have had, and in your arguments, because I can anticipate that you would also be in agreement about 

the openness. You did say in your remarks, and you mentioned 

three things that if you could, in the short time that you have, 

dwell on. One of them, you talked about how excessively narrow 

this proposal was, and if you could elaborate on that. The other 

was you said the need for this to be more holistic, and as in the 

embrace with the number of the questions from Mr. Lewis to Mr. 

Thompson about making sure that the Code has got to be more 

distributionally neutral. 

Mr. RATTNER. Thank you, Congressman. Yeah, I think those 

three points are all interrelated in the sense that I think that to 

simply focus on one or two provisions affecting business as the centerpiece of tax reform is excessively narrow, and that, as I said a 

few minutes ago, I think that the Committee should be—and I 

think this gets to your point about openness—I think having more 

hearings would be great. And to Congressman Lewis’ point, hearing 

from a wider variety of people would be great. 

We are, all five, we may not agree on everything, but we are all 

businessmen, and there are a lot of other people out there who will 

have useful views for you as you think about this, but I do think 

you have to—I think each of these provisions or pieces of this are 

just a piece, and I think that as part of the effort, if I were in your 

shoes, I would be trying to look across the whole spectrum of tax 

possibilities and things that are within the jurisdiction of this Committee and come up with a package that is balanced and fair and 

that in its entirety addresses the issues we have talked about, 

which are the complexity and the loopholes in the Tax Code, the 

disincentives, and the fairness issues. 

Mr. LARSON. And that is why you said in its current form it is 

excessively narrow. 

Mr. RATTNER. It is excessively narrow. 

Mr. LARSON. And any thoughts on expanding that beyond—and 

I commend the chairman, and I know the people on the other side 

of the aisle want to get to this. There is broad agreement, but I 

think, and we had great precedent set by Dave Kemp, which I 

know people on both sides of the aisle admire his work. I think if 

we are able to sit down in that manner in this exchange of ideas, 

in providing as much love as Mr. Farr would like, that we are able 

to create an opportunity to move the country forward. 

Chairman BRADY. Thank you. All time is expired. 

Mr. Smith, you are recognized. 

Mr. SMITH OF NEBRASKA. Thank you, Mr. Chairman, and 

thank you to our witnesses here today. I think this is an important 

discussion, important conversation that we have. I appreciate the 

perspectives that you bring, multiple perspectives, I will add, and 

I think this panel represents multiple perspectives, as well. 

I think that as we sift through this, I hear from Nebraskans, as 

a representative of rural and remote Nebraska, there is a frustration that, you know, perhaps just waiting, and to punt perhaps is 

73 

not the solution, whether it is fixing our health care system, whether it is reforming our Tax Code. 

There is an understanding that, and I would say a bipartisan understanding and even consensus, that our country is uncompetitive 

in the world as it relates to our tax policy. I think it is very important that we come to that realization and move on it in a permanent way as we have already heard. 

I know that I hear from constituents who find the death tax, for 

example, an unfair tax, inherently unfair, double taxation. And 

there seems to be an idea in Washington that, well, you know, if 

you narrow that down to few enough people, then that makes it 

fair. I disagree with that. There will still be people harmed, individuals harmed, certainly family businesses harmed. And I think 

of family businesses, particularly in agriculture, that are not awash 

in cash and liquidity. And I would imagine there are many familyowned businesses that would fall into that category as well. 

So I think if we focus enough on doing the right thing for the 

right reasons, we can get this done. But I can tell you it can frustrate me when I hear various arguments of why not to do it, that 

I don’t think are certainly as important reasons why we need to do 

this, move forward, involve as many people as we can, and that is 

what we have been doing. I know the working groups that we have 

had over time have been instructive. I speak personally on that 

front of how instructive that was to hear people out in various sectors of our economy. So I am anxious to move forward here. And 

I think that this time and this conversation is important. 

I am wondering if our panelists could perhaps explain to me, I 

know that Emerson points to Ohio for some expansions. We have 

facilities in Nebraska, not in my district, that aren’t necessarily 

headquarters for large companies, but we have manufacturing 

plants. We have various locations of larger companies perhaps. 

I was wondering if our panelists, in terms of manufacturing or 

services, could elaborate on what tax reform might do for individual locations, satellite locations or facilities, and their employees 

around the country, perhaps starting with Mr. Stephens. 

Mr. STEPHENS. I will give you just a personal experience. I sit 

on the Chamber of Commerce in Dallas overseeing an extensive 

number of businesses moving into Texas because of a favorable income tax rate compared to other States. 

So what we are talking about here today from a Federal policy 

is happening every day amongst our States. So I would suggest to 

you that this overall tax reform, bringing down the top tax rate, 

providing an incentive for investment will generate jobs across the 

country as it will allow all States to be much more competitive with 

their foreign competitors as they exist today. 

Mr. MOTTL. I am from Illinois, and we have the unique example 

in Illinois, some budget issues there, and businesses are leaving 

our State as a result of that, and they are concerned. So I think 

it speaks to, it is a great example that when you do tax reform, 

you know, if we can get it done in the U.S., you will bring businesses all back to the U.S. to all States. 

And I wanted to make a comment. There was a comment made 

about switching our tax structure. You know, I would love to do 

that. It would trigger a huge tax liability to do that. We have a C 

74 

corp, an S corp, two S corps, an LLC. I would love to get them all 

aligned so we can even have the fiscal year end on the same date, 

but to do that, I trigger a tax liability for cash that I don’t have. 

And there was a comment made, you know, we have had to pay 

taxes some years, we have triggered a tax liability in unusual years 

where we didn’t really make a profit, but we triggered a tax liability. And these are these crazy quirks in the Code that we really 

need to address, and it is particularly onerous on small business. 

Mr. FARR. So my comment, as I look at AT&T, if they increase 

their investment, increase their infrastructure of the internet and 

the uses that we use over the technology of their services, that will 

increase my investments in those particular areas. So as they invest in Texas, I invest in Texas. They invest in Minneapolis, I invest in Minnesota. 

So from my perspective, what I look at is, you know, the tax 

structure of each State. Would I go to Illinois right now? I get concerned about the health of Illinois right now. So as I look at the 

various States and where I want to invest, it is around the policies 

relative to the State, the tax structures, the benefit of the local governments and how they help and work with you. And so that is 

why we make those investments. 

But it also pays off of what AT&T does or what we do. We help 

each other for those infrastructure investments. 

Mr. SMITH. Mr. Peterson. 

Mr. PETERSON. At the base of your questions about the competitiveness of the U.S. economy, we have the best university system, we have the most innovative people in the world. We have a 

rule of law. We have an energy boom, which attracts many new 

companies around the world looking at that competitive advantage, 

but we have a tax system that disadvantages us. Each State obviously has their own competitive advantages and they are clearly 

going to be looking at that, but there is so many different advantages we have today, but we lose out on many of them because of 

the broken tax system. 

Mr. SMITH. Thank you. I yield back. 

Chairman BRADY. Thank you. 

Mr. Blumenauer, you are recognized. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

Mr. Peterson, you talked about many of the advantages we have 

in the United States in terms of our economy. I am struck that 

when we were talking about the various infrastructure investments, one of the problems we have is we have a country that is 

falling apart, and we are falling behind. Those of you who are involved in the international economy realize, in terms of roads, transit, air investments, the United States is sadly lacking. Sadly lacking. 

We just had another report from the American Society of Civil 

Engineers that suggests that in 5 years we haven’t improved the 

ratings of all the things, it is just the price tag got higher. In the 

past, we have approached both the previous Administration and 

previous proposals for tax reform, had a little bit of infrastructure 

stuck in, or some people think repatriation can be sweetened by 

maybe moving that back into our woefully inadequate infrastructure spending. There is admittedly a little disagreement about reVerDate Sep 11 2014 09:20 Feb 13, 2019 Jkt 033393 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33393.XXX 33393
75 

patriated dollars and who benefits, and some people think they 

have different ideas for it. 

But one of the things and, Mr. Farr, I would start with you because Governor Engler and the National Association of Manufacturers supported legislation I had to finally raise the gas tax after 

24 years, which wouldn’t add to the deficit, which would put millions of people to work from coast to coast, creating jobs in every 

single State, every single city, and maybe we would be in the process of learning how to legislate again. Do this, you know, kind of 

flex those legislative muscles. We could have panels like this for a 

week and listen to the president of the AFL–CIO, the president of 

the U.S. Chamber of Commerce, the president of the contractors, 

Governors, South Carolina where the legislature just overrode a 

veto of their Governor for raising the gas tax, joining 23 other 

States that figured out how to do this, which we used to do on a 

bipartisan basis. 

Now, I would start with you, Mr. Farr. Do you think there would 

be any advantage to maybe our taking a little simple tax that anybody could understand, and, in fact, it could be even shorter than 

the President’s tax proposal, that would get the trillion dollars that 

he wants to spend and that the Senate Democrats agree on that 

number and get started? 

Mr. FARR. As a manufacturer in the United States and a manufacturer across this country, I have three things. I would like to 

simplify our tax structure to make it more competitive globally. Infrastructure investment is critical. We move stuff by roads, by 

rails, by ports, by airports. We have been pushing this for many, 

many years, and we have not gotten it done. We clearly need to 

find investments. You will find very few CEOs of companies in the 

United States that would not say find the money to invest in infrastructure. 

And I think those three things, around regulation, around infrastructure, around tax policies to make this country competitive. We 

compete with all those things hurting us today. We can be better. 

Mr. BLUMENAUER. And my question was do you still support 

raising the gas tax like we need to do? 

Mr. FARR. I still support finding the funds to pay for infrastructure. I mean, I can’t—— 

Mr. BLUMENAUER. Mr. Rattner, do you have an answer to 

that? 

Mr. RATTNER. I certainly support raising the gas tax, and I was 

like in the car business for a little while. Look, I think the gas tax 

hasn’t been raised in decades, and I think—— 

Mr. BLUMENAUER. 24 years. 

Mr. RATTNER. And you made all the right points, Congressman. 

And I think as a matter of both infrastructure policy and energy 

policy, it is crazy for us to have a gas tax at this level and to allow 

our infrastructure to deteriorate. 

Mr. BLUMENAUER. Mr. Chairman, I appreciate your courtesy 

having this hearing. I appreciate our panelists raising important 

issues. I would respectfully suggest that the Committee think 

about a simple subject that we can deal with, have 3 or 4 days of 

listening to experts who are in local government, State government, the various industries, hear from UPS that they lose $50 

76 

million for each 5 minutes’ delay in traffic, invite in some of the 

Republican legislators from the 23 States that have raised the gas 

tax to find out why they did it in Wyoming or South Carolina. 

I think this is an area that we can actually find bipartisan agreement. We could actually do something, not increase the deficit. Just 

having a week’s hearing from the Trucking Association and AAA. 

Why do these people agree, raise our taxes? I think it would be 

good for the Committee. I think it would be good for the country, 

and, who knows, this might be something we could break the logjam, do something to jump-start the economy, and that would help 

ease some of the other issues that we are talking about, because 

it would certainly increase productivity, and it might be fun. 

Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

Ms. Jenkins, you are recognized. 

Ms. JENKINS. Thank you, Mr. Chairman. This has been a very 

informative hearing. And I thank all of you on the panel for giving 

us your time today. 

Mr. Mottl, I know you are from Illinois, but when I was hearing 

your testimony, I felt like I could be listening to a story of a small 

business owner in any small town in my congressional district in 

Kansas. 

You just mentioned in response to my seatmate’s question, that 

for tax purposes your company that simply employs about 80 people has divided the company into one C corporation, two S corporations, and an LLC? And as a CPA who did tax planning, I would 

just want to applaud you for the creativity for your back office folks 

and your tax team. 

However, I think it begs the question: Should our Tax Code be 

so administratively complicated that a business like yours should 

have to engage in so much work in order to achieve just a workable 

tax rate at the expense of simply growing your business? And to 

be more pointed, would you trade this highly complex system full 

of loopholes and surprises at every turn for the certainty of permanent, modern, simple, and a fairer tax system that allows you to 

grow your business? 

Mr. MOTTL. Well, thank you for that question. I couldn’t appreciate it more. You know, like I said, the reason we have those complex structures—and, yes, in some cases it works for us; in other 

cases it is hindering us, and I cannot change it. I have inherited 

this. We are a 100-year-old business, right? The C corp came from 

the 1970s. The S corps came from the 1990s, and they were all 

done during the time that there was tax changes going on all the 

time and reasons to do these things, but I would love to simplify 

it. 

Like I said, I would love to have one fiscal year end, but I would 

trigger—I am a 100-year-old company. We have retained earnings 

on the balance sheet, not necessarily cash, but it would trigger a 

huge tax liability to do that. In fact, I am also—you know, in the 

business I am here talking today we talked about women and minorities. You know, my sisters both help me run the business, and 

we would like to transfer ownership to myself and my sisters so we 

would become a woman-owned business. In order to do that, we 

77 

would trigger, again, a huge tax liability. So we can’t afford to do 

this. 

I would love to make these changes. So I would trade in a second 

all this mess, all this complexity, and all the time we spend on it 

for a simple reduced system. And, again, businesses are not opposed to paying taxes. The transportation tax is a great example. 

You know, I think consumption taxes is an important focus. Why 

are we taxing income? We want income. Let’s tax other things. You 

should tax the things you don’t necessarily want to have, not the 

things you do want to have. Thank you, ma’am. 

Ms. JENKINS. Excellent. Thank you. 

And maybe for some of the us rest of you, I think it has been 

reported that American businesses spend about 3 billion hours and 

$150 billion complying with this outdated burdensome Tax Code 

that is on the books. 

Could each of you just comment quickly about the costs associated with filing your returns and about the opportunity cost, what 

does it mean to your business to lose that kind of time and resources? Mr. Stephens? 

Mr. STEPHENS. So to put it in reference, our shareholders put up about $240 billion of capital for us to run the company, and they 

get about $12 billion or about $2 a share in dividends. And we pay 

about $4 a share or $24 billion in taxes in the United States every 

year. It is a number that is disclosed in our annual report. So our 

shareholders get half of what Federal, State, and local governments 

do here in the United States, even though they are putting up all 

the capital for the business. 

We have about 300 people who work full time in our tax depart- ment. We have a budget of about $100 million a year for that tax 

department, and we file over 250,000 tax returns in the U.S. So it 

is an extremely complex system that causes a diversion of funds 

that would otherwise be available to invest into complying, and we 

take pride in our compliance in complying with the law. 

Ms. JENKINS. Thank you. 

Mr. Farr. 

Mr. FARR. I don’t have the specific numbers, but I know how 

many people operate doing these taxes, and we have hundreds of 

people in the United States and around the world operating to fill 

out the tax reforms and compliances and making sure we are doing 

it right. And therefore, as I said earlier, I would love to take that 

money and reinvest it in another part of the company. I mean, 

from my perspective, what we look at is we are trying to invest to 

grow, and I have to allocate those resources. One of the allocations 

is tax compliance and paying the taxes and all the forms we fill 

out. So clearly, you could take that and put it somewhere else, invest in the company for growth or technology for new products. So 

it is a huge burden for us and something we have to do by law, 

and I sign it by law. 

Ms. JENKINS. Okay. Thank you. 

Chairman BRADY. Thank you. Is expired. 

Mr. Kind, you are recognized. 

Mr. KIND. Thank you, Mr. Chairman. I want to thank the witnesses for your testimony today. Very helpful. And hopefully, Mr. 

Chairman, this will be the one of many hearings that we have movVerDate Sep 11 2014 09:20 Feb 13, 2019 Jkt 033393 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33393.XXX 33393
78 

ing forward on the complexity of taking a serious run at this Code 

for the first time in over 30 years. 

But first, Mr. Peterson and Mr. Rattner, let me start with you. 

I don’t think you had an opportunity to answer Mr. Levin’s question about whether you think it is important for us, if we do take 

a run at comprehensive reform, that we do it in a fiscally responsible manner, that we look at certain expenditures that we can 

close down in order to help pay for a simplification and a lowering 

of rates at the end of the day. 

Mr. Peterson. 

Mr. PETERSON. Yes, thank you. First of all, I am looking now 

at the different tax plans in a way that, as you work through them 

yourselves, you will find ways to ensure that we can pay for them, 

that they are in addition to being permanent and comprehensive, 

that they are also fair and find a way to ensure that we have paid 

for it through them, right? 

Mr. KIND. Mr. Rattner. 

Mr. RATTNER. Yes. I think I have made clear my view about 

the fact that we should not have a tax proposal or a tax bill that 

increases the deficit when it is scored using conventional means. 

We can have a debate about dynamic scoring, but I would not want 

to see that be part of the equation to come up with a tax plan that 

doesn’t increase the deficit. 

Mr. KIND. You know, there is, I think, great consensus in Congress, and perhaps throughout the Nation, that it is long past due 

for us to take a run at the Code, over 30 years, because it is antiquated, it is outdated, it is too complicated, it is less competitive 

right now. The compliance costs are ridiculous. And this is an opportunity for us to do it. 

My fear, quite frankly, though, as we approach this is the easy 

default position. When we get into the complexities and how difficult the tradeoffs have to be made, is that Congress oftentimes 

lapses at the end of the year with a need to try to get something 

done and just cut rates, don’t pay for it, declare victory, go home. 

If that is where we ultimately end down on this, what would each 

of you think, would that be a success for this Congress or a failure 

of missed opportunity? 

Mr. Stephens. 

Mr. STEPHENS. A comprehensive plan that lowers rates and encourages investment would be a win with a prudent tradeoff for all 

financial considerations. That would be a win, yes. 

Mr. KIND. Mr. Mottl, again, if we end up, though, just cutting 

rates, not paying for it, declaring victory, is that a success or a 

missed opportunity, in your mind? 

Mr. MOTTL. I agree with you, Mr. Kind. And, again, that is why 

I am proposing that we also do a goods and services or some other 

type of board or adjustable VAT tax. That is how you pay for it. 

You broaden your base. And, again, I am proposing this offsetting 

credit on the people’s income—the taxes that they pay on their 

wages. You know, it is 15 percent for the average American worker 

that they pay in Federal taxes. 

And I know there is some concern about Social Security. You 

know, the first year that—it is on the bottom of the statement. I 

read it every year. The first year that there is not going to be 

79 

enough funds to pay benefits is the first year I am eligible for benefits, so I share your concern about funding Social Security, and that 

is why my proposal is an offsetting credit. 

You keep the Social Security taxes on the payroll and those go 

into a bucket, but from another bucket from the goods and services 

tax there’s a plus, there’s a credit. So you protect that dedicated 

cash flow that is so important, so important for Social Security. 

Mr. KIND. I appreciate it. 

Let me just move on with another question since I’m running out 

of time. One way of building bipartisan support I think in this 

place is something that Mr. Blumenauer touched upon, is tying tax 

reform into a major infrastructure reinvestment plan. As one of the 

leaders in the New Dem Coalition in this House, we are 61 strong 

right now, just yesterday, we sent a letter to President Trump asking him to consider doing—approaching tax reform with a tie-in 

with infrastructure investment. 

And, Mr. Chairman, I would ask for unanimous consent to have 

our letter submitted for the record at this time. 

Chairman BRADY. Without objection. 

80 


33393.039

<!:ongn.'l.H> llf tl!J~ llnitl'll ~tutcs 

lUm'ltington, DOC 20515 

President Donald J. Trump 

The White ltO\L'It 

1600 l'enMylv~nia A venue 

Woshington. DC 20500 

Dear President Trump, 

May 17,2017 

As Membors of the New Democrat Coalition, we are committed to v.orking 10ward 

bipanisan rolicics that create jobs and grow the economy in •'·try to"n and city across th<! 

country. In th<! coming months, v.c hovo an opportunity to find ogrcemem on a visionary plan 

tlun brini;S our infrastructure system into the 21~ century and once ngain makes Amc•icftn 

businesses the most competitive in the world. 

America'; network ofuansporution. energy. water, broadband, and civic intiustrueture 

was once the envy ofth<! entire world And yet. today, it is crumbling all around us. The ~ational 

Highway System, one of the crowmna human echie,ements of the 20'" cenrury, 1$ badly in need 

of repair and 1s not ke<ping up "'ith the projected growth in the Amcriean ecooomy. Mexico and 

Conad• are out competing Amencan porto tx.::ause they are making hugo investmcniS to 

accommodo.tc Pol)t~Panamax ships, and many of our airport~ pale in comparison 10 those in 

Europe and Asio. Our water nnd cncrg.y pipdines are outdated, ineflicient~ and in muny places. a 

danger to the American people. Our electric grid is also deeply vulnernble 10 attack and needs a 

nation"" ide upgr3dc. 

Put s1mply. this is the result of a f~ govemmcnl trnt Ita.< failed to im·est in the basic 

needs of the Amencan people. For too lon~~o we have undennvesttd and r<lied on short·sighted, 

stoJ>'gnp mcasu1cs trnl don't provide the level of funding we need to support a world-c:loss 

economy. According to the Amcricnn Society of Civil llngineel'$ 2017 Report Card, U.S. 

infrnstructurc hilS o cumulative grade of"l.}+" and needs trillions of dollars of investment by 

2025. Similarly, our tax system has not boen updated for three dccudcs nnd now hinders U.S. 

companies &om mninmining on intcrnotiun.1:1l compelitive edge./unerica's workers dc..,ervc 

hotter. 

We·~ with )'OUT call to make a major investment or atle3St Sl trillion in 

inliastructur<. Additionally, we bolieve this should bo coupled wi~1 reforming our lllX code in a 

fiscally responsible manner. We CllCOUI'IIt;C you lo "orl< toward a pl:ln that includes a •i&nificant 

investment in infrastructure, including direct federal spcndinK that is paid for in part by • deemed 

repatriation in comprehensive tux reform. Members oftJ1e New l>cmocnu Coalition have led 

ciTorts ulonu ehis line !hoc have gained si&niticant bipartisan support. Combining ~1ese ctlhrt> 

would be 3 win~ win tOr American w()rk(rs and our economy. Spccilically, thi3 inveslmcnt 

should provide a combination of direct funding and innovative fin:~ncing that addrc.~ rural and 
81 

f 


33393.040

Val Butler Deming:; 

Member of Congress 

ngrcss 

/Jut 1:4d~ BillKc'llting (} 

Member of Congress 

Se<Ut Patnck Maloney 

Member of Congress 

Member 

Bill~ of Congress 

Me

D~ mber of Congress 

~ Member of Congress 

~ Membcr of Congress 

0 • ry . Meeks 

Member of Congress 

~ Member of Coo gross 

Rick Larsen 

Member of Congress 

~ ~A/:- ~ ~~~~ 

Member of Congress 

Donold Norcross 

Member of Congress 

t:1&/;lb Ed Perlmutter 

~ Soon H. Peters ;;;;;·72 ·-··--

Mike Quigley ~ud!~V- Member of Consrcss Member of Congress 
82 

Mr. KIND. Mr. Rattner, I know you haven’t been the biggest fan 

of deemed repatriation in the past, but we do have a ton of money 

that is parked overseas not being utilized or being used efficiently. 

And one of the ideas that we have been focusing on within the New 

Dem Coalition is having a fixed rate deemed repatriation dedicated 

for infrastructures. Part of the revenue stream that we need to get 

going on this. Do you have any opinion about that? 

Mr. RATTNER. Sure. I have not been the biggest fan of deemed 

repatriation because the evidence doesn’t suggest it would make 

much of a difference. We tried in 2004. It didn’t really make a difference. There is a lot of cash on companies’ balance sheets here 

now that they are not investing. But in return for getting critical 

money for infrastructure, I would support either deemed repatriation or actual repatriation tax if that money were channeled for 

useful purpose simply to be able to get going on the infrastructure 

issues. 

Mr. KIND. Yes, Mr. Farr. 

Mr. FARR. I think, you know, the reason why it didn’t have 

much impact, it is a one-time impact. It goes back to permanence. 

And so I fundamentally believe if you have a policy just like our 

European policy is—so they—everyone brings the money back; you 

pay a simple tax on that—that money will come back to the United 

States, and it will be invested in the United States. My perspective: 

Having that money here is a good thing. 

Mr. KIND. Hopefully, we will end up at the end of this process 

with a much more simplified, more competitive Tax Code, but also 

fair for working families, for small businesses, family farmers back 

home too. And that is the goal at least, Mr. Chairman. 

Thank you. I yield back. 

Chairman BRADY. Thank you. 

Mr. Paulsen, you are recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

I want to thank, also, all the testifiers today. This has actually 

been very enlightening testimony. 

Look, from my perspective, I continuously hear from Minnesota 

companies about the importance of having major tax reform that 

is permanent, that promotes investment, that lowers rates. And it 

will boost paychecks. It will increase jobs. It will help the economy. 

I hear that all the time. 

We know the larger companies that I have in my area: It is the 

three Ms of the world, the General Mills, the Cargills, the larger 

institutions that employ so many people. But it is also these small 

businesses, these Main Street businesses that people have never 

heard of, but they are so important as the engine of the economy. 

I think of Steinwall company, which is a plastic injection manufacturer that I recently had a chance to tour in my district, or the 

Baldinger Bakery that produces the buns for McDonald’s looking 

for a more simplified Tax Code, or even the more recent example 

of a letter I received from Dawn, a small business owner in Loretto, 

Minnesota, who writes in, saying: We have a once-in-a-lifetime/generation window of opportunity to unleash a strong economy and to 

repair and simplify the Tax Code that is helping hold back our 

small-business economy right now. 

83 

What I think is really striking about these messages and what 

you shared today is there is an acknowledgment that all of our job 

creators, both big and small, are in this together. And so, simply 

put, regardless of whether you work at a large or a small company, 

these businesses and the men and women who are working alongside them each day will benefit from fixing a broken Tax Code. We 

are talking about lowering the rates, having permanent reforms so 

you can plow more money into their paychecks and more money 

into their investments and higher wages. 

And so, Mr. Stephens, you had mentioned right off the bat, this 

is about unleashing economic growth. It is about—it is a key driver 

in investment. 

Mr. Mottl, you had mentioned three different types of tax filings 

you have to do and the importance of leveling the playing field. 

And, Mr. Farr, you have talked about the importance of manufacturing with two-thirds of manufacturers particularly paying 

under that high individual tax rate. 

I will just start here. And we have all shared the perspective already. But it is well documented, Mr. Stephens, that our current 

high corporate income tax rates really does reduce domestic investment and entrepreneurship as well. And how would new investments made as a result of a 20-percent rate affect communities? 

How would that help communities? What might it mean to the 

local suppliers, again, which I think Mr. Farr talked about, the 

contractors, the vendors, that you partner with in your operations? 

Or, more importantly, what might that 20 percent rate mean to 

those individuals you currently employ or might look to hire in the 

future? 

Mr. STEPHENS. Thank you for the question. Quite frankly, it 

would have a very direct, immediate, positive effect on our vendors, 

on our suppliers, and, quite frankly, on our employees. As you put 

more dollars to work in capital investments, you generate demand 

for jobs. Whether you generate demand for technical work in engineering design, architectural work, you put to work demands on research for new technologies and new services. 

All of those items would have additional demand so that the supply that is out there would go to work. So more people would go 

to work, and in the cases of many of the people, their wages would 

go up because there is more demand for their services. 

This, then, would start that cycle that comes back to demand for 

our services, demand for mobile phone services, television services, 

broadband services. So it has a virtual cycle. But by the same 

token—I think this is really important—State and local governments would see an immediate uplift in their prosperity because it 

would generate jobs. It would generate payroll taxes. It would generate sales. It would generate sales taxes. It would generate investments in assets that generate property taxes. And, once again, that 

generates additional demand for our services and other large companies’ services. So it would have this cycle of continual growth. 

That is what is so important. As we have this extremely high 

rate and investments are moving offshore and they will stay there 

for the longer term, we are missing out on that opportunity. So acting quickly to get that done now will be an important answer. 

84 

Mr. PAULSEN. So keeping headquarters here, keeping innovation here, lifting our economy for everyone is going to be a longterm boost with permanency, right? 

Mr. Mottl. I will just keep going right down the line. 

Mr. MOTTL. Just briefly, you know, you mentioned the business 

in your district that makes the buns and the one that does the 

plastic. You know, the purpose of those businesses is to bake the 

buns and make the plastic parts. The secondary effect is, hopefully, 

they make a profit, right? And so I believe that if we help these 

businesses be better at what they are doing, have more capital to 

do that, they will invest in making more buns, making more parts. 

Hopefully, as an offset, they make a profit as well. But, keep in 

mind, the primary purpose is to do what they do, and if you give 

them the resources to do it, they will do more of that. 

Mr. PAULSEN. Mr. Farr. 

Mr. FARR. Three comments. We have two facilities in Eden Prairie, one in Shakopee, one in Chanhassen. We are investing right 

now in Shakopee. We are moving jobs back into the country. And 

it will help, obviously, from a technology jobs standpoint. It helps 

with education. It helps employment. It helps everything around 

that area. 

So, from my perspective, it really spreads out and helps the community in a big way, just like it hurts the community when we 

leave. 

Mr. PAULSEN. Mr. Farr, I visited both those facilities, and I 

heard the same message there. 

Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

So, Mr. Pascrell, just a note to Members, so after your questioning, we will move to 2-to-1 ratios going forward. 

Mr. Pascrell, you are recognized. 

Mr. PASCRELL. Thank you, Mr. Chairman. 

Good afternoon. I want to thank all the members of the panel. 

Each of you are CEOs or senior vice presidents. I want you to 

think about something I am going to say now: You know what your 

effective tax rate is now. And I am sure you have done the numbers. If the Ryan-Brady plan becomes the law, what will your effective tax rate be? 

You see, we have a problem. I listened to the chairman open up 

this meeting today, this hearing. And I listened very carefully, as 

I usually do, to the chairman. He mentioned three things in his introduction. He mentioned the corporate tax rate. Ten years ago, 

Democrats on this Committee pushed for a lowering of the corporate tax rate to 25 percent. Secondly, he mentioned the immediate expensing, write it off. That is the second thing he mentioned. 

And the third thing you mentioned, Mr. Chairman, is that businesses are eager for tax reform. 

The problem with what you said, Mr. Chairman, is tax reform 

does not only pertain to the businesses of this country. Tax reform 

refers to everybody who pays, in some manner, shape, or form, Federal taxes in some form or other. 

We have a problem here, because in the last 30 years, we have 

moved—and I want Mr. Rattner to respond to this, if he would, in 

terms of something he said before—we have moved from an even 

85 

tax system of taxing assets and taxing incomes. That is not the 

case anymore. 

I believe it is somewhere in the high 30s, 30 percent, of taxing 

income and down into the 20 percent of taxing assets. 

And I want Mr. Rattner to tell all of us assembled here what 

that actually means in terms of what someone takes home in their 

pocket, whether they are poor or middle class or on top of the 

mountain. 

Mr. RATTNER. Well, Congressman, I think what you are referring to is that the 1986 Tax Act made taxes on investment income 

and taxes on earned income the same, at 28 percent. And since 

then, they have diverged, and they are obviously 39.6 on earned 

and 23.8 if you include the ObamaCare tax. 

Mr. PASCRELL. Would you repeat those numbers, the final 

numbers, the last two numbers? 

Mr. RATTNER. I believe it is 39.6 is the top rate on earned income and 23.8 on investment income. 

Mr. PASCRELL. What do you think of that? 

Mr. RATTNER. I have a rather heretical view of it. And I am actually a huge beneficiary of it, because I am in the investment 

business and so—— 

Mr. PASCRELL. Well, all of you are. 

Mr. RATTNER. Well, some of them are—they may actually work 

and earn money. I am an investor. 

And so I am a substantial beneficiary of the 23.8-percent rate, 

which, as you know, the proposal now is to eliminate the 3.8 and 

make it 20. 

Mr. PASCRELL. That is right. 

Mr. RATTNER. I personally think it is a mistake. I have been 

in business investing for 35 years. I have had tax rates, as we 

talked about before, at 28. I have had tax rates over 40. I have had 

tax rates at 15 on investment income at one point. None of it has 

affected by one iota how I conducted my life or my business. I see 

no reason why I should be paying 23.8 on my so-called unearned 

income whereas I am paying 39.6 on my earned income. 

I think I would actually support raising all of the taxes on unearned income as part of a way to pay for some of the things that 

we have been talking about today. 

Mr. PASCRELL. Mr. Chairman, I hope you listened to what he 

just said. Because this tax reform that is put before us is phony 

and hypocritical, worse. It sends the wrong message to the poor— 

if I am bold to use that term here—and the middle class at the 

same time. 

What we are doing is saying to the American people: We are 

going to make your lives better. We are going to increase your income and your salaries. You are going to be in a better position 

now if we help the business community primarily. 

I want to help the business community, by the way. But I will 

not vote for tax reform that simply is directed and targeted at 

those who are at the engine. I want to take care of the people, also, 

that are in the back cars and maybe the caboose. 

And that is the problem we have in our tax system right now. 

Yes, we need a change. But it has got to cover everybody, period. 

I yield back. 

86 

Chairman BRADY. Thank you. 

Mr. Marchant, you are recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

I appreciate the witnesses being here today. 

Mr. Stephens, your company, AT&T, has a huge facility in my 

district. And we appreciate the fact that Texas is the headquarters 

for AT&T. 

At the end of the day, it is going to be the job of every Member 

of this Committee to go back to its constituency and say to it: This 

is a major tax reform plan, please support it, and have me convince 

them that it is a good thing for them. 

Let’s take a situation where you three or four companies call 

your employees and call your vendors into a big auditorium and 

you get up in front of them and say: This is why the tax reform 

plan in Better Way is a better thing for this company, and it is also 

a better thing for you as the employee or the vendor. 

And I would like to know how you would go about doing that? 

Mr. Stephens. 

Mr. STEPHENS. Congressman, we are here to support the comprehensive tax reform. We are for it because it will increase investment. Increasing investment increases jobs. When you increase 

jobs, you increase wages. You give people—what they care about is 

their net take-home pay and it will go up because it will be demand, higher demand, for their services. 

And the reason we are for it is because, as those working class 

individuals are fully employed and employed in greater numbers, 

the demand for our services will grow. And if our revenue lines 

grow and we have to pay additional income taxes on that, we will 

be glad to do it. But it is a cycle that helps everyone, as well as 

their local school district, as well as their local police department. 

It also helps those with getting broadband and other services out 

because those additional investment dollars will go into those infrastructure investments, certainly for our company. 

So this is a benefit for all to make us more competitive with the 

rest of the world because we are not today. 

Mr. MARCHANT. Thank you. 

Mr. Mottl. 

Mr. MOTTL. I couldn’t agree more with that. You know, I was 

reminded that this room seals when the doors close. This is a secure room. So we are kind of in a bubble here. And I think that 

we are talking, in general, about being in a bubble. You know, the 

rest of the world has gotten competitive, has changed the way they 

do taxes. And if we don’t change the way we do taxes, we are not 

competitive. And that is what it is about, getting the people at the 

back of the train on board, bringing the jobs back here, bringing 

the businesses back here so small businesses, large businesses, can 

be profitable and can do it here in America. So I hope we can do 

this and get globally competitive and look out of the bubble. 

Mr. FARR. I agree a hundred percent with the first two statements. 

I would add that I would say: Look, if we make investments 

around the world; if we have a competitive tax rate here in the 

United States, it will increase our investment right here in the 

87 

United States. It will come into the calculation of making those investments right here in the United States. 

I also agree you can’t just do business taxes- to our Congressman 

over here- you have to do individuals. Individuals have to see a 

benefit from this. You can’t just make this for wealthy and for business people. You have to make this across the board. This is our 

chance. 

But if we have more money from a lower tax rate as a company, 

we will invest more money, because our job is to grow and invest, 

not to collect cash, but to grow and invest. And that is what we 

would do. 

Mr. PETERSON. When I talk to our employees about the comprehensive tax reform that I know all of you are going to do, I am 

going to tell them we just got a raise, our company just got a raise. 

Instead of spending $560 million a year on taxes, we are going to 

pay less. And what are we going to do that? With that raise, we 

are going to spend it, and we are going to invest it. It is like being 

in a 100-yard dash, and right now, we are starting 20 yards behind. We are running a 120-yard dash against the rest of the world 

who is running a hundred yard dash. And this is going to put us 

back at the start line at a hundred yard dash. 

Mr. RATTNER. I would agree with everything that has been said 

before. So I won’t repeat it. But I would just say this one other 

piece, which is I think there is enormous urgency around this. We 

all understand the political calendar. This is the beginning of a 

new Administration. There is a window in which things, hopefully, 

normally get done. Then we are into midterms, and then we are 

into reelection cycles and the pace tends to fall off. And I think if 

we miss this opportunity, if we don’t come together and find common ground, and all of us are willing to make compromises, we will 

all regret this later. 

Mr. MARCHANT. I agree with that. And I would say to all of 

the businesses that are listening to this, that are watching this 

very closely, we intend to do tax reform. It is our number one goal. 

And we are going to need your help at the end of the day to communicate with your employees that this is a good thing to do, and 

they need to pick up the phone and call their Congressman and 

say: Please vote for this. 

Thank you. 

Chairman BRADY. Thank you. 

Dr. Davis, you are recognized. 

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

And I, too, want to thank all of our witnesses. 

As I have listened to a very intense and some would probably say 

one-sided kind of conversation—not by intent—but, you know, 

there is an old saying in Illinois where I come from. It says: If you 

fool me once, shame on you; fool me twice, shame on me. 

I have been listening to theories about trickle-down economics 

ever since I have been able to read and ever since I have been able 

to hear. And I have never found a way yet where the trickle trickled enough to really assure that the middle class was being protected in the same way that one would expect anybody from a different class or another class trying to protect that interest entity. 

88 

I think the information that we have heard sounds great. But it 

also comes from not enough diversity. It just keeps coming back to 

what John said earlier. And I was wondering, if there were other 

individuals being asked the same question, what kind of answer 

would we get? It is kind of like asking the question: Is it fair for 

birds to eat worms? You ask the bird, you get one answer. You ask 

the worm, you get a different answer. Now you have got to determine which one is right, which one is correct. Whose interests are 

being protected? Or is there a way to protect both? Is there a way 

to prevent there being losers and winners? Is there a way for the 

middle class to look at the proposals that we have seen and say, 

‘‘Yes, this will give me the assurance that my status in life is going 

to be protected’’? 

And so, Mr. Rattner, let me ask you, the tax cuts—and we 

haven’t heard much about how to pay for them. And I believe that 

everything that you get, you got to pay for one way or the other. 

But how do the middle and working classes benefit from basically 

the Republican tax plans and proposals that we have heard about? 

Mr. RATTNER. Congressman, I think, first, as I said earlier, in 

terms of direct benefit, it is de minimis. For an American making 

$50,000, a family, an average American, it would be a $1,000 tax 

cut compared to a $25,000 tax cut for someone in the top 1 percent. 

So there is no real meaningful direct benefit. 

You would have to believe that all of the business cuts that have 

been discussed here would have secondary and tertiary effects that 

would benefit those people. And I would certainly agree there 

would be some benefit. I think it is very, very indirect. And I think 

that, before this Committee should recommend such a package and 

make the contention that it helps the average American, I think a 

good bit more study would have to be done to actually document 

what we are talking about in terms of dollars. Because I think you 

would find that the cost of those tax cuts—which, again, as we 

have discussed, have yet to be paid for, relative to the benefit to 

the average worker may not line up properly. 

Mr. MOTTL. Congressman, you and I are neighbors in Illinois. 

And I am not sure if I am the robin or the worm or the dirt there 

underneath it all, but I would welcome you to come to my business 

anytime. We have hired quite a few folks out of your district. We 

have put them through training programs. And we are hopefully 

giving them that better life. I couldn’t believe more in what you are 

talking about, and I would love you to come and ask those folks 

yourself. Any time you are welcome. 

Mr. DAVIS. Thank you very much. And I will look forward to 

doing that. We are appreciative of every effort that is made to try 

and help even the playing field. 

Thank you very much. And I yield back. 

Chairman BRADY. Thank you. 

Mrs. Black, you are recognized. 

Mrs. BLACK. Thank you, Mr. Chairman. 

And I want to thank all the panelists for being here today. This 

is a very interesting conversation. 

The way I break this down is there are four factors that actually 

drive growth. One is the labor supply. The other is the physical 

capital. The other is human capital. And then fourth is innovation. 

89 

So when we look at economic growth here in the United States, it 

really has been held back. It is been held back over the last several 

years. 

And part of that is because of the size and the complexity of our 

Tax Code. That is one reason. 

Regulations, onerous regulations, that are put in place, certainly 

do help or do work a part of holding back that success. 

And for years, we have seen a low labor force participation rate. 

I know we will read the newspaper, and it will say, well, unemployment is down. But we know that only about 62 to 63 percent of 

those able-bodied workers that could be in the workplace are actually in the workplace. So we have seen low participation rates. And 

that certainly isn’t helping people at the lower or the middle income, to not have that. 

We have seen weak capital investment. Why is it that people 

aren’t investing so that we can see a growth in manufacturing and 

other industries and sectors? 

And, essentially, no wage growth. 

So these are pieces and parts that actually are affected by the 

Tax Code and would be affected as we make those changes. 

I do want to focus on, as many of the others here have, is the 

real reason for this, in my opinion, is that we need to unlock the 

opportunity and the prosperity for the American workers. That 

should be the goal at the end of the day. And I know from my own 

experience—I am a small-business owner—that human capital is 

the most important part of my business enterprise, having good 

employees that we pay good wages to, both to help our business 

succeed but also to make sure that our employees prosper. That is 

very important in our model, and I hear that from you all as well. 

And so we have got to look at ways to strengthen our people so 

that they have the skills and the training so they can compete and 

succeed in the global economy and ultimately to enjoy the benefits 

of their hard work. 

Mr. Farr, I want to turn to you. Your testimony speaks to the 

vital role of manufacturing and what it plays in our economy. I 

have a lot of manufacturing in my district, and I say amen to that. 

What are the kinds of tax policies that create not just more manufacturing jobs but better jobs and higher paying jobs? 

Mr. FARR. I think one of the key issues I talked about is the research and development tax benefit, because that is going to be our 

lifeblood of the future. And manufacturing is changing, and we 

are—— 

Mrs. BLACK. Uh-huh. 

Mr. FARR [continuing]. Going to have to reeducate all of our 

workforce. 

Mrs. BLACK. Amen. 

Mr. FARR. And we are spending millions of dollars right now, 

because without them, we won’t have a manufacturing facility. The 

research and development credits are very important. 

American companies are very innovative. We are the most innovative in the world. And by having that ability to stay ahead of 

that foreign competition, it allows us to compete even though we 

have the highest tax rate, some of the highest regulations, and 

some of the weakening infrastructure we talk about. So innovation 

90 

around R&D tax credit would really make a big difference for us. 

We are willing to give up other things. But that, from my perspective, is the lifeblood of what makes American manufacturers competitive. 

Mrs. BLACK. And if you do better, do your employees do better? 

Mr. FARR. Our employees do a lot better. 

Mrs. BLACK. And why is that? Because you need good employees to run your business. Without them—— 

Mr. FARR. Because we invest in education. 

Mrs. BLACK. That is right. 

Mr. FARR. We invest in our employees. We invest in local education—— 

Mrs. BLACK. All works together. 

Mr. FARR [continuing]. The money back in. 

Mrs. BLACK. So, Mr. Peterson, just really quickly, on a similar 

note, you described the increasingly important role of the service 

sector. Are there tax policies that you have thought of that would, 

again, create not just more service industry jobs but also high-quality jobs with better pay? 

Mr. PETERSON. We would definitely look at the service industry 

creating high-paying American jobs for all Americans. And one of 

the ways that we look at this is related to the territorial system 

specifically. 

The way intellectual property and intellectual capital is developed, it can move anywhere. It is not like a manufacturing plant. 

Manufacturing plants take a lot more of what you talked about, 

physical capital as well as financial capital, to make a decision on. 

But it is very easy to move people and to move intellectual property. Our tax laws today incentivize people to develop intellectual 

property probably in the United States but then move the ownership of it offshore. 

The territorial system is one that is most important to get the 

benefit of that intellectual property, that ownership, and the tax 

back in the United States. 

Mrs. BLACK. So what I hear you saying is that, as we have in 

our business experienced, that the better we are able to do, the better we are able to treat our employees, which that boat that rises 

is rising for both the employer and the employee. So this Tax Code 

is here so that we can make sure that they both get married together and that we see that the Americans, all the way across the 

board, are doing better because our Tax Code has released those 

dollars and the energy to have the economy move ahead. 

So thank you so much. I yield back. 

Chairman BRADY. Thank you. 

Mr. Kelly, you are recognized. 

Mr. KELLY. Thank you, Chairman. And thank you all for being 

here. 

First of all, I would not be here today if it weren’t for actions 

that took place in 2009 where one of the dealerships, one of our 

franchises, actually, under the car czar—by the way, Mr. Rattner, 

you are not a car guy. I am a car guy. You are a hedge fund guy. 

To me, a hedge fund is the guy who plants shrubs. That is what 

I save money for at home. 

91 

Don’t take that the wrong way. No, don’t take it the wrong way. 

I mean this sincerely because. I have never done your job. You 

have never done mine. But I know the reason that I am here today 

is because one of my franchises was taken away because of the 

United States Government, not because of something I did wrong. 

It is that simple. 

All of you that actually come from the private world, when I look 

at what is going on—and there is not one person—because all we 

are talking about today, is there a need for pro-growth tax reform? 

And, without a doubt, everybody says: Yes, there is. There is. It is 

unquestionable. 

Then, the next thing is: So what is fair, and how do we address 

fairness, and how do we define fairness, and is it really the best 

for everybody? 

I have got to tell you. I have looked at this every which way we 

can, from death taxes. We are third generation right now. I want 

to see it go to a fourth generation. And I don’t know that we can. 

And, Mr. Mottl, I am with you. We are a C corp. We are also an 

S corp. That wasn’t a decision we made on our own. The government helped us make it. So as we look at all these things—and 

when it comes to pro-growth, it better be pro-growth. I am just 

really concerned that a country that is going to have record revenue still can’t come close, can’t come close, to paying its 

spendings. You couldn’t do it in your business, and none of us could 

do it at all. 

And, Mr. Rattner, you are concerned about deficits. I am greatly 

concerned. I know that what when President Bush left office it was 

almost $10 trillion and when President Obama left office it was almost $20 trillion. So the concern with that is immeasurable. I don’t 

know how it grew that fast, but it did. 

Pro-growth. Pro-growth. In your estimation of where you sit— 

and I know we compete globally now. So it is kind of foolish to 

think we can do this on our own. We have to look at the model we 

now exist in. All of these different items that we are talking about 

today, is there any of them that you disagree with as far as growing our economy and making sure that all of you folks—that pay 

every penny, by the way, of what this government uses to run 

these wonderful programs comes from you. I have told the chairman many times there has been years I have not paid a penny in 

taxes. It is not because I understood the Tax Code. It was because 

I didn’t make any money. And one of those years was in 2009 when 

the annual sales rate for automobiles, by the way, went from $16 

million to $9.5 million. That is a hell of a hit. So it wasn’t a matter 

of policy at that time. It was a matter that the world was upsidedown. 

So anything that you disagree with what we are doing or what 

we are attempting to do—because we all agree that if you are 

healthy, the country is healthy. You are able to hire people. You 

are able to educate people. You are able to participate in your communities. And, more importantly, you are able to fund every single 

government spend that we have out there. Anything that you disagree with? Anything that you say we should be doing faster other 

than getting this to an end? 

Mr. Farr. 

92 

Mr. FARR. The only thing I would say you got to do faster is we 

need to get our global competitive tax rates equal to our competitors around the world. We are losing jobs every day the more we 

sit here with this big difference. This is a big issue. I will tell you 

right now, I invest constantly around the world, and these changes 

are really big issues to us as a company. And if we don’t get this 

back in line, we are going to continue to lose jobs, and we are going 

to fall further and further behind. This is very important to us in 

this country. I am an American. I manufacture in America, and I 

live in St. Louis, Missouri. 

Mr. KELLY. Perfect. 

Yes, Mr. Stephens. Or Mr. Mottl. It doesn’t matter. You are all 

doing the same thing—— 

Mr. STEPHENS. Congressman, the only thing I would add is urgency is important. And let’s not let perfect be the enemy of the 

good. We are willing to make tradeoffs. We understand that there 

are tradeoffs to be made, that this is—there are multiple interests 

that have to be accounted for, and we all accept that. Please, with 

urgency, don’t let the perfect be the enemy of the good. 

Mr. KELLY. Thank you. 

Mr. Mottl. 

Mr. MOTTL. One quick thing, just, you know, how important it 

is to make this easy for small business. You clearly get that. 

But, you know, we talked about deficits also. These other countries that are being very competitive, they are not so worried about 

deficits. They are worried about getting the jobs, getting the industry, and getting the stuff there. So it is a tough problem. I am on 

this side. But it needs to be dealt with. 

Mr. KELLY. Mr. Peterson. 

Mr. PETERSON. I am encouraged that we have begun this process and that we are having this hearing. And this is going to be 

hard. But because it is hard doesn’t mean we shouldn’t do it. 

Mr. KELLY. Mr. Rattner. 

Mr. RATTNER. I am a shrub. So I don’t know if shrubs are allowed to talk. 

Mr. KELLY. You and I have been together before. But I got to 

tell you: I wish I could have sent you the letter I got taking away 

a family-owned businesses because of somebody’s whims. Okay? So 

I don’t want to get into that right now, although we are. 

But I am going to say this—I am reclaiming my time. Thank you 

all for being here. And this is the first step in you being here before—you are the revenue producers. We are the spenders. You are 

the producers. Thank God we are finally getting the private sector 

in front of us right now to let everybody in the world know how 

we do improve our country. So thank you for being here. 

We can talk later, Mr. Rattner. 

Chairman BRADY. Thank you. 

Ms. Sa ́nchez, you are recognized. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman, for holding our very 

first hearing this Congress to discuss what I consider to be the 

most pressing legislative issue, and that is our severely overdue tax 

reform effort. 

And I want to echo our Ranking Member’s statement that lasting, comprehensive tax reform means absolutely nothing if it 

93 

doesn’t put the middle class first. And I would really urge that this 

be a bipartisan effort. 

I continue to hope that we can work on a bipartisan package unlike the recent health care reform attempt, because it is very frustrating to sit and find areas of common belief but not have your 

voice or your opinions heard. 

And while it is impossible to highlight everything that I think 

should be a priority for this Committee as we continue on this path 

toward tax reform, I am going to try to hit on a couple of key notions. First of all, I want to reiterate a point that I have made 

many, many times. Tax reform needs to be comprehensive and not 

piecemeal. We cannot fix the Code for one group of people, leaving 

countless others worse off because of it. 

We also can’t cut taxes for the richest of the rich and assume 

that somehow that will magically grow the economy. You cannot 

cut your way to growth. That has been tried, and it has failed miserably. 

My biggest fear in this process has always been a final tax reform package that puts American workers and the domestic businesses that employ them on an even more unequal footing in our 

Tax Code. Our Tax Code is woefully out of date. But how we get 

from here to a revamped Tax Code really deserves some thoughtful 

deliberation. And we really need to roll up our sleeves and get our 

hands into the nitty-gritty of what is good policy. 

The process also requires some thoughtful feedback from those 

who are going to be most affected by the changes that we will eventually make, which is why I hope that we won’t continue to have 

hearings where we only have panelists who represent a narrow set 

of interests. 

And I would love to ask the panel, rhetorically, how many of you 

are the sole or primary caregiver for an aging parent or a dependent child? How many of you are single heads of households? How 

many of you struggle at the end of the month with whether or not 

to pay your utility bill or go by groceries for your children? 

I think that those perspectives deserve their time in the sun here 

to have their perspectives voiced as well. When we get one narrow 

swath of perspectives, I don’t think that that does anything good 

for a thoughtful and robust discussion about how tax reform should 

move forward in a way that is fair. 

I have often said that our Tax Code reflects our priorities as a 

country, and we need to create an environment for good-paying jobs 

to flourish and allow families to be able to save and have some financial security. 

You want to talk about uncertainty. Many American families face 

an existential uncertainty from day to day, which is very different 

than business planning uncertainty. 

Now, during my time on this Committee I have been proud to 

work on legislation in a bipartisan fashion to try to help ease the 

burden of child- and eldercare costs. And it is my hope that the 

Committee will consider those financial responsibilities and strains 

on families, and the nuts and bolts of those proposals, as we work 

to update our Federal code. 

Beyond that, working families are only able to meet their needs 

at home when they are able to earn a decent wage at work. And 

94 

while this panel seems to focus on the competitiveness of our countries—and I am not taking that away. That is an important priority. I don’t disagree that we shouldn’t focus on how to make our 

companies competitive. But we also have to keep in mind: How do 

we help working families be successful as well? And it is not just 

about cutting the corporate tax rate. We need to look at what policies really help those struggling working families. 

Questions that working families deal with, the ability to afford 

quality childcare or to purchase a home or to save for retirement, 

those should be a focus of this Committee right now. 

Right now, we are forcing families to make impossible choices, 

and I believe that by highlighting those tough issues, we will force 

this Committee to be a little bit more thoughtful in its approach 

to tax reform. 

With that, I have one question. Mr. Rattner, I want to know if 

you could speak to how addressing the problems that middle class 

and working class Americans face, how could that benefit the economic impact across the board? 

Mr. RATTNER. I think, Congressman, that would be a huge 

plus, because, as I have said before, there is a supply side to the 

economy, which is what a lot of the investment issues we have 

been talking about focus on, and there is the demand side. And to 

the extent that middle class people have more resources, are more 

able to go out and buy things, then that is obviously a big plus for 

economic growth. 

Chairman BRADY. Thank you. All time is expired. 

Mr. Renacci, you are recognized. 

Mr. RENACCI. Thank you, Mr. Chairman. 

And I want to thank all the witnesses for being here as well. 

It wasn’t that long ago that I probably could have been sitting 

on the other side there with you as a businessman for almost 30 

years. 

Mr. Rattner, I also have to say that the only reason I am here 

is my profitable business, my car dealership, one of them, was 

taken away from me during the car czar days. And, by the way, 

there were 53 employees in that business—it was profitable—who 

were hard-working, struggling Americans, like some of my colleagues want to talk about, that I had to let go when the business 

was shut down. So we have to remember, when government interferes, people get affected. And the Tax Code is affected. 

And the one thing I want to talk to you about, I want to talk to 

you about another person that I represent. It is that 24 year old 

that starts out his first business. He or she starts out, and they 

don’t have any money. So they borrow some money. They write off 

the interest. They start hiring people. They don’t take a paycheck. 

They don’t take a paycheck. And they hire those hard-working, 

middle class Americans. And they start to grow it, and then they 

have to look at their business, and they say: Wait a minute. I can’t 

hire any more people, because I have got this tax burden. So I slow 

down on my hiring, and I have got to pay my tax burden to the 

Federal Government. So you can’t grow and you can’t bring more 

people on. That is a business that is not represented in the panel. 

But the truth of it is that is the hard-working American that 

needs to be talked about as well. And, by the way, 34 years ago, 

95 

that was me. I started my first business with nothing. I was a 

hard-working, middle class person, barely making ends meet. But 

I was able to live the American dream, and the Tax Code did get 

in the way. So the good thing about today is I heard agreement 

from everyone. 

Here are the things I heard agreement about: We need to lower 

taxes. We need a territorial system. We need to make sure the U.S. 

is more competitive. And there is a cost to doing nothing in the 

form of businesses and jobs leaving. That is so important. 

Now, the burden of the Tax Code, as I am aware of, corporations 

don’t pay taxes. You all know that. Corporations pass it on. 

So the more taxes you pay, you are passing it on to the individual. It is the consumer. And we have to look at that because 

that is higher prices to the consumer. 

So here is what I really want to do. I want to get to the bottom 

of this. The real relief from the corporate rates going down will be 

to wage earners, consumers, and shareholders. 

We do have the highest tax rate in the world. And because we 

have highest tax rate in the world, companies are leaving because 

they are not competitive. We know that. I am hoping the American 

people are watching this, because that is the truth. And I think all 

of you would agree with this. We have the highest tax rate in the 

world. 

When companies leave, we lose tax revenue. We lose tax revenue. 

We lose tax revenue. The United States Government loses tax revenue. 

So we have to become more competitive. The way we become 

more competitive in a global economy is dropping our tax rates. 

Would you all agree with that? Do you all agree we got to lower 

tax rates? Good. 

Because that has to be the driver. We have to lower tax rates. 

And the disparity, really, between the income, between these tax 

rates, is what is driving us. So tell me, would you all agree—because I want top end now. We can get into the weeds later. But 

on top end, you all would agree we have to lower our tax rates? 

Everyone here? You all would agree that we need to have a territorial system? You all would agree that the U.S. has to become 

more competitive with a lower tax rate? You agree? And you all 

agree that we can’t do nothing. 

So, I mean, we do have some agreement here, bipartisan agreement, which is great, because if we can get this economy moving, 

it is going to be so much better for the people, those hard-working 

American families. 

So this is the concern I have, and I—tell me what you think we 

should do immediately. I mean, immediately. 

And I would like to hear an answer from everyone here. What 

should we do immediately? Because tax reform is difficult. 

Mr. Rattner, I will start with you. 

Mr. RATTNER. Look, unfortunately, I think it is a package. I 

think you need a comprehensive package that addresses all the 

various issues we have been talking about today. So I don’t think 

going in now and cutting the corporate tax rate to 15 percent or 

25 percent and saying, ‘‘Okay, we have done our job,’’ is anything 

remotely like a solution. I think you guys have a huge job on your 

96 

hands with thousands of pieces. So I don’t think, unfortunately, 

you can do it today or tomorrow or the next day. I think you need 

to take some time and do it right. 

Mr. PETERSON. Well, my thinking would be we have to be bold, 

and as you go through this process, as we just heard, it is complicated. There are thousands of pieces. But let’s be bold, and let’s 

get everything on the table, and let’s fix it. 

Mr. FARR. I agree. We need to be bold, and we need to bring 

all the constituents in, the smaller people, the people in the factory, 

all the way up to the board rooms. And we need to think about all 

the impact to these individuals and what it means. But we need 

to reinvest in America. Get the money back in America. 

Mr. RENACCI. Mr. Mottl. 

Mr. MOTTL. Lower it, simplify it, and change the way you collect it. 

Mr. RENACCI. Mr. Stephens. 

Mr. STEPHENS. Lower the rate, create a cycle of virtuous investment, and do it right away. 

Mr. RENACCI. Thank you all for being here. I appreciate every 

one of your testimony. Thank you. 

Chairman BRADY. Thank you. The gentleman yields back. 

Mr. Holding, you are recognized. 

Mr. HOLDING. Thank you, Mr. Chairman. 

Mr. Peterson, in your testimony, you pointed out numerous times 

the competitive flaw in our current worldwide tax system versus a 

territorial tax system. And this is an extremely important point in 

an area we obviously need to address in tax reform. Everyone has 

agreed to that. I don’t think that I have taken a single meeting 

where someone has argued against addressing our international 

Tax Code. While other countries have moved to a territorial tax 

system, we are one of the last remaining countries to tax the worldwide profits of U.S.-headquartered companies. Others include 

Greece, Chile, Mexico, and South Korea. 

Now, in even more exclusive company, we are only one of two 

countries, Eritrea being the other, to tax the worldwide income of 

U.S. citizens that live and work in foreign jurisdictions. 

Now, we stand in even more exclusive because we are the only 

country, the only country, that has, through its Tax Code, put both 

our companies and our citizens at a competitive disadvantage on a 

global stage. It is pretty remarkable when you think of it. 

So, Mr. Peterson, you are the CEO of a company with global operations. Could you give me your firsthand perspective on how our 

Tax Code has affected the international competitiveness of both 

U.S. companies abroad as well as the ability for you to hire Americans for jobs in overseas operations? 

Mr. PETERSON. Thank you. 

On the first point about some of the competitiveness, let me give 

you a couple of examples. In my testimony, I mentioned that we 

pay a tax rate of well over 30 percent, and we have competitors pay 

in the teens. We have a competitor who is based in Canada that 

operates globally, one of our largest competitors, that pays a rate 

of about 12 percent. There is another one of our competitors that 

did an inversion and moved their operations to the United Kingdom and went from a 30-percent tax rate to a 12-percent tax rate. 

97 

In addition to that, I mentioned earlier, recent acquisitions by 

companies moving all of their offshore cash into international operations and doing acquisitions overseas. 

We are competing on a global scale. We pay the 30-percent rate. 

They pay 12, 15 percent rates. This is something that we feel every 

time we go out and have a situation where we are competing in the 

markets. 

Our employees when we move expatriates around the world or 

we try to hire Americans in other markets—they have a tax advantage, obviously. We pay our employees the same rates, which 

means that, for us, it is also an increased cost. We would like somebody to have the same net income and that means that we are paying for, also, their tax assistance when they are overseas. So there 

is an additional burden for us to have Americans when we move 

them overseas. 

Mr. HOLDING. Well, this example makes sense to you. I have 

a friend who works in mergers and acquisitions. They were buying 

a company in Hong Kong. And they were looking at moving some 

U.S. citizens to Hong Kong to work in executive positions there at 

this newly acquired company. And my friend was telling me it 

would cost 40 percent more to hire a U.S. citizen to do the exact 

same job in Hong Kong. 

Mr. PETERSON. That would be the right increase. Whether you 

are looking at people from United Kingdom, Australia, New Zealand, or from Singapore, Hong Kong, et cetera, there are always 

going to be about a 40-percent cost differential to hire an American. 

Mr. FARR. I did this. I got paid $125,000 a year. It cost the company $500,000 a year to have me in Hong Kong. That is the real 

cost of having an American international. 

Mr. HOLDING. All right. You know, I have also found—I have 

always been struck—you know, you go to a foreign country as a 

Member of Congress, and we always want to meet with the American Chamber of Commerce there in the country, whether it be 

Hong Kong—we are talking about Hong Kong. And often we go 

there, and we don’t see Americans there. But we will see British 

there or New Zealanders there or Australians there as executives 

in U.S. companies based overseas. So I think when we address the 

territorial—the global—the territorial system, we need to address 

how our citizens are treated as well, particularly for their earned 

income, and look at that as a residency-based taxation and align 

our citizens, along with our companies, as to how the rest of the 

world treats them for tax purposes. 

So, with that, Mr. Chairman, I yield back. 

Chairman BRADY. Thank you. 

Ms. Sewell, you are recognized. 

Ms. SEWELL. Thank you, Mr. Chairman. 

I want to thank all of our guests today. 

This is a critically important first hearing. I am a new Member 

of the House Ways and Means Committee. And I can tell you that 

the people that I represent sent me to Washington to try to be a 

part of the solution, not a part of the problem. And I am really excited that we are having a hearing today about tax reform. 

98 

You know, I think it is really important that the tax reform be 

comprehensive and truly be a tax reform. 

I am a true believer that our Tax Code is in dire need of meaningful reform. I have no doubt that, by working together in a bipartisan manner, both parties have a once-in-a-generation chance to 

really pass comprehensive tax reform that will benefit the middle 

class, small businesses, and hard-working Americans across this 

country. 

You know, my concern, though, is that the current Administration’s plan doesn’t seem to be a product of collaborative work. I 

think it is really important—and you have heard us echo this a 

couple of times. And I know that our chairman is listening, and I 

know that he, too, understands the value of collaborative work. We 

all want this tax reform to truly be lasting and not just a mere oneoff. 

Every day, I am honored to represent my home district of Alabama, the Seventh Congressional District. The median income in 

my district for a family of four is $38,000. But I know what is possible with a little bit of resources and a whole bunch of opportunities from this district. I get to live it every day. The challenge, of 

course, is to try to figure out how we can promote viability, great 

opportunities for both businesses and workers. I know that, by sitting in a collaborative manner, that we can achieve both, that there 

can be winners/winners and not just winners and losers. 

But I have to say that I was quite concerned that what we are 

looking at in this current tax proposal is just more tax cuts and not 

true tax reform. I find it to be telling that we have been in this 

room for the last 3 hours almost talking about comprehensive tax 

reform and Vice President Pence just tweeted 20 minutes ago: I 

know that this President will sign into law the most consequential 

tax cuts in American history. 

It can’t just be another tax cut, gentlemen. It needs to truly be 

comprehensive tax reform. I know the folks that I represent have 

been waiting for trickle-down economics to trickle down to them. 

And the spigot is always off by the time it gets to rural America. 

And I think we have to figure out a way to make this work. 

So my question, I guess—my first question is to you, Mr. 

Rattner. We talked about making sure that any tax reform is deficit neutral. I would like to talk a little bit about how we can make 

it distributionally neutral as well. Can you talk a little bit more 

about sort of supply-side economics, which you said, like trickledown economics, doesn’t trickle down to the middle class and to the 

working class? So can you talk a little bit about making sure any 

kind of comprehensive tax reform that we consider is also 

distributionally neutral? 

Mr. RATTNER. Sure, Congresswoman. And thank you for your 

comments. 

And I would say a couple of things. First of all, I agree that it 

needs to be comprehensive tax reform, not just tax cuts, regardless 

of what the distributional effects are. I would recognize that the 

President, in his plan, does propose to simplify the deductions on 

the personal side. We can debate what should or shouldn’t be in 

there. But I think certainly that is a step in the right direction, 

and we should commend him for doing that. 

99 

My problem is the distributional effects. I mentioned before that 

83 percent of this tax cut on the individual side goes to the top 20 

percent of Americans, an average of $25,000 each; 50 percent, a full 

50 percent, of this tax cut would go to the top 1 percent, an average 

of $317,000 each. So that doesn’t seem fair to me, and I don’t think 

it is complicated to fix that. It is simply a question of what rate 

cuts do you give to what level of Americans. And it is just making 

some adjustments to those formulas. I don’t think it is terribly 

complicated. It is just something we need to do. 

Ms. SEWELL. Mr. Farr, I am a firm believer that our Tax Code 

should incentivize the type of behavior we want to see. For me, I 

know that the future of work in the rural parts of my district is 

really quite scary. And so incentivizing apprenticeship programs 

and workforce development and workforce training is really important. Each Congress, I try to introduce bills that reflect that. Can 

you discuss the roll tax reform can play in helping companies like 

Emerson promote workforce development? 

Mr. FARR. For sure. First of all, you have to know, I am a nine iron from Ferguson. And we put $12 million into Ferguson for the 

last 2 years, including an apprenticeship program for the high 

school kids. I went out and raised $2 million in funding. I think 

you find businesses do this, and we don’t really need incentive from 

Federal Government. We want to help our communities. So I think 

you will quickly find out that businesses, if they are really engaged 

in the community, will do it. And I do this—and I tell you what, 

Ferguson is much better today than it was 2 years ago. 

Ms. SEWELL. Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. 

Mr. Schweikert, you are recognized. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

You know, when we all sit down here, we always have a series 

of things we think we want to ask. And this is to all my brothers 

and sisters sitting up here on the dais—maybe I am being pathologically optimistic—and outside, look, some of the political banter 

that seems to be obligational to throw out, if you actually hear 

from the right and the left here, I think there is sort of a universal 

understanding that we need big, bold, comprehensive tax reform. 

This discussion, if you actually look at what we are doing, you 

know, and look—I don’t know whatever noise is out in the rest of 

the world, take a look at our documents; this isn’t just about rates. 

This is big time reform. 

And so, look, I have a personal fixation on this concept of velocity 

in our society. How many of our brothers and sisters out there, all 

up and down the tree, if you actually look at, like, the last 10, 14, 

15 years, how little movement there really has been from different 

sort of stratifications. And that is a crisis for society when you 

don’t see that movement. 

I am desperately hoping for all of you as entrepreneurs and investors that a comprehensive plan, as we are moving forward, is 

great for the society from, you know, the person entering the workforce to the person that just wants stability and wants opportunity. 

Mr. Farr, one of the things I wanted to come to you about was, 

when you also look at investments around the world and you are 

making that decision of—you know, your shareholders, those— 

100 

what is in this tax plan, our tax plan, that makes you decide it is 

going to happen here in North America? What are we doing right, 

and what would you change? 

Mr. FARR. One of the panelists said, I think education in the 

United States is truly unique. We have a unique education system 

that drives innovation and technology. And I think if you continue 

to encourage that under this tax plan, that is very important. 

Secondly, I think getting the tax rate down so when I look at my 

tax cost to do business in the United States versus England versus 

U.K. or China or wherever that is, getting that tax rate down, that 

takes it off the table. The productivity, the education, the strength 

of the U.S. worker is very strong. And that is very important. 

Mr. SCHWEIKERT. Okay. So that is your baseline. Now we are 

coming to you and saying we are about to do comprehensive tax reform for our society. Does the expensing, do the rates, what are the 

drivers that say you are going to continue to invest in our communities? 

Mr. FARR. I think all those come into play. From the standpoint—the acceleration of the depreciation makes a big difference. 

From the standpoint of the recovery, the cash we put in and putting that cash back out into other investments. I think the tax rate 

from the standpoint of how much cash we pay in Federal taxes, 

State, local taxes makes a big difference. But, again, I think having 

infrastructure, having all these things come into play. I will go 

through 20 issues relative to making a decision. It is not just tax. 

Mr. SCHWEIKERT. Okay. So it is unified theory. But, right now, 

our job is to—— 

Mr. FARR. Tax. 

Mr. SCHWEIKERT [continuing]. Get the tax—and then we 

have—and we will have other things we have to do. 

Mr. Mottl. 

Mr. MOTTL. Yes. 

Mr. SCHWEIKERT. You made a comment before that you had 

to change your business model or your production line, your research, multiple times because you keep losing your customers. 

Could you put a little more definition on that? 

Mr. MOTTL. Yeah. Well, for almost a hundred years, we primarily served the telecom industry. It was my great-grandfather’s 

account. And I watched as other countries made a very competitive 

environment for the people that made the chips, the boards, and 

all those little pieces that go in the electronics. And then they no 

longer needed me to make a housing here to hold those boards and 

electronics. It went overseas to another country. So, you know, I 

watched that industry leave. 

You know, for a while, we did some automotive work. There were 

some issues, as has been mentioned. We watched that change and 

disappear. Now that type of work is leaving. 

Mr. SCHWEIKERT. Okay. So, in many ways, you are sort of 

speaking to where I was trying to go before. It is more—there is 

also a cascade effect. And for all of us here, we sometimes get fixated on a single point in a complex plan and not understanding 

there is sort of a unified theory where, you know, this affects this, 

this affects that, that touches here. 

101 

And this is not just business. I mean, we are also, you know, 

looking at how we deal with the passthroughs, also individual 

rates, and how it all sort of unifies together. 

For AT&T, what is the single biggest driver to get you as one of 

the biggest players in the world to make large capital investments 

in this country? 

Mr. STEPHENS. The two biggest drivers would be the tax rate 

and the immediate expensing, but, quite frankly, the biggest driver 

would be those changes as they impact my customers. 

Mr. SCHWEIKERT. Okay. 

Mr. STEPHENS. Because right now, just as Mr. Mottl mentioned, we are losing customers who are taking their business overseas. The work that he talked about in the auto industry went 

overseas where I am not the primary provider. When he talked 

about those microboards and other equipment being manufactured 

overseas, I lost that customer. 

So for us, let’s be straight, we really believe that doing these 

changes will generate small business and medium-size business activity, and that will benefit us through the revenue line. 

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

Chairman BRADY. Thank you. 

Mrs. Walorski, you are recognized. 

Mrs. WALORSKI. Thank you, Mr. Chairman. Thank you, gentlemen, for being here. 

I am grateful to represent Indiana’s Second District. We are one 

of the largest manufacturing districts in the country. Very proud 

of the folks in our district. We have a lot of manufacturers, farmers, a lot of moms and dads that are just trying to pay bills and 

trying to get their kids through school and through college. 

And I have heard from so many CEOs in my district that the 

American economy has succeeded in spite of our Tax Code. It 

hasn’t helped it. And I wanted to be a part of this Committee, and 

I am grateful to be a part of the Committee to actually be looking 

at this. And I want to just run a couple of quotes past you on what 

folks in my district have said. 

Barry Baldwin is a tax preparer. He talks about why it is important to lower the rates, and we have had this discussion for 3 hours 

on rates. And my question to you when I get there will be on rates 

and the issue of permanency and why it is so important to you that 

we don’t do something that would damage, you know, your interests in tax reform by not making this permanent. But Baldwin, the 

tax preparer, says: ‘‘More money in people’s pockets, leading to 

more spending. More spending creates more jobs. More jobs increase the tax base.’’ 

Gary Fox, he is a managing partner for a tax services firm in my 

district called Crowe Horwath in South Bend. He said: ‘‘Small and 

middle market companies are unable to keep capital and invest in 

their business with the current tax rate environments.’’ He said: 

‘‘Lower rates will allow for better capital investment. Capitalization 

increased full-time employment.’’ 

And then since we are a manufacturer, we manufacture nearly 

all the RVs in the country and worldwide, and we also manufacture 

boats. So Peter Barrett, senior VP of Smoker Craft said that tax 

cuts will allow his company to hire more workers, raise wages for 

102 

their 600 employees, create new training programs, expand their 

plant, and make new capital equipment purchases. None of those 

things, he said, happened in a vacuum. 

So you have heard from my district. I have heard from you. And 

you touched on this a little bit earlier why lower rates are so important. But I guess when we talk about the benefit of lower rates, 

and you touched a little bit on the issue of permanency, I just think 

it is important that as we talk about this, we talk about what the 

distractions can be if this isn’t permanent. And that is how I would 

like to hear your response, the issue of permanency and why it 

should be a top priority. 

Mr. Stephens. 

Mr. STEPHENS. So for most of the large companies, capital investments are multiyear projects. It takes years to go from the 

start to completion. And so as the rules change, as inconsistencies 

change, as the rules change, once again, for our customers and so 

we see demand for our services change, it makes things inconsistent and it puts higher risk. Higher risk makes people in our 

world be more careful with their investments. It is just a prudent 

responsibility we have to our shareholders. 

So whether that inconsistency is in tax rates or uncertainty, 

whether it is in regulatory conditions, all that goes to uncertainty. 

Uncertainty leads to less investment. 

Mr. MOTTL. I think I have spent some time in your district visiting some of those RV manufacturers. Goshen, Indiana, is out 

there? 

Mrs. WALORSKI. You bet. Right in the middle. 

Mr. MOTTL. I love it out there. Great area. 

But, you know, the thing about the concern and the risk of constant changing, you know, we talk about here in Congress we can’t 

get things done because of the distraction maybe going on, right? 

There is no air in the room. It is the same thing in business. If we 

are constantly concerned about changes and who is going to jerk 

our chain next, we don’t do anything. We freeze up and pause. So 

I think it is so important to have a consistent policy. 

You know, also, I have heard a lot about supply side things. You 

know, we are really talking here about—I am not an economist. I 

am a manufacturer. But we keep hearing about supply—we want 

to generate demand, demand for American workers, demand for 

training, and demand for skills. I have a skilled workforce shortage 

in my area, and I can’t hire the people to run the machines—— 

Ms. WALORSKI. As do we. 

Mr. MOTTL [continuing]. That we need. And so I have had to 

raise wages. So if we can create more demand, you will see a lot 

more of that. Thank you. 

Mr. FARR. The key issue you hear, you have got a medium, 

small, large business here. We are all interconnected, so whatever 

happens to one happens to the other. And I think the permanency 

is very, very important because we do make long-term plans, and 

if we have the risk issue that it is going to go away next year, then 

we will factor that in, we will slow it down, maybe spend less 

money, but it does have an impact. 

Why the rates are important is because I operate in a global 

marketplace. Like I said, over half my sales are outside the United 

103 

States. My major competitors are German, French, German, 

French, maybe a Japanese. They all have lower rates. And if we 

have higher rates, I lose business. 

I just recently lost an acquisition in Germany to a French company for a $500 million acquisition. Same forecast. My tax rate is 

37 percent, his tax rate is 20 percent. And I lose every day of the 

week. 

Mrs. WALORSKI. Mr. Peterson. 

Mr. PETERSON. Tax is a major expenditure for us, as I mentioned, $560 million last year in the U.S. If we knew what the cost 

was going to be and it was lower than that and we are able to predict it over the long run, we can have a completely different planning cycle and also invest for the long run. Permanency is absolutely critical to this package. 

Mrs. WALORSKI. Mr. Rattner? 

Mr. RATTNER. I would just—I would certainly echo that, but I 

would also just mention something the Committee is well aware of, 

which is that achieving permanency creates an additional burden 

in terms of how this package is constructed in terms of the legislative process, particularly in the Senate that you are all obviously 

very well aware of. 

Mrs. WALORSKI. Thank you, Mr. Chairman. I yield back. 

Chairman BRADY. Ms. DelBene, you are recognized. 

Ms. DELBENE. Thank you, Mr. Chair. And thanks to all of you 

for being here with us today. 

I have been spending time collecting feedback from my constituents about what tax reform means to them. I represent a very diverse district in Washington State with industries ranging from a 

booming high technology sector to life sciences and agriculture, and 

I can tell you that my constituents are asking for a middle class 

and small business tax relief, not massive unpaid for tax cuts for 

the wealthiest Americans and large corporations. 

I heard from a mom who is struggling to pay tuition for three 

children in college and could use just a little bit of relief. I heard 

from a small business owner who is spending $12,000 a year on a 

CPA to help him navigate the complexities of the current Tax Code 

instead of putting that money back into his business. And he still 

is paying a high tax rate. 

There are countless stories. We have heard some here today just 

like this across my district and across the country from hard-working people who just want a bit of fairness and simplicity out of tax 

reform. And we have talked about simplicity. We have talked about 

certainty, also very important. We have talked about competitiveness. Now I want to talk a little bit more about fairness and true 

impact. 

And so I want to share some data about what happened after the 

Bush tax cuts. According to a U.S. census report, median household 

income in 2007 was lower than it was in the year 2000. And according to the Bureau of Labor Statistics, employment and wage 

and salary growth were lower than in any previous post World War 

II expansion. 

So, Mr. Rattner, I wanted to ask you what should we take away 

from what happened after the Bush tax cuts? 

104 

Mr. RATTNER. Well, I certainly did not think the Bush tax cuts 

were well advised. We had a surplus when President Bush arrived. 

We effectively squandered it, created deficits, and as you pointed 

out, with no meaningful positive economic impact. So I think the 

lesson of all that is not to do it again. 

Ms. DELBENE. And how should that inform us going forward as 

we look at tax cuts in particular? 

Mr. RATTNER. Well, that should inform us, first and foremost, 

that they should be deficit neutral. And that you all, you are not 

in charge of all spending obviously, but you need to somehow with 

your colleagues make sure that the total package that ends up 

going through is deficit neutral using reasonable assumptions. 

And, secondly, while I think there is a benefit in reducing rates 

generally, we should also—for example, there was a discussion 

about R&D and the importance of that. We should also look to— 

I am not in favor of huge numbers of gimmicks or overly targeted 

tax cuts, but we should make sure the Tax Code is creating the incentives we want it to create, not just to invest but to train, to educate, and so on and so forth. 

Ms. DELBENE. Thank you. 

Mr. Stephens, you said, I think pretty straightforward, more investments equal more jobs, in your testimony. In a 2016 New York 

Times article entitled, ‘‘Gearing Up for the Cloud, AT&T Tells Its 

Workers: Adapt or Else,’’ it really talks about AT&T shifting its 

business towards more of a digital and computing-based business. 

But there is also a quote in that article that said executives estimate that eventually AT&T could get by with one-third fewer 

workers due to automation, et cetera. 

So while you work with your workforce to train for the jobs of 

the future, if you are also going to have one-third less of a workforce due to automation or technology changes, that means that 

more investments may not mean more jobs or more workers. And 

so I am concerned about the idea that investment alone is always 

going to equal new jobs as we talk about the new economy. And 

I wonder if you would comment on that. 

Mr. STEPHENS. Sure. What we are doing at AT&T is our business is changing. If you are like my children, you don’t have a dial 

tone phone at home, you use your mobile phone. And it has happened across the country. We have gone from about 55 million of 

those dial tone phones down to about 25 million. So business 

changes. And so we need less people to take care of, you know, a 

40, 50 percent loss in that customer base. 

What we are doing, though, is we are giving those individuals 

the opportunity to retrain themselves. We use nanodegrees. We 

have partnered with Georgia Tech University for an online programming, at the company’s cost, to give our employees an opportunity to train themselves in the next generation of products and 

services. 

Ms. DELBENE. And so I just want to—I understand that retraining, it just still means there are less jobs, and so more investment may mean less jobs. And because I am running out of time, 

I just think it is important that we have an honest conversation 

about what technology means for the workforce and where we 

105 

should be putting resources to make sure that we actually have an 

economy that really works for everyone. 

And I am out of time, and so I just want to yield back, Mr. Chair. 

Chairman BRADY. Mr. Curbelo, you are recognized. 

Mr. CURBELO. Mr. Chairman, thank you very much for this 

hearing, and I thank the witnesses. I am also grateful that my colleagues have expressed broad bipartisan support for a comprehensive permanent and revenue-neutral tax reform. 

We have the opportunity to reform and streamline existing programs in the Tax Code, like education incentives that will give 

families more flexibility in saving for their children; promoting 

greater access to cleaner, more efficient energy technologies; and 

seeking solutions for the people of Puerto Rico, who face a demoralizing economic outlook. 

But for me, Mr. Chairman, tax reform is about expanding freedom and opportunity for the American families of today and those 

of the future. I think about my immigrant parents and how they 

were able to come to this country and earn success. When they first 

arrived, it was tough. My mom helped her mother run a small fabrics business. On some days, my dad sought food and couldn’t find 

any. Yet thanks to the possibilities afforded to them by the American economy, they were able to earn more, put away some money, 

buy an apartment, and start a family. The social safety net back 

then was not as expansive as it is today, but opportunity was 

boundless. 

My wife and I think about our own two daughters. I want to 

make sure they grow up in a country where they can find their own 

success and blossom. The decisions we make in this Committee in 

the coming months will make that either more or less possible. 

I think of all those young people who went to college and can’t 

find quality jobs, and small businesses back in South Florida, the 

mom-and-pop bakeries and small restaurants where I often stop by 

in the mornings to grab my shot of Cuban coffee. Will our country 

offer them the opportunity to grow and invest? Or will we just sit 

back and watch opportunity in our country diminish? 

There is good news in the blueprint for every Florida family. My 

State could see as many as 97,220 new jobs and an estimated gain 

in after tax income of $4,248 per household, according to the tax 

foundation. Counties like Miami, Dade, and Monroe, which I am 

privileged to represent, I think especially stand to benefit given the 

entrepreneurial culture there. 

To our witnesses today I have one question very unique to my 

area. Miami, south Florida, is often called the Gateway of the 

Americas. There is so many opportunities, so many ways to access 

different markets from Miami. However, we also face competition 

from all those countries in Central South America, Europe, and 

really all over the world, because Miami is becoming a meeting 

point for people and goods from all over the world. 

Mr. Farr, given your perspective for those entrepreneurs in 

Miami who are creating jobs, who are innovating, who are opening 

new markets for American products, what is the difference for 

them between permanent comprehensive reform and short-term tax 

cuts? 

106 

Mr. FARR. Thank you. First of all, we use Miami as our gateway 

into Latin America, so I couldn’t resist. 

Mr. CURBELO. Thank you. 

Mr. FARR. I mean, the big impact for people starting up is having a know the tax rate will allow them to make those long-term 

investments. I mean, when you start a company up, you are putting money on the line and it is going to be there for a long time, 

and you want to know what that tax structure is going to be. And 

I think that is very critical for these young people starting up these 

companies, having the permanence, having the knowledge of what 

that tax rate is going to be, what the rules are, and make them 

simple. For small companies they have to be simple. I have hundreds of tax lawyers and tax accountants to deal with this, but in 

small companies you have got to make them real simple, keep the 

rates low, and they will invest and grow, and that is how it works. 

Mr. CURBELO. Thank you, Mr. Farr. 

Mr. Stephens, I want to offer you the opportunity to send a message to the American worker. We all know how frustrated the 

American worker is. A lot of people in this country just don’t feel 

like success is attainable for them. A lot of these young people go 

to college, get a degree. They were promised that they would be 

able to find a good job and they can’t find one today. And a lot of 

these people have watched over the last 7, 8 years this economic 

recovery where the wealthy have done quite well, the statistics 

show that, yet lower- and middle-income Americans have struggled. 

Some of these people might be watching this hearing today. 

Maybe one or two of them. Hopefully more. What do you have to 

say to them? Why is this important to them? How can comprehensive, bold, permanent tax reform improve quality of life for middleand lower-income Americans? 

Mr. STEPHENS. So for all businessmen the question of investments comes down to what returns they can make, and when the 

government takes 40 percent between the Fed and State and another location takes 20 percent or less, it makes it very difficult to 

make the decision to invest here. 

If we balance that out, if we make that competitive, those investments will come here. This will be the biggest jobs bill that this 

Committee could support, because with those dollars of investments comes the opportunities to do research, do innovation, do 

construction. 

Mr. CURBELO. So tax reform equals more and better jobs? 

Mr. STEPHENS. It is a jobs bill first and foremost. 

Mr. CURBELO. Let’s leave it at that. 

Thank you, Mr. Chairman. I yield back. 

Chairman BRADY. Thank you. 

Mr. Bishop, you are recognized. 

Mr. BISHOP. Thank you, Mr. Chairman, and thank you for the 

opportunity to be here on this very important hearing, and thank 

you for your tenacity in pursuing this package of tax reform measures. 

Gentlemen, thank you so much for your testimony here today. 

Thanks for sticking it out with us. I am the last of the group. Ms. 

Chu and I will be the last. And so much has been discussed. We 

107 

all have the same interests. We want to deliver comprehensive tax 

reform, and we think in this case the blueprint in front of us will 

deliver profound tax relief to all Americans, and that is what we 

are hoping to see. 

I am from Michigan. Lots of great things going on in Michigan, 

but manufacturing is very important. It is our life blood. And I 

want to share with you a letter and an article that I read in New 

York Magazine on May 15 from a gentleman by the name of Mark 

Schmidt, who is also the president of a company called Atlas Tool. 

They are out of Roseville, Michigan. His testimonial on the existence of the tool and die industry is alarming. Given the fact that 

this is America, we can’t afford this to happen, but he suggests 

that the United States manufacturing sector is dying. The tool and 

die business in particular is gone. His business, which is full of employees with high skills, and their well-compensated workforce is 

being choked off. And it is because we have done nothing to level 

this playing field. 

And I would just like to know, given the short amount of time 

that we have, and I know you can’t do everything to give solutions 

here, but his suggestion is that the Chinese prices are so low that 

they cannot afford to buy their major dies from anywhere else. The 

major manufacturers. And he lists why they are low, and most of 

it has to do with China subsidizing their businesses. 

He also said that the industry has lost approximately 70 percent 

of its companies and 80 percent of its skilled jobs. And the most 

alarming thing in his conclusion was ‘‘our industry will soon lack 

sufficient capacity to supply the free world’s automotive market.’’ 

If that doesn’t send off bells and whistles, and if that doesn’t tell 

us that this is absolutely the most urgent thing that we can be 

doing right now in terms of public policy, I don’t know what will. 

So I guess I will start with you, Mr. Mottl. This is your namesake, so I better make sure that I ask you first what you think 

about this, and if there is anything that we can do right now that 

would address this problem. 

Mr. MOTTL. Well, thank you, Mr. Bishop. I know the company. 

As soon as we get their phone calls, we send them the right way, 

and I hope they reciprocate. But, you know, the issue you are talking about is exactly what has happened in my business too. And, 

you know, the problem is—well, I don’t know if it is a problem, but 

we need to make a profit here, and we are competing against companies that don’t need to make a profit. Their banks will keep giving them loans and loans and loans just to have full employment. 

So the Chinese just flew their first jetliner. You know, I talked 

about the industries I have lost. Now I am in aerospace and I am 

in medical, so I am worried what is going to happen to the airspace 

industry when they have to compete against a company that has 

no need to make a profit, only to corner the market. And that is 

a fine strategy for that country, and kudos to them for pursuing it, 

but how can we engage in a different way so companies like Atlas 

Tool and my Atlas Tool can be competitive, we can create demand. 

I think it is right here in this room. We are talking about it today. 

Thank you. 

Mr. BISHOP. Thank you very much. 

Mr. Farr, I know you are—— 

108 

Mr. FARR. Oh, I am ready to go on this one. I tell you what, we 

have lost so much of our industrial base because of our antiquated 

tax policies, and we have allowed these companies to leave. We 

have allowed technology to leave. 

President Roosevelt took over our two facilities in manufacturing 

in 1939 for one reason: all our tool and die makers. He took over 

all our plants and almost put us out of business during the war, 

because we couldn’t make motors anymore. But this technology is 

leaving, and we have got to figure out how to invest back in this 

country, again, not only to lower taxes, but put money back in education, into R&D. We can compete against the Chinese if we have 

a level playing field. Americans want to compete to win, and I believe that wholeheartedly. 

Mr. BISHOP. Thank you, gentlemen. 

Mr. Chairman, I know you are pressed for time, so I yield back. 

Chairman BRADY. Thank you, sir. 

Ms. Chu, you are recognized. 

Ms. CHU. Mr. Rattner, I would like to ask you about tax reform 

as it relates to small businesses. For every year that I have served 

in Congress, I have served also on the Small Business Committee, 

and it is because I truly believe that small business is the key to 

the American dream. In fact, my grandfather came to California 

with nothing but opened up a small Chinese restaurant and it just 

had a handful of employees. It was not a fancy place. But he 

worked day and night and night and day, and it was enough to 

keep the family going. 

Now, the Trump tax plan slashes the tax rate for passthrough 

entities from the current rates to a rate of 15 percent, claiming 

that this is a tax cut for small businesses. But just this week, the 

Tax Policy Center found that over three-quarters of the benefits of 

this cut would accrue to the top 1 percent of earners. In fact, the 

top 1 percent, 1 percent would see their after-tax incomes climb to 

$76,000. 

So, Mr. Rattner, could you elaborate on how and why this tax cut 

would be so beneficial to the wealthiest few? 

Mr. RATTNER. I am sorry, Congresswoman, just that last part, 

elaborate on what? 

Ms. CHU. How this tax cut would be beneficial to the wealthiest. 

Mr. RATTNER. Well, as I said before, there are many wealthy 

people, and I think the study you cited seems to have put together 

some data, but there are hedge funds, there are private equity 

funds, there are businesses, not really small businesses, there are 

publicly traded firms that are taxed as passthroughs with billion 

dollar plus market capitalizations, and they would all receive that 

75 percent, I think you said, of the benefits of this. 

And so I think that the idea of lowering the tax rates for true 

small businesses is certainly a worthwhile goal. But I express some 

skepticism about the ability to address the passthroughs in some 

way where you leave one group on one side paying their fair share 

and the other group on the other side getting some benefit. I think 

it is a very, very hard thing to do. And I think, frankly, our current 

system with the passthroughs is probably a better system but without lowering the rates to 15 percent, because I think that would 

confer too many benefits on the wealthy. 

109 

Ms. CHU. In fact, let me follow up on that, because so many people refer to the passthrough income as if it were all small business 

income, and, in fact, many have argued that this type of rate reduction is critical to the success of small businesses. 

But can you tell us what kinds of businesses would qualify as 

passthroughs? Are there any distinctions drawn between the momand-pop restaurant or wealthy lawyers and lobbying firms? For instance, would the Trump organization be a passthrough? 

Mr. RATTNER. Trump organization would be a passthrough, but 

as we know, he doesn’t pay a lot of taxes anyway, so I am not sure 

how much benefit he would get. 

The Administration has said that it would address the problem 

that you and I are both talking about of excessive, undeserved benefits going to very wealthy individuals or very, very successful 

large businesses, but they have produced no specifics. And as I 

said, I am personally reasonably skeptical that there is a way to 

draw those lines to give benefits to those who truly deserve them 

without having a lot of leakage, so to speak, to people who don’t 

deserve them. 

I have many friends who are in the investment business who operate as passthroughs, and I don’t see any reason why they or I 

should get a 15 percent tax rate. 

Ms. CHU. Let me turn now to the Kansas model. I was very interested to see that in 2012, Kansas cut taxes dramatically. They, 

in fact, exempted passthroughs from paying any State income tax 

at all. They cut the taxes on profits for more than 100,000 businesses. In fact, the largest benefits were for upper middle class 

households, and there was massive revenue losses. Kansas was 

then forced to raise the sales tax, get pension payments, and even 

shortened the school year to save money. 

Can you comment on what is happening in Kansas and how 

could we avoid this pitfall on the Federal level? 

Mr. RATTNER. I am not an expert on Kansas, but I think it 

highlights a critical issue that we have talked about in this Committee hearing but I think really needs to be front and center, 

which is that there is no free lunch, unfortunately. That you can’t 

simply—Kansas was, in effect, a supply site experiment. We will 

cut taxes massively. We think there will be so much economic activity, it will somehow make up for that lost revenue, and it didn’t 

happen. And it hasn’t happened in the past with tax cuts at the 

Federal level either. 

Tax cuts are fine, but they do not pay for themselves, they simply don’t. And that is the lesson that this Committee needs to be 

mindful of. And in constructing its tax package, it should be deficit 

neutral using reasonable economic assumptions. So all the things 

that we all advocate, you all have to find way to pay for them. 

Ms. CHU. Thank you. 

Chairman BRADY. Thank you. 

Mr. Rice, you are recognized. 

Mr. RICE. Thank you, Mr. Chairman. 

Before I came here, I was chairman of Horry County Council in 

Horry County, South Carolina, and I saw firsthand how counties 

compete vigorously to attract investment by industry through regulatory changes, tax changes. And in States like South Carolina, for 

110 

example, one of the top five States to do business, have done the 

same thing to attract—to be more competitive and to attract investment, and it has worked. BMW, Boeing, Volvo, Mercedes, and on 

and on and on. 

But what has our country done? You know, where our country 

fails to recognize, we argue about, you know, maintaining this level 

of revenue or that or how these benefits are going to be disbursed 

through society, but the fact that we have got to recognize is we 

are in a global competition. You know, we can change a lot of laws 

here in Washington, but one law that we can’t change is economic 

law. And we can’t change the law of economic competition. 

I have a question. Mr. Mottl, I thought your testimony was right 

on point about the border adjustment and the VAT and why other 

countries have done that. They agree to lower tariffs in trade 

agreements and then they put in VATs, and it is simply a disguised tariff. And it puts us at a huge disadvantage. 

Mr. Mottl, just assume this scenario. If you have got an American company paying a 35 percent tax rate, and you have got a European company, an Irish company paying a 13 percent tax rate in 

a VAT, and they both compete to buy the same materials, they 

both make the same product, and they both compete globally for 

the same customers. Can you tell me the end of that story? 

Mr. MOTTL. The one with the VAT tax is going to win because 

they refund that money when they export it. 

Mr. RICE. The American company is either going to go bankrupt 

or they are going to get bought by the Irish company, right? 

Mr. MOTTL. Absolutely, sir. 

Mr. RICE. Mr. Rattner, do you disagree with that? 

Mr. RATTNER. I don’t disagree with that, but I think we have 

to recognize that the VAT would have a number of consequences 

and uncertainties. 

First of all, it will be a massive upheaval in our economy as certain companies benefited—— 

Mr. RICE. But we also recognize—we also have to recognize 

there is 150 or 40 other countries around the world, including 

every single major industrial country, including every one of our 

competitors that are doing the exact same thing. And how can we 

sit here on our hands and put our American companies at a disadvantage to those? 

Mr. RATTNER. It is not completely one-sided. We have State 

and local sales taxes, which function as a form of VAT, admittedly 

at a lower level. But remember that this is all predicated on some 

very uncertain adjustment in the dollar, which if it does not happen, would involve raising prices very, very substantially for 

middle- and working-class Americans who typically buy a higher 

percentage of their goods imported from people like we do. 

Mr. RICE. Income tax cuts. If the currency doesn’t adjust fully, 

there will be some increase in prices. Based on these tax foundation estimates, their incomes will go up by $4,000 a year, far more 

than these potential sales costs would. 

You know, the size of the American middle class and their income level has really declined, and it is not a recent phenomenon. 

It has declined in the last 8 years. It declined 8 years before that 

and 8 years before that. It has been going down since 1990. Twenty 

111 

years. The last time the Code was revised was 1986. I wonder if 

there is some maybe correlation there. 

The decline of the American middle class and the growing income 

inequality that we all fuss about is a direct and foreseeable result 

of the continued deterioration of America as a place to do business. 

Our Tax Code puts American companies at a disadvantage, and 

that translates to the loss of millions of middle class American jobs. 

If we truly want to grow the middle class, if we want to give 

them a raise, if we want to reduce income inequality, we must 

make our Tax Code competitive in the world. That has got to be 

our number one goal. 

I yield back, Mr. Chairman. 

Chairman BRADY. Thank you, Mr. Rice. 

Mr. Higgins, you are recognized. 

Mr. HIGGINS. Thank you, Mr. Chairman. 

Just a couple of things. You know, the American economy, we are 

5 percent of the world’s population, we are about 23 percent of the 

world’s economy. We have the strongest economy in the history of 

the world, but despite all the macroeconomic indicators pointing 

up, job growth, low unemployment, growth in the stock market, we 

lost 6 million manufacturing jobs in the past 15 years. 56,000 factories have closed. 

We just had an election where two unconventional candidates 

rose pretty quickly on both sides. Now, Donald Trump, our current 

President, beat 16 established Republican candidates. Hillary Clinton on the Democratic side was challenged by a 73-year-old socialist from Vermont who garnered 12 million votes and won 21 primaries or caucuses. 

There is something underlying that isn’t being addressed, and I 

would argue that it is income inequality. And regardless of our political persuasion, we all have a major stake in this. 

Let me give you an example. Between 1945 and 1980, we had 

productivity gains in the American economy by 97 percent. Real income and wages go at the same time by 95 percent. There was 

shared prosperity. Economists would call that a virtuous cycle or 

circle of growth. And the American CEO felt it was their responsibility to balance the economic interests of all of the stakeholders, 

the shareholders, the owners of businesses, the managers and the 

employees and the communities within which these corporations 

operated. 

Between 1980 and present, we have had productivity gains in the 

American economy by 89 percent. Real income and wages have 

grown by 9 and three-quarter percent. So if you are looking for the 

cause of the political disruption that people just voted for, it is that 

underlying issue of economic inequality. 

Now, I think a lot of people would view that personally and say, 

well, you know, that means more taxes for me, and I oppose that. 

I don’t think that is necessarily the case. I think we can reach a 

point at which we can move our tax policy out of a political realm. 

Perhaps that is naive. But tax policy either works or it doesn’t. 

You know, I think supply side is discredited. The new term for 

that is ‘‘dynamic scoring’’ that basically says that tax cuts will pay 

for themselves. Tax cuts do not pay for themselves, ever. So I think 

112 

what we need to do is address what is going on here in the American economy because, as I said, people voted for disruption. 

Mr. Rattner, let me just say this to you: Supply-side trickle down 

dynamic scoring says let’s give the very wealthy a big tax cut, and 

that money will find its way back into the economy in new business 

investment, in job growth, right? Wrong. It hasn’t worked. 

Today, American companies are holding $2.5 trillion abroad, an 

increase of nearly 20 percent in the last 2 years. It is 14 percent 

of the American economy. United States companies are holding 

$1.94 trillion in cash domestically. Zero yielding money markets 

are holding $2.66 trillion in investor cash, and banks are holding 

over $2 trillion in excess reserves in the Federal Reserve. Taken together, that is over $9 trillion. 

Why isn’t that money finding its way in the American economy? 

And why would massive tax cuts to the wealthy have any measurable difference in what it hasn’t done historically, Mr. Rattner? 

Mr. RATTNER. I think there is a number of complex reasons 

around what you are saying. First, I think the issues with manufacturing in the U.S. are not simply a function of the Tax Code. 

There is a whole variety of factors that have caused us to lose quite 

a number of our manufacturing jobs, particularly the rise of other 

countries being able to do what we do. 

Secondly, as you point out, there is an abundance of capital in 

this country. What there is a lack of are investment opportunities. 

Some of that may have to do with the Tax Code, a lot of it has to 

do with the perception that our economy is not growing that fast, 

there isn’t that much demand, and so why build a factory to make 

something if you don’t have people out there with the money to buy 

it. 

I see we are out of time, so I will stop there. 

Chairman BRADY. Thank you. 

I would like to thank our witnesses for appearing before us 

today. This is a discussion about how we grow jobs, grow paychecks, and the U.S. economy, and the role tax reforming is doing 

that. You have made all a very compelling argument for bold tax 

reform, permanent tax reform and doing it now. 

So I want to thank you for being here today. Please be aware the 

Members of the Committee have 2 weeks to submit to you written 

questions to be answered later in writing. Those questions, your 

answers, will be made part of the formal hearing record. 

And again, on behalf of the Committee, thank you. The Committee stands adjourned. 

[Whereupon, at 1:41 p.m., the Committee was adjourned.] 

[Member Submissions for the Record follow:] 

113 


33393.041

Assessing the House Republicans' " A Better Way" Tal( Reform 

Alan Aue.rbacb 

Univcnity of California. Berkeley 

Laurence Kotlikoff 

BOS'too Uni~rsity 

and 

Dan-yl Koehler 

Tb(! Fiscal Analysis Ccntt.'f 

M>y9, 2017 

We thank The Goodman lnstitu1e, the Burch Center for Tax Policy and Public Finance, ·n1e Fiscal AJ'1.1.Iysis Center, BO$t'<>n University, Economjc Security Planning, lne. and the Sloan 

f<ound:nion fOr rts~rch support. All opinions ure strictly tho.')e or the authors. We 1hank John 

Goodman, Jane Gravelle, J><:k Mintz, Jeffrey Sachs. and Donnld Schneider for very helpful 

comments. 
114 


33393.042

Overview or the House Republican Tax l'lan 

,,,e llou.se Republican wA Detter Way'' t.ax refonn1 plan includes a s.is,nificant redesign of our 

business tax system. It effectively would replace the corporate income tax with a 20 percent 

destination-based business cash·flow ta•.l'roprietO<Sbips. partnerships. S corponuions and other 

pa'IS·throosh entities v•oold faoe a distinct scbedulo with a top 1'111< of2S pe<tent on p8.1$-througll 

income, leading to a need for provisions to limit the ability ofhigb-lncomc households to mOvt 

income &om the new top 33 perc<n1 personal me to the 25 percont rate. 

The n:form "'OUid also streamline Md slsJUfo:mtly simptey penanal inc:cxne llllWioo by di.minating the Alternati\'e Minimum Ta)(, unifying cbe tax tre3tment of personal asset income 

(toxu>g hAlf of personal asset income). eliminating exemptioos, eliminating the deduetibility of 

mte incotne. and property toxes. raisilog the sOAndard deduction and modifying the child-lAx 

credit. In addition, the plan moves from seven to three inC<)me-tax br:~ckeu, with the LOp rate 

lowered from 39.6 percent 10 33 pcrccm. 

This paper examines the reform's potential impact on revenues, inequality, and fiscal 

progre.\Sivity.' The plan's proposed refornt of business taxatioo U panicularly significant for 

potentiol U.S. al\'OSimenL Current net domestic inv<Stmelll is qui"' low -just S p<fC<!ll of net 

national income. In 19505 it was rw&)>ly throe times higher.• Ahbcu&)> it is f<lnll3lly a 

"worldwide" tax s)'$1em. today's lJ.S. eo<p«aticn illcomc tax p-imarily taxes U.S. and foreign 

OOI]lOfWlions on inc:cxne eomed frcm inwsting in the Uni'.<d Slates. 

There is 1 significant debate about tho si7.e of the marginal U.S. effective oorporatc !Ax rate both in absoiUle terms and relative to rates in other countries. Mintz aod ChtL\ (2014) SL~gg(.'St thai the 

United SlAtes has one of the world's higllesl marginal effective OOJJX><li!C tax l'll!CS. (Sec figure 

1). Oravelle (2014, 2016) suggc>IS otherwise. Mintz estimates thnt the comprehensive (fodem~ 

stole, and loon!) marginal effective corporale ""' (1\fui'R) on investing in the U.S. would full from 34.6 percent to 16. I pct«"nt ns a re5uh or the lax piAn.•The Tax Policy Centtr tstim.ateslhe 

tru< pbn would lower the fedml port cflbc METR from 24.0 percent to 8.8 p«cent • 

Gnwlle sees a mueb sm3.11er decline. Mintz's estimate of the METR lnclude:s swe corporate incccno. properly, and Cld>er .._,.._ Graw!le m<eswa only the federal MllTR. Gra..,!le es<im:ttes 

the curm>t federal M£TR at 5.7 perc..,., 611ing 10 - 4.7 per«n~ Wider !he HouJ<tox plan.• 

1 bU.ps:/lllbcltet\\llly.sptetcr ..&0\'1_ astctJI))dOA.OdtcrW•y-Ta><-Po!i C)'hper.pdf 

' Wo do not c:onsidtt lhc pl.an"s propo!cd climinMJon of the estate aDd gi.ft tu. 

'Our 11C't IUitional sa'"int rae i' ;..1!$11 rnuehly (ll'e 1hlrd ofbs IWM'Ige value ,., dwo 19!01. 81o1t dCIImtttic i:rweumc:n.. 

Yottile (Otrcbled witb o:M.i<.JnAI so'"~ it r10l d4.1mDined by nltional ""'ina. This iJ dut from the historicai ra.wd 

on cumat KCOUDt deficits. In 2003. for cxatttrl-. rorriJ:n inve:stJne:OO ill tbe U.S. ncceckd ill.veamc:nt by Amcric:ans ill the U.S. (1.#,, it c..~ toe.! ad Dllli;ODII Ja\'&.8).1tcccndy, the c:um:r.. u.cowc cl.lkk 00. tltnmk. 

• Sc. bdpt:llb.xfou:dlliOD.O(J/COCI;Jd.lli'oCU:CU·ilnp.Kt-of.tax-rcfi:wm-&w-d»..ttfd......, 

• SccUibtclaa 

lm(os· ~tt'Cff'\jqumll.sd..rtu,qt,t"p4;,-..e.elym.g(~a,=S"tanV Tpti1M1111L 

i•it: Gm't'Uc"s(2017)~ 
115 


33393.043

Alt11ough the absolute values of their METRs differ drmuaticaUy, the implied pcrcentagcdt.-elinc 

iu the cost of capital are somewhat closer., Mintz foresees a 28.3 percent decline ln the overall 

C<l5t of capilal. TI1e TPC e.xpects a 20 perceJJt decline in the federol METR. And Gravelle estimates a 9.54 percent decline in lhe federal METR.• 

Lf tbc highest of these estimates i.s on the mark. lhe tax plan oould signilic."Ultly increase U.S. 

i11ves1ment nod wages, with an cv<.'ll1U8I real wage increase possibly as high as 8 percent, 

according to dynamjc simulation analysis based on tJ1e Global G-aidar Model.• In our analysis we 

consider no dynamic feedback on U.S. wage:; as well as this optimistic 8 percent wage· increase 

dynamic feedback scenario. in order to explore th.:: nmgc of possible outcomes. to 

The tax pl:m permits businesses to expcusc (immediately write off) lhe cost of lheir new 

inv0$tment. The proposed new corporate income tax also feaHtres border tax adjustments to 

ensure that companies no longer have a11 incentive to either .nove their opeml.ions or to shelter 

their profits abroad. The resulting tax is a cosltjlow tax because it ax~ all revenues ~:med from 

1 The petct:nlagc dumgc in the C0$1 of ~ilal i$ eakulated at tl•e chaz~e iJt the METR divided by J wit"cs lbe initial 

METR. 

'lfindusion ofnoo-fC'dtl"al oorpor.ue oc:wpanents t() tbe MBTR. Qi!;ed Gnwdlc's METR WldC1 the current t)'$1tm 

frocn S.7 petC«l! IO 20.7 pt:t(llt. b~ ptrotatugc (all in the COS! of cap:tal w0lil4 be. 11.3$ per«nt, ""bic:h is still far low·er than lhe 28.3 pcrcen1 decline ~ti.mat d by Mtnt,.. 

• An 8 perccllt ineru.'\e 1!1 gmemtcd in the Olobal O;.id.v Model by r~dQx lhc U.S. C\lt))IJnttc. la.x by .13 . .1 ((34.6· 

16.1)134.6) percc:r.t hold£ng marginal talCes of otber rq:ions oftbewor!d ooras.IMIIUXI maintlining fixed U.S. debl 1o 

GOP dllf'in$ tht transition. COl) a!$0 ri-Se$ by close to S percent. Deve:lopt'ltlll of IJ•e Olob:ll Oui<b Mot.lli 

rtpre$CIII.sjofnl wort otlautntce KotlikoO"fltld a teat11 of .'\OOctican Md Russian ccooomi.sts. lt is a 17-regi()ll, 90· period VO"Sion of dte origU\31 Ac.erb3¢h·Koclikotr dynlllt1ic it~cyde CGE model. ·nle liH,wl....t 1.'0\'eD ulll'qtions of 

lhe world. inoorpomtcs the late:;t United N3tiO(I.t dcoo~hic projcaioru., aoo is calibcaltd 10 tlM II'!CSC ttc:"ell 1l\.{F 

data. lknldl, Xotlikofft a:~d L1&Ard:l (f¢rd1C011'1in& 2017) uses tbe Globnl 03id!ll' Modi.i «~ t:&ldy the d)1lamic 

lrup:ltts oo tbe U.S. and oth«rcgioos of che I-IO'U.1C tax pllln. Unlike ()Ch~ t~ dies ofdyamnic. (ttdbact arising under 

the ous~ tii.X J> ~n. tlteO:lid:er Modd a1p~\11tS the size of the U.S. «onorny relative 10 the global ccooomy. This 

maucrs (or properly 8$.SC$S.ing tile: m:lgrlitude of~ph:tl infl l)w$10 the U.S.. in rcspoose to corporate tax reform. 

10 We $8)' "cp.dtl,t$1lc" for {h·c: rta300s. Fi:rst, <~thcr rcgioBi eoold l't'$J'I(ll'!d to the U.S. wo-.•c to ;a ~·tl w tax by 

rcduci.ng tbcir ootpOJate tax raiC$ « acJos!tWg the new U.S. busin.eu ta.~ tys~:em. Secood, Mi.uu:'s calcul:n.ion ofll•e 

reduaion ia the eff«:eive roruginal 001porate lalC rate Wldl'f the. Hou$C Ill" J>l3n may be overstating the cftange. While 

there i3 a stand3rd n::u::tllod of r:aiCU:I!titlg, margi:n.1l effective corporate tax rntes, l'tletltdttr$ differ on Uleir 

11SSUL.'Ilpt1oos ;ebout \\'ci¥blina different types of capital goods u well 8$ tbe dCGree ormarginaJ debt 6:n:ance. Third, 

the .. ·arious modeling a.~suntp ()l\$ in the CiiOO.,I Oa-id;w Modd mig.,.t produce more scru.iti\·c eapi.lal ilows th<m 

wo\lld tesuh frwl allanldivca:ssw:npt:ioos. Foun.b, our c.;limateafa:a 8 ptrt:Cilt n,em ~es in llte Gaidarmodcl b 

prtdiC;Jttd on tltt- t~a:.rt tt):UI!Ct oftbe t:urrO'II U.S. debt to GOP ratio tl:.rougb tim.c-. lflhe Gaidat Modd'S3Mtlruptioo 

oft \'try quick tnms:ition to higboo U.S. i:nvesrntmr lltld, lherefore, hi&her wnJes, "'itb its associated addition to 

revautt$, is ina:VIlrUpriO(c. tJ.S. debe to GOJ• could rise, lfn-ot reversed. this w01dd pn><hKe :a snJ:..ller du10 8 pcrctm 

inaeas.e in real \Ya2.es in 1hc Gaid."'r Model. We ould lll.kl. lbouah. lhal in at least one rtSI)oot U.e. mtldd'~ 

anumptiont rnigbt un<l.ctutte tbe gro,\th of US domestic inwstmetll :t~l!d he.ee re;ll w•s. 11lt mOOcl C.'<cludcs 

disaete locatioo decisions regarding in\<ctttol"'lU tb:u yield rates of return in excc:..c;s of the requit«t r«ums. 

l!mpi.rical evickrlee (e.g.. O~rt'. .X and Oriftitb. 1998) sug&e$1S that $ucb d~.-ci$ions •e rC$pOOSive to international 

tax. mtc diffctat!ia!s, which would inc::r'C3$C substantially in f.wor oitbe Unittd Sll'lte:s.. \.\i1icl1 W()I.Jld impose o la.'< 

r:.te of 7.ei"' oo domestic-source income LUidC1 tlac proposul. tliftb, if more investment emails more a\Uom:ttioo it 

C(IU}d. 3$ iJI Saet.s and KOt.l.ikoff(2012), lower, not raisewn&cs.. 
116 


33393.044

s~Jes within the U.S. less aU costs. n Costs include outlays on goods. including investment goods, 

whether imported or produced loco11y, as well as all wages. MathcmaticallyJ this business cash 

flow tax is equivalent to imposing o subtrnction-m(:thod. dcstination~bascd Value Added Tax 

(VAT) with an equal-rate subsidy to wages. u 

Since a household's eurre.nt and future consumption is financed by its curre1'1t and fuluro wages 

plus its current net worth. the combination of a VAT and a wage subsidy Ls effectively equivalent 

to taxing initial wealth as well as the future returns to t3pital in excess of the required mnrkct 

rate of retum. This makes the busiJ\tsS tax refonn a significant progressive element oftl1e overall 

tax la ~ which offsets some regressive fearures of the tax plan's personal income tax reform, 

notably the reduction in the top rate from 39.6 percent to 33.0 percent. 

1ltis paper as.:scsscs the revenue cffi:cts.. progrcssivity and work incentive effects of the Better 

Way ta.x plru1. We also consider o modification of the tax plan. namely one that also eliminates 

the ceiling on Social Sceurity's FICA payroll tax. We distinguish below between the rax plan 

(the House Republican tax plan) and th< modified plan, which includes lifting the FICA ceiling. 

Liftin.g the FLCA ceiling would generate more revenues and raise progressivity relative to both 

the current system and the tax piau. It would help shore up Social Security•s f'ir1ances and, 

poten1laUy. enhance political suppoL1. But it represents just one of many ways to rnodity the-tax 

plan, and is in no way linked to the Rouse Republican plan. 

Methodology 

To m~sure tbe effects of the tnx plan as well our modi_{icd ta."( plan on revenue-. inequality, 

pmeressivity, and work incentives we ran all households sampled in the Federal Rcscn<e's 2013 

Survey of Consumer Finances (SCF) ~trough The Fi$CJJI AnalyzeJ· (TF A). TF A is a detailed lifecycle conswnplion~smoothing program that incorporates both borrowing oonstrainrs and lifespan 

WlCCrtainty as well as all major federal and state tax and transfer programs. u 

ln the course of doing its consumption smoothing. TFA determines each household's expected 

present value of remaining lifetime spending. where t,he te:nn u{Jfcred references averaging over 

different longevity outcomes ru1d spending eucompas$CS aJl e.xpenclitu;res, including terminal 

beqttests net of estate caxes. Tite imperus ror rocu.sing on remaining lifetimes.. rather than just the 

current year, comes from standard life cycle economic theory, which pOStulates that people care 

about the funrrc, not just the present. 

The lifetime budget constraint facing each household i> given by 

(J )S=R-1'. 

11 The Hoose bu.~ ~ C2~ fl()'l.\' t:tx i~ stm.itu in mAA)' respects 10 that proposed by Autrbacla (2010) us wcU OS l'M 

Gw.,tb ar4 lnvestmenl Tax Plan proposed in 200S by The Pno:s.idt.ttc's Advisory P.k!ltol c.~ Tax Reform (see 

bttpr/{»my 'mJWN goyr'rljS9UlSSK'a!.Jro'LA:s·)NijcyiDoecrnmttJR.enmt-fiN·Tai"·$yScm·200S gdj) 

u lb-e border l\djusuneat c.an be implemented by having firm!l 3-irr.ply c.."dl)(le ~-enucs eomcd from exports ood 

costs incumd from imports. 

US¢e Au::Jbleb, Kod:ikoff. and Kodtler(2016). 
117 


33393.045

where S rcfcrencc.s the present expocced vtdue of a household's rcmMinina lifetime spending. R 

stnnd.s for remaining lifetime resources (the present expected vuluc of remaining life1ime labor 

01.\rnings plus its current ncl worLh) t'nd T stands for the present expected value of rem.ainin.g, 

lifetime taxes net Ofln'lnsfcr pay cnt~~t received. The Average net tax rate,/, is donned by 

(2)f'" T/R, 

ond the IIWilinal net tax rate, m, is &h"" by 

(3) m • IJT/i!R, 

where AT references the change in the present expected value of net truces tlssoeimed with an 

inereJse of .dR in tbe present expected v3h.1e ofresouroes. ·nus, if the expected pretent value of 

a. h<K.1sehold's spending is. fi>r example, 6S percent of remaining lifctirne •-es<M•roe.t, its average 

net tax rate. 1, equals 3.S pcrcc11t. And if C:.\ming. say, another $10,000 this year cha ~es T by 

$3,000,1he 11Wllin41 net tax rato i> 30 pe"'ont. 

A~rase remaining lifetime net tax mte\ tell us no1 only the net shart of their resources: that 

households surrender to lhe go,unrnenl They also tell us about lhe prQ8R$Sivity of the fiscal 

sy!ilem. If average net tax rates rise with tho Je> .. J of raoun:es.lho fiS<31S)~Itm is PfOSI"$$ive. If 

!hoy !ill. tho •>"em is rqresshoe. If they •• indq>aJden1 of the le\'el of resoon:H, the S).,.<m is 

proportional. 

TI1is paper. Hke our prior $Judie< ll(-iug 1FA (Auerbach cL at. 2016, Auerbach et. al , 2017), 

calculates in~ual ity and the progre.ssivi•y of the flSCaJ system on " cohon·specif'ic basis. 

Spcciftcnlly, we consider inequality by looking within IO.yeat a.gc cohoru at 1he share oftotal remaining lifetime spending tribu tab ~ to househokis fuiJjng within dirft.:rcnt within..cobort 

pereentiles of remaining Hfc.:timc resources, R. To measure progrcssivity, ~ again look '"'ithin 

cohorts. b1.1t at average remaining lifetime net tax rates rath.er lhan at share:~ of the cohort's total 

rento1ining lifetime spending. 

We use c:ol>«t-speeilic analysis to <OOSidcr inequality ond progressivily because failing to do so 

IIDOOJ11S to ~ apples 'vilh CJnlli!OS. Ranked by mnainina lif<lime spending. old..-

eohons would look poorer than )'OIIIIger collO<U simply bec:ause they hod shoner renuining 

lifc:spons. And remaining lifelime net wt rates of older eohons would Oppe# low« than !hose of 

younger cohorts simply because the e.lderly would rec:civc no credit for nee taxes paid in the past 

and appear to be subsidi7..ed becouse they 4I'C coUecting or will ~hu1 to collect Medicare, 

M4..'Clic:nid. tmd Soc:ial Security benefits soonff thM younger cohorts. 

Modeling rhe Current Tax System 

Auerboch el. al (2016) and Auerboc:h <'1. oL (2017) disooss TFA's mod<lin& oflhe =•""' S)"St<m. We lake se-.1 steps here 10 mot<h tho Cong>essi<lll31 Blldgel OffiCe's 2017 re_,. 

projections. Fint we ioflate all dollor amoonl> rq>oned in lhe2013 SCF c1.1ta by nominalave<10ge 
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33393.046

w-ae growth between 20l3 and 2017 .... Second, we inflate aU wage and selfaemployment income 

by 9 perwu 10 moreh rbc CBO's 2017 1lrojccrcd FICA tax re«ipts. 

Third, we nssume a corport'lte tax rate to match CBO's 2017 corpo:mte. revenue projceliQilS as 

el...,ly as possible. We levy Ibis e<>rp«ate tax on the model's ossumed pi'Oiruc rerum to Slock 

holdinp. Srock values have ri.seo fil- than wages between 2013 and the p~m. In additioo. 

the SCF rcsponc!tnrs appeorto undempon their .cock boldinp. Third. the CBO'• makes various 

usurnptions about earporarc inc<lm&-tax collections in rca<:lting its 20 17 p<Ojec:ted total Firnlly, 

net •D corporate equity is held di...,..Jy or indir<ctly by US bouoebokiJ. bul in our anolysis we are 

ossumirl& that there is no shiftinj: of the corporate tax 10 ClthCtS, eiiii<.T domestically (e.&., US 

workers) or abroad (e.g,, foreign sbarebolders). To capture all of th""e factors, we simply set tbe 

corporotc tax rotc in the TFA toreprnduee the CBO's 2017 corpomte tax total. 

l'ourth, the SCF asks respOndents wlmt they specified as taxable capitol guins, dividends. and 

interest income on dte.it 2012 individual tax returns. We tLSed tbesc data (~adjusted for wage 

s:rowth) in calculating personal" income taxes under both the current tax system nnd tlte House 

tax plan. ln the case of taxable capital cains income,. we fonned. by cobon 111d rc-.;ourc:e de<:ile. 

total reported (mlizcd) capital &&ins dividod by tcxal .cock boldin&s- We vary these capitalpins. it1C('II'ne-r~li%atioo rates through time as respondents move &om me age eobort to 

anorher. We enga3e in an ideoti<:al resouru-specifie decile prooedure to dettm~ine rcspond<nts • "-s. as lheY movo &an ,_ age J!10UP to another. of stock boldh1p OU1 of total financial 

assets. 

Modeling the Better Way Tax Phtn 

As mentioned. the business tax pru1 orthe I louse Republican tax reform eOCctively implements a 

tax on "'e.'lth. Aocording to Burman ot al. (2017), hosed on estimates usin& the Twc Policy 

Center model, the plan's c:asb now ltuc is close to rc:v~nue: neutral ig.norina changes in revenues 

arisinQ during the tran.sition from the cum:nt to the new bU$ineS$ tax S)"S'tm. 1• Sil1c:e the Better 

Way tax plan leaves many tronsition details unresolved, ;, seemed best. to measure irs loQg·nm 

--necs, •imply to ig.ocn tnD>ition revenue effects and form our ealc:uwions assumin& the 

cash flow tax genemes the same revenues as the CWTml eaponile tax system. 

Since the cash flow tax represenu an implicit tax co cooswnption financed out of weJitb, we 

capture its impact by introtlucir'g 1 one-time rax on weattb in TF A. This t.ax is asse.li:Std only oo 

net rut3ncial wealth; i.e .• its be...;e excludes home equity since tbe tax. plan, like the currenr rax 

system, does not treat the r«clpt of imputOO rent on owned homes as t>wi.ness income. We $et 

the nuc for this net financial wealth lax att 13.6 percent. This cnx rate was chosen t>ece.use it 

lA bga;lt\yww,.nl.p .'(lp;l.ISola!AWI t'>lt1'11 ~ rCf*1J Social Scwrily's 1.\'tn&C ..v._c trwkx uries (brougb 

lOIS Wc~tSJume: lbe samearowtta nee b lOIS Md 2016aslbll r:portcd for201tl. 

"ID beG~ weas._wmc lhM ill RIOW«ckc:lej•iJ rc::u;.a in M4UrtJtdcrW.j a daymo\--c 

free OM lM•}UI'. \ndtd IO a.olbcr. 

"AccorditctoTable2 io Ctarp~pa, die OilfPCiftlC cax ~ v.wld re.1ucc m-u~ue ~.by a totlll: of 

sm.,"'"""' .,.. ... m.de<ode m'·20J6 
119 


33393.047

reduces TF A's 2017 total conswnplion spending by roughly $3J S billion, which is the amount of 

2017 corporate ta.x revenues gti\CratcXI byTFA under the cwnml tax sy:s:tem. 

On the personal income UL< side, we rollow the tax plan with respect to all spec:ifi<KI d<tails. One 

decail thot is oot clearly specified is how the tax plan will p,.vtnt hiaJI ta<·br•cket househo!ds 

"'ho roceive p;lS$-through .. If-employment ond Other income from decllrin& all their inccme as 

butiness income to pmnlt its wtation It 2S pe-turu. The Better Way tax reform docume01 hints 

• the implemed3tioo of a limit oo such behavior. Our guess of how this lim~ would be imposed 

iJ the implementation of a. ceiling on the share of income that would otherwise be taxod at a rate 

above 2S poroent that can be dec:lllred business income. We s<t tho sh.,. or SIWh income that 

cannot be claimed as business income at 2S poroent. (Asswning a higber sh.,. would lower Qur 

estimated rovcnoc loss from tho propCSlll.) 

TFA-Ge.ncrated 2017 Revenues Under the Curren t Tax Systeru 

The CBO projects 2017 ponooal incometox, FICA""'· and corporotc income tax re\'e1lues of 

SI.6SI trillion, Sl.l50 trill.ioo, and $320 billion, respeetively.u TFA's com:sponding 2017 tax 

,.,..,.,.. estimoreo are Sl.791 trillion. $1.104 ttillion, and $330 billion. n:specti•-.ly. Tbw, 

n!bliveto the CBO, TFA is 8.48 poroent hish in estimatins fedenl incomo taxes. 4.00 pe<cent 

low in <Siunatins FICA taxes, and 3.12 poroent hish in estim:Jtins corponlle inc<lcne taxes. 

Findln~:s 

Rcvt:nuts 

Almnt dynami<: feedback (DI') effects, the JJO\ISe tax plan loses $212 billion in revenue on on 

annual basi$. according to our methodOIOS)'. With OF effectSt whkh we again stress appear to 

reproscnt an upper bound for wage &fl>"1h Ullder the plan. thm> is an annual "'v<nue gain of$38 

billion. With OF dJC<U and the lift.in& of rhe fiCA ceiling. tbet-e is o $328 bil.lion annual rise in 

rC\ft>Ues.• These pot<ntial ~ ... wnaes need robe compared with our model's baseline total 

federal ..,,...,ue (including jUSI corpon~te and pmcoal incame taxes) of $3.272 trillion. Absent 

OF. the tu pion prodtl<:cs 6.S poroent less federal re.-.nue. W~ the posited OF response, the 

revenue gain is 1.2 peteenl And with the modified""' plan. wbich includes elimina!iOn of Social 

Security's FICA taxable eamjngs ceiling, lhc revenue gain is 10.0 percent. 

Spending l 11equ11li1y 

We p~ent results for the 40--49 yea.r-okl cohort as the findings for other cohorts are quite 

similar. FigtJTes 2 through S consider spending inequality under a) CUIT<11l law, b) the tax plan 

"'cboW'JbNt'P"P¢HFtt1:wl;st~ PI'O'idesdltCI)(Y rroj«<lonsesoiJ.-y20Ji. 

un,u t.aa csri!ute is iJt a sense lt\"m maro ClflltlftiSik Chlnlhe Msl~ OF c:sae.c IOd tboWd be tq.wd.od v.:id:l 

caidOQ. as tii$SliiMS the same 9"0\''lll itt W"£6 CI'I<W tt-cqh iD~icMJ.s •00\-c: lbe fiCA cciliQa faot bil,t:e;- twlt'J,inaltax nile$ (lQ lbeir ~bor e.nmp. 
120 


33393.048

with no DP, c) the tax plan with OF, ond d), the modified tax plnn wi'lh OF. ille figures al.so 

show inequality in net weahh. 

As figure 2 shows.. rem3iniog lifetime spending is less unequal than iJ net wealth. This is due to a 

mew~ equal distributioo of htJn\an we:ahb o.s wellS$ the progrc:ssivity of the fl.$cal System. Under 

the cumnt system, the top I pen:ont (meosured in terms of R) of 40 >'"'"old$ own 19.0 percent 

of !he """llh. bUI a<:cOUJil fO< Cll\ly II.S perc<tll of the spendiJ18. In cooii'ISt, tbc poores< 20 

per<eniiiCCOWII few only 2.5 p«C<'t!! oftOI&l cohort ,.-..lth, bUI6.3 pcr<mt of cohort spending. 

As figure 3 ind~ the HouS'C tliJ< pl•n, absent any Df incrcoscs ut loba- income, increases the 

spending sl10re of the ricbC>I 20 pcr<ml from 51.0 percen1 to Sl.6 pcn:cn1. h nti""' the spending 

sJ1ru-e of the top I pcru::ut from 1 1.5 p~nt 10 11.7 percent. The poorest 20 percent expc.Tience a 

fall in their spending share rrom 6.3 per«nt to 6.2 perc:eot. These arc relotivc1y small changes in 

the distribution ofspe11di11g, although they do represent a small shift toward p<.:l:&tcr inequality. 

An increase in wages by 8 pcrc.cnt. con!lkler''(i in figure 4, makes no difference to the spending 

sb.'U'e of the lop quintile, which n:moins 11 Sl.6 P''""'"l But it reduces 1he sponding shote of the 

lop I percem from 11.7 peroeol to 11.6 pcn:cnt. The f.t<t that bi8lJer lab..- income does so liule 

to ake< spending ineq113li1y may be surprisit11:. Bill ~ is considmble u><qu>lity in labainccme. HpeCially wMn one considers the difT"""'t llba' incOtne 1rajcctorics of lab..- incOtnc fO< 

'"""' wilh difT....u resoun:e 1e,-.1s. 

figure S •hows !hal our modified lax plan in the prC$ellce of Of reduces the spending sbare of 

the l()S) I perc:ent to I 1.0 perCC'nt. a snu~ll decte-mse from hs 1 t.S pcrc.:cnt value under the C.\UTeDt 

sysu~m. The lQI> 20 percc:nt now u,ci iO spend 50.8 perc:eot of tOtal cohon spcndin,g. a bi1 e!l~ than 

!he SI.O pcr<.-cnt share under Ote eul'l'tnt sysaem. The spending shore oflhc bouom quinlile falls 

sli.ghlly from 6.3 percent under current tax provisions to 6.2 percent. 

tro~:e Rem:dnlng Ufttimt sand Currrut'-Vt.ar Net T:u Rates 

Table I shows average rttnaining lirttime net tax rates undt:r eurmn bw 411d tbe three tax 

ftfonn coses. "The !'3d that all mtcs on: ncgoth'C for the lowest qttintile and rise sh:wply with the 

.,.._.ile levels of renu~ lif<time moon:cs indiales tlllt the U.S. fisul S)'Siem is highly 

r~ive. II "'mains highly progressive in eocb of the three reform eoses. 8111 the tax plaJl 

wilhoul DF lower.; lhe avernge remaining lifetime nct tax 1111e for the lowest quimile by .S 

p<.1Wnlago point$ while lowering h by 3.0 po,...,11agc poinl> for Ote top I pcn:ont. 1be sewnd, 

third. and fourth quintiles experience cuts in tlleir a"·cragc remaining li fetime net tax rate, but 

Lhese cu ~! are smaller tban the 2.7 pt'rcema.ge·-point cut cx.pcrienccxl by tho top qnintile. Adding 

OF ciTcct.s to the mix raises the a\·eroge net cruc rote dramoticolly for the lowc.s:t quintile - by 5.9 

percentage points relative to the c:luTent system. At the same time, overage net tax rntcs for Olher 

quintilcs rise M well. For the top I percent, the reduction in the overage net tax rate of the top I 

percent relative: to the current system fa lls to 1.4 percentage points. 

'' 1\J clis<wtcdmAucrbadl. d. a1. (l016). ~tiCJNI Q.lmnt•ye.to nrtcs .-c I.Dft'lablc ~ 10 either 1\~ecw 

ftlNSiNII net tax tale, bec:au$C lhq w.:all f1Miurc ll('l tax p1ymmu 21M rcstllll'Cl"$. 
121 


33393.049

The last row of 1abJc. I p-resents t~vcragc tax rates under the modified tax plan with Of. There is. 

os cxpcacd, no chaogc to average t.ax mlcs at the bottom end of the resource distribution. Out 

lifting the FICA tax ceil log raises rago tax rates of the rich. [ndeed, those ln the top 20.top 5, 

and top I pcrecnt of the rcsoure<! d isLribution end up wilh higher a\'cntgo remaining lifetime net 

tox rates than under the current ta.x syste-m, For tbe top l percent, the increase in the average 

rem>lining Lifetime net tax rate is 3.1 percentage points relative to t11e curroot system. 

Remaining Lift-time Median Marginal Net Tax Rates 

Table 2 considers median remaining liferiroe n\.tlrginal uet tax ra ~ for our four cases. TI1e 

marginal net tax experiment we consider involves one-year increi\Se in tamings of the household 

head bySI.OOO. Recall. if the present value ofremainiJ\8 lifetime spending rises by. for example, 

$700, we measure lhe marginal remaining lifetime net tax rare as 30 percent. 

The House lax plan withOUI OF signitieantly reduces median remaining lifelime marginal net tax 

rate.\ for all five quintiles. For the poorest ttuintile, the median marginal ta)t falls by 3.4 

percentage points. For the top I percent, l1te median rare falls by 9.6 percent pOi_nts. Adding OF 

to the mix makes little difference t() the median marg.inal net tax rates in the bottom two 

quintiles. But moving to the modil1ed tax plan raises modiM marginal rates above their initial 

lewl for the third quintile and ougl~y bock to their C\Urent values ror the fourth quintilc, tOp 

quintite1 top 5 percent. and top l percent 

1m pact on Sptnding 

Table 3 shO\vs the impact on percentile-specific average remaitlil\g lifetime spending of the tax 

plan. With no dynamic feedbackJ all percentile groups are better off, but 1he average spending 

increase is highest at the top- 4.56 percent for the top I percent compared with 0.33 percent tor 

the botlom 20 percent. Addi1\S OF effects produces more significant spending gains for all 

percentile groups. particularly for the highest rcsot.t.rce groups. Now the bottom quinl.ile 

experiences a 2.05 percent average spending illcrcasc. The lt>p I pereont sec their average 

spending rise-by 9.49 percent. These spending changes nrc more equitably distribttted under the 

modified tax plan. The. p~l 20 percent still experience, on 8\<era.ge, a 2.05 percent spending 

iJlerease. But for tbe top J percent average. spending now rises by only 2.71 percent. 

\ ¥by the Honse Tax Plan Mny Bt More Prog·msive Than Our Cnlcul:dioos Suggest 

ln this analysis we've made a trndit.ional assumptioll that owneD Qf U.S. corporations bear 100 

percent of the burden of the current corporate income tax. But given the mobility of capital, some 

oftbe burden of the· corporate tax may f.·dl on workers. Indeed. the Congtessional Rudgct Office 

estimates this share at 25 percent in its own distributional ca1culation.t;. And Qther studies (e.g., 

Pehr, tl n1.. 2013) suggest this share could be· substantially higher, even potentially greater than 

100 percent.:-:· Were we to model the current corporate lax as falling in part or in full on w01kers, 

the tax pl:l.n would be more progressive than we've pottrayed. Conseq-uently, our results on the 

~ Thii pos.sibility arises btc:J>Jse tbe i•npact ofahe ooq>Or')le ta."< Oil U.S. U.av-estW('JitliiJA.l, 1l1tl$. reul \\1llo::h dcpcods 

on the mattinal 1'3!c of oorparatc inoon1c tl!.X;aliOII.. ln contta.'ct, ~m~e revtrates d<pend oo the low« t~V<:ntge rule 

of I."QfJKM"oLtc inoomc Ul:<llliou. 
122 


33393.050

ta>t l)lan's prog.ressivity should be viewed RS haviug a1 lc-.ast one bias aanhnt our finding fhtu the 

phm is somewhat less progressive thtm the current tax S)"Stttn. 

Cootlwdoo 

The House tax plan represents a sianifiC3Dt reform of our tax system and ils business we 

pro\iisionfi have the potential to increase wages by encoumglng. domestic investment The 

bu5incs1 tax rerorm effectively replaces a. tax on asset income with a tax on wcshh. On balance 

this is n J)rogrcssive move that offsets cet1nin regressive elements of the pcrsonaltaJC reform. 

With no dynnm.ic fecd.back effectS. tho House tax plan will. we estimate. reduce federal revenues 

by S212 billion on an annual basis.. ii noring the addition:ll revcouc costs of transition provisions. 

With o slrOllg feedback to wages (on 8 percent wage icerease), the ,..ronn will rai"' S38 billioo 

annuolly. One w>y to help== •••onucs don't fall is to couple the llouse lliX pbo with the 

lifting of the coiling oo Social Seourity'• FICA tax." Ignoring any ad•'mO bdlaviorol mpomo 

to hiJher tax mes oo labor income. doil'll so .. ;u raise aooual re•...,.... by S328 billioo assuming 

woces rise by 8 pm:eot. Eliminotil'* UIC FICA oeilmg would help sbor< up Seoial Security's 

fmonoes. AS things now SIODd. the system is 32 percent wx!<rfinanced ond fiiCOS a $32.1 trilli011 

unfunded liability." 

11H.~ House tax plan would slightly worsen U.S. inequality as rnc.a.5uNd by the shftrc of cohort· 

sp<11ding done by the rich. Were the modified tox plan chooc•t incquolily in spending would 

1-emai1l tlose to where it is under current lAX provisions. 

Work in«ntivcs wuuld impro"..: for all ~ource groups under the House plan. with the biggest 

improvemem for the rich. Howe-..er. given thal the pi~ a~t sizable dynamic: feedback. 

ptOduces a revenue loss. one would w.;nt to take into ac:OOW'll any incentive etrcas of v.'hate:\.w 

provisions .... e•'eOlWlJy odopo:d to Off><t I p«enrial re•-.nue Joss. for nampl<, !be adoption of 

the modified tax pbo would leo, .. the rich facing roughly the same ~~W&inal net lliX mos as 

under the c:urrent tax s)'$«m. 

The I louse tax plan represents o rt\'t:noo g_nmble. J r lhe economy re..~pond! as one might 

qximiscically hope, revenues will be close to if not exceed their currcnl value,., Moreover. wages 

AI wtJII as GDI' will be signifi~ y higher. If the ~onoruy does not r~spond, the I louse tax plan 

will materiAlly increase the federal defic:il. One nlttmativc, considered here. which gre;;1tly 

n..-ducc, the· risk of lost revenues but rc1nins the pOtential for ~ignific1mt economic growth. is to 

QOUPic the Holl\e tax plan with the elimituuion of the ceiling on Social Security's FICA tax. ln 

addition to raising revenues. this modification of tbe House ta"( plan would n1ake the proposed 

LaX reform more progressive. 

nAn impan:.ac;~\~ ~ raptG to lif\inaiiM FICA tu ccilioaisd!.adoi:na to••)' ~~be tabor~~ 

IUs. ta:ublc labor tr.:ocmc, ofll_ip an'.ill& v."'OO.otL 

u hape://W'.\"-.a.a.tm1oacc1tri20161VI_f infilllle..hlt~1 
123 


33393.051

Figure I 

Marginal Effective CorpOI'llteTIIX Rates Across Countries. 2017• 

:J 

~ "'till Ill Ill IIIII I lllfllllllllfl ~~~~~· •Souttc: Jact Mintt. School orPublic Policy, Uni\·erw.ityo£Col.aa.")'. 

hSIQ'/twwt m!nerg!WQ fyl!!!o uglotd411talpLf?!k;allon§IWlh alobal comoonv tpx rgform In lbo ar&2 C w!l Aua;rana finally ftSDOnd FtNAL Qdf 

10 
124 


33393.052

lowt>l 

Figure 2 CUrrent Law, Net Wealth and Lifetime Spending 

by Resource Percentile Range, Ages 40 .. 49 

• Shil(e ol Net Wea!1h • Sh:tu: of Ufetlmc $pcn<1tn1 

Hgure 3, House Tax Plan1 No Dynamic Feedb.ac.k, Net Wealth and Lifetime 

Spend ina by Resource Percentile R~ngc, Ages 40 .. 49 

Figure 4 House Tax Plan with Dynamic Feedback, 

Net wealth and lifetime Spendina by Resource Percentile Range, Ages 40 • 49 

• ~rc of Net We~JI,tl • Shirt c! Lift time ~>tl'ld'!'lf 

Figure s House Tax Plan with Dynamic Feedback and ElimlnMion of FICA T<'lx 

Ceiling 

Net Wealth and Li fetime Spending by Resource Percentile Range, Ages 40 • 49 

11 
125 


33393.053

Table I 

Average Remaining Lifetime Net Tax Rates 

Booom S.C.acl 'Tbitd F'o~&"tb T ... 

Quinlik Qu&.tilc Quintik Q-.lifllik Qul.otile Tu.p S% Top I% 

C'urrc11tl.aw 52 ~ 4,)% 12.1% lU % 232% Ja7% 

""' 

Ta.'CPbn ·5.1.2% J.l% 10.7% 171% ZS.S% 27.8:% 3().9!4 

TII.'CPbnwttll 

S%Wa3r -47.3% 

'·"'" 12. 1% 18.6% 26.3% 28..S% 31.S% ~e 

Mod: ~~t~~ Tu 

Pbn• wirl•3% -41)% 

'·"" 12. 1% 18.114 29.4% 3~9% 37.004 \•l-.,c:Iocrt llk 

•House Republican tax pl:m. with no ceilil\9, ()n S<>t l ~ly s FICA ln. 

Table2 

MediM Morgioal Romainiog Lifetime Net Tax Rote$ 

a. .... Second nu,d ··""" Top 

QDi:1iile Ql.lind!c Quiuoil< Quiuo"' Qtltnlih.o TopS~ TopJ% 

Currca~t..aw 37.-l% 34.8% 36"' • 19!4 ~·*"'· 47.2% 

~"' 

Ttx Pba 34,0% 31.7% 3l9!4 4l 5% «~ m ....... 4 11% 

TuPb!lwih 

S% WtS$ 33.2'% 31.7% 37.7% ~U% 40 . 41.1% 4 1)% 

ftk:fellk' 

Modificd Ta_1t Pbn•ril1 n.l% JU% 3U% ~ ... 44.6% <t7,9'fe 4_9,8% 10% \V• e r-.., •House Repubticau lu pl:l%1 v.ilb (10 Cltilins oo So-.ial SC~.:uri y' s FICA tn.'(. 

12 
126 


33393.054

Table3 

Percent hlcrell.Se irt Average Present Value of Remaining Lifetime Spending 

Relative to the Currcnl Tax System 

Ta.-< Plao 

TINP:lto wih 

&%Wag~ -... Mol!irll!dTu 

Pbn•with 

IO%W.g.e 

'""""" 

Bottom 

Quialile 

0.33!4 

lOS% 

""""" 1bll'd 

Qwmil< 

1.14% 

Q.lmil< 

LS$% 

QuW~ 

-

2.12% 

S.W% S.ll% 6.61% 

l.W% S.JI% 

'l:t<M1$C R~bliCW1 CO.X pJ~ with no <.:ciliJl& 00 Sociul Sccurity•s t'ICA ta.'lo:. 

13 

Top 

Qu.li!Lik TopS% 

3.76% 4.22% 

llll% l<ll% 

3.53% 

Top l% 

4S6% 

..... 

2.71% 
127 

f 


33393.055

References 

Auerbach, Alan J. 2010. ··A Modern Corporate Tax." Center tOr American Progress/The 

Hamihon Ptoject. 

Auerbach, Alan J., and William G. G:1le. 2017. "The Fiscal Outlook at l1le Beginning of ll1e 

Trump Administration." Brookings 1n.~titution. January 31. 

Auerbach, Alan J., l..aurcnee J. Kolliko!T, and OatTyl Koehler. 2016. ''U.S. Inequality, Fisc31 

}J-rog_ressivity. ru1d Work Oisioccntivcs.nNBER working paper no. 22032. 

Auerbach, Alan J., l..aurenco J. Kodilco(f, Darryl Koehler •nd Manni Yu. 2017. ''Is Uncle Sam 

Inducing the Elderly To Retire?" forthcoming in Tax Policy and tile Economy. N'BER volwno. 

llunnan, Leonord E., James R. NullJls, Benjruuin R. Page, Jefficy Rohaly, and Joocpb Rosenberg. 

2017. "AnAn<~lys softhe House GOI) Tax Plru.t.., forthcoming in ColumbiaJownol ofT ax Law. 

Devereux, Michael P. and Rachel Griffith. 1998. "Toxes and the Locruioo of Production: 

Evidence from a Panel of U.S. Multinationals.'' Journal of Public Eronomics 68.3. 335-367. 

Fchr, Hans-. Sabine Joklsch, Ashwin Kambhampati and Laurence J. Kotlikoff, "Simulating the 

etinlination of ~to U.S. Corporotc Income Tax." NDER worlciJJg paper. no. 19757. December 

2013. 

Grnvelle, Jane. 2014 ... InternalioMI Corporate Tax Comparisons and Policy Jmplica1ioo.s." 

Congressional Researcb Service. JanU3ry 6. Jmps://fas.O!!!Isgp/c-nimisc/R4174lndf 

GraveUe, Jane. 2016. "Corporate Tax !ntegratioo nnd Corporate Ta.x Refonn." Congressiottal 

Rc.earob Service. September 16. 

Gravelle, Jane. 2017. ''The 'Setter Way' flouse Tax Plan: An Economic Analy>is. April2S. 

Mintz, Jack and Duanjie Chen. 2014. ''The U.S. Corporate Effective Tax Rote: Myth and the 

facL" The Tax Foundation. Special Report no. 214. 

hUllli;/!files.taxfoondatioo,org/!cgacv!docs/SR214.pdf 

Sacbs, Jc!Tcy and Laurence Kotlikoff. 2012. "Sman Machines and Long-term l\'l.isery. Nationol 

Bureau ofEc.ooomic Rcsesrch working pnpcr no. 18629. 

14 
128 


33393.056

J.P. Morgan 

Harth Am~r ~~ Eqt~ ty Rose;~rch 

Hardlines I Broadlines Retailing 

CM!I)Ie:ed «l~:1017111CSPt.Ctsl 

OiaaemlnatedOO reb 201712:1SMI E:Sl 

Tax-Math Update: Price Increases Needed to Offset BAT. Who Has Pricing Power? 

Followiu& up 011 our detailed Dcccmb<:r a11ulysis look.in:g at the impacts of prOJ)OISed ta:< policy changes on our 

coverage uni.,·crsc (including lhe Oorder Adjust.menl Ta.'(. lower hendJine corporate tax rnte, nod ioterest'eupex 

deductibility ch mget~ $ee our not~ ''Dt•M;tlh Olvmpjc;s"'), lh~ big question is how reLniiCT$ make up for the lost 

1ax deduction of imported goods. J'P'M US Chief 6cooomist Michael Fcroli ~that the impaa ofDAT 

will be fully offset if the USO appreciates 25%. thus mating impo~ ct1c3per (thoush we. could n1n into iS$ues 

\\ilh doltar-denominatcd <lontraccs). The other JXUh is price increases. 

• Retailers, on a\'erage, would need to raise priees by 5% to ofhet lhe nca:nt1ve i.wpac·t ofBA1', with some 

ret.a.iltrs as high as 14°!. (DOY) and some at only 1% (CNCNSI). As shown iu Figure I, we estimate the 

lligbesl pnce hikes ue«<to be done by BBY ( 14%), l'RTY (I I%), WMT (9%), and WSM!fCS (8%). "tUie 

some of the lowest bikes ncOO to be done by the auto--partS retailers (2%). This range follows the overall 

imp3Ct of the AA''r, \\ith high s:ro.ss margin bu~inesses \\ith prirn.1rily domestic .sourcing (e.g., TSCO) $cdog" 

lift while low GM st¢tors \\itb b.igbtr imports (c,g., BBY, W'Ml') needing l>iggcr price increases. See Pigure 

I bliow. 

• The question we ot\t-n g~t nskOO lS wbo bJls pr1tl.ug power lD OW' uah·erse. Clearly, we believe !lru!l§ 

jmnroy(;menl ISCO WA und aulooorts ha'o'c pricing power. We also believe that I)~S mjgln. so long as 

the key brand.~ cn(Qrcc minimum pricing and maMgc tho chttnnel.s. Also rec<!~ilt:rs with small ticket.'! like MIK 

~seem to have a clear p4th for a large J>Oitioo of I be rassortlllCrtt. However, wt.: quesCiuo ir the. world 

of ~ (bruuds and the online competition) y,ojJI huve the discipline, and home f'umj%hin,&1 seems 

similarly challenged. Tbe grocery wodd ~ms precarious.. FirS(, you have con;panit's lil:e COST who live on 

price disparities. Second. we recall the impact of the hard discounters in tbe UK <lurin,gthe inOationary period 

a.round the financial eri.sis \\here m:ainline grocers raised prices but the· hnnl disoomters kept il low. '!'his 

$ten'ICd to open llle floodgates of share los:s und WMT bas first-hnnd exp:::riencc: of that with it~ AsOO banM:r, 

• See Fi&ure 1-4 tor a recap o f rt'Sull$ from ou.r previous note deulliling the impatt or propo.~ed tax 

t.b.aoges and em•U us Lfyou would like a copy of our workin: file cont.tinin&: the ealculario•'S.· 
129 


33393.057

F"tawe 1: ~~ Hikt Ntedtd 10 Ot's« Border Adj11.ttmet'lt T.u knpaet on PAT 

Price Hike Needed 

to Offset BAT Impact 

on PAT 

BBY 14ll> 

PRTY 11% 

WMT 9% 

WSM 8" 

TCS 8" 

OKS ~ 

GPC ~ 

COST S% 

TGT S% 

MIK 4% 

ULTA 3% 

HD 3% 

LOW 3% 

AAP 2% 

TSCO 2% 

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OI<'.:X.CPYca itt«tiooo 761Gof&eCorp<Wrions AcllOOI Crrn•tty:lbisC~~tetil.l is~•<itft!UA1 byJ; ~ :Mcutlc!.spk.fuD.f\111 

ljlr--hv.hl$ttl0f;ll1ltftlbyl,l:.c"-~.-lll!lrf~ilofi'IJ!k!l~lt."Sieh H0011 Kont:: Tk I%0"4tt\ipdUdOtuc'C Iofl!lt:~;ae:MICWI 

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l..ld., -~OIIIIIOIM i.lt~ Fioladll ~ fiml: m.twpa S«viin bpM.Co., Ltd., Kar:col«fl Pilwlcc lhtNII (\;iflsho)NO. 81 

Par.iriptqAsso ~ioa/ !~ $w.lndc$0N!crsAtl«<.-tioo. Tb FioAAcl.t.lf~CfA'**'ou.otJ..-, TnJCI1 f....c:iel ~,,;._ 

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~ 

Vl'totiii.JJU:<'ISIO.Ibt~cbcblr\ie~ibe~-u..f«UUl!i«IU)'btihft«<:fitief.~in.lbiJrtpOR.~J'IOIII IIM Q .. 

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inltlel iosudl uqrtm)'Wg..,..urir~ M IRIIIIII. Tbtup6!INII!JtoiiiNC'tllltdW'llti'JiltJ(.Wv.bicllJ'l'M$S KUIJ~ lllatt:ctllllkn.uybt~ 
134 

f 


33393.062

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tltllOIWikll~»rceo~olparb(ulal..eouo ties.r-e:i.l rmn"~~n~tt or to<n!c:tle-tnfW10col1•cl ~•.~r«ipic:atoiChis r~cuast -.ab 

ib~¥On~~~~clifls-rwcumitllorfuww!blic~~t.mio J?M:SdiftribwsU.~U.S.m.e~rdlp!lbliskll~ooo· 

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d:wou8baJ..P, Morp. ...... ,.or&fl'ik'fl•intbeirb<lmt,..nsdl<1i011cma~ina 11Wpmnirt~ 

-o.kl l)~~·ltil c.n.dl.,~) rtl.201' 

Cut)yri;:lllt :Wl 7 Ji'MUtJ•r• (.'llue & Co. All rJa.hb reserved. ThiJ rtporc or 21tf pordoa htrt<~f Pu:y tlOt be upri•lltd,J;Oid or 

to:<lhUil ... red .. ir_liolloo•l '' ~ .. 'li UI.'a WlfWIII.,{J,r, !.~~harp•. 
135 


33393.063

Goldman 1 !tc~om1t1 

Saclls Hmardl 8 Oeeember 2016 

US Daily: What Would the Transition to Destination-Based Taxation Look Like? 

IMericle/Phillips/Struyven) 

• A key foaturo or Lha House Rapub/i(.'(ln bhliQr.iaJ, roc corporate tax reform is a 

proposod SWitCh to dolstination-basod ta.Xat•oo In today's note. v.-e ci$cuss how 

the transioon to da'!itm<l K>~H>ilsed taxation wovld v.'(lt1( and the bumps that mi{Jht 

bo f~lt along the way. 

• Under an idealized ver$>on ol the tsan.s.tion. the dollar wo1.:id epprociatu anoug.h 

to off:i,et the impact of the t&)( Chango, resulting m no im~t on pr.ecs, rr'\MQiM , 

or trade flows. E\len •n this case. a large a...O abrupt d'lange 10 exct.ange rates 

W'Outd dcfivor a ros~o hit to US resident~ foreign wealth and OOU!d cr-eate tisks 

of <Joltet<lenominated debt problems abfoad. 

• An aluwnaWe tJansrtion scef'lario teatum'lg pa.rucd dollar appreciation, higher 

W\ etiOI~. a hit to th@ prof1t n'la1gins or US net i,....>orters. and h gtler net exp<)f1$ 

appears I"'''Ito likely. Industries with &ow maf'gins and high impon shares such as 

appafel would be p.:Ut CUI<~ttv vu nAC'~ob e to the (flange. A gra-dU81 phaso·in of the 

new system could he's>. but creates rts own nsks. 

• While <lesti,..tion-based tex.etion offers meeningful benefits. the transition to the 

naw system oou!d have unintendod (X)RS()(J'Jcncoo. r()(>.)rcQcss of how 

adjustment taJces paac:e. In ttgh: of the uM;ettau'lty reg!Hctng the potential effects 

of such a po(cy. and the opposition it hes alre.&<Jy pt<woked, w·e thil\k thlft 

Congress is more lik61y to rn<W& ~from tho destinatie)M)asi$ tax proposal. 

A key fe~ture of tho House Republican~ for corporate me reform is a 

proposal to SWitdl to deStif\iJtiOn-based taxat1on. Lnt week. we <frsc:usse<lth& 

$J~ai s of the proposed d1ange. which is currentty being debated 111 the House. In 

tOday's not& •..ve dJSC\ISS how the tranS!flon to desnnat on-based taxation \YOu•d 

wed and the bumps that m1ght be felt along the wey. 

Tho J)(&ctical effect ot S\\fit:d'ling to destination·b&SOO taxation wouJcf be that US 

firms •.vould exdud& &xport f!'YVnutts but \'tt)Ukt no longer deduct ifll>On costs when 

ealcul:~t ng thcir t.:vc ~so. The economy would adjust to the new system during e 

H8r\Sition pe.riOd through some cOtnbiMtion of chaf'lgM in nominal exchange rates, 

prioo levels, oorponne prof=t margins, and ltade IIOWS. 

We begin by describing an tdealizod V&tsion of the traMition as 1t has been 

presented to C~ess. Pfopoo&l'lrs of des-tlttal!on·based taKatton erte ~ 

~ shc11Mg th<:lt S)'l'l'lmctric botdcr ~ustments should not affe<.-c 11ade fiOvJs. 

For example. &te£b3dtaod tloltz·Ealdfl arguo tMt "Bordor adjustments do no! 

distort uadtl, a:s exd'lan.g& rates should cebct •mmEKhlltely 1ooHse11he 1Mial impitct 

e~hPendl 

lt

~s.a.

2t~ucl'l

~eo 

~~ 

A.le,; Pbillil):l 

~~t~ .... ~ 

Oe<kMtricll 

~-=-~~~ 

g~:l5~~~~(f>'n C" s-t.bCb 

Karen Reidlg.oo 

~=-:oc: ..,. ¢0'1'1 

A.wisf'le ltt.akker 

~~::'~~~~ 

lnv&StOts shoukf consider this rEII)O(t as ooly a sin{llo factoc- in making theit inve-stment decision. For Reg N:. 

cenif!catu)n and other 1mpottant dis<:IOS:ut&S-, soo the Disclosure Appendix. or 90 to 

'.WJW gs OC!mffft$ft1Wb/hMQA html. 
136 


33393.064

Goldman Sachs 

of those a~us.tmcn s As a corollary. botdeJ sdrustme.nls do no: distot11he pe;ttem 

ot domestiC sales anef purchases~ In 1t'!eory, the bofdof ad,ust:ments would initi&J!v 

malre impocts less oompetitivu llnd US expocts ll'l04'Q oompet1tive, reducing OOma:nd 

for i!ll)O(tS and in<:toasiog domand for O)(portS. This would C3V$e r appr~auo . 

reversing the ln1tial effect on CO«'.J)etlllve:wtss l.lnd uadA 1fo<Ns. 

If nanc~al markets e.ntclpato 1his now oqui1ibr!um. proponent$ orguo. nom nal 

exd"'fl!fe rates shov'd react immEK!iately 10 offse11he impact of tl'le botdor 

adJustment. Fot e.x3mp!e. ass~Jming a 20% statuiOfY ra.x rate, a US comparrt se111ng 

M imported produc1 f()l$ 100w.tllnoprolt would need to inecoaseprioos by $20to 

contlrMJe operating withovt runn1ng an after-tax loss f()( a S20 dedm$ in import 

costs 10 offsol tho impact of tho $20 incroosc in taxes, tho OO!I<Jf wo~d nee<l to 

apPJeCiate by 1/ll·tax rate), or 25% In this8XbJY\tll&. 

If clollar appreciGt1on "vere mmed~ate and perfeclty cat bfeted. there 'h'OUid be no 

effect on consumer prices, profit margins, or vado fiO'IN$,

1 Moreover, there ......ould oo 

no d1ffefenua11mpact on firms W"'tll tow vs. tugh Import oos~ shares or I<N1 vs h gh 

profit margins To iDusvate this, Exhibit 1 prOVldes examples ol income s-ta:en.al'tts: 

tor va1io ~ typeS ot ltrms unci..- ea<:h tax tOQimo. Un<* cu«ent tav ... UlXCls are 

asse$s.ed on lotal soles minus toat1 costs. Under a destinati01'1-ba$ed bol'def. 

adjusted tax. taxos wolfd inste-ad b<l assessed etlly on domost1C sakis minus 

domeStiC oosts. For net Importers. t!lis results in a much largcu t-ax burd~n. as 

shown in the first column cf Eld'libit 1. Hoo.Nevef, beccuse tha delli!f app.~ec Ales. the 

f11m's irnf.l<l« oosts-when measurod in 001\ats-dGclino, offSo4)~ing tho larger tax 

burden. As a result eftef-tax prof11s &fe Identical In the two tax regunes ln. the r.<~AA 

of not GxPQrters. ~h"""" in the seoomf <:O!umn of E>dlib11 1, lower cc-.·eoues 

measured in dollars are offMn by a smaller tax bufdM. agatn rosu1t ng in no change 

to afteHax profits after the sw1tch to dcs6natioo•IJ.&sed taxahon. 

' The~'a»UI'I"'e 11\a1tht~lfdOt~Sotbo-.h "l)CII'>itdtnd~gooc:.$•f\)$Ctil'l 0o'a(l•\ 

c:vr"I'ICf llnlt$M'ld atO:~~~~Ot theswtdl toOO?Cifl8:ief'l~~1~1dlt<>n. 

10tctmber2018 

U$0toly 
137 


33393.065

G!>ldman S.achs 

lypo.•nl! nu 

t.i<l't I<<>! llghln>f"'"'' I !t I01•1"''" H1•1h Prnl!l l ow l' rdlt 

,,,..,.t,, f• pc.:.<t<'~ ShiH.:- 1 Sh11w ll.srll '' I.Ju<J" 

Exc~ta~t(lor~tuTtncypttS} . • ~ICNinii'IS ... 100 ... ! F«t !lfls.ftt lnfottitlt'tuntr.ty 0 ... 0 0 

j Tcntsalt:tii'IS ... . .."' 100 

0omn;TC~td$ ,, " 0 $) 

F~eoA•II\tclrt•Ofl~ " " .. TOI.,C0!1.tln$ ., .. .. .. T»el:ln" ~ 2 

1\eti' .. Updl 

i Elctll~ '*' ~eign u.maty F* S) 125 ~5 "' 125 

l: Damest!CsaluMS 100 0 100 100 

~ F~tar. sn ro.cweney 0 100 0 0 

"I lctflluae. ~n s 100 .. 100 100 I ~C:OitSin S " " • .. '% f~t'*'l!tk"'$"O.IIII'q' " ,, .. i 

.§ Tctelconsm$ .. II 12 .. .! laxbt.Mc!n.Jt20% 11 .$ 20 2 

~uxpcfil 8 

So.e"'-~t.tt.l~~~ 

'1\lo sec t·wo rC<>sons to be skeptical about l.his smooth piCtUre c:f the transmon 

process The first tooson is that oval\ 3:'1 adjustmem thai did oc:c;u1 entirely through 

notn•'lal exchange ttltes wc:uld create large ris!<s. As noted at».'9. the tQquired dollar 

appreCiatton would be very ta.tge; 2590 if lhe statutOI'y oorpotbte tax rate were 

reduce<:! to 20%. and even high&r rf tho st.Btutory tat& wQfG reWcod by le-ss. Such 

an ebrvpt d'lange would tesut1 in large neoative wealj'l eft&cts IOC' US res dents and 

fhe risk of potcntia!ty serious dollar·d'ooomintlted Cfebt problems abroad. L 

The StMx:lnd r&ason •s lhat we thtr\k 11 1s unlck.ety that norrun.al or even real exchange 

rates would .n fact adjust so quickly and pertectly. O.Jr ~ have shown 

that marr, As•an oentral banks 1\av$ inter..-aned to st&bi'izo exchange rotos. The 

combination of pegged exchange rates in rneny lllldtng psaners wi;h pi10e stidMes.s 

imP:•es lhat real exchange rates would not adiust as smoothty QS implied by CUfrent 

pol!cy prCVQ:>a's. While Desataod Hjnn ha'IG found that floa:ing exchange f3tes 

rospond to news about dlaf19e$ in US tax-based expol't cncemi'.'tl:$, the past mtwes 

were of 8 vastly sma"er magnitude 

lnste~. we think it is mOfe lil:.e:ly that tho uttnsioon to dQ$11Mt•on-b&~d taxation in 

the US woold result in meaningful but imperfect do11M appreciation and price 

edju<Jtment. In the near t.erm. ~uch an lncompl.oto dHU'I{)O in roal oxchOJn.go r.1t0'i 

' Th<tt•81'ttNOof1SW~::>OOt'IO&I'MaboutOOIW~oddclb Mltlctm:~;)brcJod Fr.,si,:;QtnOf.rmt 

11iweolf's41tllngctollw ~~• s.concl. ihllll ~ontc.a toreigt~.weal hWOUidbo 

~..-e.I)O!SsJoty elbw!AQ some goo.oemmtnts to ttK berw!ic:il11es "nd sws.~ •rww~ NIT:$. E..en 

XI. "''Oth.nl: $Uch•JDrg•tn<fttwupt c:~would<::teete MN'Iingf..;nsu ... ptxes\~~ ~~ 

1\lbilr.ies.. 

·~10!6 

• 1 

>00 »O 

100 100 

25 ,, 25 •• .. 

10 01 " .. " 12S 125 

100 100 

0 0 

100 100 

25 ,, 25 .. .. ..~ 

,; 102 

.. 1 G 

t•o•J 
138 


33393.066

Goldma11 Sachs 

could result in fc:wJOr profit macoii\S for US lmportc;s :tnd ., docllno in the US trade 

deficit. This scenario would have a numbor of eoonomic OOflse u~ncGS H',gher 

QOnSumcr price inflation could teed to tighter .-non&ttny pOticy, thOugh Fed off1cials 

might dovmplay the impact as a transitory tnftuet~oe . Pr~ssur~ on marg ns from tho 

policy shift could be substantial. challenging tho solvency of some Mt importer flrms 

that were in good fin3ncial condition pMt to the $i.ldd0n pol1cy change. Finally. 

reduced tmpr!fl damAnrt and lnr:rAA.~ Alf(IOtt t'!Atn;~M 1ovnuld inlti.-tty bnosi US 

outP'Jt. but could in\1'\tC" rcta!iotion, cspcci;:,lly si11CC the new US rules are vnl kely to 

be JUdged to be wro compUnt, in our vi&H., 

It is very dcff1cult to know in advance how tKI)vstment dur1ng lhe transitoo period 

would be sp1i1 among the various margins. We can. hot.:\'0\ICf', 3$$CSS whid'l 

lfldustries wookl be most vu~ere~e to a tess elegant tran.s.ition than dasetibed tn 

Exflibll L We measure en industry's vulnerability as the ooosurt'l&f p.ice dlat.,ge that 

would be required to k&ep after-ax profil margins ~angod. assuming no change 

in e>td'lenge retes (the magnitudes woukf be smaller u"!der pan.al do: lar 

appreoat!on), Wo atSQ repeat tho c.1'0Jiation under the :~ssump~ion that statutory 

corPQfaie tax t&te.s &mUitaneoosly taJi to 2G%. These vu!nemblhty measures. shown 

in Exhibit 2, are increasing in the oet jmport !iha•tt er1d d&C~eas ng m margins, bolh c t 

\'lhich we fl1.9asu;o uslflQ <ftata from the input-output tables. We ca!Jtion th.al lhese 

are industry 8\letages. and tn every ll'ldusuv tl'lt:~te Will be ltrms \vho$e vulnera~ilV is 

much oroatO:t. 

bhi: t 2: lndustJ;es v.'IIJI HIOll Net Import Shares 8ftd Low Marglns Wo.14 St Most V.l•trtblt 

PerttrtcbanOe 

15 

SNe« ~oteom.c..~Seh(jlo)N ...._....,,..._, 

We draw lhr&e OOC'IeluS!OOS from Exhibit 2 First, ihe required ptico i.ncroasos WOI..""d 

be faitly large fOf some net 1mporting industries and p.-ob&bty ... ery la·ge f01 SO«'e 

, 01 OQUI'~•. tht w~~ (l()l'fiJ)1alnt .,...ould pcesurnablr torr'lt tr()M «NNI!its W'ill'l ~ "''nOWOiitfJ M-.-. tt!• O!Jtiorl cA rlt! inQ thef" pegs. 

US01Iy 
139 


33393.067

Gotdma'l Sath$ 

firms 11'1 tt.ose mdustnes. meaning that some oom.;>rcssion of protil m3rglns for the 

bcggest net imp011ers seems liltely. S~nd, a Simultaneous reC'ucuon in the 

statutay tax rate to the 20% level proposed W House Republicans would 

$Ubstantially cushion the blew.•. aliO'¥\•ing efte·-tax profits to hold stoady whikl ptieos 

acf"rusted over a more real1sllc time horizon."" Third. apparel stands out as a uniqueJy 

vulnetabla Industry. 

To SYI'f)fl'lalilC, wo seo sud\ a !cuge al'ld abrupt change m corPQfllte tax pohcy as 

likety to 00 some..vhat d!Sruptive, ho\vever it occurs. Even adiusunem entirely via 

nornmal ex<:h&nge nltas woukl create mearY.ngfu1 usks. esJ)eCi<~LY risks abroad that 

US pohcyf'Nikers would hove limlted power to mitigate. The more l'ltely scenano o! 

pal'tial dollao:' adjust.MQnl could lead to some oomb nation of higher US inflation. 

St2eab!e hils to the proh! margins ol net tmporters. end a ihnnklng trade defiCII d'lat 

could prompt retaliatory trade pciicies. Cootd a gradwl transioon to destinatJOObased taxatioo alleviate these risks? For example. W-lat if ono-d,ird of impon CO$U 

and export revenues were igllOfed the fir$1. veer, then two-thirds the seoond year, 

before full implementation in the third year? 

A gradual phasHi \\.'OUkl ;xob8bly do •tile to rea'!Jce the si<!Htfacts of sudden 

dollar approeiatioo OOcauso most of the dollar response to even a staggered pc"icy 

ShOuld occur upon aMOUI'K:91'1'lenl. not trnplementalion, assuming it is crO<lbfo It 

ooukl, howo ... et, reduce short·ru-n JXO$Sure on tne prof1t morgin' of US net IITlpol'\tlfS, 

reducing the risk of maku'tg cune.ntly v&able firms h sd\o"Snt. Bvt st~oring 

rY~pl tmentation ae.au~s risks of i!s own: if the 0011-ur appleOi&ted mOJe (\\liCICy than 

poiJcymakot$ anticipated, gradual phase-in wou'd actu.olly benef1t net importers and 

herm net exporters because impomus' costs would fall moro quidc}y than their tax 

bil1s '>'IOIJkl rise end &xpotters' costs would 1is& n'IO(& qu-ddy than th&tr tax bills 

wouk:l fall. lhe sceneorio shovm In tho u>p.nght box of Exhibit 3. 

Exhibil 3: A OtN~MI Pllase-in ol Oesd•atlon-8ased l a:.tatk>11 Does Not EJi«<inn1e Tc1111si'tion RJsk.s 

ho~~,..ift of M1rw ~iQR.BMed CorPQfl)C• T•JI Aegl!M' 

lmmedi.-rte ~ 

i il lmportJen.Ntutral lmpooers: H¢tfm~ 

I 

"' E•pcrten: N@Uttel Exporters: I. ower rna!Jfns 

~ 

~ 

l !I tmpcrten: Lower tl'lllr&lns fMpon.rs: Ro"'ltf\ty n•v:ral 

bpoften:H~ttmaraim bpomrt:. Rou-Jhlynevtral 

• f.ootnbitl&'.lwif"Od'ltrpt~n'lt.ls..MStflat~MIIkl~l"l r~x,.._..nue ~I'!'IQfl 

n¢UIIOi.~thO$VIO~t.onofnetlnt••:ndod~ltY~~<:'t.lll~e~n$l"'Q. the•toQund 

PfJCI ehar1g.s would rise. 
140 


33393.068

Goldmen Stc:hs 

P(Op¢(\Ct"'!s of o SWitch to cfest.mahon-t::ased axa:~ note that it wot..I<S allc·N ~ US 

to reduco rts r() at~W!y h gh statutO')' rate and reduce the incentive for firms to repon 

pcofils 1n ooun111es w1th lower Utx rat&s. 'rhe$$ are meaningful benefits •Nith suong 

bipartisan appeal. But the transition to the new system v.'Ould invite & tanG& of risk:s, 

regardless ot h<>N lldjustment takoo plaoo. These costs might bo v..'OI'th booring, but 

th<:;y hove alreGdy provoked opposition from thooe who fear mcomplete adjustrr.em 

n! rAAI A'tl"'#u!n(JA '"''""~. incll..•dino both con<'ernod not i"'PPf'tc-r~ ::~nd ro~t!3dcfil whO 

WOrry IJl(tt patt11!1l i.tdJU$1ment Wl1 amoum to proetec:uonism Largely f01 these 

reasons. we thtnk that Congress is more likely to utt1matelv mcve a~ frOI'n the 

oorrent destination-basis tax prOCJO.S<'I, 

O;M<JMc(oclc 

Alec Phil ips 

~20 5 

uso • ., 
141 

f 


33393.069

Goldman Set h$ us ow., 

Disclosure Appendix 

RegAC 

Wo, Jlo'l H.lt:iut, 2:iKI\ ~AlOe Pt11'!~ Oo-1d MOJdO. OUI'ISt~'ftl. Kaftl\~~ and~tl'holkklr,. 'leretP,>c.e"dytnlt .. ol m. .......... •'IP'eo&ed'lll tllorcp(llteco..ttdyrt!l\le:tOOfaer-!wM;s, ~'-nee MMiri~W~Mlonsol N ltm-.t.JtiM!. Cif client 

ll)l."lOOflsllof,$ 

llf'll&stot!'r«wite: s~!le!lf. tllendv.:h.leltlistt!donlflec-!lello clthos r~.rotN:>r'StslnGol<l~ SW~f(iiQO.t i,..,.W"'..-.c Rese.rdl ~rt.. 

O:S<:Iosures 

Global p<oduct distributing entities lho~ "'""lmtm~~O.V...onOIGolc:imtl's.ch:i:pr~&ndd«JOolteaf'G&el)lctl li'OductsbcleM!Iof~S«MorteGlobtllbals .Artltylublsedin~S6cfl&olfeesa!'OUI'ldtn.....cwtdoroct...c.oc-.tyr••a.Oilf'l!tl•lr•.wld~.~~~QriMtc:r~S. 

evtrti"*M.COI'I'II"''Cii~Jontl'.d~n•t•tt Th'*~'*di~tedn~:r.tr-.tJ.,GolctY\Ins..Niu!o raiaPivltdWIN2t0057S'1tJ7).'1'1 

Bt :ib.,Goldl"'"*1s.d!tdof!.·;aWC«tr.OttcleT~ •v.lot•sM»>>¥.tOf$A.;I'I~bi·~~SiehsC.fo.t.:lll'c.OI~S4d'l~& 

Co~i'l\iotta~bf~Std\tiA! ... LLC.:hlnd~tbi'G~S.td'ls~s.o;.,IJtiC~t•I.W..~J•I»f'~~Wtt~Co. 

d;h ll·•~ofKot" bi~S.CbJ"-Sit) l. l.oC.. S.0..1 8 tMIO'I: in '*-vle.l!t'ldbt~s.du N_.Z•o1tv'ld llrntll¢~ ~~'¥ 

OOOGCIIOmonSachs.hSinQac;oro toj Go16!1"\11\S6ct,s~lpo:•)fiw,(tcn,.:af'lo(NJI'I"ber. ~16\'M.tttditi!N~ed$w.•ot~by 

~Std'lt &Co GdO"'"tt'ls.d's lnWI'IfW.I lias lj)flfOo/ed tt.s rosea·ch 1:.. c«tnec;-.on ~ rtselis.1rbut,JOnonlht lk t~ ~Otod£111'10i*'l 

"""' EI,JIOPf'" Utlfo"':~S.d'$ ..,1¥1'1·~ ~edbv:I'•P!vc;ential ~to-.Aullto'IIV a!ldi9!Modb(tlwfiNI'IQiiiCotw:t,.cl "-'111(1Nyaf'O(I tho P~~al Ro;oMUonAVcl'-«>tV,hts~dri$ ~tf\..,W'I'IoKto"'<w~ti'IUdlt.ttblbon., f'le~~oon•nd l.l!wedK.ngd::>m. GolclfNn Sect<tltf.J&ndOoldrtiiJ'Is.ctls ncerYitlioMIZ\~~~SS.JI'Igffd._'un.~tedi:'\'IMOundelal\$;.l~ ;,rl~~~f~I'Niflllso 

d.;~MU~rosow:l'l~~. 

General diS<:Iosures ~ ~dl it»'ourt 6fV~OO'\t)' O~or d'orl<f:sd"urestdotngU>GQ!dma--. s..dls, t'-.s -...-ct~ •l~OI'ICV'fttltlN~iMOI'mot.cro th1t w. C1:1A$1d0ttcAMio.b.ll \~(tQnocrCJ)!etOMil it¥;CI6;)1$(ll'~.tt'd r:~f'OIX~te'"IOdonlls$1..(h.Tho~~.bOr\.~.nU>t • .s~..,.•nO 

b«t;;t!!ISeont~hGI..,«eosofthoOII!IOhcrool'¥lelore~c;,<f'IM90~oc.tl)ficti\OtillcttiOt\V. .. tHkto\IPdlteo!lfrese.ch•5 

IIIJP'OI)"V41.1. bJt V/JIIOuerii~PJI.!~tn:wor~Vlft'Otn~M. Oltlor ltw'lar-ai-otwlustrv feC)Om ~i:shedMa c.-tlocklitkSt. 'lleWQit Mt!Qfi:'/ 

cfreporrsM•~a;f~ .. .IIWW l'iH~a •ll'lh*';,}t)'$f'8~~ 

(kl1{1i!WISfcnt(OfldVetJIIQIIOI:IIItvl4er~onttgf~tedll'l~tonkr.g,jn,oestrriOf'AI'J'\W\...,emont,.•IIObtokelatQt~S.Wt~vt..,...trr.errt 

~IJI)I'odOI'IOib.I$IFIO$$l.~w..11 119.1blt¥11111J)Of<On!liOOOf111e~SO(II;IIfoedbyWGtobii.IN..sr.'!Wnlft~trd'\0Ms1011. 

(ka;!Qo\s...<:N&Co IN:IlhlledSUUttbrOUI<~I$IIOII'II11l:orofS7'0C('wrlt«w«!'9'gpl· 

Our wfH~, tlltd«~. Wid cnllcw profe~~4bm11N PfO\oWCI'IIIOIWM:CI\Mtf'\:ttl ¢0t"WWott''W'/Ot V~ St'tttgleJ 1001.&' cht\ts a.-ad omap.11) 

'""""Vdlalos C'WII ovl\letVjlil (II .. lll~t "'VI,IOo•lt;u v to,o ll~"'I.Mr•<><"' ""f)tonJOd.., ""',.,..¢"1, o .. MS" f'Ni"''iGmeni.,N, pYIC:'*v..S119cltlQ" 

rw=;ti11QbuSIIIC$$00f'Nf'tlll(lkeii'M:S.'IInl)flldOC$onf hOt¥eo~tetlt-ctlthe~a1~01vi!Jwstx;li'IJs~ i'!M rosoardl. 

Tho~u IIOf'l'letl in th4ti!OO't ~"'&'.oe ttOtn !jone »~<hsevncd...W:'i\ o.Jt clients, irlclu*'o Gol:lmln S.W UO.!*toll$ ll'ld 11.-Jel:&. or,.., <l~nthi:s•"PQ11,tr,~sva;og10$tf\l': Oict1'1'10f'cotafy$ SOtM't'ot'tti'IM*'I~•~•M\~OI'IIf'lonwkecpnc•cltNtq.~~~yS«~,~niJM 

<1'~1edf'llt'ib eport,whld'lll'!!f*lm1Pf tledrectJOnelt;a:o..n~eolho~ 's~pr«l.¥9flt~~ro-s\ld'I51C<b.M'/wc:t~ 

lnld~Stfi~e~Jo8$1Wt~lli'U ~tii'NfdOIIOC.,OCI \l'lttona'ySt·• eq.~~~y,otrg or s-ud'l sto6:s, whdutli-~lll'fit-:u• s~ocr•r•~ 

l)olet'll~ roi.Jtrt .. b !bCCMW•;JO QJ~<IS dcJscrtlod !Wll:DA 

W.rdout ·l•tes.dfio«t..dtt(:(10'.,~d~ ~oe~o~r:y6tldc~w~ystt,wilf etnti'ne1CtboN>oeb'l\'l«s.'-lorl~'~aa 

aspr.nct~tll'\.erd b!.-v or :tetl !I'e stJO.( ~ et tlflfM1U..C1; If""" ~od toirHho$lOMOid'l 

ThoV>CrWSa~locftO~Pit'fYPI•)oW! O!'I•tGoi:IMarls.ctlsa!f~COf'l"ere«:es.~i'ldMcl.>ab~otllerllit!1'~<kfcioMriS!Kfts.lfonot 

t~ece:,wiV,..,!'Ie<t 1tw:1se~f Goobt ll'lloe~tMCnl Ruo•rdl andere not n oK.c-a! lliowcf ~ $acht. 

Ntv tN-<1 P«tVreforoncod narttln. irlctldnil altf u !Hf*)pia, ~r•:Hts ~ Otller 1)1'0~ Clf "*"'~ot ,_. tlovsoetold, rut t.Mt IXISito'ltrl m. Sl'OI.I..,.;~, merflltoood th« •e I'>COflt-..,~1 WI'JI , .. ~ e:qlfe ne~ O>f anatfSts N:r.o .niNS '""""' 

Thsrese.arch!st.ot an dlorm Mil or the $01iclwto"~olanol*~bo.oVOI\' Sto~,jf'llly in¥¥P'ofdr<t(ltl""'*ewcfiMO~or ~~ v.oJdtlo 

illt$;fl. It clots not«<M~te • ~«~!(eeonvnen~~on or IA:U> irco acco:~nt the e»rt!O.l;tf ~tment ~ III'IM!(Io)l $11\101\101'11. 01 Meds d hc!Mcl.alclorns Cl4tlts $hould COII~W"'ethtiV~Y~• Ol ~liefti"'lhlt~• ~il.ttt•tor tJ* p.w~iouW uwms:IMC4f ...,_, ~ 

_,.,~ . seol:profeubnal .ako, ind>*'sl a:c «<~ Tl'tt pru•~~olh.otSV!"Itf'll,,.lttred 10.,. ~ ,...,.<1>.-.d t~IIIUOMe JJOM !Min 

mtr~ .. 'WtwbtNII« itllotllovtdt 110 ~,~~~;re ~e. Ma•r~....-.s•r• noi9U«.-tted. e~~d•SON otorqrvt~• ~ o..»ut. J:~fiord. lno~rt .,c~Nw..:ll'efwe~•OI'I•IIt .... W<>toretof. <>titleornede!Wedlrom.c.enal"'~ 

C..W~ 

~~ 

tf¥1

sho.lldr.-.i-cutren.~opcb'ltcf!Sebsu•e~~s~etta~l'rOMGoldT~nSachssaleso_..e~eat'.-Of't 

UCC«''S. he~t>~Cse~ti.!Mts. ~ ando:h« denv•lt'18S.~ o~.,.dllffc&lllll'ld••root$110t.ltNt for ll ~ 

~~~~~.Ttn.p;:kltloos:SI'fltl\'btSIQI'Io .U'l .-tootoo'l$. ~~·~IJb •IAI<t'ieJIOtdw.loW1d 

$Oietofqxiontweh» $1114~ ~~~'lll <OI\wift•St.W «:1 upon ~s . 

AllrtMII'<hfepont• edisumineted..,.,....ailtblet~aldont!oiii'Tiull~o;,.l~"'tleclron~J)I.ibh<.c.tQnto~•nc~el«'d .,.~. 'blul 

lt$Mtttl COI\ttl'lliltt<ll$..--ltlolltdtoOI.II ~1*01 M~M<:•to~~'/'9\lfe<O;Jtcrs.I'IO!' i$~ $xr~Rt~*tll)l chO I~tttlut.onol Qui 

rnNf'dlbvth~dPI> f''9;JfeQa:O't. t"«tue.wat,modolsor01hw"'tt"""'bltOI'I•~toe:vi•S&CIII'I!y ~OOtot~}'OUI'$11M ~MJOIQO 

.. -....., 

Oisclos-..erdo:mJIIIOniSabo,...W,' at~~e~<>tf'O"rt~C<w~~200WeMSt:eot.~~k.,lft 

10202. 

0 2018 Ootdma11 :bdlt. 

No p!lrt ot IIWs -~ 11alm.~y M OJ ~ltd. ptlo!JOCOpieol or dujlllt01f d II\ Gr.y to"" b'( a ny ~IIIIJ Of (II) •C'dk-1rib'lted wfttlout the prio. wf'~t~•n 

(01115«11 ot TIM Gotd-11 s.dls 010up, Inc. 

,.,.1 
142 


33393.070

ld$ PilE PETERSON INSTITUTE FOR 

INTERNATIONAL ECONOMICS 

WORKING PAPER 

17-5 Effects of Consumption Taxes on 

Real Exchange Rates and Trade Balances 

Caroline Freund and Joseph E. Gagnon 

Apri12017 

Abstract 

ThiJ j»p<:r 01o1inn the c:ffcxu bordcr~djus(ed co.uumpcion wcs (m3inly V2luc iWided DX~ Of VATs) in 2 

umplc:of34 :&dv1nc.cd«<nomiesfrom 1970 tbtough 20 15. We f'l1:d rh:u 1hc rctlcxd-~n-,c r,ue u:nds to ri~bytht 

li.tll anlQum or ~ny c:o~.msumption we in<nUC, with Ucdc effect on the: cumtu aa:wnt ~tK.C and modes~ otfsc.:uing 

tff«r$ on the tlllck wei income babnc.cs. Case studies scgg«t dl:lt ~jwrm-cnt COtnC$ initiAlly through pric:tS. We 

ttQIC •Mt d1e borckr«<;u.:>tcd ~ Oow tu of the House R.tpuhlle:~:lJ dltrcu in important Wl.f$ from oonsump1ion 

f,J.X<:$ used in oor sc.udy, which tti.sd: the po6Sibllity of a sltJwa ildjtUUIWOI I'~ widt tcmpor.uily l.uscr tndc 

dl"= 

]EI..codm FJI, Fn. H20 

K~-orch! VAT, border Cl."< adjl.lStmcm, cx~angc f':lfC adjustment. curtdlt acxo.un 111djmunent 

{;an)Jinc Freund, senior kllow ilt the: Petmon lnstitul< for fmtrnadonal E.oo,,oeni~ lloii:.Ct M"y 1013, wu «gional 

<hid' 21 chc Wort.d B~nk (20 11-13) aDd lud coonomist in lht r~tcb dl:')urt.uK'I'll (200?-13). j oseph E. Capon • 

.sentor fdlow u the Pctcrsoo ln$titutc for Jnt~nation:d Economics since: Scpttmber 2009, w:.s vi,.:hing a$$1Xiat(' 

dna:lor, Divl~:ion of'Monewy A.IT~in (2008-09) 2.1 the US fcd<r.tl R~ ~td. Prcviondy he urnd 21 d'<' US 

Fed~! R.~n-c~ B..Jud ~' 2$$0Cia tc dirmor, Oiviskln of lntctru:tlonal Fltunec- (J 999-2008). and ~nior erooornisl (1987- 1990 •.,.fl991- 9n. 

0 Petetson lnst•tuti! !or lnttm6bONJ C:~ cs All right$ ti$etVed 

1ho!.pvOIIC..lUOII has Deen suttected to a l)!~~tion ottr rtvltw Intended to eMure anatttJCal cualft'Y. 

The vtews ~os.scd aro tl'\os.c ~ lhct&othots. lhl~ Pl-b<Ott.ton IS P<~tt o1 tnt overo>S orogral"'l of the 

Petetson lnS!iM:e tor lfltematiOMI E(OI"'I)mmi(:S. .u ondQrs.cd by •t\ uoord ot OtectOts. but I( does not neces· 

s.ariiY ref ect the v16W'S of enelivdu-~s of th• Soard or ot th(! tn:sbt:r.e's1otaff « m.YI6Qe~Y~~enl 

Tttt ~(!I'SQf\ I "'t ;vte lOt" nten•ot~tiOt'laf Economk:s sa Prf'll!:&~rt•san. nt)'IC'lf'Of t in$htutl()n tor tiQOfOU'i. 

•nte4101;tually OI"Cft ond ~~ 'lol.vdy o)nd d<scussion ol iMt>'f\Cit(()O!!II eeot'.<>'Yiie OOley Its I)Ufi)C)Stls to ICent•fy and analylc 

•mP<)t1.ant rssues to ~e gSObalizat!Otl bentf•Oill anCJ S~Ata~Mble to· l~ Ptc>Pit C)f tilt Unlltd Stotes &nd the WOfid at"'d thM 

tO dtvt~oP &:"d oomll'll.lniCate ptacucal new awoaehes tOt dealing W\th thetn lt.$ wor".( •s fund«! by;) t'llghly Ovefse oroul)of 

~nthrQPC foondJOOtl$. private COI"I)()(6-!fO:lS, a'\4 inial" est.:! indi'>"l(b,!811$. f$ wtlltS entOrr-9 01'1 ItS QtHtal fund. About 

.55 DC"ttt!~ ol tn. lt\1.t<vte's resources •n •ts latest riscal )•eilf wife l)(oYidtd f1t ((IMr•bvtOI"l from outside eN UMtd Sl~tti. 

A •st ot a 1 fiM~ ~ers IOl" tl'le P""e<:ed•l'l\l s.u: ytlilf's •s PQ)ttd ot t.uos://oi~com/Sites/dtiM.It1JeslsuOOOttotSI>dl 

1750 Ma>Ss.KhuSC!tts Avenue. N\Y I w .nh•n;lQn. oc 2<1036·1003 VSA I 202.328.9000 , •• I 202.328.5-'32 , .. I W\'Ot.plle.c.om 
143 


33393.071

INTRODUCTION 

1\J ll1c Unh«< Suru con$1der:t mo\·i1tg 10 ca atin;nlon bast"d <;a.s}, llow ux,thete Is growing, concc:rn :.ho11t 

the lrnp . .cc b( the prop<bcd lxm:kr ~jwunmc on rr:ack.' Border "CCjuAM(J'It ~n ._,I« fllu.t., whk:b t:U 

imporu :and c:xc:n1pt ~a. b .1 COn'IM()n w;ry of u:xing Gnly ~dxuuu.-d in • t®nay. Most countna 

pcrf'otrn .cud\ bordo- adj..mrMnh on w.J,.,. added uxa (VATs). US swa c:&'tc:tiw:ly borda~jtut u!cs 

U."«". ,.,.J.k:h ~) co :a!l goods~ 112 a tea~.~ of -here they arc proch.ud 

Econon".k moddl bply chat bonier adjusnncnc ~ r.oc ~ u-k p.~ttnN Of' tbt cndt b1bnc:c 

bc<:lu.e the rc.al ex~ fltC (Rf..R) .dj~&JU. But nuny procluc:Jcn a.nd r:narlw:c p.uucipants far chu bordes-

:.djw.uunu will be pc~<;.1iOnbt. rabin& cor.. :and duropdr".supply dujnJ. A critic.l ()Uotioon dnl$ i$: Does 

border adjustment genmtc an oA'xttinc; movetr.<nt in thC' re:.l c.rclumge cilte or doo It w<nk like :a wand 

cxpoM aubl.idy ;~nd mise the crOOe baJ:mcc? 

We IUtC'mpt (01U\SWtt thU quotion by cx:uninlns, the experiences or <.ounulo th:u h .• \"(' inapkmented 

VAT-. a.nd other bordc:r'4djuncd oon.'Um1xlon w~1 We do it in du« w,.)'$. F,nt, II.'C examine mo .. -em<nu 

ln the RER. the u.k b.:al.uKc:. u..d ethft V~tJi.I.Wo uound. the dla th.lt countri!CC' firJl ln•pknoued a VAT. 

~. •c: '* aos.s-cououy tiftlc-.ICrio R"pa.tiont to ~ lon&-run rorrdadom bctW«D ~ 

uon tu r.na. tbt: RER. :ttd ~~of o:rmul W:ance. ~ coauol.•nc for oc.hct ~ th.x 

wouid be o:ptatd co mo¥t: tht o.dw'&e r•tc and cnde. FiNlly • ._ constdc:r a hand.&.! ol C»C" m.tdiu.. 

Ov"flllll, ouz rOlUlu .S" .. ppott ~bade thcon:tlcal conclusion dac RER nttt~u,.m .. lit!ly nfT..,.. bor<kr· 

adjuJtC'd consvmpdon QXeS, induding chc: VAT. Ow-n•)oulu :alw ""~~~ that 1 llli"}:.C 1huc of the mo,~mcnr 

In chc JU:R comt .. nia «>n.~umcr prko. In p..-nic.ular, incrC'.lS(S in VAT roues ccmpor.uily Increase infbcion, 

wl1kh ptrmantndy changes the R.ER.. There IJ lndc evi<lcnce of any 6i&ni0cam cffa::• o( bordtr--adjus:( .. >d 

to~UUmpuon wtts on the cum:nt acoou.nt bal.tncc. alth-ough chert: m~r be d.ffcrcm cfTccu on the compon<nts of chc current account. MOI!It of cttc: adfUl.tmcm oca:us within three )'Qt.'L 

Th.t: dcscioacion~ ash flow w PfOPC*d by d::c Hotat KqklbfcM_. (I frcn in tmpon:anc Ynys 

from bon:kr..-Jdjuu:ed OO."'UUmpdon LUCS t&Kd In ochu coururto.. In par\M:u!.At, ...ndcr 1hc: botder-adjusttd 

C¥h f\ow (J:~ ((.;F'I). IU qto nry ~ .. on tbc rums• bhot C101t .t-..ve ~nd ... lflNiioful apo!Ult". 

n.~ kry d~W-rrn~~tt impLa th~t the channd or R.ER adju.umetu is lilccly co ~ di!!c-Jc:m AI AL~ <t 

al. {2017) notc,1 VAT rt:qulru an lncr~w: In consu.rr-.et pric:o cdi!Uvc 10 W"~irl-. wbJc:h may n:pbin rht 

~j Jtmtm p.mr.rn .scm h• the o~ ta. lu CO U'tl~t. b«au$C' bbor C0$1.$ c.1n \x: deduct«!, a CPT tloc,.; not 

1 ~ltNM.on ba&ed. rf#er$ tO lht t<ax t:tll'\9 ... 'ltd beud on w 10('-At~~on or cno COO""•IITII't Ry tdX109 •IY'I)Orts and 

ext!YIC)C f'IO tlfDOrts.bord:et-~stment ~ .1 t•x to l'ooo.ll on eoti$1.11Y'tri w•t" n • country 

l Tl'lt,..,... roeusoK Ot'l V/loT' lf'l thll ty41f ... \.t~ ~ Gn;COI\SU!"fttbbn UXfl. ......-.y .. or .. ~<;~\ ,.I:Jc:>tdeo' ad· 

""'~I'IOf•btodt rtheregressQI.,..)'tt. 

1A8fr':tfWV.0V~'o-f~"IV"'ffltt-T4#. .MW-2-' 20":!: hll~//fbftt:fi~~.QOII/ 

... ~Vrd/AMil(t~~t.., Po~W 
144 


33393.072

rf:qulre • c:hangr in consumer prie<s rduivc 10 w•gcs. so any 2djustmt'fn ru.ay bt: more likdy to come 

throu&h the nominal cxclunr,c: race:. T~c I lome IH,...posal would tax gross c:uh Row 11 20 pcrctnr, which 

lmpllet a 2S P'"''"nt lllX r:uc on c::tih Oow 1~1 of d;c: IU, a.nd would require a 2S pctcc:nt RER ;appreciation 

In ~qullibdum. 

AltnOU&b appl't'Cb.tion of cbc nom!n.tl cxchansc: me: would fac.ili~k Jotl1dt.M; «onomk ad;usanc::n.t, 

lt mtcJu disrupt d~ dob.tl FIIU.nd.ll &)"'t""' Jiwn dw- do[b/s do:'IW'Wit rok ln r.:runc~ ~tiwdy, 

tkt- tp«ial r* of th.t do:bt ~ mun dot the: oorcin.a! ac.ha."&C rate ro.ponch; only f*1iallyto ~ 

prcsura, espccWly if other counlrica milt eM ~ dqr.uiation of dwir ('U.rttnda.. Limits on 

dolbt •f'P1CC~ticlon fottt ~dju~tmcnt to come through US prica 2.nd qea. h would a kc dme: for prif:cs 

l.l'ld Wll'o II) rach 11. new «juilil1riurn, b«aute w~ arc~ in ~dv;.nec: throuah comracu and ~ Mbnl 

~''e may not 20cXItnmodnc: th( £u!J $h!(c. Whcrhc:r ~dju un m evna ua.Jiy corncs through a '25 percent 

a.l>prcc(allon Ot a '25 pet(!cnt inc:r'!'a~ In waK~ a.nd pticcs ot some c»mbhudon o( the cwn, rhesc a:iju$t• 

nt~nl' 11rc l.arsc. and ue:ll lu~Cr th.m the evtna smdi~ in thl( p:apcr. 

Whrn a VAT iJ na.::~ dom~tlc. ptkd often go up alrnos.t onC' r~ one. N a result, apon:cr$ and 

lmpomrs rc:nutn indiffcmu bn-·ec-n ~and fO«ipl nn:~ bca.u.u dK lncreatc ln chc tu ts olfsc.c 

by ttw ~nsc- ic the-doma.t:.c pn«.lc eonu:uc.. when a CF:' &s lmp!c.rncnrcd. t1x pricE pcesuriE$ .... l! v:wr 

eaott indusc.ria and ~ ac:ro. Bnn. whhln lndu.-rics un.!a;s. the- nomtn~ ~ nee adjul.ts qukkty. 

ln rhc Jl~ of nomirul adunsc race ldf~tmen, the result 1$ Lkdy to be a cemponry t~i;nu.ltl$ to 

do111ntk production and an ~mpro\~mcn' Ln the tAd( Nb.no;. 

WHY SHOULD THE REAL EXCHANGE RATE ADJUST TO VALUE ADDED TAXES? 

CnnJ.ickr a eountty hnp cn~Crltin~ il VAT Of final $lk.s we on goods $Old dom('l;tleally. lmpotts fac!c the 

ux but cxpotu do noc.. l'hc prOClth of tdJwcment <kpc:nds on rhc u tcnl to whkh. cJ~c WI: !deb tO Mgbcr 

coruumer prices. We cons:dcr twO utrc-11w case,, one l.n whkh consu:ncr pricu tJj( by the fuJI amount of 

tbc n.:, and dw od.u in whida eoru.JI'l)('t prica do t10t riSt' 2t all 

\T/hcn CONU."'''CC pric:u rise by cht F,U vnounc of dte eu. the nominal c~ ttk does noc: noc:d 

to adjwc. The: pri« of~ •inch are nor tuM. dod not: ri:w, and thq conutuc 10 be to~ itt forrign 

mukcu ac the wnc local price as bclorc lhe pri« ofimportJ. whtc:h Mt; cued .. rlks by tfw: i;UUC a.'110\lr.t 

., domatinlly produced go<><lt. Assuming that rhc 1u ne i• tnmsrnn:d b.atlt w coruumcrt. pe-rhaps 

1hroush a reduction in other tues, ~ansmncr~ nt'.ai t~ n c.ttcir total conJumpdon s.pcndln&-1 Morcc:w<r, 

(t)n~umn (lou'c ),a,·c co ~wi~b bct'\\'(C'Il lmpotu and dom~tk produ(« 'lt'em~ chdr p ried have ristn 

• .t,) Out IOOJ'l.SonthebotcMt !IQuK'W't"'C. tht,. ..,.~.( CO«O¥tSO"'IS~Wf'M t.t1< 'l-1\t..,._ W~l'l 0'"" t"'IUU. bot· 

6er .0. .... tflto"(. $no.f'tln9 "n::or"t•COfPOt••• J. :03C~ Ult, 0) ~ ,., t.,. ~ ~W'<"'C. W()llelllqry 

.,~UYtnO.at'KS~.\ux~ .... Of'SIOI'*itor.o..cethet.teal~'llll'<AIId-.o,._,.,...~s 

~COI'IIk.TIIVSWOt.fc;ha~IO'*« ... fll·l.l~r..eltrCOT~ 
145 


33393.073

equally. 111c tr.Kk balance Is thu' noc :..ITn:cttl 11 ~ RER. whi~h Ia rh~ n:chang(' , ... t~ lbt«l n.tio C)r 

(Oi l)"UIII(f ptl~ :u ho n1e I C) (OmUntl!'f pfiCe$ abroad, t lttt by the rull arn(IUI\1 or th~ t:lX.. 

\l1hcn COfli;u;un prica do not dur.ge-b«:.nctc o( nlOrKc:.uy pollcy Utn«l 2t nu.inuinin&ttablll!' pricu 

and/or rcdi.ICtions 1ft odtcr buMnCII ~ ~t ~-.:r dK loal C0$1 of ptoduct.iOft-4:~ nOIIIhiW c:sduntor 

me mwc apprcc:b.re.. If it did n01, f~~m~ would hJ\Ot .a suo~ inernth't' to i.nCffiSC: ocporu lxaUk they 

""'O'IIfd be abll!' U) ~~~ d~em abrotd II( the s:a.rne pt"i« ll11U 114:mu:: ;~. d II.VOid JXl)'i.nt the r..x. lmporrs, on the 

ochl!'r h11.nd. would f.toe c.hc: ux but w(lu!d nC)I wn su1y ltU d1:tn bcrorc. ·rhc lncrc:aKd supj.dy of exports and 

n:d'.K«l ckmand for impom woctkt crate Ul Unbalance In tbc forr~ ~~ m~-k«. which would pM 

cp rbc n:.lH' of the cJomoQ( curra\()'. An ~ n;a.a}y cqwl10 che: 1~ r.arc rdulantn tkt forc.gn 

cxcb~ 5< mldr.ct and keeps cxpoiT\ 11nd imporu. and chusche tPdc balance, urdu.1~. 

;\ coomry', tro~~dc b.tl.lln«: h fq".-lto UK' gil9 be(W<e,n OOm~ti~w,inl( and dotncsdc invaunent, If the 

G,O\'Ctnm~nl rcmms cOf\Sumplion u.x n:vt:nua to hou~ho <L. ia s:&'fl.ng dod not rUe: and hoo~b tavc 

the: .s.ant< aftn..wc ta.1 income. » hd'ore. Cocu.mpUon wa do not J.ko the aher 1u tnwn oa uvi.~ Of 

the ron of apu.oll, to dKn il. no ~1 10 cxpca. ~y du.n;c ro ptlv.wc P"t't-.; or i:.'lvacmc.ru. 11\us., with 

fUll RI-Jt offit:c11.nd a roruwn flaa.l balance. horfk:r.-..Jj~ced wr.sumptlon uxtt $.houki no• affn::t $living. 

nvaun~ut. or 1hc rad~ b:a.l.ancc. {Fddttdn ;~nd I<J\I.Sil\li.O 1990). 

A uniform VAT nre cwt tonsump\ion is lmpora.nt bca:u~ ic Jlft\Cnt,: d4tott00ru. lfthc tXt b levied 

t~:C« h.uvUron~ produc:u. then then will be: an irt«n~ tosbif "*''f(R>m~ c:boKJOOCh.l" pnaicc. 

tr.oM c.:Ol.lmrio c:xdudc .tO:'I'IC: .c:rvku. such u«<uor;:tdon, ~C'It..<tM hald!, as•"t:11 A ~c foochrufk. 

Oolng 10 is probknmk btt-~lbC ic cUCOun.gtf 1 thJrc tow.ud these- get"'u!ly uomn.dcd £04Xl1) Anotl.cr 

di$u)tlj,on :ubd bt:cauSC' t6Utba Jhould !»Y h~ IIIIC 11ll t o r thcit hornc COlmtry but in pr.tcti .... .,.,.y Uu: ax 

r.l~ of moe counuy tbcy Jt( vk!dn&o When thcx lAX t'UC'I ddt~r. <km.-nd ch!ft, coward m~ country ,.,;th the 

Jowutu DCe. 

£n.mpc KCIOtt and lOUtbm tend o~~ a •inhk shale of conwmption.. The. VAT I C'VC'nue ratio 

mc-:»"UICS thl' extent to whk:h thew OO\'eb illl ~and scrYk~. h 1_, dc:l"ln<d a:s acw.tl VAT tC\'<:nuc 

d)vid.d b)' tcvcl\"c. rlwu wovl.l I.K' ... olk ocd if allw•~'"'"t-'' u wcac u•.ud Ill the VAT nuc. h cqtu!.t I ft ~t 

VAT b btoad bas«l ~ pn>.,c-rfy adm...nis.wullt t. &o:6 thao 1 if SOtM 1«ton a« unt.utd ot j( cotkction 

~ llliC\"'CP. h CL"' ezotal 1 'rf toi'TI~t ~~ rdaatn ttt 1bt.mt or if a COJ.Il'Wty has a lOt1ri.sm surphu. 

h .hown in ublc I. nTn i1111101'1& OECO oouzmi.u, VAT r~nue f'lli<l' arc wdl bdow I, aVff.la;in&j~nt 

0.)), 111nd h"' c rt'tufli ~ roughly unehangcti nvcr I hi' bst d~e. 

The dt!Krcnct bc:t"o«<n :1 V A'r 1uld :a l>ordn..dj\lucd CFT 4 th.Jr ptkc * ljusmt.cnl I; rnorc: oomp1ex 

ucder.a err. To theotcnt thon ~ norrur~cmca..l"¢C: r.ue doG not ~t«bt('quiddy.ll..d F..dty. pri«s 

ol'impotu and xoocb wid. lmfiO!'!ed CO:\!<:ru a.Je Lkcfr 10 rik sub.tanti.JJy. h bless de....• wll&l h.o{~Per.S lO 

5 T~ •.ICc.ot-.onJ a so Qei"IE'I61e "" (ll'tl!'/t'lo fo1 t.llt lr<JU<f CW 1'1'11$·ii'WOI~ wt~t t.••o)bl~ {JOQds es nonttlltb~ lMy 

rr-.y .so oo~h \()1"'\e ttdl"'!.dltttOI'It IntO the W!>"Mal feM(IITIY 
146 


33393.074

oche-r coocf.s. To fU.llyadjrut co ~:he: ta., OOth prkt~ and W"'..ges hav~ co ri$e. Clvtn bbor eonuotcu, :ldjustmcm 

co.1kl calu• longt'r ch:ul with a VAT. 

In ~om an, it adjustm('nt ooma throuch tht nominal uch..ngc .-.. 1c :.pprtcl.ulon It could naJtn litt 

the bot<kr-:ldjUJttd CFT more npidly. Given 1hc OOU:ar's mws u the wOfSd's prcmlt:r rC"Wtw curten')' ~.nd 

j ft'Ujof UftCt of~ och..t!'15t' r.tt(), h b r.oc: dot how f.u 01 f.ut 111c!jumnmt wouJd procud thtougb 

ch.,ch.and 

PREVIOUS STUDIES DH 'OlE ECONOMIC EFFECTS OF CONSUMER TAXES 

A fcwj:Judiescnmint'thc dTt:aofVATson •Dtkllow$.t:mplo)..nc:tt,llad p!KO. Daaland Hine$ (2005) 

usc dau (rom 168 coor.trles for 19S0 ... 2000 tnd find 1hac <!(KJ:uri<1 with a VAT oro« 10 perOent lm 

~md h~vc lower ~rl'IIJ opcnnes.\ clun COt.uufic~ without 1 VAT. They aJso fjnd tlu1 'ub,.k!i~trleJ of US 

•llirur ouJ~lt b VAT COI.I tri~CCJ d tO e:xpon ~.t. Th(.y;~tg:uc: lh:at txpolbllfC &oWC'r b«a~.~~e VAT• tend 

co be hltJ'Itr on traded &oods th.ln no~tQckd s,ooch (IIJ slwwrt by che rcbtivdy low VAl' r(Vtn!X r.ni.os 

rtpo"ed :.bovc) . .. -hida pt.~shc-.J pnxlucuoniJ'ld conJumpCon inro noou.llb!o. lncomplt't(' VAT «bates 

to «" pott~ compounds diC' ahilt o( roourc:a fOWAfd •o:u~ 

N'odoot- (2010)..,.. P"'dd.ta- 12 y<an, 29 ~ acd 146 ...... ala oocwninc m. dt<a 

o(VAT .vtd l:S corpon:e incon;;c: Wt on t,;$ compnitn'Qa:s.l..ikc Ocui and Hlro. tle Gndl. dace VATs 

tmd to miucc: tr.adc. botb imporu and c:xpom. v.d rt--<11 the efl"ccu d.ilftr KIM ~«eon. He also finds 

th•t VAT• in ~-dop.ingcoumrio tt.nd co ~tiTr<.r US apo-ru but no-t imporu and intcrpn:u thia findin& 

a.~ evidence: rh:u VAT may ixo dUpruport.ion:udy applied to goods en rain& 1 coun1ry. <t«ing u a barrier 

to trac.!~t. H~ :dso uplor« the rebtlonshlp bct~'«n rhc US corpc>r21c income CIIJI a.nd foreign VATt in a 

crou ~e<don g:r:rviry modd . The rw.rlts show udu~d US nporu and t."Xp-.andcd US lmpom I" o:tunrry· 

lndwcrlca wlo.uc COc'porac~ ~::~xes Art NJhnt and VATs 1« ptektlt, offc.rina; IOfnt cvldcncr tb.at border 

lldj~Uunmu in othu countrits co.apkd w\th cxisdnt US oorpont:c income: en hun t..'S ClOMpedtivcnc$$. 

The mody ,...,.. cr-ly .do•cd co d>< J"'O""<d bo<da ..l;...mc.u on • c:uh 6ow ux u by 0. M..Oj 

and Kttn (2012), ..t.o cx:anUnc t.hc c<oaomit: dr«U of shiftil'& tantion ~.,~ ftOM Lobor 2nd &own.-d 

COMUtnJKiofl. 'ntcy J.o..... that $ucb r&aJ cicvJ.ItDtioru: lu\'C Wog shQn-C('nn pvtidn dfe(U Oft c:np!oyt:)mt 

ltfld uade babtlcc:J. ap«:W)y i.n cun'R.O'\C counuldi. BecrWlt' ncb nno mnnbc?1 cum:ncy is dt'crmincd. by 

tht voup. no.sin&fe mc:mbtr an •ppr«.id(' tO olf~t Me e"•'Cnt$, Effects on noncuro counc1i~ arc .slightly 

$~~t~llc• and no121 ~ta ini<<LIIy •ignifteln•, ahhout,h posltivt &hol1·,·un drecu rftnaifl. 

A larger body ofliter:nure foot.~e4 on the prlc~ dfccts ofimpltmcndng t. VAT.' 1'hc .s:wdiC$ find ch;n 

In coun1rlcs wbac a VAT rcpi.~Cn sak;: tuts there art no price dkcr..s; in contrlltl, In counuic:> where lhe 

th:uc o( ~nucs from eonsumpeiOn taXa Ul(I'U~. thuc ~nets co be • ouc--umc u•ac-.ue in prica. ScOOies 
147 


33393.075

lltatC,I(amineri.uin VATr.at~ flnd ch:a1 prict41tnd co risc:a mostou~ fo1 one witl1 VAT fil«'t.Ol'CraJI, the 

ratth..s lltt conJd$h~IU whh a full onc:·tiulr oRioe!t of VAT in tht' price )e'\•el. 

Methodology and D• ta 

We uM ewo approxl>b. fine we look2r lh-ec:frttu:ofaft~:WVAT oo ptku.r~.al ruhangrues.andtnd.: 

~ boct. on 2\"c:~ XJou tou.ncda and on • &. sp«ifte C2leS. Tht adn:mcc: ol this ~tckh is 

tlu · t.hcx..,.. tM& na:u.. oftc:R .,m, btsc" ~ ifl cbc bX a..,d tb= lllltoiOdated bordn adju:sunmL 'The 

duach·a.ru:acc IJ Um odxr tua aJc bdf-,1 phaMd ouc. some of ~:da nay be border adj!JStcd. 'The VAT is 

ortm ~n o( a brp rd'orm f»t:b~. "'h.Jdlt~~)' C(ln(ou6d o:~ rata and 1ra<k b.Wnca. In addition, 

In many<»n a VAT is implmlentcdin rcs.ponte 10 a: f~Q"i.sl$, 

The sccond. approach is a more c:omprchcnJivc «<~nomeulc arulf$i:s, whkh roeuKi. on flucru:t.donJin 

QOn."-tmer t;ues ow:r time and aaoss t:ouructe:.. Tt~ ~vanca~ of thiJ appro«h is th:11 lr allows'~ tQ COntrl!)) 

(oc od}n (:acton lhat att'«t exchange- r.uc:s :1.1\d cr.-:ie b..b.nca. The di.soKIY.UltiSI= is th.u (accort bnidn poltc:y 

chanp. tuch as clunp io consumpdon o( [OIXO!blc cood•· m;ay awe Oucuw.ions u. the pcb and tcnica 

w: t.h-1~ o( CONII.mpc.ion. To rnWmlzc: the dl'cct o( qda d·.aqp io c:oruwnpdon, wh.kh nuy f.a!l mcwc 

h..wily on t.;p.~y .....J p>ds. ""' l'ocw on .... , • ..., r<bdor~ ;o d>c d.oJa. 

MOM of me d.au are from 34 OfCt> CIMII\U~- Du~ Oil O.UIQl ~· babn~ and r'..(1 mtc:ma· 

donal [n\utmc:nr pos.ition;s -.sr f1om 1M Eatan&l Wealth of N.atioru: cl.u:.utt.' Mit~n& cbr.a au hUed ln 

from th.r Jmc-rnatioJUI Mo:KUry Fund'• (1M F) \t'-,U &orw'ltk O~tlt..lt cbub;t;.e _ v.ht:IC' av.Uiabk. We 

ucfude a (ew obs«vitions from tr.tn•l1lon f'CC)Ilomln; in F.M;crn Euwpc bcfor( 199' out o( con«rn abo1.u 

1hc rdlabtlhy n( che inhl;al posm;m~tlou data. We 1;)~0 exdude Luxembourg btcau.Jt ItS roft II.' a fin.'U'ICi;tl 

umcr 11 .. nd clccwnk c:ommer« hub cLnoru Itt m~ ltcd <CI\$l.Unption tu r.ate.• 

Tb<d.:tu. auannwJ f'ro:n l910 th~~ 20 1S. Oara for nunyc:oo."uja ve mi»•nsln chc: fi.rn ha!fo( 

1h.la QJ'I"'pk; lOtS data tie l:llO&Jtg (or • (cw coumri"-

ln fl"\ncip!e. r.he RER.ckpmds on rdauvcCONUmpcion ux rde$ at home and ab«ai For the rTcEon 

~ ''C: we bil.a.ttnl RE.R.& b¥Cd or. a.ut.unpdttn dd'br~~~~U twr-n ,...t., Mol•"'')' •Mi,. t;".rd pa.:tna 

c:ounny .and meuurt the rdariV(: 001'\Wmpcion w mo N dtc: rario (1 • home w rate} I (I • panna r.ax 

r-Atd. Conuol variabksare abo aprcucd. rcladvc to puma c:ounrry v.tlucs. 1nc: J»Nncr W~.~r•uiQ ~e C"ither 

the United St.ata 01 G::rmany. For c.hc: ('ICIC:rnal mbnt:c r~ons. we usc only clu: home we rate. blu the 

rtsulu arc: noc afrttt~ much f"'~ t:ompouc exu~ma.J balanc-es against a pannu country and .~ th~ l";ll io of 

7. ()(CO AMual M!!Mbl ACOOUI'IC:SW ~onut ~lattSitesd~ 

• T'ntelaiAWK <Sl/Na~~ WWWWfOifJ/.)IIft"-'l/fNb6/'Vwo/20CE/0.:ai\Jodlle/v.o0669DD 

9 OMD<•"'tflllnCt..,._UCWo.wd f.,..-)lr'il"'ttftiiCI~eCJY~U'(Itf.*"'t~OOOd'5M"CCMI'VIaStt~ 

~~beet"Stt01"';ii"'~"M4~, f.~MN"<es~:OothefOJCOJI'CIIH~VAT 

on ~"JWOOnot ,~ •rd»t• lnedOtO\•J#tse•t~te:·cncMt't<M.t~O"''I...._,broacJ. 

~..,.,asareSIJt)eee::t~VAJ.n~(~20l4Q. 
148 


33393.076

cax ratc.s. Por the cs.~e nudlet, we foe:v~ on behavior in rhc: country implt"lllt"lttln&• pronoun«d c:b:lllge and 

me#IJ:ttrc: cht cxdt:.ngc r:~tc u t)te ttack wrlglun l RER. 10 The prim:uy measure of the trMie bJl.mot (BAl.) is 

tl!c cmnnt ac=t.ount bah.ncc (CAB). HoWC"o'<r, «<also examine the sood-* Mid ~(t'o'h:tt ~tldt" balanc< (GSB) 

m chc dilTctti\Cc ~ the CAB and tht GSB-.nuch iJ the: Nbnct on iiKOI!.M anJ tr.msfers (INC). All 

bl!..ancc: MUil•ru :arc opruscd a;; pau·na of 110t11i.W COP. 

Goods and~ lD fl""C''OIC (C$REV) Ut' uuson £00ds~tcnkc$ tn.'\lr.IICricwu. lnc:ludit!& VAT. 

Wet w:u. excise: I,);;J;ICl, ~ tan. 'b. 11 AJJ ol U.('W l;ttd; an border adj:.ntcd...o dl.M lmporu incur c.~ w: snd 

cxporu do not.u BOUKhold comumpt.ioft (OONS) is in r.bmir.a.l cemu. 

WHAT HAPPENS AFTER A VAT IS ADOPTED? 

Analyzing the: c:fTcc:t ofintroduclng a VAT wltl\ bot de• adju\otn•ent dcpctld$ on wbat CUC'Ilt.rt being repb«d 

and whcthct the corAl tu bucdo1 i.s ri)ing or r~Ung. If other (j'J)CS of Jaks taxa th1r tre a!*' border :.djustcd 

atC' rtplxcd. the dl'cct on the RER wlU be mlnlml.l. In O)ntnsc:. if cocponuc: or ln«unc wcs arc rcpl~. 

one would cxpca the d'tttrs co show up In the ndl;mgc r~tc. 

Tilhk 2 lisu dlc OECD eow~ukt ~-.d the ya.r VAT W» adopKd. the VAT me. ;and the: lUeS th4c 

wtrt' R"plaoed. In most c::aa.. VATa 'IIITft: a.nt:rOd«c:d co n:pbocochcr t:DOICdi.wonion.ary twfl0¥n tuca. 1'hc 

probkm with a ~cs cu dw .1pplics 10 ' I r;ood' it th.ll it w::c:s inmmcdiata ('\'.cc-onet •ilc:n thq' Me. 

.old and .1pt.in whm the final good in which they m m i:nput U:Ktld. Uk.e VATt., thcym l~rcd>' bordc:r 

1ldiusted, bcause imports race the ux but c:xpotca do not. Ho .. "C'\'tr, the boJdU *'ju:$11U('I11 4 itiCOCnpl«c:. 

bcauJC rcb3tel 21'( not provided on &:tl~ IIIJCS fl"lrl fin inu.•rn1ft'!iatn o( exponcd · 

Ar,c, VATs were: inuoduc;cd. m~t councrl('f r«ordcd 2n inertt$1e In the 'hue o( ta:r fe'V(':nuc: (tom 

~ :a,:td KJvica ~puc b«~\UC VAT• requite: fewtt- aocp1ioR.' 2nd a.n be durgulmot(' btOI.IIdly 

and a' ' h.ipr Dtl;, w;tl.oot the: datonk>N ~ uJn t:ur aarn. 

f''S"rc: 1 ~-,;the !TloQ"o'<rO'CHt or~~ nU:S., prices,~ track ~CU ift COUntr :u :around the time 

VAT• WCR imported. hod A~~ rov!a rot the tnultn';.ltft ncmbn ol counula dut u,c data roc few 

yean bd'ote:md aficrimpkmmudon In ad. uodo .. P~:.ct 8~~ rau:fu ror IOc:ountr.cs dw hswcb,ta ln 

il.ll Jain. llw upper klt dwu in panel• A and B !>how dat ~in the cu: rat ~moeuumi us~n& OEO> 

data OU goods and services taXU U I dwc O( COnS'JI'nptiOn. Qn a~, the .Jutn: of s.Mii,; and kl"\i CXS l<t.XQ 

In consumption inctcaKd by t.S per«-ntilf,'C point~ wtu·n 1he VAT wu implcn.lC'IHed. In New ZeaLand. 

l,ol:..nd, Ponu_RaJ, and Spain, whkh aho rcduc:td lnoomc t:a.XCS. the incseuc w.u o.bove J ptr(<J'It:•te points. 

To dtc tllt<n' thu.some of the cuctln the mc:L<~u~ nuay n()t h:w~ b«n bordt:r adj . .ntnl -(or example. turn10 0.Ct Of'\ tttdt-v .... 'Ctlttd tad'lt.""'t rat• trt' ,..,.,...l"'t WOfld 8af'rl,(s WOrld Oft.~et'lt ~41torJ 

11 .,_.,....cOoJI'IIresw-.r~.,erc.-rd~or4Uo._on~., • ..,,rl',...Y:tti'O 

tl• ,c:ot.w.tU'.M'l.Or"'leV._rtY'VATYGIM.,.I'ICJC'eband~~s.N.,...~a.c;l'l~f'd 

:.xt~ ... ttttPIS._.OI,.,........ 
149 


33393.077

Qver I ;~,XC$ charged o:t intcrmedi.l.ces to cx.pora-or.c WQUid niU cxp«:t to see .scme cvi<lc:ncc: of c:xch:a. ~ 

n,te :appr«:iadon around the time the VAT .,..'OIJ implemented if the border adjustment work.~. 

The remaining ch.ucs in panels A and B sho0w averase mO\'etrtcnu i.n the inflation rate, tbc tr.u.k· 

wc~gtued rc;al csd•ange r.n~t. the dollar real ocd.a.n~;c: r.ue, the curll':nt account rt:l.ative to GOP. and (he 

good$ and KrVi<es trade balance rebtivc: to GOP, for 11 balar.cod sunpJe of counni(S.1J There: b urong, 

~dcnce 1b:u inn.nion inuc:a:sc.d and the RER 11pprcci:ued followint; VAT !lnp en e~u:~~tio". 

\Vhik d•c currcnt ae<QUnt genmilly improvn! lhrougi10\H tl1e period, it docs nor :appar tQ h:we b«n 

a.ssoci:ued v.ith VAT implementation. :as the upward t]'(ttd prc::cedcs the introducrion ofVA'I' lmPQrr:uuly, 

the goods~ ucvices tr.lde- b:lbna: to GO I) st:tbiliud :u the time: of VAT bl\ple! ct! -;~tic> . 

REGRESSION ANALYSIS 

We next use the full p:and dn:LSC"t tO esrimo:~te the dTec.c of <han&d In the dfecri\·e oo ~ump it.m 1~ DIC 

(GSREY/CONS) on RERs and ntwtal b;t1anco. Vt/e ran p:~ncl unit rwt lc~tt on :ill me-.asuru or RE~ 

fu\UCDP. 'l!ld CSR£V/CONS. We rejrcc 1h:1.t th<'$C ~rit$ :are: nonnadon:ary in ~'Cty oountry. HowevCf, 

we al~o rej«t th:a.t th~ ies :1.re u:uionaty In C''cty (!C)untry. i>IQt$ of rh~c'ht:t dt~pby trending 1xhavior 

ofCSREV/CONS in SOOIC t:Ounrti<:s and R£R :u'd 8AVCOP in 2 rc:w oountrlu. 

Gh'tn the :tpp:umt mixture of st:~t!orury :~.nd o~tiooary d:.ua. we an:al'yze the cl.ua wing both 

coinrc:g.ntion ~ndcon\•enr on.a) fr:.mework't.. The rc~ulr are nn:ly $Cndrive to 1hf: thoit;;e Q(fnunework. The 

es:tim::•rcd atu;.tiou:s :ue ~· own bduv.;, where Y tknote; either the :c::aJ ex<:hilllgt' rate (RER) or the extcrn:al 

bobne< (IW.JCDP). 

Cointcg.tatiQn framework: 

li.Y11 • PlY,, -a {C.SREVICONS)~~. 1 -A Controls,. ,l + coumryefTects + ya.r dTcet$ (I) 

• r (t.Y ... ,. 6(GSREV/CO~S),,, . <l(CSREVICONS),. t.(G$1\f.VICON$) ,· AC.nttol<) 

Conventional framcwork: 

Y, • «(GSREV/C.ONS), • /1. C.rtot•b, • ~Y,..., f (t.Y,..,. t.(CSREV/CONS), . 

dControls) 1- coumry cffccu + year effectt 

(2) 

f.quarion (I) b cstim~ted by ~ dyn:unk fixed cff~ :.l&(lridlm, 1'hc: axfficic:nt « repr~nl:$ tbt' long· 

run dl~ of tht' consumption nx t11tt :l.tld P rtprtidt$ chc: $pe-ed of adjw:tm<nt to the long·run rcbtionship. Equation (2) is estimated by ordiru.ry leas.~ squares (OLS). !'he lc:>ng·n•n e.ffect i.s &iVt"n by a./( t .. p). 

A notable diffe:rt"n« beno.·cen the: two frnmeworb i~ the iuclu::.ion of i!ddition:al dytu.mic cern!$ on thC' 

ta.t. 1\J.te VMiablc: in «juati.on (1). lo p:m.icul:u, the leW diRere:nce term oontto!$ for possible $hocc•run cndoll, Countf'loltS 'l;lt h .-.. er~ 1nf\at:ton nnes abovE! 10 J)e(CE'f'.< In CJ'\e rOUt' vears. be'()(tt lt'Ct \/A l ""-'S IMOIQ!"'"''Qntro 

re l<Ciud~ fr<>m U'le inl'tatl-on 9'b'*" 
150 


33393.078

tlty o( cht consumpti(M1 c:.x l"oltt co ridm cht ral exdlanse r.uc or 1ht <'Mf•nliJ b.d11n«. For o:.unp!c, 

11 cydlc.1l boom <~~y pus;h up R.ER and push down 8AIJGDP at the u.mt' tirnc th;u II lnausa GSRBVJ 

CO~$ b«:.u# w: r:UC$ nuy be hi&hct Ol'l cycllally Kll.)hivc- goocb. We w-.tn~ to nehldt §ll<h:. muasirory 

torrtbrion o1nd (oo.Ll on lht:: lot~~ mn cl~ in CSR.EV/CONS, which ""~ b)l.lmt a" dtiYm by pollc:y 

cholca .md oot ccoMmic .hodu. 

We view d:c C'Oi.:ltqp.tton R'wlu • more- co~ dun the conwnt~ m..lu: ~ cht 

c:onwmdor..al (nn-cwodt may flnd lpUriowly .ipl.fQ."1t raulu ..,-iltn t1w: cbta an 11\lly nonswio!U:y. 

~e .._,c touons COCX'tQillK pounds tOr ~rsu n& 1~1 thoc d.loa should~ stadonlt)", bul if a aeri~ 4 noc 

lone -.nough. it m:y bcbve like • nos,H••Iona•y M"ria:. 

In cht" ~in,rk rheortticalmodc-1 dhauscd ~~. 1ht RER"'hould 1i.sc In llrOj)Qrt.on to tny increa.K in 

1he bo«k ..,.dj\~tcd w: nut on <onJumpl!on (<';SRCV/CONS), implyi1'g that u l In cqu.1ri()n (1 ) and 

cJ(I..f})- I in equ~tion (2). The: J.unc modc.l ln:p!in that CSREV/CONS Q.oo&d h.w~ nn dfa.lon the 

cncrn.al bal:ance. '10 1tlac Cl • 0 in C\JU.ulon (l)ar.d cJ(l ) • 0 in C'C)Uition (2). 

Com•ol n.ri .. bla uxluck cencro&l P"f'~"~""'''ll re~o~nues (pttant of GOP}: Ctft<:nl ~unmcnt J"ucaJ 

l>obocc (pcr«nc of GOP); purct...lnJ .,._. """' (PP?}-<odjw:<d p« C>p;u ;,'"''"" (los .acio "' US p« 

a(l4ul~); :and na in«:mation.l in..-acman poLrioo (perunt ai'CilP). 

T.~b!t: ~ preoot:nN- Our b;t$ic ra\tlu for the dTtel or C:O:tSl:.mpcion QXC'S on ~ u~ ng ...... comtcgr::adon 

frnmcwotk. TIK top bill' dhpbys t«uhs udl'l:(; tht RER agains1 d1c Unhtd Snuct wd the bouom haJf 

dbplar~ rou!u U$ing the RER ,.r;ain'' (;.cmnt•y. l}«::l.USo( thl' RER rqpol'lds co f11CCOI'J b<>rh ;u l•t:Mnl' and 

a.b~d. chc apbnatocy V.U ;~LJo :VC C'llpr015CJ U c{jf'rl'rtRCC1 bctw(C:n tfK home (Ounuy vo~ ~ or the vui· 

abk :lf'l(llhc fQnntt country \"..!uor.•• The p.1rtnt"rc::ountty, C'itba eM lJII.itcd s~.a Of Germany. is cxdlUkd 

from the- rcpa.slons. A!l rttJa&5oM include a fL.U ~of coun.uy £sed dTow co conO'OI f'or d A\orcnces aero» 

counuks due atC' sahk ow:r cin.c- 1

' 

The ubk d.sp!ays long•n.tn codfldt:nu on~ nriabks dw 'lll"ttt K:d.Nkd in the ooklK'pldnt ,'C'CUW. 

We do nor: d.Upby the sl.o:;-rvts cocA".cknt'l or ctw ncinu.u:d COWluy and. yc;ar find clruu.. 1'1K botto-m 

row d~o;pb>, th< «ffj ColrC'(Cion oodllacnu. whleh eapu:n: the spud: of adJmmwntto lcmg.ruo equiliJ,.. 

rlum, •bout 20 f'C"'C~m pu year. Thc:sc cocffi d~ts are- :.lw:aJ$It ~dy $:igni6an1, -"•mcsring ch.1r d•~ d:u.-

lltC ehher colnlcgr.n«<. or $tatiorury. 

1.£ 

, __ 

.., 

b..~ 

,.. ~,..,... 

dQir"Q •. "'·• 

SO'flo1)uid eov&d 

..... 

_.e 

~'*Ut{o(l 

·~'-.d ow....,. ... -_.,. OK..., OOUt'~'Y'S t•.O. ..... ,....,....; ,..., ••<. ~ 

uti tO«''"'It'UC:~ COUtlllty·S;~eC:~f<: t•otdfl..weQ'"dKI ,.......,.,.,ft ot h rOteO" 

~·~Oty\F¥ .. 0oft. 

~ C~t.Md.,.te".$l"•'~lnthi:Vteg.f'Mo01'1tboec:iaiMU.tN1 ~ ··M...,. ... l'\WltoWJO 

n XIIO """'~~~noflllfJ'IW'oltJOf"O"ebtcii.U ~dt'etene~S~~ Co.l'llnn 
151 


33393.079

<:olunnl t di,;plap. rcwhs witlt .. 1\!IJ ..cc or conuol variables and yc:u efTecu. CAiumn 2 £:haws rC'uh~ 

whh aJioontr()l v:~ i:tbltfb\lt I'IO)'t1t dTccu. Columns) :tnd 4 shaw re'uh$<l•llt)ll1fl& chellsnl babnce, tl1e 

v.uhbk wlch the l:~rgac number of ~ln~ ob.~.atiCHls. Tile chllngc iu tltc o clmaccd consumpcion tax 

cfkcr (the Anr row} uRecu rhc !l(ldhion:~J ob:ll•ncicans a.:'d nor the on,i£~icK1 of the rual v.uUblc.'' rinallt. 

wlwurv ) 1.-w;i6 d:lpta)• raulu \Ubc onJy the consumpdon ax r.uc a~ cout~try and year dT«u. 

The fi.m rowo( Qth ~ o( the ubk dl~yscM ~~ dfcct of~ cotht..mpcion us ntt on tM 

ral f'«Mnp: n•f~ \1C1ith m.c u,..,ed Suco a pannn COUftU)". the r.~ nluc: :.., 1.7. \1Vh\ Can.:.ny ~ 

putMt WlolllU)'. ~ avcngoc valuc-u 0.7. The 0\'C'nd r.~ i.e 1.2.. 

lbc: b;,;e diffc:n:nca in the ocjma1c:o1 JGr-0\.' stlecifieatiOJU prul».bby rdl«t lhc fxc that rca! oehansc 

ntM ~ fnt n•OI"c- vol:uik dc.an cotuwnpUon ux r .. teJ. For the typiW c:ountty Jlnd year, h~ rttl exch;&~ ge 

Ute ag;ainn thc:o United States apprccUta or dC'prcth ~ by 11 :~C:r«m, wl•ti'Cill$ the ro ~o mptlon we rate 

(te.laclvc roche United Stues.} dsa or F.alb only 1 IJC''ent.11 We h; a sUghtpn:(c:rcnce for the re.t 1Ju shown 

lu (Ofumn) because- this sp«ificaUon WCf '.1 lu~ number of wnuol v;ui.lblca while: rerainln& tn(ISI of lhc 

:t.'<I~.JI~k ohkrvations. HOWC\'a, the odw:f Jt:ICCiAOliOI\$ am provide a usc-Jul MD~C' or chc COns£d«<lhk 

unurujncy .u.noundins Ut'f OM C'Stinu ·~ 

Suthcical ~pUficantt is conwnuon;a,Jiy mcaJUted • a rwo-uilcd COl of ckYbdo.u rrom 0 in cithn 

di.Raian. n~ astmsb tiC'XI co chc codr.dcrtl CNifN'Q c:knote this ronm.~Uot tl lncaM&fC' o( a..cnJ'acanoe 

ac the •r.ad.dorW I,.S, and 10 ptrot:r.c twh.liowt"~o~. we arc pa.rticuladyt'OU<lCrncd abou1thc: h)-porhc:s4 

orfull C'Jr.(,h.JrljeC r.l.lC offi.ct of co ll'o~mpbOn taJn;, <l I. Thus. t\0.'0 ro"-s <lit 1hc eM f'aeh half of the tAble 

d!Jt,to~yone•tailcd ccscsoCthe hypothncs lh.at a u and a • 1. We rejca a • Utn l<wo1 ol a,. 0 in tourot 

six rt~IOn$lllfliru t rhe Unlftti Sr.IU'S :~ nd onr of ; t>gr~s ons llgli.nst Cenna.ny. \Yic never reject 0. .., I 

In ravar of (1, < I. In odlft Wold$, lhC' toult) art CUIUistcnt with a one-fof-one tc..ll ndt.,ns,c mtc: adjusun<:llt 

in rapon.,c to du.n&c' in the VAT In the lont run. 

OM rr.owtt of the sl.ort·run tu('CW'IY o( RF.R 10 GSREV/CONS d the- .rum ol chc mimatcd codfkknt~ on the lcai, <onm::.~o~. anclbf:r:cd c.luep in GSREVJ(:O:'I:S. l'ht- J'iC'~ ,~of this 

tW'C ror dM" rq;;rosio:u itt a!* J 4 0.44. l"'plytft& WI the rdll ~ rak DMM!I by •• pa«nl of 2.'"17 

dun&e In rcbti~ ~cumprion cu r.ua. by 1hc yn~ aftn ch~ ux ra:r chantuT •blc .f dil.p!ap ~Ia b~ or. lh( (Onvcndon~ fnmework. iht tdUIL' :ue broadly ' im.ibr to tho.se 

of Qbk 3. The aver.tgc long: .. nut c.ffect of the c:on~ttmpdnn u. r..tc on the real r.k(.h~ Jt'C' rt~te if 1.3 2."'d the 

avcn&e t-r, n dfea (1hc: $tun or du: wcRkic-ms on th~ con:emporancous leo.-cl and chance In C.SRIW/ 

16. Tbt QOtffCitnl en theC'.O"<SSJrnpt 01"1 U:.C rtl0 1'-'<llm.N1'/ und'1ng('d bydr(lf.lC)tl'l!) the I K~ .. ., .. ~ W\(QI\Imn f 

¥1(1 rWrCfi"\Vt'WretgrnSIOrl "'U...wno8'>2 obMII"oo.ltl<lt1s. '"'"liSbasott\A "'l~DOt~l'\'ll•otrrtetable. 

11 w.o.t._~~'1)1Ca!-a6oo.stindard~.tb01\ll"'t~tr"'*d'lar9!o'•"'a~ '~VJllt• ~lit~$ 

t9t"$tC.tr'.tn$t·t~()OC!'t*"()b«Ao...MI"''Iii""t«'AA'(t~ ... .,.,..~ •• - .. lti·Q.ntne)l~-~" 

c-.,...,01 CMoett"'-~'..tft .. c.r,..,..,. 

10 
152 


33393.080

CONS) i$ OAO. The onc-mllcd t (:${$ of a/0-PJ • o a.-~ si&••if«.:..m (iu favor of Q/(1-~) > 0} ~u the 10 

pcr«:nr level in lOof 12 rcgr<"Uiortsand th~: tcsuofal(l-13) .. I arc: gnifiant. 

nu: rQulu br<Mdly ruppon the h;-pothesis o-f full cxchat~tc r.ue offic:r of h:ms~ in consumption tax 

rates. How·~r, chc: rc::mltsdcpcnd &re:ul)' on which rou nHy {d1c United St;~,lc$ or Ge-rmany) i.s the p:mner 

C01mrry. ·n,e cxU:tcncc: of lixocd exdta.ngc rates 1><-twe<-n some COUMries rnay imply a different p<~ttc:rn of 

dyn:uuic ad ~~tmctlt rcbtivc to ilo:lting cxchancc r.ucs. Por thU tr':\.'<On, ~ ~tso r,1.n «JU:ttion (2) ~­

ra y on (;t) curo <~ru countries ptus Oenmarlc si::U'ting in 1999 attd (b) norHuro--arca countries cxdudin& 

IJc:nnurk. 13 For chc fonncr countries {about on~quartc:r of d-e full tMnp!c}, we uscGctmlt1)'as the JXInner 

country and for the latter counuies {abour one-h:~lf of rhe full s:unpl.::) v.~ usc lh~: United States. About 

onc·quam:.ro(thcsampJc is lo.<:t owing to j>lc·l999 )'C',Ifl {¢ c:~ouo members and late joiners (0 (he curo :azo.. 

For the non-<UI"'-atC'.l cou.ntries. the rn:ul ~ arc$ltnilar tO chc full sample rcsu)t'i, with ::1\'0':Ite kmt-tun 

tax r;ate cocfficienu dm :arc never sig.n!Ae:antly diffcran from those of thr top Jutr of tabk 4 ;u'd clr:n lt<~Y< 

:an avct;l&e V:l.lue of I.J,. for the cum An:a 00\IJllriC$, elte oocffici<":nts \Ill!)' onsid et:~. ly 'XtO$$ spttific:uions 

with I~ standard errors.. raising the likc:Uhood o( tOO small of 2 s.unplc for the number of p:memetc:rs 

bcing esrinutcd. nte COdftcknU ;a:c r.c;\'Ct .Sitniflantly different from 1h~ of the lxml)m ll:aff of c 4 

but the :'1\'Cr.lt;e v.a!uc of 1he cocfficic.mil i$ $0 11~h<~t lower. at O.S. 

Trade Batanc•s 

ialllc ; di$pla}'$ our b:uk roulrs for ()(((N\.11 b:tlauccs in the t»inlcgr.u.ion rr.utl<\\'0-rk. The cop displays 

result." fot the: cuncnt account b:al:mce; cite rn.iddle di:spb.yi rtruhs for the goods and tt-rvkes trade OObnce; 

and the bouom displ:tys esu ~ for the diff'cr<nce bc1.woen the first two: the b.:.L'l n~ on income a.nd rr.uu· 

fcrs. In C!lch c:uc, 2 coumry•, occtmal b31bnce refers to its 1.radc with the rot of tl1c wurld and we thetcforc 

do not need to specify cl\c expbnawry v.arlab ~s as differences bct\'o'ctn onluct in the home Mld ~nner 

cowmic:s. 

Tht C$d uod cffec:n of the consumption Ill.\: r.uc on thc:currt-~u account arc :til cku:e tO 0 d only one 

is Si(Vliflt.'l_ntly different from 0. The goods andservi«s t.ntde balance C'OC'ffieictlU are cnif¢rmly higher and 

ebr« OUl or 3i.x: li!C ~igni!"l("#,ll dy PQf.th•c. The income :tnd r-~n.~fe~ cocffidtnl~ an; all t>~UiV<Md four Ol.lt 

¢(six ve tt:a.ll.stically Sil_!;n ifiCJnt. The shorr-mn cfTccts. meoasmcd as rlc ~um rJf c.xfficienu rJn the chmp 

ln c:cu'lsumpcion (:r.,x ntiC$, 8rc about t\VO· Lbi:ds of tl:c: long·tun dfcets for good$ and $Crvlw rntdc and lulf 

¢f lhe long-run eff~ s for income and aansfas. 'rhus. most of2r.y long: .. mn change in che QtC'cn:al bal1Jlcch..,pc:n.s by the year Mter the mx rate- dl:tn&cs. ·n~e cue. (Otr«li<>n wcffic:icms ;uc a bit l.ugcr dwl che 

l8 Oe~r\c hi» ~inteil'l@d & ~ghefy fxed exc~& rat• ag.aitW: the -.m ~~"'' ~ W q onQvcJe Gill'@(@, wtlld1 

iolned at the boQ•M•t'IQ Of ?001 bvl cJU:IuOO C«.~ntr-.es th.1t JO•ned the euro area afttf 200l 
153 


33393.081

c.xfrtcic.,,t$ r~~ c.he RER. wirh ,. lon&·run :.tdjwuuem spted of about 20 to 25 pcn:cnt per year~ they are 

alw:tys highly y~ifican1. 

i:.hlc 6 di~pb~ :an~Qgo s l'dl.lhs mine I~( oonvc-.n:ion:al r~mcwotk. Ahhough the O\•c-roJI paw:rn is 

similar to clt:u of ublc 5, dK eodlic:ic1it v:lluoo :.rc uniformly lower (or the <:uncnt account and the goods 

and Sttvkd u·:ack balance. Nor:~ of (he CW'I'CM account O()(fficicnt$ b signi.Rc:andy differem from tero. 

Two of the &ood.s and $crvic:d ox.fficlc.nu an: signif'IQiltly posirivc. The. resulu for irteomc and cransfcn 

a1c nc;Uiy ldcnr,iCIJ to d,O\oe of t:tbk 5, v.ith fwr of ~x signif'icant1y negative. Put simply, the.' rcsulu :att 

COi'li:istCI\t with ch211_.gt$ h1 d~t VAT having: no significant dTc<:t 0:1 the cuNcnt :Kcounc in the lont nm. 

Ovaa..U, the: results in robles 5 and 6 suggc:.sr dur consumption ta'Cts iu\'t liu!c eiTttt Oil tl~e emrcm 

K<:Ount balance, bu1 thC)' tc:nd co lower net income and tnuuf'er paym«~tt and ro r-W net goodt and 

CT~· et'$ e-;xportS, We wnj«tUrc chat by raising the real exchange rate, consumption r:.:xes reduce the v:.Juc: 

ofincom(; vtd from fo rd&Jl inves-tmenr.s and cnn.skrs rc.lative co the ,•.tluc. of f'*ymcn~& u) ford~ cr$ 

on tht:ir invesuncou ;md to om:soing cn.nsf('($ from domestic residents. The b.ig.her RER. abo rcdu«t the 

ne-t iotcm:..tional inVQtment position of domestic rcsidenttand thus rcduc.cs thc.ir re:al we:tlth. 'J"hit roim:rd 

wc:o.hh may inert»<: uvin& ;md thus spur an incsc-.ue in net ocporu. lbscd on ~ twirul cocffidcnt of 0.2 

fo r the tndc b:a.lan(;C and -{).2 for the- income and tr.ulsfm: ba!ancc- ~ a 10 pttcentatc point inctt* in the 

oonsumpdoo tax nuo-which is an ord-er of m;.agnitude largc.<r th:tn che typical y<1rty mo-.·e:mc:rtt 3J'Id larger 

tb;an any yc.uly c.hange in our umple-would be expected to r;a~ the tt.lldc: bal:auec by 2 jXfCC:nt of COP 

and r«<ucc th< income lUld tr.msl'<rslnlancc by an (((Ual amount, !<:lving the: curunt :.ccoun1 unch:u1gcd. 

FOUR CASE STUDIES 

The ¢$'~1 1$ J,rc..•.cnt«i ::lbQ,·e are bro:tdly consi&t<:nt with fUll e-xchange r.tt< ofUcc. but th<t< ate potential 

OOn4le'HIJ witl1 botl1 mctbodologie&. Tiu:: cvcm nudy ~'Uff'ers from confounding dfecrs from d:e c:ype of QX 

rcfonn. Th~ rcucssion a.rn.lysi.s allows U$ tO c.oncrol (o: other (;Kcors, but the coc.ITkiems :Uc R()t plcd!$C)y 

c•:nim:u'W. A$ 2 f'i 2l:~uc:rnpt 10 uncfc;;rSI;;l_nd the c.if'w or border ~justnttnt, W( e-xamine the CO~Uet'ICe$ 

of 2 VAT inuodu<tion or ii1CtC'.&S<$in rour (ouncrieswherconc wou!d most expoot coS«: :.djustm<:nt a.-1d 

th1c arc relevant for chc United SutC'$. 

Now z e a la nd 

N('Y>• ZcWnd is the- dc:ane.n example in our ample. It implcreent«< :. 10 perectu v..Juc: added tax in 

Ocrobc-r 1986. \\.11k-ll ~:t rnl,af 1'0 12.5 pc:ro:n1 in 1989 and 1 S percent in 2010 (Benge-, Pallot, and Sb& 

2013). The: ta:r is w1iqudy bro;a..d bllk'd: lt t~pplies lO govtnunent t~ction.s and excludes only residenti.&l 

rents 2nd tinandal s<rviccs, rdloc:<ed m the V/\T ~'<'Venue ntio of nearly 1 (u.bk 1). /\.1 ttle VI\ r brgcly 

~ 
154 


33393.082

rep!:wcd ~r:otc and incon~ taxes. the.re was :1 not:~blc ldju..nmenc in the. sh.ue or goods and sr:NiCQ: t:ucd 

in <OJUumption. The border adjustment, rhcrefau:, .~ new. 

MuGh or the initial adjuSinlC'!U h.af>pencd via inO:ttil;ln. Inflation (measured rdati:ve to the S3me qu:.ner 

the previous fC'.ii£) ~\'U;;jged I J p<re<nt d uring cbe flrSt t.hroe qumc~ or 1936. then jumpnl fO 18 fl'CI'Cnl( in 

the: (our quarters after the r..u: w.a inttoduc:ed (able n. J>w dHYcrcruly, the 10 pc:rcnn t;nwas ac:cornod:atcd 

by a onc:<>t.imc increase in the rate ofinflaciou of7 j)t"rtnn. The jump in prices mirrors dte CXJXIn~ on it' rhc 

share of goods and services w:cs in con$l.Unption. which r0$e from I 2 pcr«nr in 1985 (rhc yc:u before IJ1c 

VAT w.as implemented) to 20 pw:c:ru In l987 (the: 11 ~tr rull f<:M of the tax). These- tc:sulu :tk CU!Ui$\ent 

with (;Vitkncc cq>Onl:d il' Zod1ow et al. (2010} «.h:u rbiug VAT r.uC'S c.onuibme 10 :11 n~rim c: iner(',l.SC 

in priett. 11le pri.tt increa$C fed ln to dte RER. which apprcdJtcd by 15 percent bct\\o'«lt 1986 and 1987 

(figutc 2). 

Thcc~ofNewU.'II nd oOCts n idcncc Lh:u the ~d based VAT was :lSSlOCi:utd with 2 one•time 1'('..11 

appre'Ciationtbat offkt the tax. The cvidenoc: $UQ;C$ts that the iti~ m«.h~ni!> 'n for tl•c: adjus1mem ~ ' 'ia 

prices:. Indeed, the re.1l exch,\u'l&e r;ate jumped by more ch 1 the consumption tax rate, tld10'\lg.h the dT«-t 

likdy rdl«.t«l the r. 1ndal market'$ 1>0Sich•c: ~C$$rn<nt of the cmitc pxbg< of reform.s, whieh mprov~ 

the fi$Ca.) outlook wd rel1:xed m-2ny domesde rc:guJations. 

figure2 :~.4o $h.OwS che C:Urrent.a«ount b.lbnee in New Zet.land .. ruund tbc: ti•nc: ofin:lplt:tll(lldng the 

VA I. Over.all, there:. wa.s $()me: lnr. C'Ol~ in dte currcm account balance ovc:r the period. but it Started doing 

$C> lxforc: tbc: c:hang:< occurred. The shift from hlOOMe (0 OOI'l.$umpticm taX(:\ would be: <-lrt>«tcd to inCJC'iM$(' 

saving. which v.-ould imptO\'C che rtent~ocoun l O'IC':r time. 

Australia 

In July 2000 AWtr:Jib inuoduced :1 lO pcrct.nr VA'J', whkh l:argdy rcpb~d od)(t iodi.r«t sales uxu. 

Ouphc A:u or d«re.'ISing toc~l rcvcm.re in GOP. the shue of good.t and scrviw taxes in oon.sumptiC')n 

increased by nc:arly 2 pc:wc:rn. 

The ovt-I1.ll imp;act should h•ve b«n lower rhan in New ~bnd, 4in« Lh(' shift to botder-adjusced 

uxa was $ma11c:r. The period was as.sociat~d with ris:ing iirfbtio•' in drc :siJort run. The jump in the in Oa~ 

ciou row: of3 pcY«nuge points (t2blc n dos:d y matchod t+.e !ncr~ in the consumption tax l'llfe. n.e !'Gil 

c:xc::bange rate. howc,·cr. did not appr«Eare on rhe time VA'r vnt a~(l>pcc:d.l n addition, the current ~ocounr 

to GOt• r.uio tempor.arily inctc:ased, suggotin& tlt;u tl1c border llodJusnnent may ha\'t temporarily fed inro 

the m.de balance. 0\>tt dlc next two )'Cli.N it ra ·et$«1, with no medium run chan&e in the cuuc:ut o:ounl 

<r.gure2). 

13 
155 


33393.083

Canada 

(':~n;~b imroduc«l :t 7 pcr.:em VAT in 1?91, which w.u b tcr rcducc:d 10} J>tiUill In cite rnid·2000s. Tile 

l:ll l~trgt y rcpb«d a .sales ax on mmufxuarcu chat h¥1 been i.n rl;&Ct": ~nc.c 1?24. The lnanufacntl't'r·, 

w u .. ~ through dt<. Yah.e: clu.in ;U~I Wob tcpt)i6j'll(", $Ubj«:tin{t it co ClOmpUlnts and ;1 acria or rcporb 

"'W''t•sr<focm fromaseulyu til< 19.10io (Btnl and Gendron 200')). 

The r..cw VAT was ax::lbi.··Kd wid! pto'f'it'icbl ~a Q."'<C$, ,.,·hid. ~uurccd lcto VATs. tOmC: immcdi.-

ltdy. The: skate-of toads and JiU'IIkc:s t.u.ttln consumption was fl.a1.. &en andlad~ prorinc:bl r.nu. •hid. 

•<trc .dda:ton cop. thcOV"cDD irM.rel.)tWllt ~· Jn addition. r~ tuW1.UJll) kd to• m1.1d' b.roadtr but 

chan chc pr~;ous r.unu&aurer't ux ...nd WO\.~ border adjusted to" grntn ntcmcha.n c:hc m2nuf:K:turcr'$ 

c;ax. Sdlt, tlvm rhe conwnion of Silk. l.n.n, w.: upttt only a $1'1\a.ll dU!n~ in JWI~ and the udt:.ngc r.&tc:. 

'fhc 1'*.\ l1ad a t!U:t!J :.l))d imfiU..'di .& tt CfTOCt 00 p!!C~ :lind !he rt:1J Cltclii \~ nliC (f'l.,;utc 2), TIIC: CIJtf(nt 

~m b.thnocasa.Jh1!'c of COl• rerrt:lintcl unehart~;cd . 

11~< price ehansc b; app;ncm lnunedl:&tcly In (jU:altcrt)' (bQ (t:~bk 1). Ahhouet" thr 1nerasc w:1;5 rdr 

rh"C"ly u oc.ln~. thr ~:~vc ~rnmcnc ch:u cn:~ud tl-:c r:ax lOSt the nc.at dc•nMM. Sullivan (2.011) 

-.ri;cs. -nc Ca.nadU,., ~ a~rtRr"" nnr pc>liti.dan's; i:mcion cb.at suppomnc a V/\T iJ c:u«:r 

.klkick • 8t11, I-.e alw cJk lhc arrK f'o. dw VAT •corn~ • a it aoiYOi c..n.ac:t.'s bud&" f"''bkms 

oattltOUI irw:r~ &he .Rae of ~r:.wnt. Oap..ce t.\c nat fP'"ttnmau awnp.Upln& to reti~'C' the ax 

andrwwpi.ngthcd«don. the VAT 1m:11 ruIn J•bu 1o rhluby. 

China 

In 1?94.Chin:t impiC'mentcd a 17 pcrccnr VAT on &oods.."'ith ~ rcduccdnlltOrJ)pc:rcC'I't scapl~. lllc: 

VAT applied only 10 goods, wilh a 4C!f»nttc !Jwlnm. w CoV<ring services. h dcvi.Jw.l (rom a bro.td-b:tkd 

VAT in q'\Ynl orhcr respecu as v.dl: For curnpk. &Omc apiul c:xpc:ndimro wnc nl)l deductible, and 

l.nput rcb;nn (o( cxpocu 'f'Vicd by KCtOf' (Yan 2011). 

The W:: rcpbccd a c:ascadinc lUitlO't'(f taa and~ for bwu COipODtt f.ncomc W"CI. Tbe UWl'M)'•U 

u_, dW noc ~low «kdaaioa. of w:ts paid on immnoclatcs. which mt.:.anl rkar tl~ ca.c:tlldrd up the vilX 

dulra. The VAT raised significant rn"Cnuc, xcouncin& for 0\'tt 40 tJCr~cot of toc.l c:u .nmue ...ben i: ..,'» 

lmpkmmted. 

OtitiOII also b<pn pcuing thc yua.n co the dol~u in 19?4. A*. 2 muh, a he nCNnhuJ cXd~ang.c tate e«ald 

•we adjust to chc VAT. The VAT W:lS lmplcmcnt«< duJing ;a ~tiod c/t,igl, tuflalion. cvctthd~ 2 ~h:.arJ' 

Of\C•Umc lnuc.uc: !n ptka :~f n VAT ln.pJcmt'malion is vi.sible. Th¢ rate ofi,.futlon jum ~ from 17 w 

22 pcrecnl ill the fil>l C{l.l.utCr VAT w.&t applied (~b c:7). i'hc: pri« <.ho~ 6cf-.Uina.lcd:t rnl a.clun&c utc 

appc-ecbcio."- In C:Ot!.tr;Ut, th.c <umnt a«''•IIH tnn.1.inn! rcbrivdy $cable in the: y~ :afrc:r the VAT....., 

14 
156 


33393.084

Implemented. The ex:pe:rknce o(O•ina j_, •00 C.OII')L.lclll whh the real c:xdunnc rare :K"IJ''-'11ng 10 olr$et the 

hmdt:r lldjusm~t:rtl in d•e tu. 

CONCLUSIONS 

Thb: ~ l~ly supporu the- dwotnla.l u.wrUon dw: a c:ocnuy's rt:.a! aduntt rillt: cliO in PfOPOfrion 

10 .,.., inc:ret$1t in i.a bon:kr41dJu.s:cd. OONUmpCion tuC$o with link dlta on dw t.wttn\ .a:oun1 babnot:. 

HowcYtt, dx borda4djl.u;tcd c::ull ttow m; ~ comkk«d in 1M t:n.d Swa d.ft"m tn important 

..-..)'1 from the c:ons.umpcion IDd •-t: aam.aoC', rai.f,;:ng the possibitry o( a t.lowtt and 100ft oompScu . .cd 

adj!Jj;tmnu. 

Roal ExchanSJe Rates 

The rwnt .\tudy a1HJ C:llllt studiQ gtn4:r.llll)' flnd a•k!en« of 3 p<)ltith·~ c:ffc<1 ofbocdcr--adJuned cons.wnpd¢1) 

~a on the rW ~ ntc. Much o( tf-c adjns:unent Ollr~ tbrougb coruum<r priw. In S()tn( ~. 

lh.c nomltt;~l aductc r.uc alJO awcd•u:d and tht R.ER 2pprttbccd by ~n mote tfun tht. inc:rc.ucd l<U 

c;~k. 1lti:i au. adji.UC.Illalt probably rdlccu: cxhc:r ufortru dw actomp;mkd VAT iAar.ut.~ dw: 6M.'td.al 

nu.r\c-b \icwcd posicivdr. 

11.< ~~PI""' oh< hypocl>ai• o( fun"'"'-!;< = olliet (11 I) ""'lflwlr!y.....,.. ""' oh< 

hYJ*~ of noachMge race offict ((I 0). Ono-ajJcd 1cs:s rbat she of1i.c1; h gotcr thut 0 arc signZSc:ant 

Ul n\'( of 12 (2$($ :at do.c 10 pcl<:cntlevt.lln the colntrp"Oltio:l fr.;unework and 10 of 12 CNCf In d\e QOIWt;n• 

don.tl (Qmcwotk. Ono-tailc:d tcm thllt Lhc oiTtc:t if kiS than I art ncvt:r s:igntf'iClnt. 

11t~ dq;:t« of offict is not pr«itely ndmued. Point estim:Ue$ rMte frtuu O.S to ).I. This imprecision 

tlmost urainly rt":fl«o the domlrutu role of f.ac:ton oth~t ~~~~~ OOlllUillption t:uca. lnduding factors not 

rt"'-Uy obsc:I'Y:ll>!e, in u:Mnt;t: nu bcho~~vlor. E..cha.n~ rates are hi~bly vobtile, and cconomisu Mw h..d 

JiC.IHt IUCCdS in ocp'.:aining tbt.m 

11k C"Wll'll A:rudy and cast SludJa fiJld no C'rldcnc:rof t..""Yifi'Qtlt Jfc:a ofbotdc:t..djus;ccd t.OMU.Mption tUCS 

on t.bc CWrcnttccou.nt baJ.ar.ce. fn .Omc CUt$, the OU'n:nr <aOC::OCtnt i:n<:r(;II.Jed mockntdy around ~time or a VAT 1~. but m~y VAT incrc~ wcle a:«H-bued with inansa i.n the flteal bala!\ec, whleh would 

feili'lltln dnnand for iniporu. 

The regressions find some C\'ldence for • n\odenuC' dTc(l of t.Oil)ut111Hion tax Uf4:) on lhc component$ 

o( the curn:nt ~unt ~l.u.ec: the soodt ••"-' kf'ticd tr.tde bal2nec tt~d the lnc:omc 1nd tr.tn.sfC'rs bitl .. nec. 

Mcdlal'l point c:uin::ua an uou.nd 0.2 f'or trade :at~d -().2 for Income and 1r.11ru.kn.. Ollc p.l'Sible ccpbna-

~ Is Wt d:e con~t.a.:·npdon w: b • $tn.~U JXI'iti~ cl&a ot: the soodt &nd.mim 1:lr.Wntt dw is offid 

IS 
157 


33393.085

by a small neg..ttive effect on the ~.stmem ill(OII)t l.>.bne~. c:fk~d g th~ dc:cline in proflu on foreign 

invt.Stment c:nued by the r~l o:t:h:U'I&c rJifC apprcc:i.ttion. Gocxb and ~rvicc::s and in\'esunellt income are 

rypkally tlu: t .... v litl'got romJJUnenu of the (Une ~ :al!«)unc. 

lmpllc.ations for the Oestinati on Base d Cash Flow Tax 

In the long nln, eh3nt;es in )XI'Iiey :are :l(C()mmod:ued by d1anges in the rc:al exchange rate. e.x2edy :IS 

tbrory pr«ikt$. n ,e event smdy :and u.~ ea.s~ study anal)'$i.s reo.-cal that adju.nment to the new equilibrium 

is complete wi!.hin about two yan. whh much of t:he adjustment happening immedi:udy duough pri<e$. 

'The et;r<:$$ton:~ ly-; s finduomcwh:u s,lower \ldjU$tment, alrho'l.lgb more chan h:t.lf of adjustment seems tO 

occur within thr« )"(".ar$. To the c::xla:lt tb:.u bold tax. retonn ls a t~ event thou t:lkc.s pi.Ke e\~1')' 30 ye:.rs or 

$0,2 ee~ycar ~djw:tmcn t is not tOO worrisome. 

'llm:e impom nt Q\'f:t(5 ar~ wonh 1\0tittg. Ftrsr, the United. Snurs is alar~ country chat cortnols the 

\v¢rtd's rC$Crve CUrrC'nCy. \'<fhile mo,·erncnt in the nominal exch2n~ rate oould immodl:udy ofT$<1 rhe 

border adjunmc:nt or the gsh flow tJX, rhe extent to which dollar movr:fllei'IIS rc0«1 tr:\c.le rebth·c 1,0 Goan· 

chi Oow~ may be q uite 'mall in prnctkC'. lu addition, tbt" doi!M's sptci2l role In tlob:t.l 1.r.ade a.nd nnanc;c, 

r.a.nd lhc :~ct that a number of countries· exch-ange tues :a.re tiod to the doll.u, could mute thi$ dtmnd. 

Second, the proposed border-adjusted CF'l' is different from :t VA'r or $ill($ r.tx, for whic;h pt'ices do 

mC»l of th~ ;dju.sunem. In dk' ~ncC' of rapid cxchar1ge rat<' a.ppr«i:uion, :idjwunent rtquires increases 

lu both pricct and w;agc.s. which would likdy take longer md be tr.orc complex. I( tC$ a.r< .dow to adjust. 

there woukllikdy be real eJTc:cu on employment and mtde in che$h()rf n111. 'fhcrc i:~ aJ<Q 2 <J~I<'Stiol\ o( the 

extent 10 which the Federal R(SCrvc would acc;ommocbte the change. 

Third, 1I1C' sit-e of du: propOS«! CFT is l.;ugcr cl1at1 otbtf uxe.s. Most other oountties have ni.sM bonier• 

adjusted co.uvmpcion f.aX($ in $m;aJI st~p . requiring only srn.il pri<e increases or cxchaJ•&e t"o~te appr«~ .• 

rionl. TJ,<' shift 10 dtc dcMi ~n b:..s«< CFT', M proposrd in th< HoUSC' blueprint, would require 2 25 

pcrtcut :tppr«ia.Uon or a 25 pcn.:cont incrcuc in ""'ap and prices. The magnirude: of the c:h~tc is: br 

«>uts:l<k our sampk and could erc;uc addicion:t.l concerns rot elk' g!ob::.J fimnciaJ !iy:uoem and for eonu.uncr 

pti« ;md :~g< inR.11 ion, 

If the cxcl•:mge rate dO<$ not immediately adjust, or adjwu onl)· puti:1Jly. real trade dfe<q arc likely. 

During the adjustment period, exporting and impon-compcrint firms would bcn.cf'it, while rcl:tilct" snd 

lhm.s u.sing importe-d inpms would sufrcr. 

16 
158 


33393.086

REFERENCES 

AV('I(t:lbetl, Alan, Mchaet P. Dltvftwx, Mlct~tl Kttn. and Jol'ln vena. 2017 D•s. tn.uon-IM~ed C•th flOw Taw:at!'M. Odous Ul'll'o'M$1ty f'.et~:re I()( &~i~n Tt~lliltiOf~ WOI'kt\0 Ptlt:)et {January). Oxf<ltd Ut'WYtt•lcy. 

tHntdOk. 0, R. de Hoo1J. M. Kcm. eod P W~ 2015. t:stit'l'la!lhfl VAT P•U•TfiiOurlh IMF W0f111t10 P<tpt..-

.s/21-4 W6S'-'gton: lntwr..a-:..onta MOMt¥Y foul'l(l 

hnO .. M.Iitt.H.viotPMk)t..and.....,._VISI«tt 101t. l~deLMSoOI'.!SbtMUM.ctSC..ttlfromN....,Z .. Iat'd'sCiST 

Hll-~ r.x ...lo&.r!-;VI#U. ~19-98. 

lero.~M'Jd~o.nctron-20ot SMM l».Sin~ lheGST-14ST·0Sl RST"Sys:ft"\."'Afohion 

ol ~ Pl'eMrted .. U.. Amel'l(oln Te Jro1l:y ~·co.-~ en Sltutlur""V • l'tdlfill VAT. Ofos.$natld 

~0"~W•sfvVICII\.~Uir)'· lt 

de~ R end '1.. ~ 10Q F.'IJC,fll O.W.~ Md Rv:44 ~ TN VAT~ TI'OtltJI«< r..-s Y$ 

W~ PN)tlt 1218$. W~QI'\ l~.,~·!Otlott Honrt.-y Fund 

oe..-. ....... .lind ,J.tmes R. H~ Jr 'OO!i v~·~ Addt!<J Tb•$ Md If!~ TrMH· TM C~•.V·"':w~n.lt)' 

ol Mch9tfl. 

f'~IW\ Mlltln. ancl P..ul l<I'U9ITI•n tm Mhtfi\IIIIC)MI Tt..OO Eft~X«S of V~·~,tt AOOfd Tt.o(etlon.lf'l TaUIIOnUI t~ 

GlOMI t:conomy. ed. Assaf RN.In end Jot! sattnroo Clu:.,gnc t.Jniv.tt$..1'1 of Ct1i(~ Pwon 

NICI'\olson. Hrlehnl 2010, V•fwAdthd r.x flt<l V$ Tt.tOtCom,_:.:JVMIISS 'a~ton OftiC. ol C~lon ¥'<! 

fconon,lr An,!ysls, rntemot>Cn<~l T1M ~"" Utatb\. US D•o~rntnt o f Commer~ 

OFCO(Org,lllintlon tOtE<~ Coootorllon tftd ~l)t'l'lt".4.). 2014t.~$t•t.Jiol;t :1014-Lu~emQocltg 

PMI'f. ~"••bbltl' « www.Of'Cd.otg/ctp/corwr"'CXIOtl/,....~tit'lktQ...nd•consurnac!On<tt.oe·l~-2014·11.netm· 

......... 

()((0 (OrQ.,.;;uc.cntor fC.(W'IIOI"ftt(. eoop.MoOI'I oHIO~ 201-&0. (OtW1Jn"Ct.O'\ Tax T,_. 20loe PMs. 

,.,,..... ,_ ... .oeoclibraiYOto/fiOc.WIWtl~.sM4-~·~ 

(Mt()0605.2~3£860280DliWO"aiC1(0087QGE.Otf5F. 

~Hit\,..tA201\.VATessorsr"'ft''~ ru~A....,...•-w~t-.CO"'I/Www~ . .. v•...vsutuvAM-'12PtJ~/S~~"" »Ad 

YMI. )("' lOP. Ct-.~ VAT~~ T.,_ ~. Av.-....: www_,wc.,..ty,ts~{rrr-ef-FtJJ/J...V 

YA.N•lS.(I(tf/$fi'-/YAN•'5..pdf(.-;CV"o\400tiJ~27 2011). 

%~. Gtoro- R, JoM W 0~. II'C)f'l~t~~ $, NabiO. Rot)ert J Ort. •ncl Ro!Mrt J. C.rl'dl. 2010. ~ 

Cfit<"U Of IMPI•I'M"'finO a VAT In 1tT• lJr~jfiiKJ St•IM "'Pfoc~ Of the IOJid AltftWI COitlw~ on Taxation. 

wa~hll~ton NatiOotWII Tax Association. 

" 
159 


33393.087

Tabl• l VAT r;ttes and VAT revenue ratloJ 

Sttt!datdVAT 

rl!tot.>OU VA.f,.....MJ• VATr .... .-~tt 

CAoll"'ltW' ......... ·-- , ..... 201l 

......... .. .., ..... ,. ... . .. - " OS .... ""·~ "' .... Ot!le .. ... . .. {N(tl~it ,. 0..4J O.SI 

"""""' " 04 .... - ,. .., .., 

- I) ... .... ··- ••• ... Ge•rflfny .. ... .... ~·· 

"'- " ~·· 0>1 

......... " "" ..., 

- »> .... .. ....... " ... ... . ..... " ..., 0.6• 

.. , ,, ... , Ul , .... . .. "' - 10 .... ... ....._ .,. l.t) 

- •• .,. ..,, ~·.,HhtflaAdt " '"' o.n Ntw.t•ltnd " .... .. .. ·- " ... , .... - " .. ., . .,...... >J . .. .... ~..-~1( ,. .... ~., 

·- ,. ... , ~ .. ~1!1 " ''" ~" 

·- .. ., ... - • .,. ..,, . ....., .. ... ... .....,.._., ,. ... ....... ,.., ..., __ .,_,_ 1'1-a.•f'lot.var.ble 

Nco!l"\'Mt~r.doluctu.o Vo\l~CII.....,td~tMIII.It 

Nwo.Mbt~fldi.-<MMo"l'fbri~U:- .. VATr~ Sootlou.OCCDD1014llt 

.. 
160 


33393.088

Table2 VAT Implementation da tes emd rct•s 

y •• , 

c..- ltnpltmf'tllod VATt>UIII Tuurt-pltK.d 

Al,$1~1~ 

- CI'goOOs~K'f\"«sWli{\IATl ~~~Indirect tun and .f'l«<rr.c t&.:t$ 

AII'ICI!.1 1913 ~VAT, ItdiiCf'C! Jatt ft C.Seadet!Jfnow:ttn 

... ,.,m 1?11 lol.ttf~VA st¥~!Jafd ft. ~ l.W..lS~ C.SeadttUfMY« WI 

""""' "" ,.C)OtXf$~"14wviCtstaxNAl} Mlt!Uflctu~rt'w~tuO,I$1} 

Swt.~lancl "'' 6.S~V,\T Sat" tax on 900<h 

O.lt 197S ~VAT Casc.adtutn,t..,~lltflr-dl~talltt 

C%«1'1~(. "" 2~VAT,teduc.d att S94 TtmOyttWC 

Germany "'' I~VAT,~ratt- S~ CMCfdttU i'IO\'CJ'~ 

DtrtN~ "" lor. VAT ~lrU.l 

..... "" Th ~r41tVA.T.lblrdl.rd ~6'*.~ '-'Coldtw~tu.oUwlrlnllift(l OllDM 

Uto~ "" IO.VAT fumo¥tf~» 

fiti~'IC .... ~VAT lQIIf'IO'It'Q;if 

fft ~ .... I~VM .-)lliet VAl 

UrittdiG~ 1914 IO'ii.VAT Pvf(~t»-tfldSE''IKt .... ti'J'II)I~tlll 

·- "" Four·r.Mt"VAl$1.tnlbld tN.,...~3Mr. ~clu!itS.~S~MOYttl~ 

u~IY .... ltip!e.r. VAT. tc.~o ¢ 2~ T\lfi'I(JvtfU.)I; 

""'"" 1972 fouN.MeVAT:~II. I' I(I.)~JOW. Y.'l~&ndllaii'IOYI.'ftA'It 

........ ,.., 1-ISW.VAT 

...... 1916 MI. VAl ... ... .. ~ 1911 I~ VAT 

- .... ~COtiS\Iti'IPtfo."'t.UNAl} Other lndltect aA<I~b4:1JolOt.J 

..... 1911 IOOiVAT Wra6et lff'IO"ooCfWX.Oitltl ncl ~ulef'S 

""" '"" 18<JiVAT Tl.mQ'YCf~ 

l~ g .... 15VAl,fC'diKcdttl¢_... 

....... '"" IG.VAT 

Ncthrrl.1nd\ ,,.. 12')1,.VAT,rtdi."'C¢Cf<ltl: 4'lil> CU:tMt\lri'\O'<IffUx 

""''"' .... lO'JbVAT Gtf*lls.»if'lWC 

~2Collblld .... I~ VAT lnCOMCllJC 

""""" ,,., l~ ,ft'(tU(.@CSrat ~ Tun\O'!Otr U:ll 

Po o~gtl 19$~ ,. T: WI<flt::l1 646. 8*-.30'16 T«llotltrnwtt•ont andottwf lndlflP(t~l'lK 

Slov.t ~bllc. ,,., lJ"'VA tfdliC.f!Crat ~ l urnowr t.txe 

........ ,,., ~V~T.rfdvctdratea.n• 

S.o<tn "" I~ VAT ~$aleS tall 

Turkt)' "" ot~~ VAT Otherlncflff'dlillllr$ 

noWOf~...,..~~"'~ 

SoU'I'<~NatiO!Ial ~urces ar.dOC<Orei)OrtS. 
161 


33393.089

Figure 1 Changes In exchange rates. prices, andtr•de balances following 

Imple-mentation of VAT 

"·' 'l l"k/j :::· rf :.\ - : ••D ~ s V\ -s 

1s.s .. .:s · ..- -10 ....... -<1-202 -4-2(12~ -4-2(12 

YN' Y"r )'81 

:J;0'4 4-~024 ~~ - 4 -2024 

)'('.ill vN• yew 

NoteS:.GI'f)I'IUrtt~JedOtUII C~tJ~J(Wwhidl<t~rt: ll:lbbic:ll'forg»:: arndscMctll~lal(~~ 

•Wreol~ 14f«ln~ti0n, l4fotlht tU <IOIItr~~ ~e.lO !ot thtt•~wdut!teclr~l~h.lr"lgtl 

r~te(R(R2.14 Ofthtc;unenUC<O".K'.UUst\ll'tC)( GCf, t~ 1f<M' '-' t·•~~ausN.reOfGDP. 

--

20 
162 


33393.090

Figure 1 Changes in exchange rates, prlc.es, end 1racte b.\lances following 

imp lementation of VAT (comlnwd) 

8.. T~<OUMI)' Silll'lplt 

lnll,.loft(.;)trCMii 

:.J: r:l 1v 1 ~ .,r 1 o · ·> ·> JL _____ .,J _ 

_. - 2 4 - 2 4 • :t 

Noc~ThesamplfcOIIs stsof Aus.tralla, 

- Car&&, fltlll.~ ~. ktlaftd.~~I'\.Ntw ~ lt-a!ar.d.Poo't~~ - S'...tt.ttffand • .tl'ld S~jl\ The~tiM9'~P"ttllOC IIC!nc(I(!IY.fiiH-Mtit~lr&icn¥x~ .. tl0J)tf(MI ~li'IV 

theiOutyMf'Jbef~ •:~~•ek>rm. 

.klor.vtt;Authol~ OIW~Iii:IM ln1t'lg d.U .. dcsalbl'd In I C!!I.. 

21 
163 


33393.091

T•bltJ Colnteg:rating rogrcnlon of rU itX<-hangt rat• on consumP110n tt• Nltt. 151 70-20 15 antmal., 

eqvation (1 }, long• nm coint•gr11tlon c04ffldents 

P•rtllof'I'IUI\lltd St•IH 

Good\& ~Me~~ I'Mt l.1 1''' ,,. 1, 16 '"" .,. 104'" 

cton ,,,. .. ,.,, ..... tt,:t<l) toll] 

fw.+l~~ I IV' ....... ...... l UI, 

--- " .... . .. 0 11 ,,.... .... ...., ..... ..... 

IWM .. f*~l!w:low 0.41u' 0~1''' OJC'"" ~,. .. toll• (Q,111 .... , (Q.1U 

Htl 11\wt~Mt.n~ poioUO., .. Q.ot,• ~ ... ... , ..,., (003) (0.041 tC.Ol) ....... 

(l~rw..cwn ..O.IJ'"' -o.Jt"' -4.11' .. 0.)0"" 017"' ~,,... 

.,.., ,.,, ..... """ ... , ...., ........... .. _ ,., .. Yft .. , .. .. .... .. _ .,. .., ... ... ~ .. ... '" .... mo .... .. .. ... 

... 

~ Q,tj ' --·-- Oil .... . .. ••• ... . t\uvd~ll-M'I"""'I"lll¥.11: (1,1'-J II .WI ..... fU>fJ t'JM) <3.61) 

HIC bf a.t~et 0.94" 0.1) 

IA•J) '"" ..__.._ · 1.76'" • I 7~"' ..,., .... .... ~ "'" ... ., ""' ..... ..,.,~~ ...... ov• .. ...,. .. ...... &Ill ..... . ., ..... Hrlrtln .... t,....I)Ol.ttol\ .... .. , ..... -o.os·· 10.01) .... ,. '"'" ~·" 

["OrCOI~IOfl -G.ll"' ..0.)4"' -011"' .(Ill"" ..0.11'" .... , .... ... , fO.O.ll .. ., fO.(I)J ... , ... ~ 

!!!"tlltUi '" ... "' .. "' ... 111'1QI.Mtcf ... G.ll .. , .,, '"" ~.1) 

........... ... ... ,.,. "'" .. .. 11 .. 

... 

... 

'-"1Q.- poc0\.-pc.m 

~A4/t"li'<<t~\. ..... "'G .. ~"""'*'·-

:n 
164 


33393.092

Ta blt 4 Ordinary lust squarts {OLS) regression of real exchange rat~ on consu•nptfon 

tax ratt. 1970·2015 annual. equation (2), estimated long-run effects 

r•rtt~tr.Vtl~ttcl Sttt•• 

Gooc:lststM<:on~~t )14••• ..,.. ' 1j.9' "' I.U ... , 1Jr (!-'«) (1.2$) ~, ... , ,..,, (~.661 ... ,.. 

f iSQlbol-to 1.19" 2.15"" 

''"' (O.I'J} 

GoYtmMton r~ -119 .... "'" 1..$11'" 

(1.18) 1112.) tD.1ll 00.$01 

IWI~I.,. ~capiulr'ltome- 0.44""" 0.48"" O.'H'' o.sr••• 10.12) 10.21) {l).l&) «l.lll 

NeollnYe$l"""'tJ)(M<"rlon ..... ..... ..., .... .,.., 1001} t!MlSI ..... , 

Y~tlfecu '" ,. rts .. '" No 

hqlll'f~ .., . .,""' ... , .... ., ObMfval ,Oti-S .., 90S 1134 

(J/H~>O "" "" """ u.J(I-11.)<1 

PartMI!Ci«man:t I 

Gooodl&-servktsWt ~W ... . ...1A1 .. ,,., .... . .. (l.l9) (1.119) t:I.6St ..... , ~>•• ...... 

flsc..lbf~t'IC.t ,., 0.2) 

~ .... .. .... 

~~~·~~" -1..88' · 172• .... ..... • 1.111 (I .co) ..... , ,., 

fltlaCvtl*c.19'tati!COI'ne O.S2"' O.Sl' ... 0.24'' OJ)• .. 

«U21 II)-'«) (0.10) tO.on 

Hetl~~~· -<lJ» -11.02 .... ... .. ""'' .... , ..... , ,.,, Yt•rtffta' v .. ,., ... "' ... IHQII~rtd ... ... ... .. .., .,. Obse!v"liofn ... "" "" "" ,,.. a. /(1~> 0 ""' a.I(I,.P<l 

' p<.10,u p<..OS,•••p<..Q1 

ee:AI.I\tlofs' <.a~IAiclc"~S\Islngda~ Otwlbtd " tt'JC:t.. 

, 
165 


33393.093

TlllbleS (olnttgtftlnv rtgreulon or t)lttrnal b1lance• on consumption tu r.te, 

197()-.201$ •nnu,ot,. tquat.ion (1), n~run colntegratJon cotffidents 

Cu"HII al(Oollftl • (oOOd,&~t.P' ~IIO 0.19 ... . , o.J3'' .... ... fO.n) ((U:ij ""' "'"' ... ~ lO.UJ 

rl:S<Ilbltal'tC• ... ..., t0.11) ~~Ill 

GoYirrllf'Winlr~ -=·· ...,, ~;tS.·· .... , IQ,lS) f!),l)l "'" .... ., 

Rel•ow '*up;t.tin«Nnt OJ)(j•u (l.Q8• ... o~·· 0D1"' 

... , (0.021 (D.Ol'J ,,.., 

~~tll)tiiiOt'l .... ~)·• ..... ..,., .. 10.01) tO.CH f)01J fOb I ) 

CnOtCOtl't<t.CB ..0~'" .0.2$"' .... ,- .Q.24''' -(ll3'" --4.23"-' .. ., .... """ ... , «l.OZl '"'"' y~~!f«b Yo "0 Yft No YH 

ll'i(IU.rtd OJO .,, ... o.n on ., .......,_ ... ... 1162 ""' ,., .... Goo<b ~'"-'•~M• 

Goods & ser.tces tn r-~:t OJI .,. o.sc··· Q4l'" o.·~ 0.4(1''' 

"'"" f().l9) """ 10.>&1 "''" IO.Hit 

..,.. ....... ...., .... , 

"'"" """ ~IWIIM:~ ... , ..... ...,,.. ...... 0).1,. (0.11) fO.U) OUI) 

At•tlvfi*C•pJ:•Worne 0.07''' ....... 0.10"'' o.u .... ,.., ...., .,., .,., 

.... ~~~~1311 ...0.02"' ·0.03"' ~_o.··· -Q.e4"' 

""" (001) fOOO tOOl) 

UI'OfCO.If«<IOn ~.l~'" ..0.2$'·"' o(IN·•• ..0.19''' ..013:''' ..0,11' .. 

P•n ..., ...,, .,.,. Ol~l) ..... Yt.trtl«u v .. No VH "" Vft No 

........... .,, 0.2) .,. __ 0.2J ., ... .... ... ... ,,. 1119 ,,., ~t~l '"' 

,. 
166 


33393.094

Talbh S Coint~9 ating r1119ression of external balances on consumption tax rtlto 

1970 .. 2015 annual. equation 11), long-run colntegration coeffidenu(comlrlVfd) 

lt\c4)Sif'.ndtJt~.Jfel') ' • Goods&~o!S ~~· o.u .. ,. OJ>" -01?" ...027' -o:J:l' 

0111) {0.11) <'1'.14.} .:).1)) «), 14) {Otl) 

Flsalbalbl'ICf' .. , 0.01 

O).{)S) fO.OS) 

~llr'nMt e.wlut ...0.1,')'' .. ,. ... .•. (0.07) to.07j (0,11) t;).Q9) 

~!Mpc!fUIJ)it..l h-totlle ·0.07 .... -o.OS"" -o~· .. 

8),01} {0.01) .... .... N«IIWI'stment pos!Uon 0.07''" O.Ol''' ... . ••• .,0.00 O>J)l) 40.01) 

[ rrotCOl'fl!'tt!Ofl ...0,>'1' "' 4.29"' -Q.IS'" -(1.16"" -o.u··· ..0.14"' 

.O.OJt ... ~ .... 40.o>J """ ,., Vurc&:<ll y .. .. Yu .. y., 

fl>$<1....utd 03S OJO .. ,. .., .. , ... ObMrw;:lcns ... ... 1162 1162 "'" ""' ' IK1C\ ''CK-0\. 000 pdU 

Sor.inY."Au:hof~u'wl.tuoM~d.tt•df1(.fb!d lrttf;ol, 

25 
167 


33393.095

Ta~t~ Ordil-..ry lu.st squares r~ru.sJon of ext•rMIINJanus on (OMumption ox 

rat•. 1970.l01 S annual. equ.-don (:U. e.sUmat.cllong-run .Wecu 

c ... ,.., .a«~ s 

c..oca.~ ... ,. ... .... ... . ,. 420 . .. - .... ...... ,..,, .... . ..... 

............ ""' ..... oua ""' .....,_,..._,~ .044" -4~ ... ,.. .... , .... ~ .,.~ ~1)t "''D 

ReiMIYe:pe,up«•f"'CCITC' Q.(lt~~· ow•• .... ooe .... .... , 10.02) to.:m to on 

...-.lnvc.'Umtnl PO$".dQn .... .... , -0.01' ~01"' 

ID.Oit J>Olt 40/Jll to.Cil 

'l'~ ef«U Yo .. ... .. "' .. .,..,.... .... ••• ., ... .. , .., 

- ... ... IH1 H11 "" t2Sl 

Ge.d~A~tr-"t 

'-*" - MNc:IIS~ml' 601 ..... 0\l' ..,,. ..,.. .,. .... ""' ..... ...... ~ .,.,, 

'""'""- . ., 

.... , "''" - ------ ..,,. .. , ....... ... ,. ..... "''" CO. I& tO.lJ) 

lteii!M Ptr"'"u Inc~ C.CI"• G1G' " Q.IO'' G1l'" ... , 100~ ()1)1) 100~ 

Hel ~r'ltl'AC~• -G.O)' " ·O..Ol'" ..Q.Col"' .(IJ)\'" 

11>.01) (001) 1'0.01) lO.Ol) 

Y•lllle«.cct. v .. ... v .. .. "' ... IHQutr.cf o.n ••• .,., ., "'" .., .............. ... ... "'' "" "" --

•• 
168 


33393.096

T&ble 6 Ordin;~ry least s.qualti regreuion of external balances. on consumption UIX 

ratq. 1970.201 S annual.. equ<~tion (2), es.tlmated long-run effects, (conrli'!utd) 

ln<omeaMtt&nJfen 

Gooch&st~Yk lillllll f' ·0.02 .... -o.n .. ..().(:)"" .., .. -<).2)• 

(0.101 ... ~ (Oil) (0.101 to. lot 41),1 1) 

nscalbtlwe .... ••• (0.()6) (0."'3 

GcW!ftiMCnC le'<enuc! ... . .. ... 0.01 

"""' oo.on (.0.\2) "''"' ~!~o"t percep'tab:omt ..0.07 • 0.01 ... , .... (0..01) (0.01) (O.Olt {().031 

fit':~p)l.l'.io.'l o.Ol"·· o.o.r·· 0,01 0.01 

... OlOU IM I) (f).OII 

...... c-tr"'-'> 

~. ed OJI ... 0.81 •• 0.11 .,. """"''""' '"' ,., 1176 1116 

" p<.1Q.• "p<.05,•••J)<.01 ""' ""' ~t I.._.Mr~o ,.:cll&)r~uslnqdio~<~~, OO<Irtltert 

27 
169 


33393.097

Table7 lnnation a round VAT c:hango. four·qu;uter prke change {petctnl) 

"""'" N.-wZNllltod A~,~tt_rali.t Olina C1nad1 AWt•l" 

<» l l.SI6 U> 

'"" U> 

Q> 10.42 too 16.10 ~" U7 

Qo 11,0} , .. 11.1) ... , Qo 18.:1:4 ~" >W ~ .. ,,. 0 1 1&>9 ,,. 21..1} ... , .. 02 .... . ., '"" ... 14\1 

0) 16.9S .,, ..... ... 1H' 

04 .... 1Ai ,.. ... ... OS ... ],I) 1'11,/ 1.)7 8)7 

06 us .... '"" "" ., Sowt'ft:I»U for Au'ltr"'-',N(owU-Jiolnd,il'ldCillr~ ~~fr0t"'Q«X).~1~ IQf'~~rtffOM 

~thoo<aMda~~An•lt"JC\. 

28 
170 

f 


33393.098

gur~2 ltnpltlt'ltnt41Uon of VAT, by(ountry 

''"''" " 

·~ l 

.

• 

. "

... _, 

""'""·::._ ___ _ 

_, ........ 

~ --·-·-·--... ..,... _, 

"" .. .." . 

. 

-

• • 

-· 

... 

1 

::. 

_, 

,. 

... ,... . 

•' ·~ l \.... I 

-4

:! ~ t..-, ~ 

_, 

_, 

. 

-

. ,... 
171 

[Member Questions for the Record follow:] 


33393.099

HEARING ON How TAX REFORM WILL GROW O UR 

E CONOMY AND CREATE JOBS 

Questions for the Record 

Question from Rep. Smith (MO) 

Question for Mr. Stephens 

Lead in: 

Mr. Stephens, big companies like AT&T can go to capital markets to finance investment. 

However, farmers and small businesses in the Missouri don't have that ability, they need to 

borrow money to get the capital they need to buy land, equipment, and run a farm, and they need 

to finance these expenses through debt. 

Question: 

What kind proposals would you have for us, so we can help our farmers and small businesses to 

grow? 

Mr. Stephens: 

We want and need small business to succeed. If they succeed, we all succeed. They are our 

partners, our suppliers and our customers. AT&T is proud of our commitment to small and 

minority owned businesses. I think it is important to recognize that smaller businesses do not 

have the same access to capital that a larger company like AT&T does. The House Better Way 

plan proposes ending the deduction for net interest expense to help finance a lower 

rate. Recognizing that base broadening is necessary, there should be some type of exemption to 

help small businesses that rely on debt financing. I believe the Committee should pay special 

attention to industties that heavily rely on debt related capital, industties like agriculture and 

farming which are critical to our overall economy. 

Additionally, this issue highlights the importance of having transition rules that do not harm 

businesses for decisions made under prior law. If the committee ends the deduction for net 

interest expensing, they should include a grandfather to allow the expensing of existing 

debt. Failing to do so may shift businesses' focus away from investment and toward debt 

repayment. It would also penalize businesses for decisions made under prior tax laws. 

Questions from Rep. Holding 

Questions for Mr. Peterson and Mr. Stephens 

Lead in: 

In putting together a tax reform package, one of the key goals is to ensure that American 

companies have a tax system in place that allows them to remain competitive on the global stage 

- and moving to a territorial tax system is an important step in achieving this goal. 

Similarly, if we are moving to a territorial system for businesses, it makes sense to me that we 

also ensure the tax code supports the competitiveness of American citizens globally by moving 
172 


33393.100

away from the current citizenship-based taxation system and to a form of residence-based 

taxation. 

Question 1: 

Do you see a benefit from having Americans in positions in your overseas operations? 

Mr. Peterson: 

At S&P Global, we benefit from a variety of backgrounds in our employee base. As such, we do 

see a benefit in having Americans in some of our oversees positions and value the diversity of 

opinions they provide in those operations. We 're an international company and invest in our 

employees both in the U.S. and abroad. But permanent, comprehensive tax reform allows 

companies like ours to make additional, long-term investments in the U.S. and in our workers. 

Question 2: 

How does the current tax code, with citizenship-based taxation, impact your ability to hire and 

retain Americans in operations outside of the U .S.? 

Mr. Peterson: 

Hiring Americans in other markets has a higher cost due to the current system. Taxation is not 

the only factor in making these hiring decisions, but the cost is something the company must 

consider. 

Question 3: 

In your opinion, do you think a change in our tax laws to move to a residence-based taxation 

system could allow or encourage companies to hire more Americans for jobs in their overseas 

operations? 

Mr. Peterson: 

In any tax reform effort, we would expect companies to evaluate changes to the tax code and 

change their behavior appropriately. From a purely employee perspective, the American 

candidate will be able to compete with similarly skilled employees of other nationalities. 

Question 4: 

And if so, what impact do you think this would have on the overall job market for Americans? 

Mr. Peterson: 

Combined with a lower rate and more competitive international system, comprehensive tax 

reform with residence-based taxation would increase economic opportunities for Americans. 

Question 1: 

Do you see a benefit from having Americans in positions in your overseas operations? 
173 

f 


33393.101

Mr. Stephens: 

Yes - clearly there is a benefit. 

Qnestion 2: 

How does the current tax code, with citizenship-based taxation, impact your ability to hire and 

retain Americans in operations outside of the U.S.? 

Mr. Stephens: 

Americans working in foreign jurisdictions are taxed on their worldwide income and are nearly 

always much more expensive than employees from other countries who are only taxed on "in 

country" income. Additionally, the U.S. taxes benefits such as housing and transportation while 

other countries do not. This also makes employing Americans much more expensive. 

Question 3: 

In your opinion, do you think a change in our tax laws to move to a residence-based taxation 

system could allow or encourage companies to hire more Americans for jobs in their overseas 

operations? 

Mr. Stephens: 

It will make more economic sense for global companies to hire Americans for jobs overseas and 

increase employment opportunities for the U.S. worker. 

Question 4: 

And if so, what impact do you think this would have on the overall job market for Americans? 

Mr. Stephens: 

It would increase the demand for American workers and thereby increase employment 

opportunities and wages. 
174 

[Public Submissions for the Record follow:] 


33393.102

AFFORDABLE RENTAL HOUSING 

.A.C:T.'I.O.N. 

A Call To Invest in Our Neighborhoods 

Statement oftbc A Call To Invest in Our Neighborhoods (ACTION) Campaign 

In Response to the Ways and Means Committee Hearing on " How Tax Reform Will Gt·ow Our 

Economy and Create .Jobs" 

May 18, 2017 

The A Call To Invest in Our Neighborhoods (ACTION) Campaign, representing over 2,000 national, 

state. and local organiu11ions and businesses. urges the Ways and Means Commiuce to expand and 

strengthen the Low Income Housing Tax Credit (Housing Credit), and to protect multifamily Housing 

Bonds, as part of any tax reform effort to grow our economy and create jobs. 

A 30 Ycat· History of Success 

The Housing Credit is our most success!\• I tool for encouraging private investment in the production 

and preservation of affordable rental housing, with a proven tTack recmd of creating jobs and 

stimulating local economies. For 30 years. it has been a model public-private partnership program, 

bringing to bear private sector resources. marke-t forces. and state.Jevcl administration to fmance more 

than 3 million affordable apartments - nearly one-third of the entire U.S. inventory - giving more than 

6.7 million households. including low-income families. seniors. veterans. and people with disabilities, 

access to homes they can afford. Roughly 40 percent of these homes were financed in couj unction with 

multifamily Housing Bonds. which are an essential component of the program's success. 

The Housing Credit Creates Jobs 

Housing Credit development creates jobs - roughly 1.130 for every I ,000 Housing Credit apartments 

developed. according to the National Association of Home Builders (NAHB). This amounts to roughly 

96,000 jobs per year, and more than 3.25 million since the program was created in 1986. NAHB 

estimates that about half of the jobs created from new housing development are in constntction. 

Additional job creation occurs across a diverse range of industries. including the manufacturing of 

lumber. concrete. lighting and heating equipment. and other products, as well as jobs in transportation. 

engineering, law, and real estate. 

The Housing Credit Stimulates Local Economics and lmpt·ovcs Communities 

The Housing Credit stimulates local economics. NAHB estimates the Housing Credit adds $9.1 billion 

in income to the economy and generates approximately $3.5 billion in federal. state. and local taxes 

each year. 

Conversely, a lack of affordable housing negatively impacts economies. Research shows that high rent 

burdens have priced out many workers from the most productive cities, resulting in 13.5 percent 

foregone GOP growth, a loss of roughly S 1.95 trillion. between 1964 and 2009. 

Housi.ng Credit deve lopment positively impacts communities. About one. third of Housing Credit 

properties revitali_ze distressed communities. St:mford University research shows these investments 

improve property values and reduce poverty. crime. and racial and economic isolation. 

'The Rousing Credit is a Model Publ.ic-Private Pat·lnet·ship 

The Housing Credit is structured so that private sector investors provide up front equity capital in 

www.renttllhousingaction.org 
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AFFORDABLE RENTAL HOUSING 

.A.C:T.'I.O.N. 

A Call To Invest in Our Neighborhoods 

exchange for a credit against their tax Liability over ten years that only vests once the property is 

constmcted and occupied by eligible households paying restricted rents. This unique. market-based 

design transfers the real estate risk from the taxpayer to the private sector investor. In the rare event that 

a property falls out of compliance anytime during the first I 5 years a tier it is placed in service. the 

l_ntcmal Revenue Service can rec:apture tax credits from the investor. Therefore it is in tbe interest of 

the private sector investors to ensure that properties adhere to all program ntles, including affordability 

rcstTictions and high quality standards. 

The Housing Ct·edit is State Administered with Limited Federal Bureaucracy 

The Housing Credit requires only limited federal bureaucracy because Congress wisely delegated itS 

administration and decision-mtlking authority tO st;ue govemrnent as pan of its design. State Housing 

Finance Agencies. wltich administer the Housing Credit in nearly every state, have statewide 

perspective; a deep understanding of the needs of their local markets; and sophisticated finance, 

tmdenvriting. and compliance capacity. 

The Housing Ct·edit Address es a Serious and Growing National Need 

More than one in four renter households in the U.S. - over I I million- spend more thatt half of their 

monthly income on rent, leaving too little for other necessities like food, medical care. and 

transportation. This crisis is continuing to grow. HUO reports that as of2015, the number of 

households with "worst case housing needs" had increased by 38.7 percent over 2007 levels, when the 

recession began. and by 63.4 percent since 2001. A recent study by Harvard University's Joint Center 

for Housing Sn•dies and Enterprise Community Partners estimates that the number of renter households 

who pay more than half of their income towards rent could grow to nearly IS million by 2025. 

Affot·dablc Housing Imp roves Low-Income Households' Financial Stability 

Affordable housing promotes financial stability and economic mobility. It leads to bener health 

outcomes. improves children 's school perfonnance, and helps low-income individuals gain 

employment and keep their jobs. Affordable housing located near transportation and areas with 

employment opportunities provides low-income households with beuer access to work, which increases 

their financial stability and provides employers in those areas with needed labor. 

Fami1ies living in affordable homes have more discretionary income than low-income families who nrc 

tmable to access affordable housing. This allows them to allocate more money to other needs, such as 

health care and food. and gives them the ability to pay down debt, access childcare. and save for 

education. a home down payment, retirement, or unexpected needs. 

The Housing Credit is Critical to Preserving Our Nation's Existing Housing Investments 

The Housing Credit is also our primary tool to preserve and redevelop our nation's current supply of 

affordable housing. Without the Housing Credit, our ability to revitalize and rehabilitate our nation 's 

public housing and Section 8 housing inven1ory, decades in the making, would be significantly 

diminished. In addition to putting the residems of these properties at risk of displacement. we would 

lose the-se investments thtH taxpayers have nlre.ady made. 

In mral areas. where direct funding for ntral housing programs has been cut significantly, the Housing 

Cre-dit is the backbone for preservation and capita) improvements to the existing housing stock. lowincome ruml residents' incomes average just $12,960. and they arc ofien living in areas with extremely 

limited housing options. making preservation of the existi ng housing stock crucial. 

www.renttllhousingaction.org 
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AFFORDABLE RENTAL HOUSING 

r.I.O.N. A Call To Invest in Our Neighborhoods 

Congress Should Strengthen and Expand the Dousing Credit 

Congress should support investment in the Housing Credit as part of any eilort to grow the economy 

and create jobs. The Affordable Housing Credit Improvement Act (H.R. I 661 ), sponsored by 

Representative Pat Tiberi {R-OH- 12) and Ways and Meaos Committee Ranking Member Richard Neal 

(D-MA-1). bas strong bipartisan support in the House and among the Ways and Means Committee 

members. This legisl:uion would enact roughly two dQZCn changes to ~are gthe n the Housing Credit by 

streamlining program rules, improving flexibility. and making the program beller able tO serve a wider 

array of local needs. 

ACTION also calls on Congress to expand the Housing Credit. Viable and sorely needed Housing Crc.dit 

developments are turned down each year because the cap on Housing Credit authority is far too low to 

support the demand. In 20 14 - the most recent year for which data is available - state Housing Credit 

allocating agencies received applications requesting more than twice their available Housing Credit 

authority. Many more potential applications for worthy developments are not submitted in light of the 

intense competition, constrained only by the Jack of resources. 

The scarcity of Housing Credit resources forces state allocating agencies to make difficult tradc-offs 

between directing their exlrcmely limited Housing Credit resources tO preservation or new construction, 

to rural or urban areas. to neighborhood revitalization or developments in high opportunity areas, or to 

housing for the homeless, the elde,rly, or veterans. There simply is not enough Housing Credit authority to 

fund all of the properties needed. but with a substantial increase in resources, many more of these 

priorities would be addressed - and che benefits for communities would be even greater. 

Though the need for Housing Credit-financed housing has long vastly exceeded its supply. Congress 

has not increased Housing Credit authority in 16 years. To meaningfully increase affordable housing 

development, we urge Congress to increase the cap on Housing Credit authority by at least 50 percent. 

Such an expansion would support the preservation and construction of up to 400.000 additional 

affordable apartments over a ten-year period. 

We also call on Congress to retain the tax exemption on multifamily Housing Bonds, which provide 

critical fi11ancing to roughly 40 percent of Housing Credit developments and are essential to sustaining 

the Housing Credit's production potential. 

Investing in the Housing Credit is an invesunent in economic growth. h transforms the lives of millions 

of Americans who for the first time are able to afford their homes- and it transforms their communities 

and local economies as well. 

ACTION Co-Chairs 

National Council of State Housing Agencies 

Enterprise Community Partners 

ACTION Steering Committee Members 

Affordable Housing Tax Credit Coalition 

Council for Affordable and Rural Housing 

Council of Large Public Housing Authorities 

www. rcntalhousingaction.org 
177 

f 


33393.105

AFFORDABLE RENTAL HOUSING 

CSH 

Housing Advisory Group 

Housing Partnership Network 

LeadingAge 

.A.C:T.'I.O.N. 

A Call To Invest in Our Neighborhoods 

Locallnitiatives Support Corporation/National Equity Fund 

Make Room 

National Association of Affordable Housing Lenders 

National Association of Home Builders 

National Association of Housing and Redevelopment Officials 

National Association o f REALTORS® 

National Association of State and Local Equity Funds 

National Housing and Rehabilitation Association 

National Housing Conference 

National Housing Tmst 

National Low lncome Housing Coalition 

National Multifamily Housing Council 

Stewards of Affordable Housing for the Future 

Volunteers of America 

For a full list of ACTION Campaign members. visit www.rentalhousingaction.ora . 

www.renttllhousingaction.org 
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33393.106

AdvaMed Aoeel 

701 Penn$ylv:.nja :\vcnuo, Ste. 800 

Wubington. DC 20004--2664 

Te l: 202 783 8700 

F:u:: 202 783 8750 

www.AdvaMedAceeJ.orc 

May 30,2017 

Adva~ccel 

Tax Reform Should Include Incentives for Investment in Knowledge-Based 

Pre-Revenue Start-Up Companies 

Introduction to AdvaMed Aced 

The Advanced Medical Technology Association (AdvaMcd) is the leading trade 

association representing medical technology manufacturers and suppliers that operate in the 

United States. AdvaMcd's member companies produce the medical devices, diagnostic 

products, and digital health technologies that are transfonning health care through earlier disease 

detection, less invasive procedures, and more effective treatments. Our members range from the 

largest to the smallest medical technology innovators and companies. Collectively, we are 

committed to ensuring patient access to lite-saving and life-enhancing devices and other 

advanced medical technologies. 

AdvaMed Accel is the division within AdvaMed dedicated to the needs of smaller 

medical technology manufacturers. AdvaMed Accel is the only organization of its kind focusing 

specifically on the needs of the medtech industry's emergiJlg growth companies. AdvaMed 

Acccl focuse-s on promoting policies conducive to capital formation and innovation, and 

advocating for domestic and international regulatory and reimbursement policies that recognize 

the unique needs of emerging companies. 

Imp0t1ance of start-ups to U.S. job growth 

While there has been a significant amount of discussion about tax refonns that might 

benefit small businesses with taxable income, there has been little focus on startup pre-profit 

businesses that will not benefit directly from reductions in the corporate tax rate. Yet start-up 

companies are crucial sources of job creation and of economy-side irmovation. If comprehensive 

tax refonn is to achieve its goal of stimulating long-term economic growth and job creation and 

developing a more competitive U.S. economy, the needs of pre-profit start-up finns !)l1!g be 

addressed. 

Advocacy, in$1ght, opportunity for ~mt-rging 

medtech companies 
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33393.107

Research shows that all the net job creation in the economy consistently comes from the 

start-up sector. ' Moreover, start-ups that continue to grow after their first few years are 

disproportionate engines of job creation. Fast-growing small firms, comprising less than I 

percent of all companies, generate roughly 10 percent of new jobs in any given year2 ·

3 As the 

2016 Economic Report of the President stated, "A healthy environment for start-ups sets the 

stage for current and future job growth.'"' It also points out that "Entrepreneurial success 

ultimately translates into improvements in quality oflife and in productivity growth."' 

This job effect is especially pronounced for knowledge-based start-ups. In the innovative 

high-tech sector-defined as firms with high shares of employees in science and the life 

sciences, technology, engineering and math-new firm formation was 28 percent higher than in 

the private sector as a whole for the period 1990-2011. Among high tech firms one to five years 

old, net job creation totaled 3 percent per year. By contrast, the high failure rate among all 

young firms resulted in a net job loss of around 3.5 percent for these firms. If businesses that 

failed during their first five years are excluded, young high-tech firms generated an average 

employment growth of more than 9 percent per year, while the comparable figure for the 

economy as a whole was closer to 5 percent6 

Knowledge-based start-ups are especially important in sustaining and improving U.S. 

international competitiveness. U.S. competitiveness, especially in manufacturing, depends on 

maintaining a comparative advantage in producing new and transformative products and in 

innovation in manufacturing methods. Indeed, since the U.S. cannot hope to compete-and 

would not want to compete-on low wages, it is only by innovation in products and methods that 

we can maintain or regain world leadership. It is typical of many knowledge-based industries 

that the most innovative and transformative new products originate with start-up companies. 

The deterioration of the U.S. start-up economy 

While a healthy start-up sector is critical to America's long-term economic future, the 

U.S. has been experiencing a decline in start-up activity at least since the late 1970s. While startups accounted for approximately 16 percent of all firms in 1977, that proportion had declined to 

1 Tim Kane, "The Impmtance of Startups in Job Creation and Job Deshuction," The Kauffman Foundation Research 

Seties: Finn Formation and Economic growth, July 2010. Start-ups are defined as firms one year old or less. Of 

course, not all job-creation comes from strut-up ftnns, but the jobs created by older fmns are roughly balanced out 

by job losses in other older ftnns. 2 Diane Stangler, "High Growth Finns and the Future ofthe American Economy," The Kauffman Foundation 

Research Series: Finn Formation and Economic growth, March 2010. 3 Ian Hathaway, "Tech Starts: High-Technology Business Fonnation and Job Creation in the United States," August 

2013. 

4 2016 Economic Report of the President, p. 213. 

s !d., p. 212. 6 Ian Hathaway, "Tech Starts: High-Technology Business Fonnation and Job Creation in the United States," August 

2013. 

2 
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less than 9 percent by 20137 A sustained decline of this magnitude is a clear warning sign that 

reform is needed. 

Typically, funding from venture capital or angel investment is a key source of financing 

for start-up companies in the knowledge-based sector. The lack of stability in availability of 

financing can be a powerful force stifling start-ups and choking off a whole generation of 

potential innovation. The medical technology sector is a prime example. The innovations 

provided by small start-up firms have been a disproportionate source of new products and job 

growth. Such firms are critical to the industry's innovation ecosystem. Yet innovation in 

medtech is critically threatened by regulatory burdens and reimbursement uncertainties that 

create lengthy and expensive development and commercialization cycles, witnessed by the 

following statistics: 

The number of new medtech firms created each year has fallen by almost two-thirds, 

from 1,500 annually in the late 1970s and early 1980s to around 600 in 2012. 

More than 30 percent of medtech firms are at least a quarter century old and more than 

half are more than 16 years old - markedly older than other high tech industries. 

Medtech's share of total venture capital has fallen from 13 percent in 1992 to 4 percent in 

2014, and its share of early-stage venture investment has fallen from 10 percent in 1993 

to 3 percent in 20148 

Overall, the latest statistics for 2014 and 2015 indicate that the number of the earliest-stage startup companies receiving funding is the lowest at any time since 19959 A 2013 survey of 

investors found that almost half planned to reduce investment in medical technology over the 

next three years, while only one-quarter expected to increase it. 10 

While the U.S. provides few special incentives for investment in start-up firms, this is not 

true of major competitor nations. Other countries recognize that knowledge-based, high value 

added firms are the jewel in the crown of a successful strategy for high-paying jobs and 

economic growth. They provide a wide variety of tax and non-tax incentives to attract and 

nurture such firms, including firms that are in the pre-revenue stage. 

Tax reform, including lowering of the basic corporate tax rate, is critical to America's 

long-term growth and competitiveness, in part because it will facilitate capital formation. But 

pre-profitability start-up firms, already suffering from difficulties in achieving robust investment 

7 2016 Economic Repmt of the President, p. 2 15. 

8 Innovation Cmmsellors LLC, "A Future at Risk: Economic Perfonnance, Entreprenem ship, and Venture Capital in 

the U.S. Medical Technology Sector," 20 16 9 Vanun Saxena, "Med Tech VC financing tops $800M, but funding for new companies remains scarce," Fierce 

Medical Devices, October 16, 20 15; PWC and National Venhlre Capital Association, op. cit. 10 National Venture Capital Association, "Patient Capital 3.0: Confronting the Crisis and Achieving the Promise of 

Venture-Backed Medical Innovation," 2013. 

3 
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33393.109

and capital formation, will not benefit from reductions in tax rates. The striking decline in the 

number of such firms being created every year is a danger signal that would be a mistake to 

ignore. 

Tax incentives to support start-up firms and capital investment 

If tax reform is to achieve its overriding goal of creating a brighter economic future for 

America, it must include discrete provisions to stimulate additional investment in start-up, preprofit firms. Current federal tax law actually discourages investments in pre-revenue start-ups in 

a number of ways, including very strict limitations on the use of net operating losses and 

restrictions on tax benefits that might otherwise accrue to passive investors in new ventures. 

Although these limitations were enacted to prevent abuses that had little, if anything, to do with 

legitimate innovative start-up ventures, they have had a devastating impact on the ability of 

American innovators to raise capital. 

Medical Device Excise Tax 

For the medtech sector, the impact of the current federal tax rules is compounded by 

additional taxes that have a punitive effect on all companies. The medical device excise tax, 

imposed as part of the Affordable Care Act, has been a significant drag on medical innovation 

and resulted in the loss or deferred creation of jobs, reduced R&D and slowed capital expansion. 

Overall, the U.S. medical technology industry saw its jobs ranks fall by nearly 29,000 while the 

medical device excise tax was in effect, according to data from the U.S. Department of 

Commerce.

11 While the job loss cannot be attributed with absolute certainty to the medical 

device tax, the magnitude of the job loss during those years that the tax was in effect certainly 

indicates a likely nexus between the tax and that employment trend. A new policy brief released 

by the American Action Forum (AAF) in March further underscores the impact of the device tax 

on medtech employment. According to AAF, if the tax resumes in 2018, up to 25,000 additional 

jobs could be lost by 2021. The net impact of permanently repealing the medical device tax 

could be in excess of53 ,000 additional jobs, compared to what would occur if the tax remains in 

effect. 12 

The effect of the tax on start-up firms is two-fold- it deters company growth, since the 

tax is imposed on the first dollar of revenue earned; and it restricts the ability of established 

medical technology companies to invest in or acquire start-up companies by limiting the amount 

of available funds. Congress wisely saw fit to suspend the device tax in 2015, and we urge the 

Committee and Congress to finish the job and permanently repeal this tax. 

11 AdvaMed Medtech Employment Analysis, 

https://www.advamed.org/sites/default/fileslresource/advamed medtech jobs analysis 2010-15 final fmal.pdf, 

accessed on May 16, 2017. 12 Dr. Robert Book, "Employment Effects of the Medical Device Tax," American Action Fomm, Mar. 2, 2017, 

https:/ /www .americanactionfomm.org/research/employment-effects-medical-device-tax/, accessed on May 22, 

2017. 

4 
182 


33393.110

Angel Investor Tax Credit 

Investment in pre-revenue companies is the best way to insure that they will eventually 

become the powerful innovators and job creators that will strengthen the global competitiveness 

of the US in high-technology and that will add to the U.S. revenue base at home. It is worth 

noting that the research credit and the ability to deduct research expenditures are important 

incentives to encourage companies to continue investing in research. However, these credits 

have done little to strengthen investment in pre-revenue companies. 

One approach that has been supported previously is a tax credit specifically offered to 

angel investors. Already, 24 states have addressed the need to keep innovative small business at 

home by enacting angel investor credits for technology companies. Eight states, including 

Kansas, New Jersey, North Carolina, Wisconsin, and Arizona, have adopted angel credits 

specific to bioscience investors. Similar proposals have been made on the federal level - with 

the new Administration in Washington committed to boosting U.S. economic growth, a federal 

angel investor credit would send a clear signal that the United States intends to keep and foster 

small business innovation at home. 

Taking these needs into account and building upon the successes at the state level, 

AdvaMed Accel has developed an angel investor tax credit legislative proposal. This tax credit 

is relatively simple in structure and purpose. Equity investors in a small business, defined as a 

domestic business entity in a pre-revenue position with under I 00 employees and headquartered 

in the U.S., will receive a tax credit equal to 25 percent of their investment. To qualify for the 

credit, the investment must be also made in a small business engaged in a high-technology field 

that has been in existence for less than five years. 

Because the purpose of the credit is to facilitate the transition of the entity from prerevenue to profit-making status, it is temporary and capped: over the lifetime of the entity the 

total amount of credits allowable is limited to $25 million and to no more than $5 million in a 

single year. No single investor will be entitled to more than $2 million in credit in any single 

year. Qualifying investors include SEC-accredited individual investors, investor networks, or 

investor funds. Qualifying investments include any form of equity, such as stock, a general 

partnership interest, or a limited partnership interest, and any capital interest in a partnership. 

We look forward to working with Congress, and in particular, the Ways and Means 

Committee to advance this legislation as a component of corporate tax reform. Other policy 

options may also be appropriate, but failure to address the issue of incentivizing investment in 

start-ups would be a major shortcoming of any comprehensive approach to tax reform. The lack 

of capital investment incentives for start-ups has resulted in a flight of innovation from the U.S. 

to foreign jurisdictions in which government policy is more supportive of new ventures. 

Unfortunately, as these new ventures seek capital overseas, they are likely to remain overseas 

when they take off and become profit-making employers. Small businesses and innovators are 

5 
183 

f 


33393.111

the engines of economic growth in the U.S., and it is therefore imperative that the U.S. establish 

a policy that encourages private investment in start-ups in order to keep them at home. 

Conclusion 

Tax reform, including lowering of the basic corporate tax rate, is critical to America's 

long-term growth and competitiveness, in part because it will facilitate capital formation. But 

pre-profitability start-up firms, already suffering from difficulties in achieving robust investment 

and capital formation, will not benefit from reductions in tax rates. These firms, especially 

knowledge-based start-ups, are critical to long-term economic growth, job creation and 

competitiveness. The striking decline in the number of such firms being created every year is a 

danger signal that would be a mistake to ignore. If tax reform is to achieve its overriding goal of 

creating a brighter economic future for America, it must include discrete provisions to stimulate 

additional investment in start-up, pre-profit firms. AdvaMed, AdvaMed Accel, and its associated 

member companies stand ready to work with Congress to achieve this goal. 

6 
184 


33393.112

MilfO<d Wayne Donaldson, FAlA 

Chairman 

Leonafd A Forsman 

Vice Chairman 

John M . Fowfer 

Executive Director Preserving America's Heritage 

May 31.2017 

TI1e Honorable Kevin 1>. Brady 

Chalnnan 

Commiuee on Ways and Means 

U.S. House of Represenlalives 

Longworth House Otlice Building, I I 02 

Washington. DC 20515 

The Honorable Richard E. Neal 

Ranking Member 

Commiuee on Ways and Means 

U.S. House of Represen1a1ives 

Longworth House Office Building, II 02 

Washington. DC 20515 

REF: Letter for the Record: Hearing on How ·rax Rcfonu Will Grow Our Economy and Create Jobs, 

May IS, 2017 

Dear Chainnan Brady and Ranking Member Neal: 

The Advisory CoUllcil on Historic Preservation (ACHP) welcomes the oppomlllity to provide the Comminee 

on Ways and Means wilh a letter for the record following d1c May IS hearing on how tax rcfonn will grow 

our economy and create jobs. Established by the National Historic Preservation Act (NHPA). the ACHP is 

the independent fede(lll agency charged with advising the President and Congress on matlers relating to 

historic preservation. Among its duties, the NHPA specilkl•lly tasks the ACI{P with promoti.ng studies 

regarding the eflects of tax pelicies at all levels of government on historic preservation. 

TI1c writte-n 'S tim y of the hearing witnesses tended to focus on reducing corporate tax rates, modernizing 

international tax rules, and simplifying the tax code. Tax credits were not central to the testimony. but the 

ACI{P would like to take this opportunity to commend to you an important tax incentive that bas an 

outstanding record of past success and great future potential to create jobs, grow the economy, and support 

community vitality - the federal historic rehabilitation tax credit, also known as the l1istoric tax credit. 

Administered by the Depamnent of the Interior and the Internal Revenue Service. the current 20 percent 

credit st•ppons projects that rehabilitate income-producing historic buildings- commercial and industrial 

buildings. hotels. apartment buildings. residential rentals. etc.-while maintaining their historic character. 

ll•e incentive it offers is oflen essential to the financing for rehabilimtion projects that are helping revitalize 

both urb:m cores and small towns. The ACHP wishes tO express its litll support for maintaiJJing the h.istoric 

tax credit as a component of a refonned tax code. The ACH P consistently has encouraged measures to 

ensure the continued use of the historic ta.x credit as a valuable tool for integrating historic preservation and 

development invesunent, and for improving the economic vitality of America's commmlities. 

Since the inception of tax incentives tor historic preservation in 1976, more than42,000 projects have been 

approved in all 50 states, the District of Columbia, the Virgin Islands. and Puerto Rico. As of FY 2016, these 

projects have generated $84.15 billion dollars in ba il i~1 ion investment and created 2.44 million jobs' 

TI•ese jobs have benefited seveml key sectors of the economy, notably the construction, manufacturing, 

services, and C.nanciaVreal estate sectors. Sectors not in1mediately associated with historic rehabilitation, 

such as agriculmre. mining. transpertation, and public utilities, have benefited as well. (For more infomtatioo 

ADVISORY COUNCIL ON HISTORIC PRESERVATION 

40t F Street NW, Suite 308 tONashington, DC 20001·2637 

Phone: 202·517 ·0200 Ill Fax: 202·517 -6381 lllachpOachp.gov Ill www.achp.gov 
185 


33393.113

2 

on the impacts of the historic tax credit by sector, see the attached chart.) As ofFY 2015, the cumulative 

positive impacts on the national economy included $271.7 billion in output, $ 134.7 billion in GDP. S99.1 

billion in income, and S39.0 billion in taxes, including $28.1 billion in federal tax receipts2 

It also is important to note that the historic tax credit pays for itself. Through FY 2015, the $23. 1 billion 

cumulative cost of the progr:nn was more than offset by the $28. 1 billion i.n federal tax receipts generated by 

the rehabilitation projects receiving the credit.' 

The success of the historic tax credit is reflected in legislation introduced in this session tltat would build 

upon the credit and further enhance it. The Historic Tax Credit Improvement Act (S. 425/H.R. 1158) bas 

bipartisan support, with nearly equal numbers of Republican and Democratic cosponsors. (There are :1 total 

of 54 c.<>sponsors in the House and 10 in the Senate.) The bill would refine the credit to encowage itS use in 

small. midsize. and rural communities. and to make community-oriented projects- sudt as the rehabi.lit::nion 

of theaters, libraries. and schools-easier. Using the historic tax credit to encourage rehabilitation of historic 

schools also is addressed in the School lnfrastrucmre Modernization Act (S. 1156), which would modify the 

credit to apply to school buildings that continue to operate as schools. 

1l1e historic L1X credit has a critically important role to play in retaining and restoring key historic landmark 

buildings and complexes and bringing renewed economic vitality to Americ-a's city centers and Main StreeL 

corridors. We respectfully request that you carefully consider the effectiveness, value, and n!:.ch of the 

credit, and its impact on American communities as you proceed with your assessment of tax code refonn 

priorities. We are conJident that your examination will conclude that the historic tax credit is a cost-effective 

way to encournge essential private sector investment in our nation's cities and tom1s. and that the credit 

makes an imponant contribution to growing the economy and creating jobs. 

Please feel free to contact us if you have any questions on our position or if tl1e ACHP can be of any 

assist:mcc. Our Executive Director. John Fowler, can be reached at (202) 517-0200. 

Sincrr. U1 ._. ,..... .;...__ Milford \Vayn Donaldson, FAIA 

Chainnan 

Atl!lchment 

Narional Park Se1vice, Fedeml Tax luceulivesfor Rehnbililntiug i~ ric /Jui/dings: STaTisTical ReporT and Analysis 

for Fiscal Year 2016 (March 2017). 1

Rulge1'S University aud lhc Na1.ioual Park Service, Annual ReporT ou 1he Economic Jmpoc1 of 1he Federal Hisloric 

Tn.T Credit for FY 1015 (August 2016). 

;Ibid. 
186 

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33393.114

S-UMMARY EXHIBIT 1 

N~Uon.- Economic ~nd T...- lmpi'C:ts of federJ~I HTC·rel~ted ActiVity 

FY t978throu&h f:Y 201S (HTC lnwst.rr.ent: $120.8 billion I 

Gross Oornestlc Product by Sector from ~ederal Hfstorlc Preserwtlon Investment 

($134,682 mi!!loncuf'!WI~Ivc, fY 1978 201St 

...,( ... , .. ~ 

~"S..tv r_..,. ... "" 

...... CO'IIIt'Wn.O\ 

"'"".t.o(tiA,. 

lfN'400ft "' ..... bf(Uf'~ll ..., 

W~al(' 

r.- ~t~t $RI'lllhUIU' 

.st,.,u, 

~·· ~~-+----+----+----+----+----+----+----~ 

5.000 10,000 15,000 20,000 25,000 lOJ;fiJ lS,OOO 40.000 

(millionsof201S$) 

Income Created by Sector from Federal Historic Preservation Investment 

($99,086mlllion cumulahw,n 191&·201.!1) 

AV(U. WI'I' 

"t" ~~~~ IO"t~"''f.& l~~o-'> 

., ... CO'IIItll,;ttO'\ 

Wr.'\.lfl(f""'"' 

r~ t. ..., lc Ut ll~ 

"""'"' 

5.000 10.000 15.000 20.000 25,000 301)00 lS,OOO 40,000 

(millionsof201S$) 

Jobs Created by Sector from Federal Historic Preservatio n Investment 

(2.160~/2 jobJ; cumuf;ati·N, n' 19/'8-101!1) ...,( .... _ Aitl·~ OI'cM1'f> .. l bll 

.... (.on~ -..cf (In 

M.ln\llllttil'"' 

l<i',~XIn , ).f;t,III)~C!$ 

..... ..w.. JII~~~~~~~~~~h __ j ____ l __ J bU ff~f! 

~~ ........ .,_ ......,.._ ""'«• 

100poo 200,000 100,000 LOO.OOO SOO,OOO 600,000 100,000 800,000 

{job,. 
187 


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3M 

Abbolt l..abonuorin Alcoa Corporatioo 

B3llk of Anltrica Cup, 

t)0$101a Sc.-ia~~ifac COf9. 

Cat«))ilbrtnc. 

The Coca-Cob c~ 

Danaher C«pcntioa 

n~ Oow Chnnicl11 Co _~,,,,ny 

Ol.aPonl 

Si Lilly 11nd Conii)Wry 

EnlCf'SOO. Electric Co. F.uoo Mobil Corpontioo 

(".o\et:tl El«tric COO~:.III)' 

(;es)el'l\IMillslnc. 

Goos)c. lnc.. 

HoneyweU b)ltmatiooallnc. 

[8!1.1 Corpor.\tion 

ln1enaati'()l~l Palper COI.I•Xlll)' 

JQtaMOn & Johnsou 

Johnson Controls, Inc. 

JPMorpu ChiS(&. Co. 

Kelloss Con.K)Iay 

K.irnbetly-cL-uk Cotp. 

Ma~at'a:rd nc. 

McConni<.k & Con~uay, IJK. 

Moc-pn Sl:ualey 

Onldc Corporatio.a 

Ptpsi.Co. Inc. 

Pfitcor- lnc. 

Pnxtcs-& (}:unbk Co. Pll dcr t~lfiti.'UIIC~IInc. 

S.~P Global W<:. 

State S0«1. Corp<M'8tioo 

ielC.II$ Irt h"\lti)CI\ts,lr c. 

l.initcd i«hnolo;.iC$ 

( OIJ)Ofl\tion 

Unit~ Plvtcl Stn:ice. b.c. 

Veriton COitlll1UJlie:lti<>ns llK. 

n~ W~t.lt (>is:ney Con,:.any 

trh A CTAIIiance for Competitive Taxation 

Alliance for Competitive Taxation' 

Statement for tbe Record 

Submitted to U.S. House of Representatives, Committee on Ways and Means 

May 18, 2017 

The Alliance for Competitive Taxation (ACT) submits the following statement for 

the record of the May 18, 2017 hearing held by U.S. House of Representatives, 

Conunittee on Ways and Means on «How Tax Refonn Will Grow Our Economy 

and Create Jobs." 

ACT is comprised of leading American businesses that employ millions of 

American workers from a diverse range of industries~ including technology~ 

manuf.,cturing and services. \Ve believe pro-growth business tax refom1 can be 

fiscally responsible, create U.S. jobs, increase wages for American workers and 

strengthen small and large American businesses by setting a competitive 

corporate tax rate and modernizing our intemational tax system. 

For years, ACT has called for tax refonn that lowers the corporate tax rate and 

provides a competitive international tax system that allows American businesses 

to compete in the global economy. 

ACT applauds today's hearing for underscoring the need for comprehensive tax 

reform that will grow our economy and create American jobs. 

As policymakers debate the merits of corporate tax reform, the benefits for 

American workers must be a priority. ln recent years, leading economists and 

experts on both sides of the aisle have weighed in, and their analysis is clear: 

America's complex and outdated tax code is hurting American workers in the 

global economy and tax reform would create new oppommities and growth for 

workers here at home. 

Having the highest corpor;ue tax rate in the developed world is not only a 

hindrance to U.S. businesses. it also hurts American workers. A report from the 

Congressional Joint Committee on Taxation highlighted this issue and offered two 

points of consensus from existing research: 

"One is that the burden of the corporate income tax falls largely on 

domestic ind viduals~ and therefore the corporate income tax does impact 

the well-being of these individuals. The second is that/he burden of 

corporate income taxes is not borne entirely by capital owners, and is 

1 Alliance for Compclilive Taxation. P.O. Box #34346, \Va.sh.iugton DC 20043, 202-464·9522 
188 


33393.116

Membc!-Congxu\ies. 

3M 

~tl.:tboratori es 

Alcoa Corporation 

O:ull: of America CoJP. 

Bostoo. Scientific Corp. 

Clltapilbrhlc. 

n~ Coca-(:ob Con•~l)' 

Dauahct Corporation The DowCbcmic:al Coruparay 

DuPonl 

Si [.illy and Con'Jx.lll)' 

Enb!fSOO.EI«tricCo. Euoo Mobil C«pontiot:a 

~neml El«c.ric Cornp:my 

(ioen~ Z..til lnc. 

~c. Inc. 

HOO¢")'W-tU lntematiooaJ Inc. 

rO~f~tioo 

l.ntemational Pa))et"COOIJ)I'IIl)' 

Johnson ~10: Jo t~u.on 

Johnson Coo.troJs. lnc. JPMorpn Cblasc. & Co. 

Kellogs ComJJoatty 

Kim~y.C'- -k Co.p. 

M~crl;ardbac. 

Mc(:onni<:k & Con,~ly. lise, M..,..,suru.,. 

Ondc Corpcntion 

~iCo.lnc. 

PfiterbiC. 

Pro«c:r&GambkCo. Pmd~ial Financial Inc. 

S&P Glob:!,) lnc. 

SUite St~ Corport~tion 

Tc-.lUISinscnlllleUts.lnc. 

United T«bnologics 

COfPOr.ltlon 

United Pl'lttd $cr\"ia, InC. 

Vttizoo Communication~ luc. 

lhe Wah OisneyCompaoy 

~ A C T AIIiance for Competitive Taxation 

instead shared between capital owners and labor with the share borne by 

each being the subject of ongoing debate. " 

The burden of a high corpor:ate lllx r•te is borne by American workers {through 

lower wages). consumers (through higher prices), and savers {through a lower 

renarn on their savings)- not by corporations. 

American multinational companies are some of our nation's leading employers 

and contribute significantly to U.S. economic growth. It is clear that there is much 

to be gained by modernizing the U.S. international tax system. A study for 

the Business Roundtable found thilt in 2013 U.S. companies with globa l 

operations directly employed 23.3 million American workers and supported a 

total of76.6 million U.S. jobs, $4.7 trillion in U.S. labor income and $8.3 trillion 

in U.S. GOP. 

Additionally, the Organisation for Economic Co-operation and Development 

(OECO) studied the effect of tax systems on economic growth and concluded. 

"Co1pol'ate income taxes are the most hm·mful for· growth as they 

discourage the activities of firms that are most important for gl'owth: 

investment in capiwl and productivity improvements." Cotporate tax 

increases are the most economically damaging way to raise revenue, as 

they reduce economic growth, reduce jobs, depress wages and hurt all 

Ameticanfomilies." 

It's estimated American multinationals have over $2.6 trillion of accwnulated 

foreign earnings indefinitely reinvested abroad - much of which is trapped 

overseas by the 35 percent tax rate imposed by the United States on repatriated 

earnings. What docs this mean for American workers? According to ACT 

economic advisor Doug Holtz-Eakin: 

"Currently, American companies have $2 trillion in earnings that they 

cannot invest in the United States without incurring a tax penalty; that's 

money our economy desperately needs. The benefits are obvious: That $2 

tl'illion canfimd research and development in the U.S. so that the next 

great product can be American-designed. It can expand domestic 

production facilities. It can hire American work<Jrs. Today, 95 percent of 

the world's consumers are owside of the U.S. We should want our 

businesses to sell American workers' products to them. And when they do, 

we should want the profits to come back home. " 
189 

f 


33393.117

JM 

Abbott ULbcntorle$ 

AJooa Corpor3tion 

Bank or Americ:-11 Corp. 

l.J0$1on Scie.)tiilc Corp. 

Catnpi.Uatluc. 

The Coca-Cola Company l)anlllle-Corpomtion 

11~e l)ow Cl ~mic:al COlnp.-uty 

DuPoot 

Eli Lilly And Company 

£sr~!Mo01t l«tric Co. 

Exxoo Mobil CorpondMm 

G¢•lmll Ef«cric Ccmpeny 

(;en~! Mill' Inc. 

~e.btc. 

Hooeyw~ll bltcmatiooallnc. 

(U:\i Corporation 

l.nten\ationlll Pnper Co.npmy 

Jobnsou & Jol:ulson 

Jolmsoo Con1rols. Inc-. 

JPMCIJ"}tan Chuc &: Co. 

Kellogs ContJ;~~~ y 

Kimberly-CLad: Corp. 

M~\'f'Cardrnt. 

McConnick & Compllll)', _ h~~t. 

Morpn Stanley Onde Ccrporatioo 

PepsiCo. bu:. Pfizc,- lnc. 

Proott & Gani>lc Co. 

Pnadmaill1 FinaJ)Cialln<:. 

S&PG:lob~t.l hx. 

SUite Srlfft Cupornt;o" 

Tu.as rm.rurucrus. IlK. Unit«l «1Jr!Qiog ~ 

Corp<:lf';lt-ion 

United Parcel Smi«. Inc. 

Vcriloo Coruownic:ations Inc'. 

11~e WaiJ O~~ey Cornp;my 

Ark A C T AIIiance for Competitive Taxation 

Along with a competitive corporate tax rate, it's time for the United States to 

establish a competitive international territorial tax system that encourages 

economic growth, spurs job creation and lets American businesses compete in the 

modern global economy 0 11 a level tax playing field. 

We hope you will keep these facts in mind as you consider the impacts of 

corporate tax rcfom1 on American workers and the U.S. economy. 

We applaud the House Ways and Means Committee for its continued leadership 

on this issue. ACT Stlmds ready tO work with Congress and the Administration to 

enact :1 2 1st century tax code rhar will create Americ.:m jobs and make the U.S. an 

attractive place for both small and large businesses to innovate, invest, and thrive. 

Sincerely, 

The Alliance for Competitive Taxation 
190 


33393.118

AHIP ~ 

STATEMENT FOR THE RECORD 

Submitted to the 

House Ways and Means Committee 

How Tax Reform Will Grow Our Economy and Create Jobs Across America 

May 18, 2017 

America's Health Insurance Plans 

601 Pennsylvania A venue, NW 

Suite 500, South Building 

Washington, D.C. 20004 
191 


33393.119

America 's Health Insurance Plans (AHIP) is the national association whose members provide 

coverage for health care and related services to millions of Americans every day. Through these 

offerings, we improve and protect the health and financial security of consumers, families, 

businesses, communities and the nation. We are committed to market-based solutions and 

public-private partnerships that improve affordability, value, access and well-being for 

consumers. 

The debate over how to reform the federal tax code to help grow jobs and expand prosperity is an 

important one for our country. It is critical in this debate to reinforce the elements of the tax 

code that currently work. Included among those are a cornerstone of both the American health 

care system and the employer-employee relationship: employer-sponsored health benefits. One 

out of every two Americans with health insurance receives that coverage through an employerbe it their own or that of a spouse or parent. This amounts to at least 150 million Americans who 

are covered by an employer. 1 After the federal government, private businesses are the largest 

payor of health care in the United States. For most employers, offering health insurance 

coverage to their employees is an important priority to attract and retain the best qualified 

workforce while investing in the long-term health and financial stability of those in their employ. 

Across the country, business owners and leaders take pride in offering quality health coverage to 

their teams of employees and hope to continue those offerings. 

Central to the stability of employer-sponsored health benefits and the continued offering of 

benefits is the treatment of employee health benefits under the tax code. Section 106 of the 

Internal Revenue Code recognizes that health coverage is distinct from income and an important 

component of an individual's compensation. This recognition is essential to promoting the 

availability of good jobs that include robust, earned benefits that make our economy competitive 

in a global market. 

Employers are constantly reminded of the rising cost of health care, realized in the form of high 

premiums borne by employer and employee alike. With these high costs, it is important to 

recognize the substantial variation in plan costs based on a variety of factors, including 

geography, family size, drug costs, and market forces. A one-size-fits-all approach or attempt to 

tax benefits above an arbitrary threshold would cause middle class Americans to lose coverage 

and an unsustainably large number of businesses to be penalized with taxation that would hinder 

growth and increase the uninsured rate. The Affordable Care Act's (ACA) excise tax on high 

1 2016 Employer Health Benefits Survey, Kaiser Family Foundation, September 14, 2016. http://kff.org/healthcosts/report/2016-employer-health-benefits-survey/ 
192 


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cost employer-sponsored health coverage (section 4980I of the Internal Revenue Code) is 

currently an obstacle to economic growth and hinders the ability of businesses of all sizes to 

engage in long-term planning. 

The rising cost of health insurance is fueled in part by taxes that increase premiums and limit the 

ability of businesses, especially small business, to expand and create new jobs. Relief from these 

taxes, namely the Health Insurance Tax (HIT) established by the ACA, is a clear way to 

encourage economic growth by lowering premiums. According to an analysis by Oliver 

Wyman, repealing the HIT would have as much as a three-percent impact on premiums for 2018 

- reducing premiums by an average of $220 for consumers who buy coverage in the individual 

market, $280 for small business employees, and $270 for employees oflarge businesses 2 

Together, the HIT and the excise tax on high-cost coverage increase the cost of doing business 

and limit the ability of employers to hire new people and create new jobs. Repealing these taxes 

would be an important step toward reducing health insurance premiums, promoting affordability, 

and helping more employers offer quality health benefits. 

A system that encourages employers to offer health benefits to employees is one that supports 

American competitiveness and allows for American workers to keep more of their hard-earned 

money. Further, as more Americans enter the workforce, the strength of employer health 

coverage in this system increases the number of Americans with health insurance without 

requiring government expenditures. 

The employer-sponsored benefit system also helps fuel the growth of the fastest growing 

economic sector in the United States: health care. The Bureau of Labor Statistics estimates that 

health occupations and industries will add the most jobs to the U.S. economy in the decade 

spanning 2014 to 20243 This growth is supported by the innovation and cost-efficiencies 

generated by employer-sponsored health plans. Employer health plans have been leaders in 

value-based insurance design, workplace wellness, and accountable care that allows for job 

growth by reducing costs and promoting a healthier workforce. 

Employee health benefits are worth protecting and enhancing because they are succeeding. 

Given the amount of time most Americans spend at work and the vested interest employers have 

2 Estimated Impact of Suspending the Health Insurance Tax from 2017-2020, Oliver Wyman, December 16, 2015 . 

https:/ /ahip.org/wp-content/uploads/20 15/12/0liver-Wyman-report-HIT-December -2015 .pdf 3 Employment Projections: 2014-24 Summaty, Bmeau of Labor Statistics, December 8, 2015 . 

https://www.bls.gov/news.release/ecopro.nrO.htm 
193 

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in protecting the health of their employees, this system makes practical sense and is worth 

protecting. The close relationship between an employer plan and the patient-employee also 

allows for data-driven decisions and efforts to improve health outcomes in ways that other 

systems are not as well suited to do. The treatment of employee health benefits under the tax 

code helps preserve this relationship and gives employer-sponsored plans the opportunity to 

innovate in areas such as patient-centered medical homes, accountable care organizations, and 

active engagement in employee wellness. 

Beyond their role in innovation, the employer-sponsored benefit system serves as a bedrock of 

stability particularly in contrast to the ongoing policy uncertainty and market instability that is 

roiling the individual health insurance marketplace. Eighty-two percent of American workers 

report that they are satisfied with their employer-sponsored insurance 4 According to the same 

survey, if their employer health insurance relationship were to end, nearly one in three American 

workers say they would leave their job within a year. 

Preserving the existing system of employee health benefits also helps Americans at all income 

levels, but particularly middle class Americans, keep more of their paychecks. It encourages 

employers to offer robust health plans with low deductibles and allows workers the freedom to 

invest more money in their families and communities. Any tax reform efforts to encourage job 

growth should include the goal of increasing jobs that are both high-paying and include health 

benefits that add to the value of work and enhance American competitiveness. Protecting the 

employer-sponsored benefit arrangement does just that. 

Thank you for considering our views on the importance of maintaining the current treatment of 

employee health benefits under the tax code and repealing the ACA's health insurance tax and 

excise tax on high-cost employer-sponsored health coverage. We look forward to working with 

the committee as you consider these and other health-related issues in the tax reform debate. 

4 Employer Beware: Workers Demand Health Coverage, Accenhrre Private Health Insurance Exchange Consumer 

Research 2015. https://www.accenhu·e.com/us-en/insight-employer-beware-workers-demand-health-coverage 

4 
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AMERICAN CHEMISTRY COUNCIL 

WRITTEN STATEMENT SUBMITTED FOR CONSIDERATION TO 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON "HOW TAX REFORM WILL GROW OUR ECONOMY AND CREATE 

JOBS" 

DATE OF HEARING: MAY 18,2017 

The American Chemistry Council (ACC) thanks the Committee for continuing to examine 

comprehensive tax reform and for examining the effects of tax reform on the U.S. manufacturing sector. 

Because of the importance of manufacturing to the U.S. economy and the effect of tax rules on 

manufacturers, we are particularly interested in the Committee's consideration of a reformed business tax 

system. 

ACC and its place in U.S. manufacturing: 

ACC represents the leading companies engaged in the business of chemistry. ACC member 

companies apply the science of chemistry to create and manufacture innovative products that make 

people 's lives better, healthier and safer. The business of chemistry is a $768 billion enterprise and a key 

element of the nation's economy. Over 26% of U.S. GDP is generated from industries that rely on 

chemistry, ranging from agriculture to oil and gas production, from semiconductors and electronics to 

textiles and vehicles, and from pharmaceuticals to residential and commercial energy efficiency products. 

Our industry directly employs over 810,000 Americans in high-paying, quality jobs and each of those 

jobs supports an additional 6.3 American jobs in other manufacturing industries, meaning that nearly 6 

million Americans are working in the industries that rely on chemistry to drive economic growth, 

innovation, and American competitiveness. Importantly, our industry is one of the nation's largest 

exporting sectors, with over $173 billion in exports in 2016, or more than ten cents out of every export 

dollar. The U.S. chemical industry is a leader in the amount of R&D performed, innovation delivered, 

and exports shipped, contributing enormously to the nation 's economy. Further, given the recent surge in 

the development and availability of domestic natural gas, which is an important feedstock and energy 

source for the production of chemical products, the U.S. chemical industry has reacted by announcing 

plans for over $181 billion of new U.S. based investment. These investments will spur the U.S. economy, 

increase employment and increase the U.S. standard of living. 
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As a major U.S. advanced manufacturing industry, we are keenly interested in how tax reform 

can, and will, affect om industry and manufacturers generally. To ensme the U.S. regains its competitive 

edge, our tax code should be reformed to drive U.S. investment, innovation and productivity to create 

U.S. jobs. The focus of your hearing was timely, and the decisions you make can be critical to the health 

of the manufactming sector in general, and to the American chemical industry in particular. In 

considering the outlook for tax reform, the ACC Board adopted the following "Guiding Principles for 

Corporate Tax Reform": 

Tax reform should produce a fair, simpler, and internationally competitive tax system that 

promotes economic growth and job creation in America. 

Tax reform should recognize and reflect the important role of American manufacturing and 

the jobs it creates. 

Manufacturing is a capital intensive activity, and therefore, tax treatment of capital 

cost recovery is of key importance. 

- Advanced manufacturing techniques and products rely on research, and therefore, 

incentives for research and development expenses also should be supported. 

ACC supports adoption of a competitive territorial system for the taxation of income earned 

outside the United States. 

ACC supports a substantial income tax rate reduction to reflect rates at least comparable to 

Organization for Economic Development and Cooperation (OECD) averages. 

Tax reform must produce a "level playing field concept" such that American companies 

investing abroad can compete equally with foreign investors, and American and foreign 

companies investing in the United States are treated equally. 

Tax reform should be enacted comprehensively, not piecemeal, and should include 

transitional rules that allow taxpayers to adjust to a new tax regime without financial 

dislocation, contraction, or reduction in employment. 

ACC regards the principles not as a menu of alternatives, but as a template for a reformed 

corporate tax system that would achieve the overriding goal of economic growth. Our comments below 

reflect these principles. 

Proposals for business tax reform: 

As our principles state, ACC believes that business tax reform should produce a fair, simpler, and 

internationally competitive tax system that promotes economic growth and job creation in America. The 

measure of each decision and trade off made in the process of tax reform should be whether it advances 

these goals. We also support the adoption of a competitive territorial system where foreign earnings are 

not subject to significant additional U.S. tax. 

We note that business tax reform is generally proposed within a framework of revenue neutrality, 

under which the reformed system of business income taxes would produce the same amount of tax 

revenue as the cmrent system, but at a lower tax rate-requiring repeal of a broad range of so-called "tax 

expenditures." In assessing whether such reforms would need to be revenue neutral, we respectfully 

suggest that the Committee take into account the impact on revenues that would result from a reformed 

globally competitive system that is more supportive of economic growth. We fear that embarking on a 

complex and difficult tax reform process that simply achieves revenue neutrality on a "static basis" would 
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be less effective in promoting economic growth since, by definition, it would create winners and losers in 

a zero sum game. 

We are also concerned that a base broadening effort to repeal a number of so-called tax 

expenditures could disproportionately and adversely affect U.S. manufacturing. For example, accelerated 

depreciation is highly significant in encouraging and supporting investments and job creation by the 

manufacturing sector. Without careful balancing of the impact of changes in current law on the 

manufacturing sector, solid, middle class jobs could be impacted. 

A poorly designed system could reduce the chemical industry's ability to compete in U.S. and 

global markets could cause the industry to experience reduced growth or contraction, resulting in a 

corresponding reduction of the manufacturing workforce. Likewise, spill-over consequences would 

adversely affect suppliers and service-providers that depend upon manufacturing customers. 

Om concerns arise from recent economic analyses of certain tax expenditures and the consequent 

effect of repeal of such provisions on economic growth.' Specifically, unless the statutory tax rate under 

a reformed business tax system is low enough to compensate industry for the loss of tax provisions for 

investment, reductions in capital investment and economic growth are likely to result. 

Finally, any comprehensive changes to the tax code must include transition rules in order to 

ensme that taxpayers have time to adjust to a new tax regime without economic contraction and 

consequent reduction in employment. 

Rate reductionThe U.S. has the highest marginal corporate tax rate of any major industrial nation in the world. 

This high tax rate acts as an impediment to U.S. investments and expansions for both U.S. and foreign 

owned firms. The U.S. needs to enact comprehensive tax reform that significantly reduces the tax rate. 

Doing so can provide powerful incentives for U.S. investment, particularly when not neutralized by other 

changes that directionally increase the cost of capitaL ACC realizes that coupled with the tax rate, a wide 

number of tax expenditures may be eliminated or reduced to fund the lower tax rate. But if the rate 

reduction is not sufficiently large and if the loss of tax expenditures disproportionately affects the 

manufacturing sector, the result may be less, not more, growth. 

1 See, e.g., Joint Committee on Taxation Repm1, "Backgrmmd and Present Law Relating to Manufacturing 

Activities Within the United States", July 201 2, p. 87. 
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Accelerated Cost Recovery--

The accelerated depreciation of capital assets, known as "accelerated cost recovery" or "ACR," 

has been allowable under the tax code for decades ACR is a central element in the business plans of 

most chemical manufacturers. It allows recovery of the cost of capital investment more quickly for tax 

purposes than under financial accounting rules that amortize asset value over a longer period of time, but 

slower than under expensing or recent "bonus depreciation" rules. 

ACR encourages new investment in manufacturing by providing cost-recovery rules that 

compensate companies in part for the risk of investing large amounts of capital in relatively low-profit 

enterprises. For the chemical industry, this typically means longer start-up periods for bringing new 

assets on line and longer pay-out times in order to achieve returns commensurate with the investment. 

Because ACR is extremely significant to manufacturing, repeal would have an obvious and 

disproportionate adverse effect on the industry. ACR leverages the value of capital investment in 

productive assets. Accordingly, greater investment means more growth and more U.S. jobs, all of which 

could be at risk if tax reform removed the provision. Rather, if ACR is to be repealed, it must be 

supplanted by an even more aggressive provision, such as immediate expensing, so that capital intensive 

industries are able to expand and reach their full economic and job-creating potential. 

We respectfully question whether "reform" and the progress the term implies would occur if 

changes in the tax law meant a significant economic discouragement from making new capital 

investments, with less growth, and erosion of the national economic ballast that the manufacturing sector 

currently represents. 

Incentives for research and developmentThe chemical industry is among the largest creators and users of technology. Accordingly, 

current federal tax incentives for research and development represent key factors in retaining a domestic 

chemical industry that can compete with chemical manufacturers globally that typically enj oy more 

favorable home-country tax regimes. The tax reform debate should consider the continuing and important 

role of competitive incentives for creation of U.S. technology, including expensing and an effective R&D 

credit, while addressing the mobile nature of capital and intellectual property. As a goal, the tax system 

should encourage investment in the U.S. in R&D activities, the ownership of resulting intellectual 

property (IP) in the U.S. and exploitation of the IP from the U.S. 

A territorial system for taxation of foreign earnings -

ACC endorses adoption of a competitive territorial taxation system in replacement of the obsolete 

and overburdened world-wide system for taxation of foreign earnings from active business operations. 

The U.S. is the only major industrial nation with a worldwide tax system. The incremental U.S. tax 

imposed upon ACC member companies' foreign operations causes such companies to be less competitive 

than their foreign competitors. This is not just a matter of abstract theory since 95% of the world's 

4 
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33393.126

population is outside the U.S. To serve this large and growing market, we encourage the Committee to 

continue to search for ways to promote exports of property manufactured in the U.S. to meet these global 

needs. But in addition to serving such markets by exports, as explained below, ACC member companies 

must also expand overseas to grow and prosper. It is important to note that as these companies expand 

throughout the world, new high value jobs in R&D, engineering and administration are created in the U.S. 

The manufacture of chemical products is a global and highly competitive industry. Freight is a 

significant cost for ACC member companies; to compete effectively they cannot produce all products in 

the U.S., ship them across an ocean and truck them to a customer in the interior of a continent. We must 

be local to compete effectively and the current U.S. tax code acts as an impediment to our 

competitiveness. 

Finally, movement to a territorial taxation system would eliminate the current " lock out" effect of 

existing tax law and allow substantial amounts of cash, (particularly from industries outside the chemical 

sector,) to be repatriated to the U.S. This result, when coupled with pro-growth domestic tax changes, 

would drive additional capital investment and employment in the U.S. 

Repatriated earningsOutside of comprehensive tax reform and absent recognition of the unique circumstances of the 

chemical manufacturing sector's operations abroad, ACC strongly opposes proposals to tax historical 

foreign earnings. 

In previous years, proposals under consideration for raising tax revenue to pay for highway and 

infrastructure projects included a device referred to as "deemed repatriation" or "mandatory repatriation" 

to U.S. parent corporations of foreign earnings accumulated by foreign subsidiary corporations and 

permanently reinvested abroad. Use of the term "repatriation" in these contexts is inaccurate and 

misleading because the proposals do not require nor anticipate any actual return of cash. The proposals 

mandate U.S. tax on foreign earnings as though the earnings were distributed to U.S. parent corporations 

as dividends. In the case of the chemical industry and other manufacturers, the distinction between actual 

and deemed dividends is very real and has very serious consequences. 

With the exception of relatively small amounts of working capital to pay receivables and meet 

other current expenses, foreign subsidiaries of U.S. parent chemical companies typically keep only 

incidental cash funds offshore. Earnings from manufacturing operations of the foreign subsidiaries are 

reinvested in plant and equipment in order to serve foreign markets and compete internationally. As a 

consequence, only a relatively small amount of earnings is represented as cash and cash equivalents and 

available for actual repatriation, and therefore parent companies would need to borrow money in order to 

pay the U.S. tax with respect to deemed transfers of deemed cash. 

Absent comprehensive tax reform that includes significant corporate rate reductions, adoption of 

a territorial tax system, and sufficiently lengthy transition periods, the tax on reinvested earnings would 

reduce amounts and availability of capital in the U.S. This would also lead to weakened balance sheets, 

lowered share prices, limited investment in new plant and equipment, stifled growth, and eroded payroll 

and job creation. As noted above, the chemical industry is among the largest U.S. exporters, with an 
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outsized share of export dollars, with many jobs in the industry supporting exports as well as foreign 

operations. 

LIFOCongress enacted the LIFO tax accounting method in 1939, concluding that for some taxpayers, 

LIFO is a more accurate means of calculating taxable income. A business cannot thrive and maintain 

operations, unless it generates enough after-tax cash flow to produce and purchase replacement goods at 

current-not historical prices. By matching current revenues against current inventory costs, LIFO can 

provide a better measure of the true economic performance of a business. 

Without LIFO, a business could not deduct current prices from taxable income and its ability to 

produce or purchase new, replacement inventory and to maintain and grow investment would be 

impaired. Purely inflationary gains would be masked and taxed as "profit. " 

Like ACR, inventory accounting methods have been designed to appropriately reflect taxable 

income and to serve as prime instruments for encouraging reinvestment of earnings. Far from a 

" loophole," LIFO is an essential element in the structure of a tax on business net income. Elimination of 

LIFO absent a correlating offset elsewhere and a significant transition period would represent a tax 

increase to manufacturers, a significant cash cost, and would hinder growth. 

Interest deductionsThe chemical industry has tentatively budgeted approximately $181 billion for investment in 

plants to utilize ethane from domestic shale gas as the feedstock in manufacture of chemical products. 

This new source oflower-cost feedstock can mean a significant cost advantage for U.S. manufacturers 

and a manufacturing renaissance. But exploitation of the shale gas resource requires capital investment 

commensurate with the enormous growth potential for the U.S. economy. A significant concern for those 

considering investment in new plants is the ability to use both debt and equity capital to finance the 

ventures. Full deductibility of interest expense is vital to all industries in this regard, but of key 

importance to manufacturers and other capital intensive industries. 

In the case of a long-term proj ect that requires large up front outlays, like the building of a new 

plant, investment dollars are tied up for a period of years before completion of construction and onset of 

production at a profit. During this period, the interest on company debt compounds. Accordingly, longterm, capital intensive projects are especially sensitive to changes in the cost of capital. Limiting or 

eliminating the deductibility of interest, once again absent other reforms that act to offset the effects of 

such policy, would directly increase the cost of capital and would have a dramatic effect on investment 

decisions that of necessity rely upon analysis of the time-value of money. 

Interest paid on debt is recognized as a cost of doing business and virtually every business relies 

on debt at some level to finance its operations. Investing activity targeted for growth is based upon 

achieving certain rates of return over and above their cost of capital. Reducing or eliminating the interest 

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deduction would immediately increase the cost of capital, thereby increasing hurdle rates companies use 

to evaluate investment opportunities. This will lead to reduced investment and capital spending activity 

with the potential for companies to reevaluate capital decisions that have already been made or are under 

consideration. 

Companies need flexibility in raising capital for their operations, whether through debt or equity. 

They use a range of factors in striking the right balance: cash flow, capital costs, types of projects to be 

financed, risk profile, and desired financial profitability. We appreciate the concern with companies that 

are too heavily in debt and are over-leveraged, but the market is a very efficient mechanism for sorting 

this out. Companies with too much debt will see their cost of capital increase in the market, which would 

probably move them toward a more balanced mix of debt and equity that will keep their capital costs 

more in line with their competition. There is no need to legislate what the market already manages 

efficiently and effectively. 

Moreover, imposing a limit or reducing interest expense deductibility would have an immediate 

and sustained impact on capital costs. The resulting decrease in corporate investment activities would 

threaten the already low economic growth experienced in the U.S. over the last several years. 

Accordingly, as with changes to the ACR rules and mandatory repatriation tax, absent comprehensive tax 

reform that includes significant corporate rate reductions, adoption of a competitive territorial tax system, 

and sufficiently lengthy transition periods, the disallowance of deductions on interest expenses would 

reduce amounts and availability of capital in the U.S. 

Summary: "Level playing fields" 

As reflected in the attached Guiding Principles for Corporate Tax Reform and as an overall principle 

to guide policymakers, ACC believes that U.S. tax reform must provide for a "level playing field" where 

U.S. companies investing abroad can compete equally with foreign investors, and where U.S. subsidiaries 

of foreign investors which invest in the U.S. and U.S. parented companies are treated equally. Further, 

we believe that tax reform should not create winners and losers among industries or among types of 

businesses, but should attract investment and enhance job creation throughout U.S. business enterprises 

and foreign enterprises investing in the United States. In summary: 

The U.S. should adopt U.S. tax rules that will enable, rather than impede, U.S. companies to 

compete on a level playing field with regard to their foreign business operations. ACC supports 

the adoption of a territorial system (which is comparable to those of our major trading partners) 

for the taxation of foreign business income, that would permit competitive treatment for U.S. 

companies. 

U.S. companies operating in the U.S.- whether U.S. owned or foreign owned-- should be subject 

to comparable rules, and thus taxed on a level playing field with regard to U.S. business 

operations. ACC supports U.S. tax rules which would provide parity between U.S.-owned 

companies and foreign-owned companies. 

Changes that would place the burden of U.S. tax reform on one or more particular industries 

would not result in a level playing field. For example, when looking at potential base broadeners, 

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the manufacturing industry (including the chemical industry) should not be disproportionately 

impacted, unfairly so, vis-3-vis other industries. Otherwise, this would have a significant 

negative impact on U .S. manufacturing, economic growth, new investment and jobs. 
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omm nt's of th~ American Council for an E nergy-Efficient Economy on 

Tax Reform and Energy E fficit'ncy 

Steven Nadel, Execulive O ireclor 

June I. 2017 

We commend 1be House Way·s and Means Coo:uuillec for beginning considemtion of tax rcfonn. The 

American Council for an Energy-Efficient Economy is a research, educ.atiou and policy organization 

founded in 1980 that focuses on technologies, programs and policies that improve energy efficiency 

in the U.S. for the past several years we have researched ways the CUJTent ta.x code impedes cost 

effective iuvestmen1s in energy efficiency and ways 10 improve the 1ax code $0 i1 ios1ead cnc01.u·ages 

energy efficiency inves1mcnu that crca1c jobs, irnprove coJ:opetitivencss and Slrcngdu.•n o ur ec.onomy. 

with only a limited oos-t to the Federal Treasury and without favoring specific tecbnologjes. Here we 

briefly summarize three recommendations. 

I. Refine deprecis.tion periods to more ucur tely rtflect the :werage servic.e li\'ts of 

equipment. lnacclUate depreciation periods distort market forces. Under current law, 

depreciation periods for many types of equipment are written into the law. and some of these 

deprt.-cialion pc1iods bear litlle ri'lstionsbip to I)-pi cal se-rvic-e lives in 1he field. Pat1icularly 

egregious arc the dcprc.eiation perioc:ls for equipUlCnt in commercial buildio,p.s. including beating 

and coolin,gsystews.ligbting fixtures and controls, and roofmg,systems. Currently, this 

equipment is depreciated over 39 years. the same depreciation period as is used for a new 

eon:unercial building. However. ligh11ug., cooliJlg and beating cquipmeot and roof systems 

1ypically have lives o f I 5~20 years, 1.1 01 39 years. lltc 39-ycar depreciation period acts as a 

barrier 10 new investment as many businesses will choose to repair cquipUJCnt when i1 fails in 

order to avoid bavin,g to write off the un·depreciated value. We c.all this situation "penahy 

depreciation." just the opposite of the accelerated depreciation that is sometimes employed to 

enco urage iuvesllueuts. Since <."<Jnip(ncut has been steadily increasiu$: in efficiency, eoco urngiog 

equipment replacement w ill save energy as well as creating sale-s for <."Qnipmt'OI Il)Bnufacturers 

and installers. 

We recognize that the Republican "Better Way·• plan includes illllllediate expensing for 

investments and hence clim ina1cs depn.-ci:Uioo. Out ifthjs asp~et ofOencr Way is not included in 

leg.isla1ion. we recommtnd duu Congress establish a d'1>ret'iatiou period o f about I 5 years for 

energy-related equipment iu coOllllercial building.s. Along with partners in industry. we have 

developed a draft definit.ion which we can share if you are interested. Fu.rthennore, new tax 

leg.isla1ion should authorize the LRS to modify depreciation periods in response to market changes 

w ich the guidance 1ha1 depreciation periods should aJ'proximatc average strvice live$ in the field. 

As cquipwent evolv<."S and changes, tbc IRS sho uld be able 10 adjus1 depreciation periods as 

service lives cbange. 

Likewise. in the case of combined heal and power (CHP) systems (sysH~ms tb.at gcnera1c both 

beat and power, achievin@: high efticieocies). the depreciation period varies as a function ofwbo 

owns the equipmem and bow it is used. even chougb ofteo the same equipment is used by a 

variety of owners and for a variery of applications. We recommend thai a si.n$Je service life be 

ciC<'I~d for all JJ ~TS . perhaps 15 years. 
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Improving depreciation periods will reduce distortions and allow market forces to operate more 

freely. 

2. Refine existing energy efficiency tax incentives in order to promote advanced energy-saving 

techniques in a way that is technology neutral, allows manufacturers and installers to plan 

for the mid-term and phases out when market share targets are reached. Tax policy should 

promote energy-saving technologies and practices that have a limited market share today due to 

market barriers, but where temporary federal assistance can advance these technologies and 

practices to the point where they can prosper without federal assistance. Federal incentives can 

open both a domestic market and an export market for advanced energy-saving techniques. 

Specifically, we have reviewed experience with energy efficiency tax incentives provided in the 

1980s and over the 2005-2011 period, and based on this review we recommend that the following 

principles apply: 

Set product performance standards primarily in terms of whole building energy efficiency 

savings, letting all technologies compete. 

Target efficiency improvement levels that currently have a very small market share, which 

keeps the cost of tax incentives down and minimizes the number of"free riders" (consumers 

who take the tax incentives but would have made the same purchase decisions, even if the tax 

incentives were not offered). 

Provide a substantial incentive to motivate significant additional sales. 

• Monitor market share of eligible products and when the market share starts to become 

significant, the tax incentives should either be phased out or eligibility levels increased, 

starting the process to "transform markets" again. 

Keep the incentives in place for long enough so manufacturers and other market players find 

it worth making investments to develop and market eligible products. 

Many of the tax incentives first enacted in the Energy Policy Act of2005 have been successful, 

and provide useful lessons for energy efficiency tax reform. For example, high-efficiency 

appliances, heating and cooling equipment, and new homes now have much higher market shares 

due in significant part to these tax incentives. In the case of appliances, the original qualification 

levels are now standard practice, and qualification levels were tightened several times. On the 

other hand, tax incentives for Energy Star windows largely subsidize purchases that would have 

happened anyway since qualification levels were set too low. Going forward, limited federal 

f1mds for energy efficiency tax incentives should be provided in four areas: 

a. Efficient new homes 

b. Efficient new commercial buildings 

c. Comprehensive retrofits of existing homes 

d. Comprehensive retrofits of existing commercial buildings 

For each of these four areas we recommend that legislation establish a three-tier incentive for 

"good", "better" and "best" performance, with the highest incentives for "best" performance. 

Market share for each tier should be monitored by the Department of Energy, and when the 

market share for a tier reaches 10%, the eligibility threshold should be increased or the tier 

phased out. And when the market share of the highest tier reaches 20%, tax incentives in that 
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area should be stmset. Perfonnance should be measured using metrics in widespread current use 

for each area (e.g. for new constmction, percent savings relative to national model building 

codes). We have been working with indushy groups to develop this proposal and can provide 

additional details on this approach if you are interested. If eligibility levels are set higher than 

typical cmTent practice, costs can be kept to modest levels (on the order of$1 billion per year for 

all four areas combined according to our preliminary analysis). 

By setting broad perfonnance criteria that ensure public benefits and advances beyond nonnal 

market practice, combined with phasing out incentives once technologies and practices that 

achieve the perfonnance become established, Congress can advance US competiveness at a 

modest cost to the Treasury. 

3. Consider " clean tax cuts" . TI1e Grace Richardson Fund, R Street Institute, ConsetvAmerica, 

ACEEE and others have been working to develop the concept of"clean tax cuts"- the 

application of supply-side tax rate cuts to "clean" investments that reduce emissions of various 

pollutants. The idea is that by cutting taxes on income from clean inveshnents (where "clean" is 

specifically defined), investors will be more interested in making such inveshnents, and large 

amounts of private capital can be leveraged. Clean tax cut proposals are now being prepared to 

promote clean investments in oil and gas production, energy efficiency, renewable energy 

production and more. In tenns of energy efficiency, examples of"clean" investments could 

include investments that allow a building to meet the criteria for an Energy Star certified building 

or that reduce the energy use of a commercial building or an industrial process by at least 30% as 

detennined using approved software. 

Three leading mechanisms are being developed to promote inveshnents that meet a definition of 

clean: 

i. Applying the capital gains tax rate to income from clean investments that is 

passed through to individual tax-payers and covered by individual tax returns; 

ii. Expensing of investment ammmts in lieu of depreciation (similar to item # 1 

above); and/or 

iii. Allowing tax-free bonds to be used to finance clean inveshnents. 

Details of these proposals are being developed by the Clean Tax Cut Working Group (see 

http://cleantaxcuts.org/ ). 

Addressing Energy Efficiency in Tax Reform Will Create Jobs 

In a 2013 report' ACEEE examined the approximate impacts of earlier variants of two of these 

provisions (depreciation and energy efficiency incentives) on the US economy. To estimate the 

impact of the energy efficiency tax incentives on the overall economy, we used ACEEE's DEEPER 

input-output model of the U.S. economy. The DEEPER model looks at cash flow in different sectors 

of the economy and estimates the impact of efficiency investments relative to spending on 

conventional energy supplies that are displaced. DEEPER looks both at the inveshnents and the 

impact of energy savings that are available to be re-spent. Overall, we found that these two energy 

efficiency tax provisions would result in a significant increase in employment- an average of about 

160,000 jobs over the 2014-2030 period. The job gains would start at about 52,000 in the first year of 

the new tax policy and steadily increase to about 300,000 jobs in the final years. These job gains are 

1 http://aceee.org/research-report/e 132 
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driven by both increasing investments in energy-efficient products and services as well as 

reinvestment of the energy bill savings. We have not conducted an input-output analysis of our 

revised recommendations, but the results of our 2013 study provide a likely order-of-magnitude 

estimate of job gains from inclusion of the energy efficiency provisions we recommend. 

Conclusion 

If enacted, these reforms would reduce barriers to cost-effective energy efficiency investments and 

contribute toward increased investments in efficiency. Such investments would reduce energy waste, 

create jobs, and foster economic growth. 

We would be happy to provide further details on these proposals if they would be of use. We would 

also be happy to discuss these ideas with Members or staff. 
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ffACLI Financial Security ... for Li fe. 

Hearing Statement of Maurice A. Perkins 

Senior Vice President 

The American Council of Life Insurers 

Before the 

U.S. House Committee on Ways and Means 

"How Tax Reform Will Grow Our Economy and Create Jobs" 

May 18,2017 

The American Council of Life Insurers (ACLI) is pleased to submit this statement for the record 

for the May 18, 2017 hearing, titled "how tax reform will grow our economy and create jobs." 

We thank Chairman Kevin Brady and Ranking Member Richard Neal for holding this hearing. 

ACLI would like to take this opportunity to respectfully comment on tax reform. 

On behalf of the U.S. life insurance industry, we share the Committee's goal for tax reform of 

encouraging economic growth. ACLI is a Washington, D.C.-based trade association with 

approximately 290 member companies operating in the United States and abroad. ACLI 

advocates in federal , state, and international forums for public policy that supports the 

industry marketplace and the 75 million American families that rely on life insurers' products 

for financial and retirement security. ACLI members offer life insurance, annuities, retirement 

plans, long-term care and disability income insurance, and reinsurance, representing 94 

percent of industry assets, 93 percent of life insurer premiums, and 97 percent of annuity 

considerations in the United States. 

Understanding the financial and company tax implications of the life insurance business 

model is key to safeguarding the financial security protections and guarantees our products 

provide for consumers. These protections and guarantees are not available from any other 

financial services companies. 

The nature of the life insurance business is very different from that of a manufacturer or 

retailer in that it involves the satisfaction of long-duration promises. Life insurers receive 

premiums in exchange for a contractual promise to pay insurance or annuity benefits. Those 

premiums are invested in assets that match our expected liability obligations and duration. 

Life insurers utilize those premiums as well as investment returns on the premiums to pay 

policyholder benefits as they arise, often many decades in the future. Because of the nature 

of our business, financial regulation supports our ability to deliver on our long-duration 

promises. 

Life insurers help to grow the economy through long-term investments. The industry is the 

largest investor in U.S. corporate bonds and also holds significant investments in the 

mortgage, real estate and equity markets. 

American Council of Life Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

www.acli.com 
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It is important that tax reform support the policy of protecting personal financial security 

through use of financial protection and retirement savings products. The ACLI appreciates the 

opportunity to comment and point out the unique features of our products that make them so 

critical to the financial security of all Americans. ACLI and its member companies look 

forward to continuing to work with the Committee to address the industry"s concerns on these 

very important issues. 

Thank you. 

Maurice A. Perkins 

American Council of Life Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

www.acli.com 

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Statement 

••• of the 

American Farm Bureau Federation 

SUBMITIED FOR THE HEARING RECORD 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS AND MEANS 

"HOW TAX REFORM WILL GROW OUR ECONOMY AND CREATE 

JOBS" 

MAY 18, 2017 

Submitted By: 

The Amel"ican F31"m Bm·eau Fede1·ation 
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The American Farm Bureau Federation is the country's largest general farm organization, with 

nearly 6 million member families and representing nearly every type of crop and livestock 

production across all 50 states and Puerto Rico. Our members grow and produce the food, fiber 

and fuel that propel our nation's economy as well as putting food on our tables. According to 

USDA, II percent of U.S. employment comes from the agriculture and food industry, 

accounting for 21 million jobs of which about 18 million are off-the-farm positions. 

Federal tax policy affects the economic behavior and well-being of farm households as well as 

the management and profitability of farm and ranch businesses. Farm Bureau supports replacing 

the current federal income tax with a fair and equitable tax system that encourages success, 

savings, investment and entrepreneurship. We appreciate the opportunity to file this statement 

explaining the importance of tax reform and highlighting tax code provisions important to the 

long-term financial success of farm and ranch businesses. 

Farms and ranches operate in a world of uncertainty. From unpredictable commodity and product 

markets to fluctuating input prices, from uncertain weather to insect or disease outbreaks, 

running a farm or ranch business is challenging under the best of circumstances. Farmers and 

ranchers need a tax code that recognizes the financial challenges that impact agricultural 

producers. They want a simpler more transparent tax code that doesn't make the challenging task 

of running a farm or ranch business more difficult than it already is. 

Farm Bureau supports tax laws that help the family farms and ranches that grow America's food 

and fiber, often for rates of return that are modest compared to other business 

opportunities. What is needed is tax reform that supports high-risk, high-input, capital-intensive 

businesses like farms and ranches that predominantly operate as sole proprietors and passthrough entities. We believe that tax reform should be equitable and designed to encourage 

private initiative and domestic economic growth. 

Farm Bureau commends the Committee on Ways and Means for moving forward with 

comprehensive tax reform designed to spur growth of our nation's economy. Many of the 

provisions of the tax reform blueprint will be beneficial to farmers, including reduced income tax 

rates, reduced capital gains taxes, immediate expensing for all business inputs except land, and 

the elimination of the estate tax. The proposed loss of the deduction for business interest expense 

and the deduction for state and local taxes, however, is a cause for concern. The blueprint can be 

improved by guaranteeing the continuation of stepped-up basis, preserving cash accounting and 

maintaining like-kind exchanges. 

The statement that follows focuses on and provides additional commentary on the tax reform 

issues most important to farmers and ranchers. 

COMPRHENSIVE TAX REFORM WILL BOOST FARM AND RANCH BUSINESSES 

Any tax reform proposal considered by Congress must be comprehensive and include individual 

as well as corporate reform and rate reduction. By far, the most common form of farm ownership 

is as a sole-proprietor. In total, farms and ranches operated as individuals, partners and S 

corporation shareholders constitute about 97 percent of our nation's 2 million farms and ranches 
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and about 85 percent of total agricultural production. Because many business deductions and 

credits are used by both corporate and pass-through businesses, their elimination without 

substantial rate reduction for all business entities could result in a tax increase for the vast 

majority of farmers and ranchers. 

LOWER EFFECTIVE TAX RATES WILL BENEFIT FARM AND RANCH BUSINESSES 

Farm Bureau supports reducing tax rates and views this as the most important goal of tax reform. 

While lower tax rates are important, the critical feature for farmers and ranchers is the effective 

tax rate paid by farm and ranch businesses. Tax reform that lowers rates by expanding the base 

should not increase the overall tax burden (combined income and self-employment taxes) of 

farm and ranch businesses. Because profit margins in farming and ranching are tight, farm and 

ranch businesses are more likely to fall into lower tax brackets. Tax reform plans that fail to 

factor in the impact oflost deductions for all business entities and for all rate brackets could 

result in a tax increase for agriculture. 

Farming and ranching is a cyclical business. A period of prosperity can be followed by one or 

more years of low prices, poor yields or even a weather disaster. Without the opportunity to even 

out income over time, farmers and ranchers will pay more than comparable non-cyclical 

businesses. Tax code provisions like income averaging allow farmers and ranchers to pay taxes 

at an effective rate equivalent to a business with the same aggregate but steady revenue stream. 

Farm savings accounts would accomplish the same object plus allow a farner or rancher to 

reserve income in a dedicated savings account for withdrawal during a poor financial year. 

Installment sales of land benefits both buyers and sellers by providing sellers with an even 

income flow and buyers with the ability to make payments over time. 

ACCELERATED COST RECOVERY HELPS FARMERS REMAIN EFFICIENT 

Farmers and ranchers need to be able to match income with expenses in order to manage their 

businesses through challenging financial times. Expensing allows farm and ranch business to 

recover the cost of business investments in the year a purchase is made. In addition to Sect. I 79 

small business expensing, the tax code also provides immediate cost recovery through bonus 

depreciation and through long-standing provisions that allow for the expensing of soil and water 

conservation expenditures, expensing of the costs of raising dairy and breeding cattle and for the 

cost of fertilizer and soil conditioners such as lime. Farm Bureau supports the expansion of 

immediate expensing. 

Because production agriculture has high input costs, Farm Bureau places a high value on the 

immediate write-off of all equipment, production supplies and pre-productive costs. While Sect. 

179 does provide full expensing for most small and mid-size farms, USDA reports that almost a 

quarter of the large farms that account for nearly half of all agricultural production made 

investments exceeding the expensing limit in 20 15. Thus, an expansion of immediate expensing 

has the potential to change the investment behavior of farms responsible for a significant amount 

of agriculture production. 
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When farmers are not allowed immediate expensing they must capitalize purchases and deduct 

the expense over the life of the property. Accelerated deductions reduce taxes in the purchase 

year, providing readily available funds for upgrading equipment, to replace livestock, to buy 

production supplies for the next season and for farmers to expand their businesses. This is a not 

only a benefit to production agriculture; a journal Agricultural Finance Review study found that 

for every $1 ,000 increase to the Section 179 expensing amount, farms that had been previously 

limited by the expensing amount made an incremental capital investment of between $320 and 

$1,110. 

CASH ACCOUNTING HELPS FARM AND RANCH BUSINESSES TO CASH FLOW 

Cash accounting is the preferred method of accounting for farmers and ranchers because it 

allows them to match income with expenses and aids in tax planning. Farm Bureau supports the 

continuation of cash accounting. 

Cash accounting allows farmers and ranchers to improve cash flow by recognizing income when 

it is received and recording expenses when they are paid. This provides the flexibility farmers 

need to plan for major business investments and in many cases provides guaranteed availability 

of some agricultural inputs. 

Under a progressive tax rate system, farmers and ranchers, whose incomes can fluctuate widely 

from year to year, will pay more total taxes over a period of time than taxpayers with more stable 

incomes. The flexibility of cash accounting also allows farmers to manage their tax burden on an 

annual basis by controlling the timing of revenue to balance against expenses and target an 

optimum level of income for tax purposes. 

Loss of cash accounting would create a situation where a farmer or rancher might have to pay 

taxes on income before receiving payment for sold commodities. Not only would this create cash 

flow problems, but it also could necessitate a loan to cover ongoing expenses until payment is 

received. The use of cash accounting helps to mitigate this challenge by allowing farm business 

owners to make tax payments after they receive payment for their commodities. 

DEDUCTING INTEREST EXPENSE IS IMPORTANT FOR FINANCING 

Debt service is an ongoing and significant cost of doing business for farmers and ranchers who 

must rely on borrowed money to buy production inputs, vehicles and equipment, and land and 

buildings. Interest paid on these loans should be deductible because interest is a legitimate 

business expense. According to USDA Economic Research Service, the interest expense 

accounts for 17.9 percent of fixed expenses for farms and ranches. Immediate expensing will not 

offset the loss of this deduction, especially for the bulk of farmers and ranchers currently covered 

under Sect. I 79 small business expensing. 

Farm and ranch businesses are almost completely debt financed with little to no access to 

investment capital to finance the purchase of land and production supplies. In 2015, all but 
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5 percent of farm sector debt was held by banks, life insurance companies and government 

agencies. Without a deduction for interest, it would be harder to borrow money to purchase land 

and production inputs and the agriculture sector could stagnate. 

Land has always been farmers' greatest asset, with real estate accounting for 79 percent of total 

farm assets in 20 15. Since almost all land purchases require debt financing, the loss of the 

deduction for mortgage interest would make it more difficult to cash flow loan payments and 

could even make it impossible for some to secure financing at all. The need for debt financing is 

especially critical for new and beginning farmers who need to borrow funds to start their 

businesses. 

REPEALING ESTATE TAXES WILL AID IN FARM TRANSISTIONS 

Estate taxes disrupt the transition of farm and ranch businesses from one generation to the next. 

Farm Bureau supports estate tax repeal, opposes the collection of capital gains taxes at death and 

supports the continuation of unlimited stepped-up basis. 

Farming and ranching is both a way of life and a way of making a living for the millions of 

individuals, family partnerships and family corporations that own more than 99 percent of our 

nation's more than 2 million farms and ranches. Many farms and ranches are multi-generation 

businesses, with some having been in the family since the founding of our nation. 

Many farmers and ranchers have benefited greatly from congressional action that increased the 

estate tax exemption to $5 million indexed for inflation, provided portability between spouses, 

and continued the stepped-up basis. Instead of spending money on life insurance and estate 

planning, farmers are able to upgrade buildings and purchase equipment and livestock. And more 

importantly, they have been able to continue farming when a family member dies without having 

to sell land, livestock or equipment to pay the tax. 

In spite of this much-appreciated relief, estate taxes are still a pressing problem for some 

agricultural producers. One reason is that the indexed estate tax exemption, now $5.49 million, is 

still catching up with recent increases in farmland values. While increases in cropland values 

have moderated over the last three years, cropland values remain high. On average cropland 

values are 62 percent higher than they were a decade ago. As a result, more farms and ranches 

now top the estate tax exemption. With 91 percent of farm and ranch assets illiquid, producers 

have few options when it comes to generating cash to pay the estate tax. 

REDUCED TAXATION OF CAPITAL GAINS ENCOURAGES INVESTMENT 

The impact of capital gains taxes on farming and ranching is significant. Production agriculture 

requires large investments in land and buildings that are held for long periods of time during 

which land values can more than triple. USDA survey data suggestsabout 40 percent of all 

family farms and ranches report some gain or loss, more than three times the average individual 

taxpayer. Farm Bureau supports reducing capital gains tax rates and wants an exclusion for farm 

land that remains in production. 
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Capital gains taxes are owed when farm or ranch land, buildings, breeding livestock and some 

timber are sold. While long-term capital gains are taxed at a lower rate than ordinary income to 

encourage investment and in recognition that long-term investments involve risk, the tax can still 

discourage property transfers or alternatively lead to a higher asking price. 

Land and buildings typically account for 79 percent of farm or ranch assets. The current top 

capital gains tax is 20 percent. Because the capital gains tax applies to transfers, it provides an 

incentive to hold rather than sell land. This makes it harder for new farmers and producers who 

want to expand their business, say to include a child, to acquire property. It also reduces the 

flexibility farms and ranches need to adjust their business structures to maximize use of their 

capital. 

STEPPED-UP BASIS REDUCES TAXES FOR THE NEXT GENERATION OF PRODUCERS 

There is also interplay between estate taxes and capital gains taxes: stepped-up basis. Step-up 

sets the starting basis (value) ofland and buildings at what the property is worth when it is 

inherited. Farm Bureau supports continuation of stepped-up basis. 

Capital gains taxes on inherited assets are owed only when sold and only on gains over the 

stepped-up value. If capital gains taxes were imposed at death or if stepped-up basis were 

repealed, a new capital gains tax would be created and the implications of capital gains taxes as 

described above would be magnified. This is especially true for the vast majority of farmers and 

ranchers who are both under the estate tax exemption and have the benefit of stepped-up basis. 

Stepped-up basis is also important to the financial management of farms and ranches that 

continue after the death of a family member. Not only are land and buildings eligible for 

stepped-up basis at death but so is equipment, livestock, stored grains, and stored feed. The new 

basis assigned to these assets resets depreciation schedules, providing farmers and ranchers with 

an expanded depreciation deduction. 

LIKE-KIND EXCHANGES HELP AG PRODUCERS STAY COMPETITIVE 

Like-kind exchanges help farmers and ranchers operate more efficient businesses by allowing 

them to defer taxes when they sell assets and purchase replacement property of a like-kind. Farm 

Bureau supports the continuation of Sect. 1031 like-kind exchanges. 

Like-kind exchanges have existed since 1921 and are used by farmers and ranchers to exchange 

land and buildings, equipment, and breeding and production livestock. Without like-kind 

exchanges some farmers and ranchers would need to incur debt in order to continue their farm or 

ranch businesses or, worse yet, delay mandatory improvements to maintain the financial viability 

of their farm or ranch. 

FARMERS AND RANCHERS PAY SIGNIFICANT STATE AND LOCAL TAXES 

Farm Bureau supports continuation of the deduction for state and local taxes. Loss of the 

deduction for state and local taxes paid would have a significant impact on farm and ranch 
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businesses. According to USDA Economic Research Service, state and local property taxes 

account for 16 percent of fixed expenses for all farms. An additional, important contributing 

factor is that taxes are often built into the price of rent and lease payments, which are substantial 

for farms. Therefore, losing the state and local tax deduction would likely cause higher rent and 

lease payments. It should be noted that the figures for taxes mentioned above are only for real 

estate and property taxes and do not include any state income taxes if those exist. Therefore, the 

overall local and state tax burden is likely higher then stated above. 

SUMMARY 

Farm Bureau supports replacing the current federal income tax with a fair and equitable tax 

system that encourages success, savings, investment and entrepreneurship. We believe that the 

new code should be simple, transparent, revenue-neutral and fair to farmers and ranchers. Tax 

reform should embrace the following overarching principles: 

Comprehensive: Tax reform should help all farm and ranch businesses, including soleproprietors, partnerships and sub-S and C corporations. 

Effective Tax Rate: Tax reform should reduce combined income and self-employment 

tax rates low enough to account for any deductions/credits lost due to base broadening. 

Cost Recovery: Tax reform should allow businesses to deduct expenses when incurred, 

including business interest expense. Cash accounting should continue. Sect. I 03 I likekind exchanges should continue. There should be a deduction for state and local taxes. 

Estate Taxes: Tax reform should repeal estate taxes. Stepped-up basis should continue. 

Capital Gains Taxes: Tax reform should lower taxes on capital investments. Capital gains 

taxes should not be levied on transfers at death. 
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American 

Forest & Paper 

Association 

American Forest & Paper Association 

Statement for the Record 

Committee on Ways and Means 

U.S. House of Representatives 

Hearing on How Tax Reform Will Grow Our Economy and Create Jobs 

May 18,2017 

The American Forest & Paper Association (AF&PA) is the national trade association of the 

forest products industry, representing pulp, paper, packaging, tissue and wood products 

manufacturers, and forest landowners. Our companies make products essential for 

everyday life from renewable and recyclable resources that sustain the environment. 

U.S. manufacturers of paper and wood products appreciate the opportunity to provide 

input to the Ways and Means Committee as it considers how tax reform will grow our 

economy and create jobs across America. AF&PA supports comprehensive tax reform 

that encourages economic growth, job creation, and the competitiveness of all U.S. 

businesses. Central to this is a tax system with a low corporate tax ra te, support for 

investment in U.S. manufacturing and its global supply chain, and an international tax 

system that reflects a globally competitive territorial tax system. 

The U.S. forest products industry - made up of both C-corporations and pass-through 

entities- is a significant contributor to the U.S. economy, employing nearly 900,000 men 

and women in above-average wage jobs, investing heavily in equipment and 

improvements, and exporting products throughout the world. The U.S. forest products 

industry also supports jobs in other sectors of the U.S. economy. A recent study 

conducted by the Economic Policy Institute found that each paper industry job 

supports 3.25 jobs in supplier industries and in local communities as the result of respending and tax receipts. 

The U.S. forest products industry provides excellent employee payroll, retirement, and 

health benefits to its workers. Meeting a payroll of approximately $50 billion, the forest 

products industry employs about the same number of people as the automotive industry 

and more people than the chemical and plastics industries. The industry has a generous 

compensation and benefits structure .. earnings of pulp and paper mill workers exceed the 

average for all U.S. private sector workers by about 23 percent. 

The industry produces more than $200 billion in paper and wood products annually, 

accounting for approximately 4.0 percent of the total U.S. manufacturing GOP, and ranks 

among the top 10 manufacturing sector employers in 45 states. In a typical year, the forest 

products industry transforms approximately 13 billion cubic feet of wood · the majority of 

which is purchased from privately-owned forest land- into value-added paper, packaging, 

lumber and other wood products. 

Page 1 of 2 
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We are highly capital-intensive, in some cases more so than the average manufacturing 

industry. Data from the U.S. Census Bureau's fourth quarter 2016 Quarterly Financial 

Report (QFR) indicate that depreciation, depletion and amortization amounted to 5.0 

percent of paper industry sales, versus 3.2 percent for all manufacturing . And the industry 

has made significant investments and facility upgrades in recent years. According to the 

Annual Survey of Manufacturers, in 2015 the paper and wood products industry invested 

$12 billion in plant and equipment. Items such as recovery boilers, turbine generators, 

paper machines, and environmental controls are critical to maintaining technologically 

advanced manufacturing facilities that compete in an extremely competitive global 

marketplace. 

The industry's supply chain and customer base is globally integrated and includes many 

cross-border transactions. Exports of U.S. paper and wood products account for more than 

15 percent of the industry's annual total sales. In 2016, the industry's global exports 

totaled $29.4 billion, of which $9 billion were exports of wood products and $20.4 billion 

were exports of pulp, paper and packaging. We estimate that our industry's exports support 

approximately 135,000 jobs at pulp, paper and wood products mills and related logging 

operations in the U.S., as well as many more jobs in communities where these facilities are 

located. As a capital-intensive industry, many of the industry's vital large capital purchases 

come from abroad because there is no U.S. manufacturer of like items. 

AF&PA's member companies recognize that comprehensive tax reform will not be easy. 

However, the opportunity to increase U.S. economic growth through tax reform is 

enormous. Our key goals include lowering the corporate tax rate and a reformed 

competitive international tax system to help attract and retain business operations and 

good paying jobs in the United States. To ensure capital-intensive manufacturers invest 

and expand with new and more efficient equipment, we support appropriate depreciation, 

interest expense, and research and experimentation tax policies. Further, capital gains 

and dividends rates for individuals should be tailored to ensure U.S. equity markets 

remain a reliable source of capital. AF&PA believes that a reformed tax code should be 

long-term, prospective, provide for a smooth transition, and not result in negative market 

bias. 

We would be pleased to discuss these priorities with the committee and answer any 

questions you may have about our industry. 

For more information, please contact: 

Elizabeth Bartheld 

Vice President, Government Affairs 

American Forest & Paper Association 

1101 K Street, NW 

Suite 700 

Washington, DC 20005 

Elizabeth Bartheld@afandpa.org 

202-463-2444 

visit AF&PA online at www.afandpa.org 

Page 2 of 2 
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United States House of Representatives 

Committee on Ways and Means 

Written Testimony 

Jonathan Williams 

Chief Economist and Vice President, Center for State Fiscal Reform 

American legislative Exchange Council 

May 18,2017 
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Dear Chairman Brady. Ranking Member Neal, and Members of the Committee. 

Thank you for the opportunity to comment throughout this important policy diS<:ussion. By way of 

background, my name is Jonathan Williams. and I serve as Chief Economist and Vice President o( the 

Center for State Fiscal Reform at the American Legislative Exchange Council (ALEC). As you may know, 

AlEC is the nation's largest non-partisan individual membetShip organization of state legislators. 

Comprised of nearly one-quarter of the country's state legislators and stakeholders from across the 

policy spectrum. ALEC membetS represent more than 60 million Americans and provide jobs to more 

than 30 million people in the United States. We believe all Americans desefVe an effident, effective and 

accountable government that puts the people in control. 

In my role, I work with our members to develop sound tax and fiscal policies based on best practices 

from the SO states. AlEC does not support or oppose legislation and I personally submit these comments 

to bring some observations from our non-partisan research and analysis on state level tax reform 

efforts. 

I commend this committee for taking on the difficult but economically advantageous task of reviewing 

our federal tax code. As you know, it has been more than 30 years since President Ronald Reagan signed 

the last comprehensive federal tax reform into law in October of 1986. 

A$ this committee deliberates fundamental changes to our nation's tax policy, states are enacting major 

changes to their own tax codes. In the past year alone, nine states significantly reduced taxes, accotding 

to our Center for State Fiscal Reform research, State Tox Cut Roundup 2016. In 2015.17 states 

substantially reformed their tax systems in a pro-gtowth manner. All told, in the past four years. nearly 

30 states have significantly reduced their tax burdens. The ease studies from these states exemplify how 

states can indeed be the '"laboratories of democracy'" as described by United States Supreme Court 

Justice Louis Brandeis. 

Every year. I have the privilege of co-authoring the national economic study. Rich States .. Poor States: 

ALEC-to/fer State Economic Competitiveness Index. Together with my co-authors (Reagan economic 

advisor, Dr. Arthur Laffer and Stephen Moore)·we analyze how economic competitiveness drives 

income, population and job growth across the states. The new lOth edition of Rich States, Poor States 

offers a roadmap to economic competitiveness based on policy reforms. The report presents rankings of 

the SO states based on the relationship between policies and performance, revealing which states are 

best positioned to grow economic opportunity. and which are not. 

Consistent with the sizable majority of the academic reseafch, we also find that taxes mattef for 

economic competitiveness. People and businesses often seek out lower tax burdens across state lines. 

Rich States. PO<Jr States data show states that keep taxes low. avoid job·killing over-regulation and 
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follow prudent budget practices consistently and significantly outperform their highly taxed, over· 

regulated counterparts. 

Rich States, PO<Jr States adds to a growing body of evidence that taxes matter, and some taxes matter 

more than others. For many years, our research has warned against an over·reliance on income taxeson both personal and business income. For instance, we analyzed the nine states without an individual 

income tax versus the nine states with the highest individual income taxes over the past decade. From 

2006 to 2016 {the latest data available from the Census Bureau), the population in states with no 

income tax grew 111 percent faster than their high ~oun parts (11.9 percent vs. 5.6 percent ) on an 

equally-weighted basis. In aggregate, population grew by 1$.2 percent in the no income tax states vs. 

6.? percent in their high tax counterparts. According to the Bureau of Labor Statistics and the St. Louis 

Fed, over the past ten years {March 2007·March 2017), private sector job growth in the states with no 

income tax increased 28 percent faster than the states with the highest income taxes (6.9 percent 

growth vs. 5.4 percent growth) on an equally-weighted basis. In aggregate, private sector jobs increased 

by 12.2 percent in the no income tax states compared with 7.9 percent growth in the high income tax 

states. Obviously other factors, including right-to--work status, regulatory environment, and makeup of 

state economies clearly factors Into these statistics; but these general trends are reflected decade after 

decade for the past SO vears. 

The reasons why income-based taxes are economically damaging to states range from the adverse 

economic effects of the taxes, to purely public finance objections, such as the volatile nature of income 

tax revenues .. Recently, Governor Jerry Brown of california admitted Sac.ramento's over-reliance on 

progressive income taxes has caused some serious budget problems for the Golden State. Meanwhile, 

Governor Dannel Malloy in Connecticut has acknowledged that numerous tax increases have hurt his 

state's competitiveness and economic growth after their loss of General Electric to Massachusetts. 

Additionally, an analysis on the impact of various types of taxation, conducted by scholars at the 

Organization for Economic Cooperation and Development (OECD}, found that taxes on productivity, 

such as personal and corporate income taxes, are particularly harmful to economic growth. 

Regardless of the form of taxation policymal<ers choose to utilize moving forward, the key is having 

competitive ta.)( rates and eliminating spedal p references or c.atve--outs wherever possible. This avoid s 

the temptation of government picking favorites in the tax code, and essentially ddving up tax rates for 

everyone else. 

North Carolina provides us a clear example or the constructive effects of pro-growth tax reform and 

budget prioriti•ation. De$pite being handed a $3 billion budget gap for the 2011·12 fiS<al year, North 

carolina's General Assembly took great strides in repairing the ailing budget and its structural problems, 

all while providing substantial tax relief. 
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Next they repealed the state's ~Death Tax;" consolidated the individual income tax brackets into a 

single rate of 5.8 percent, and raised standard deductions for single and joint filers. They also addressed 

the state's corporate income tax rate, formetly highest in the Southeast, cutting it to 6 percent in 2014, 

5 percent in 2015.4 percent in 2016 and 3 percent in 2017, all contingent upon meeting certain revenue 

growth targets. 

In 2015 lawmakers cut personal income taxes again, raising standard deductions and lowering the rate 

from 5. 75 percent to 5.499 percent beginning in 201?. North Carolina has cut taxes for families and 

businesses by over $4.S billion this decade, and among states that have a corporate tax, North carolina 

is now the lowest. 

The state led the nation with 13.4 percent growth in its GOP from 2013 to 2015 and preliminary 

numbers have it continuing this trend in subsequent quarters. Strong domestic in·migration and job 

growth put North carolina ahead of every regional competitor and in the top 10 nationwide. Over the 

last 10 years, North Carolina has atttacted more than 500,000 new residents, on net, from the other 49 

states, earning the economic vitality, social capital and tax revenue from these new taxpayers. 

In spite of, or perhaps because of, all this tax relief and budget prioritization, the state has maintained 

its AAA bond rating, met every revenue requirement, balanced its budgets every year, and as of 

February 2017, the state reported a SSS2 million budget surplus. Opportunity thrives in North carolina, 

and in no small part due to these reforms. What the future holds looks brighter still, with long.run 

effects of these reforms putting the state on track to provide nearly SG billion in total tax relief by 2020. 

North Carolina serves as a textbook example of what pro·growth tax and budget reform can do for an 

economy. 

Of course, even In the face of all of this positive economic data from the North Carolina tax reforms, 

some opponents or tax reform might suggest the policy experiences in Kansas since their 2012 tax cuts 

prove tax reform does not produce growth. In reality, the Kansas tax reform story is far from the abject 

failure some like to suggest.ln fatt, recent data suggest there are some very positive trends for 

hardworking taxpayer$ in Kansas. 

Perhaps the most important complexity to keep in mind is the Kansas tax reform plan was never fully 

implemented as intended. Many political compromises gave us the fiS(al policy patchwork that Kansas 

taxpayers face. Taxes were lowered, but spending was not. Then taxes were raised in a significant way. 

Some of the tax increases came in the form of broad-based retail sales taxes, while others were 

discriminatory taxes on consumers of specmc products. 

Many critics of the Kansas tax reform experience are quick to point to relatively lackluster economic 

growth and budget shonfalls in the years following tax reform as proof of the reforms' failure. However, 

like many other states at the time. the significant downturn in oil prices and agriculture prices hit Kansas 

especially hard. Controlling for these sectors, the rest of the Kansas economy enjoyed growth. 
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One of the key reasons Kansas policymakers took up the cause oJ tax reform in 2012 was to reverse 

decades of economic stagnation in the state. After the tax reforms of 2012 were enacted, Kansas started 

to eatch up in pdvate sectol' job growth, shooting up from 40th in the nation for job growth between 

1998 and 2012 to 30th in the nation from 2012 to 2015, according to data from the Bureau of Economic 

Analysis. Pass· through entities have led the way in this jobs boom, accounting for 98 percent of jobs 

gains since 2012 through 2015-up from 82 percent first two years, according to the U.S. Census 

Sureau. Furthermore, business startups continue to break records since tax reform was enacted in 2012. 

The 2012 record was broken in 2013, and again in 2014. New business filings set another record in 2016 

with 18,147 new domestic busi ness filings. 

Kansas provides a number of important lessons, the most important of which is that broad-based tax 

relief must be paired with responsible prioritization of spending. After all, taxes and spending are 

opposite sides of the same fiscal coin. Kansas has increased actual annual general fund spending by 

more than $2.94 billion since 1995. This is an 89 percent increase. Adjusted for inflation, this is still an 

outslted 55 percent i ncrease duting a period in which population grew by only approximately 12 

percent. Since 2012 alone, general fund spending has increased by more than 4 percent adjusted for 

inflation. In short, for every 1 percent in population growth from 1995-2017, spending increased by 

nearly S percent in real terms. Based on this spending growth, it is clear why Kansas has faced budget 

shortfalls as they reduced tax rates. 

Much of the aiticism about Kansas is based on pte<:onception and myth, rather than empidcal data and 

actual trends. Pro·growth tax relief can be trusted to make states more competitive, but it takes time to 

develop and must be ofrset with appropriate spending reforms. 

Overall, the economic evidence clearly showcases the success of states that have enacted pro-growth 

tax reforms. The 50 '"laboratories of democracy .. give us numerous examples of this every year. In 

conclusion, 1 have i ncluded the ALEC Principles of Taxation for your review. This document provides 

some helpful guidelines as you look to create a fairer, pro-ogrowth tax system:, which empowers 

hardworking American taxpayetS to enhance their economic opportunity. 

I wish you all the best with your important task at hand. 
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ALEC PRINCIPLES OF TAXATION 

The proper function of taxation is to raise money for core functions of government, not to direct the 

behavior of citizeM or close budget gaps created by oveNpendlrtg. This is true tegotdless of whether 

government is big or small, and this is true for lawmakers at all levels of government. 

Taxation will always impose some level oj burden on on economYs petjormotlct, but that harm tan be 

minimized if policymakers resist the temptaOon to use the tax code for social engineering, class warfare 

and other extrotleous purposes. A principled tax system is on ideal way for advancing a state's economic 

interests and promoting prosperity for its residents. 

The goal of American tax policy should be to talse revenue for functioM of govemment in a way thot 

minimizes distortions, so os to grow the overall economy and facilitate commerce. 

Guiding inclp ~s of taxation 

The fundamental principles presented here provide guidance for a neutral and effective tax system; one 

that raises needed revenue for core functions of government, while minimi2:ing the burden on citizens. 

• Simplicity-The tax code should be easy for the average citizen to understand, and it should 

minimize the cost of complying with the tax laws. Tax complexity adds cost to the taxpayer~ but 

does not increase public revenue. For governments, the tax system should be easy to 

administer. and should help promote efficient, low-cost administration. 

• Transparency - Tax systems should be accountable to citbens. Taxes and tax policy should be 

visible and not hidden from t axpayers. Changes in tax policy should be highly publicized and 

open to public debate. 

Economic Neutrality - The purpos.e of the tax system is to raise needed revenue for core 

functions of government, not control the lives of citizens or micromanage the economy. The tax 

system should exert minimal impact on the spending and deeisions of individuals and 

businesses. An effective tax system should be broad·based, utilize a low overall tax rate with 

few loopholes, and avoid multiple layers of taxation through tax pyramiding. 

Equity a•ld Faime$5-The gov·em.ne•lt should not use the tax system to pid> wi•lners a•ld losers 

in society, or unfairly shift the tax burden onto one class of citizens. The tax syst em should not 

be used to punish success or to "'soak the rich,"' engage in discriminatory or multiple taxation. 

nor should it be used to bestow special favors on any particular group of taxpayers. 

Complementary- The tax code should help maintain a healthy relationship between the state 

and local governments. The state should always be mindful of how its tax decisions affect local 

govemments so they are not wotking against eaeh other-with the tax;payer caught in the 

middle. 
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• Competitiveness- A low tax burden can be a tool for a state's private sector economic 

development by retaining and attracting productive business activity. A high·quality revenue 

syst em will be responsive to competition from other states. Effective competitiveness is best 

achieved through economically neutral tax policies. 

Reliability-A high quali ty tax system should be stable, providing certainty in taxation and in 

revenue flows. It should provide cer'talnty of financial planning for Individuals and businesses. 

Benefits of a principled tax system 

Since taxes lower the economic welfare of citizens, policymakers should try to minimize the economic 

and social problems that taxation imposes. Citizens then directly gain the benefits of a low tax burden. 

These benefits are summarized below: 

• Greater economic growth - A tax system that allows citizens to keep more of what they eam 

spurs inueased wor~ saving and investment. A low state tax burden would mean a competitive 

advantage over states with high-rate, overly progressive t ax systems. 

• Greater wealth c.reation- Low taxes significantly boost the value of all income-produci ng assets 

and help citizens maxi mite their fullest economic potential, thereby broadening the tax base. 

Minimize micromanagement and political favori tism- A complex, high-rate tax system favors 

Interests that are able to exert influence in the state capitol, and who can negotiate narrow 

exemptions and tax benefits that help only limited taxpayers and not the general e<:onomy ... A 

fair field and no favors .. is a good motto for a strong tax system. 

The ALEC Principles of Taxation are publicly available at 

https://www.alec.crsJmodel-policy/stat·ement-alec-principles-of-taxation/ 
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The American Made Coalition (AM C) represents a broad collection of industry leaders from every corner of America's economy, including both small and large businesses. AMC companies collectively employ millions of Americans, either directly or through their suppliers and distributors, and we are proud 

of our roots here in the United States. We do business all over the world, import to and export from the 

United States., and witness every day how a badly broken tax code has restrained our country's global 

competitiveness, limited the growth of the U.S. economy, and reduced the number of jobs available to 

American workers. Our membership continues to grow, and you can find our latest list on our website: 

www.americanmadecoalition.org. 

The American Made Coalition believes 2017 presents the best opportunity to transform our outdated 

tax code- to create jobs, increase wages, and save taxpayers money. Thirty years have passed since 

Congress last overhauled the tax code. In that time, most other developed nations have modernized 

their tax systems and significantly lowered the rates businesses pay. Many of these countries also 

stopped taxing business income earned beyond their borders. 

In contrast, the United States has the highest business tax rates in the developed world, and its worldwide tax system encourages- and often requires-- American companies to move their operations, assets, and headquarters to other countries in order to remain competitive or, alternatively, leave themselves exposed to acquisition by foreign-domiciled companies. This hurts American workers. The 

complexity and distortions brought about by the tax code are a familiar, unpleasant reality for U.S. 

companies who would far prefer to reinvest in the United States while avoiding a foreign takeover. 

Comprehensive tax reform gives us a chance to correct those systemic flaws and bring our tax code in-to 

the 21st Century by lowering rates and adopting a competitive territorial system. 

By transforming our outdated tax code, Congress and the White House can accelerate economic growth 

by encouraging more business investment and boosting job growth. The nonpartisan Tax Foun-dation 

estimates that, taking the entirety of Chairman Brady's initial proposal, the package would cre-ate 1. 7 

million new jobs, increase wages by 8% and save taxpayers an average of $4,600 a year. How-ever, the 

study shows that a rate cut alone will not generate that kind of growth. Businesses need more certainty 

to make the kind of major, long-term investments that would strengthen the economy. The only way to 

give businesses that certainty is to make permanent reforms to our broken tax system, within the 

confines of the congressional budget rules. 

Tax reform must be a vehicle to make our economy more competitive. Our global competitors have 

spent the last 30 years modernizing their tax systems, undeniably surpassing the United States. Our 

broken system encourages companies to shift earnings, operations, and intellectual property to other 

countries. In other words, our existing system discourages American companies from investing and creating jobs in the United States. We need to end the incentive for companies with a global footprint to 

invest and create jobs elsewhere; and instead, encourage them to bring their earnings and critical intellectual property back to their U.S. operations. By adopting a destination-based territorial system that 

only taxes economic activity in the United States at a low, competitive rate, Congress can bring our tax 

code in line with other developed countries. 

This preference for imports has also helped fuel the flood of foreign-made products into the United 

States, displacing workers across the American economy, from textile workers in the South to appliance-makers in the Midwest. We might not be able to address all the advantages low wage countries 

have over American workers, but we can end the tax code's bias for goods and services produced in 
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other markets, while also building an economy that attracts high-tech manufacturing and information 

services jobs to the United States. 

AMC member companies compete in almost every market in the world. We believe in free trade and 

open markets. But we also see firsthand how the U.S. tax code disadvantages American companies, both 

here and abroad. We do not support new barriers to imports; we just want to see Congress mod-ernize 

our tax code to bring it in line with the rest of the developed world. The global economy is a lot different 

than it was in 1986, the last time Washington came together to overhaul the tax code, and we are long 

overdue for major changes that will make our economy more competitive. 

In that vein, a simple, temporary rate cut would not go far enough to address these challenges. In order 

to generate the kind of growth our economy needs, we need an international tax system that makes the 

U.S. competitive on a global scale. This is why we are so encouraged that Congress and the White House 

have outlined bold proposals to rework the tax code. Transformational change is long overdue, and we 

applaud policy makers at both ends of Pennsylvania Avenue for making the most of this mo-ment by 

pushing for big changes that will reinvigorate our economy and level the playing field for American 

workers. 

The American Made Coalition supports pro-growth tax reform that creates and sustains American jobs, 

revitalizes American communities and levels the playing field for American businesses and workers. We 

appreciate the leadership demonstrated by members of the Ways and Means Committee in this debate, 

encouraging Congress and the White House to embrace game-changing policies. And we applaud the 

White House for unveiling an outline for comprehensive reform and giving tax reform what it has been 

missing for years -leadership from the President of the United States. As the process advances, we 

hope lawmakers continue to think big and enact the kind of change that will propel our economy into 

the 21st Century. 
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Submission to the Ways and Means Committee on May 17, 2017 

Subject: Hearing on How Tax Reform Will Grow Our Economy and Create Jobs on May 

18, 201 7 

On behalf of: 

Americans For Fair Taxation 

PO Box 4929 

Clearwater, FL 33758 

800-F AIRtax 

Fax 727-478-3143 

info@FAIRtax.org- general information 

media@F AIRtax.org - media contacts & news tips 

Submission: 

America will never be great again with a tax base on production (income, savings and 

investment). Without production there is nothing to buy and nobody has anything to buy 

with. Production is what increases the tax base and raises the standard ofliving for a 

country. Taxing production is like putting the golden goose on a starvation diet. 

The F AIRtax bill HR 24 I S 18 moves the tax base from production to consumption, thus 

creating a long term jobs and economic stimulus environment. Reference below the 

FAIRtax Stimulus Model Results with 10 year growth projections. It is from $22 million 

of private funds for study, research and focus groups to find and create a solution to our 

present tax code problems and issues. 

Key debate question, "What is wrong with the federal tax code and how to nx it?" 

The root of the tax issues is the 16'h Amendment (enables direct taxation and without 

limits) passed in February 1913. Six months late came the first legal income tax, then the 

IRS, payroll taxes for Social Security and Medicare and tax withholding. The 16'h 

Amendment gave the federal government huge new taxing power and we lost Freedom, 

Liberty and Civil Rights. The 16'h Amendment in our Constitution, the document that 

protects the people from its government, enables a graduated income tax, the second 

requirement for communist state per the Communist Manifesto by Karl Marx. 

Please consider the following problems and note that taxes are a discouragement, a 

burden, a punishment. 

1. We all fear the IRS. This is government tyranny. An IRS investigation does not 

involve a judge and jury, thus a loss of Civil Rights. The IRS is used for political 

purposes and needs to be eliminated. The federal tax code has grown to over 74,000 

pages. Nobody understands the code, it's too large to administer, full of loop holes and 

encourages bad practices. 

2. Direct taxation discourages work and creativity by taxing production, income, savings 

and investment. We want more jobs, but have a regressive tax on jobs of 15.3%, shared 

50/50 by the employee and the employer. Production is what creates jobs, a vibrant 

economy, better the standard of living and a larger tax base, but we tax production. 
227 


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3. The 47% think they are not paying federal taxes, but in fact they are paying over $0.28 

per dollar in embedded business taxes as a hidden regressive sales tax. You see all taxes, 

fees, etc. to businesses are costs that raise prices and are passed onto the next buyer until 

finally paid by the final consumer. 

4. Border tax adjustment, Untaxing "Made in U.S.A. " and placing imported goods and 

U.S.A. goods on the same tax system. The U.S.A. has the highest business taxes in the 

world thus raising the prices for USA goods and services, but imported goods do not 

carry that same high tax burden. 

5. Federal taxes are based on jobs, companies and capital; thus driving them out of our 

economy and also discouraging them from entering. 

6. Federal tax withholding reduces spendable income and take home pay. 

7. "United we stand, divided we fall" and our tax code divides us into classes. 

8. We spend some $431 billion per year to just comply with the tax code. That is an 

expensive "stay our of jail card" that adds nothing to wealth and production. 

9. The "underground economy including illegal aliens" is estimated to be over $2 trillion 

and is untaxed. 

10. Tax evasion is at $0.6 trillion annually and growing ... easily solved with real/true tax 

reform. 

ll. There are many who cheat or don't even file a tax return. 

12. The tax code hurts most the impoverished and lower incomes while the deductions, 

loop holes and exemptions are of most help to the wealthy. 

13. Let's put the care and feeding of the family before paying federal taxes? 

14. The Washington beltway commodity is the federal tax code as it is bought and sold 

by the lobbyist, special interests and politician. Hence the growth of "Crony capitalism". 

Today the U.S.A. is infected with "tax cancer", a deadly spreading evil. 

Would you like a solution to all of these problems? Flat taxes and rate changes are not 

the answers as they still tax jobs and creation, need the IRS with annual tax filing and tax 

withholding. A flat tax may make it easy to file your income tax, but we have been there 

before and politicians know and agree the tax system will quickly revert back to its old 

ways. The value added tax (VAT) is another new tax without eliminating any old taxes. 

It is called a consumption tax but still taxes businesses and opens up a whole new play 

ground of taxation for the politicians, lobbyists and special interests. Both the flat tax 

and the VAT still need the 16'h Amendment and are not solutions to the real problems. 

America 's Big Solution is called the FA!Rtax ®, a bill of 132 pages (double spaced) in 

Congress HR 25 I S 18 that does address all of the problems mentioned above. The new 

Congress has 45 supporting the FA!Rtax (40 House and 5 Senate). The FA!Rtax is real 

"replace and repeal" tax reform. It abolishes all federal personal and business income, 

gift, estate, capital gains, alternative minimum, Social Security, Medicare and selfemployment taxes and replaces them with one simple, visible, federal retail 

sales/consumption tax- collected by existing state sales tax authorities. The FA!Rtax is 

easy to understand, has no tax loopholes and one tax rate. It collects the same tax 

revenue with a progressive sales/consumption tax on new goods and services of $0.23 per 

dollar. The FA!Rtax has only one tax break, called a Prebate that is a monthly tax rebate 

based on family size. The Pre bate helps most the impoverished and lower income and 

decreases in value as income and wealth increase. The Prebate makes the FA!Rtax a 

progressive tax plan and puts you in control of the amount of tax and tax rate you pay. 

The FA!Rtax promises real long term growth for jobs and the economy. The 16'h 
228 

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Amendment would be repealed with companion legislation. U:arn more, join the 

grassroots cause for rcaVtrue tax rcfonn and contribute at bigsohnion.org, FAll~ ax.org 

and #FAIR TAX. 

The FAIRtax Stimulus Model Results with 10 year growth projections is from S22 

million of private funds for srudy, research and focus groups to create a solution to our 

present tax code problems and issues. 

FairTax simulation In Years 

model results 

Cumulative frowth 

over current system 1 2 3 4 5 

Gross Domestic Product 2.4" 5.2" 7.0" 8.2" 9.0" 

Employment 3.5" 5.7" 7.0" 7.7" 8.2" 

Domestic investment 33" 35.4" 36.9" 38" 38.8" 

Income from employment (w•aul 27.4" 31.8" 34.5" 36.4" 37.7" 

Consumption 2.4" 4.1" 5.8" 7.1" 8.1" 

Disposible personal income 1.7" 4.5" 6.4" 7.7" 8.7" 

(odjusted for chonaes in the price level) 

10 

11.3" 

9.0" 

41.2" 

41.2" 

11. 7" 

11.8" 

Units se~led 2004 GOP • 1.00. C1pit1l 1nd l1bor sec to equ1t cons tint sh~res of 0.3 1nd 0,7, respectively. 

End of submission 
229 

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A ME R I CAN S FOR 

PROSPERITY. 

Thursday, May 18.2017 

Dear Members of the Ways and Means Commiuec: 

On behalf of3.2 million activislS in all 50 states, I write to express broad support for comprehensive t:Lx refonn 

th:ll will lower rates. simplify the code, and encourage opportunity for all Americans. However, as you begin to 

c-onsider the details of a tax refonn package, I encourage you to consider the serious implications the proposed 

Border Adjustment Tax (B.A.T.) would have for American consumers and businesses and leave it om of the 

eventual tax reform package 

Under a B.A.T., U.S. companies would no longer be allowed to deduct the cost of imported goods from their 

tax bill. This. in effect, would slap a new tax on imporiS at the corporate rate-20 percent under the currem 

House proposal. TI1is would equate to a tax hike of more than S I trillion over I 0 years. 

The proposed B.A.T. would directly harm American industries :md consumers throughout the country. A recent 

study from Americans for Prosperity quantities how much each state stands to lose. In some sillies. the tax bill 

on imporiS Lmder the Border Adjustmem Tax could be double, triple, or even quadmple the amount of all 

federal income taxes businesses in those states currently pay. Our research has also shom1 that cert.,in U.S. 

induslries--including lll.'\nufacturing, enerb'Y· and agriculture- are particularly vulnerable to the imp:tct of 

B.A. T., since they rely heavily on importS and international trade. 

Supporters of the B.A.T. will auempt to argue that American consumers will not feel the proposed tax's burden 

because the U.S. dollar would automaticall)• •md fully adjust to perfectly offset the increased cost of imports. 

This argument. however, is based on textbook economic theory that is highly unlikely to play out in reality. 

since currency markelS are inherently difficult to predict. Foreign exchange analysts have gone so far as to call 

the idea of a perfect adjustment scenario laughable. The risk is simply too high that businesses and consmners 

will ultimately shoulder the burden of this proposed trillion-dollar tax. 

Comprehensive tax reform must involve reducing economic distortions and loopholes while lowering rates for 

Americ:m individuals and businesses. Unfortunately, including ofborder adjustability in any tax refonn plan 

would cre-cHe a ncwl wide-reaching distortion that would impo1c.t all stx::tors of the economy and every consumer. 

We urge this eommiuce to eliminate the B.A.T. proposal from any forthcoming tax reform package, and 10 

focus on positive. pro-growth reforms that will deliver much needed tax relief and economic gro\\1h. 

Sincerely, 

Brent Gardner 

Chief Government Am•irs Officer 

Americans for Prosperity 

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33393.158

Statement for the Record -

Ways and Means Committee Hearing: How Tax Reform Will Grow Our Economy and 

Create Jobs Across America 

Grover Norquist 

President, Americans for Tax Reform 

May 18, 2017 
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Over the past decade, the economy has struggled at just two percent GDP growth as the 

country has experienced the worst recovery in the modern era1 While the post-World 

War II average remains at three percent GDP growth per year, the Congressional Budget 

Office projects that under current policies, two percent growth will continue into the 

next decade.' While the unemployment rate has stabilized in recent years, labor force 

participation has continued to drop, indicating that the economy remains weak.3 

Because of this lackluster recovery, families have lost an average of $8,600 in annual 

income, according to one estimate4 

One reason for the stagnant economy is the fact that the U.S. tax code is outdated, 

uncompetitive, and complex. The current code restricts the growth of new jobs, 

increases the cost of capital, and discourages innovation. 

It has been more than 30 years since the tax code was reformed, and in that time, the 

world has changed drastically. Other countries have updated their tax codes and 

lowered their rates, while the U.S. system has barely changed. 

The uncompetitive code means that businesses are unable to compete in the global 

economy. For instance, our uncompetitive code enables foreign competitors to acquire 

assets at a far greater pace than American businesses. 

Over the past decade, U.S. companies have suffered a net loss of almost $200 billion in 

assets. Conversely, if the corporate rate was 25 percent (the average rate in the 

developed world), one report estimates U.S. businesses would have instead experienced 

a net gain of $600 billion in assets over the same period.

5 

Tax reform is the only way to reverse these trends and enact policies that benefit the 

economy. 

Pro-growth reform should reduce taxes on businesses to a globally competitive rate, 

reduce taxes on capital gains, and eliminate the death tax and gift tax. Tax reform 

should also allow for full business expensing for new investments, and enact 

territoriality for individuals and businesses. Changes to the code should be made with 

an eye toward simplicity and permanency. 

Changes to the tax code should not be constrained by concerns over increasing the 

deficit. Increasing economic productivity by merely one percent over the next decade 

1 Economic Growth by President, jeffrey H. Anderson, Hudson Institute, August 8th, 2016 

'The Budget and Economic Outlook: 2017 to 2027 Congressional Budget Office, january 2017 3 Labor Force Statistics from the Current Population Survey. Bureau of Labor Statistics 

4 The 'New Normal'? Part 1: Economic Stagnation, Congressional Joint Economic Committee, Oct OS 

2016 

5 Buying and Selling: Cross-border mergers and acquisitions and the US corporate income tax 

Business Roundtable, March 15 2015 
232 


33393.160

will strengthen the economy and create $3.15 trillion in additional federal revenue. 

Enacting appropriate changes to the code both bolsters the economy and works to 

reduce the deficit6 

Tax Reform Should Reduce Taxes on Businesses: Today, American businesses are taxed 

at rates far above foreign competitors. The average federal/state corporate tax rate in 

the U.S. is roughly 39 percent, while the average rate paid by foreign competitors is 

about 25 percent7 Businesses organized as pass-through entities face rates even higher 

-above 40 percent, and even 50 percent when state tax rates are accounted for8 

While the U.S. rate remains high, other countries have adapted to the global changes by 

aggressively reducing their rates. Today, only the U.S. and Chile have higher corporate 

tax rates than they did at the start of the century9 

These outdated rates affect the entire economy. People, not businesses, pay taxes, so 

high business rates are directly absorbed by employees, consumers, and investors 

through lower wages, fewer jobs, and stagnant economic growth. 

For instance, a 2006 CBO report found that roughly 70 percent of the corporate tax cost 

is borne by labor alone10 Similarly, a report by scholars at The American Enterprise 

Institute found that every dollar increase in corporate taxes decreases wages by two 

dollars11 

Tax Reform Should Reduce Capital Gains Taxes: The tax on capital gains and dividends 

is levied on after tax income that has been reinvested in the economy to increase 

productivity, grow jobs, and increase wages. The U.S. integrated capital gains tax12 

remains one of the highest in the world, which discourages investment, raises the cost 

of capital, and ultimately suppresses economic growth. 

Tax reform should seek to preserve the base of the capital gains tax. Often, the Left 

argues that the capital gains tax is a "loophole," and calls for eroding the tax bit by bit 

through increasing taxes on carried interest capital gains. In truth, carried interest is no 

different from other types of capital gains income. Increasing taxes on carried interestor any type of capital gain- would not only hinder economic growth, but would directly 

' The Budget and Economic Outlook: 2017 to 2027, Congressional Budget Office, january 2017 7 Corporate income tax rate OECD (Organization for Economic CO-Operation and Development) 8 Pass-Through Businesses: Data and Policy Scott Greenberg, Tax Foundation, january 17, 2017 9 Tax Reform Advancing America in the Global Economy, Business Roundtable, October 2015 10 International Burdens of the Corporate Income Tax William C. Randolph, Congressional Budget 

Office, August, 2006 11 Spatial Tax Competition and Domestic Wages. Kevin A. Hassett and Aparna Mathur, American 

Enterprise Institute, December 1, 2010 12 Corporate dividend and capital gains taxation: A comparison of the United States to other 

developed nations Alliance for Savings and Investment, April 2015 
233 


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impact pension funds, charities, and colleges that depend on investment partnerships as 

part of their savings goals13 

Tax Reform Should Implement Immediate Full Business Expensing:_Under the tax code, 

business owners cannot immediately expense the cost of purchasing equipment against 

their taxable income. Instead, they are required to deduct, or "depreciate," these costs 

over several years depending on the asset they purchase, as dictated by complex and 

arbitrary IRS tables. These rules create needless complexity and increase compliance 

costs. 

They also force business owners to make decisions based on tax reasons over business 

reasons. In contrast, a move toward full expensing of assets will streamline business 

activity by allowing the efficient purchase of new assets. According to estimates by the 

Tax Foundation, allowing immediate expensing of assets increases GDP by five percent 

after a decade and increases wages by 4 percent. 14 

Tax reform should also be sure not to change the code in a way that erodes the progress 

made by moving toward full business expensing. For example, lawmakers should 

preserve section 1031 "like-kind exchanges," for land assets as a complimentary 

provision to expensing1 5 Similarly, the ability to deduct advertising costs as a necessary 

business expense should be maintained. Going in the other direction by limiting this 

expense would create new distortions in the tax code16 

Tax Reform Should Simplify the Code: Tax reform should be made with an eye toward 

simplifying compliance for taxpayers. Today, the code is more than 75,000 pages long 

and contains over 2.4 million words. This complexity forces American families and 

businesses to spend17 more than 8.9 billion hours and $400 billion complying with the 

code every year. In the last 30 years, the code has more than tripled in size. 

In addition to implementing policies that increase growth, tax reform should cut taxes 

for individuals. Rates should be reduced, and credits and deductions should be 

consolidated and streamlined. 

13 Lawmakers Should Oppose Efforts to Increase Taxes on Carried Interest Capital Gains. Alexander 

Hendrie, Americans for Tax Reform, May 10, 20 17 14 Long Run Growth and Budget Effects of the Expensing Provision in the House Republican Tax 

Reform Blueprint, Stephen j. Entin, Tax Foundation, February 2, 2017 15 Like-kind Exchanges Should Be Preserved as Part of Any Tax Reform Plan Alexander Hendrie, 

Americans for Tax Reform, December 6, 2016 16 Tax Reform Must Preserve the Deduction for Advertising Costs. Alexander Hendrie, Americans for 

Tax Reform, February 17, 2017 17 Americans Will Spend 8.9 Billion Hours $409 Billion Complying with U.S. Tax Code in 2016 john 

Buhl, Tax Foundatio n, june 15, 2016 
234 


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Tax Reform Should Make Permanent Changes to the Code: Where possible, changes to 

the code should be permanent, not temporary. Permanency should be a goal of tax 

reform for two reasons. 

First, permanency gives certainty for taxpayers who do not need to be concerned that 

their taxes will rise in a years to come. Certainty means a business owner can plan 

ahead to invest without concern for their ability to afford the investment and cash flows 

in the future. 

Second, permanent tax policies mean that low-tax advocates do not need to continually 

devote political capital to ensure tax cuts remain law. Congress already struggles (or 

fails) to complete its basic annual duties. Relying on federal legislators to renew tax cuts 

every couple of years is a recipe for disaster. 

This does not mean every change in tax reform has to be permanent. However, there is 

a clear need to make as much of tax reform concrete to ensure stability for Americans. 

Tax Reform Should Move to Territoriality for Businesses and Individuals: Today, the 

U.S. is only one of six modern countries with a worldwide system of taxation. Because of 

this system, American businesses operating overseas are double taxed on incomeonce when they earn it in the country they are operating in, and again when they bring 

this money back into the U.S. economy. 

This means that American businesses are faced with a disadvantage relative to their 

foreign competitors, which endure only one layer of taxation. 

The worldwide system has also resulted in an estimated $2.6 trillion18 in after tax 

income being stranded overseas. Moving to territoriality with a reasonable one time 

repatriation as a phase in will result in this money being brought back into the economy 

to be reinvested in jobs and wages, and providing higher federal revenues. 

One way to end this disadvantage would be moving to a border adjustable tax system. 

This would guarantee that business activity is taxed only where the product is 

consumed. Exports that are consumed by individuals outside the country are not taxed, 

while imports consumed by individuals inside the U.S. are. 

Just as American businesses operating overseas are forced to comply with the outdated 

and burdensome worldwide system of taxation, individuals living overseas are forced to 

comply with the system of citizenship-based taxation. This means that regardless of 

"Thomas A Barthold Letter to Congress from The United States joint Committee on Taxation, 

August 31, 2016 
235 

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where U.S. citizen lives, they must comply with IRS rules and are double taxed on 

income. 

The current citizen-based system effects an estimated 8.7 million Americans that live 

and work overseas1 9 This system is nearly unique to America- every other country in 

the world with the exception of Eritrea has residence-based taxation. 

Implementing a residence-based taxation system would ensure individuals are taxed 

based on their location of residence. This would make tax compliance far simpler, and 

reduce the reach of the IRS. It would also make the extremely burdensome Foreign 

Account Tax Compliance Act (FATCA) obsolete. 

Tax Reform Should Kill the Death Tax and Gift Tax: The death tax is unfair, hurts 

economic growth, and is extremely unpopular with the American people. It is a tax paid 

on savings that have already been taxed at least once, and potentially more than once. 

Furthermore, those who are hit hardest generally are first and second generation small 

business owners, because the truly wealthy can avoid the tax through an army of 

accountants, attorneys, and charitable planners. 

Repeal of the death tax must also mean repeal of the gift tax. With the death tax gone, 

the gift tax, which was created as a backstop to the death tax, is no longer necessary. If 

the gift tax were left in place after repeal of the death tax, it would raise little, if any 

revenue because a taxpayer would simply wait to transfer their assets until they died. In 

contrast, repealing the gift tax along with the death tax would serve as a backstop to 

ensure the death tax is gone for good. 

Together, the death tax and gift tax collect very little revenue and suppress economic 

growth. In 2015, both taxes collectively brought in $19.2 billion. The federal government 

brought in a total of $3.25 trillion, so coupling these taxes together contributes to less 

than 0.6 percent of all federal revenue20 

Repealing the death tax and gift tax would produce strong growth that would in turn 

offset this lost revenue. After macroeconomic effects, repeal of both taxes would 

reduce total revenues by just $19 billion over the entire first decade21 

19 8.7 million Americans (excluding military) live in 160-plus countries. The Association of 

Americans Resident Overseas 20 Historica l Tables. Obama White House Archives, Table 2.5-Composition of "Other Receipts": 1940-

2021 

21 Modeling the Estate Tax Proposals of 2016. Alan Cole, Tax Foundation, June 14, 2016 
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Association for Corporate Growth 

May 17, 2017 

The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

RE: Hearing on How Tax Reform Will Grow Our Economy and Create Jobs 

Dear Chairman Brady, Ranking Member Neal and Members of the Committee: 

I write you on behalf of the Association for Corporate Growth ("ACG") and its 14,500 members, who 

are all dedicated to advancing policies that enable middle-market businesses grow and succeed. ACG's 

members sincerely appreciate your efforts to solicit legislative proposals designed to increase economic 

growth. Two critical proposals that ACG believes will help consumers, market participants, and financial 

companies responsibly participate in the economy in a more effective and efficient manner, ultimately 

leading to overall economic growth, are outlined below. 

Background: 

I. Middle Market 

The middle market is broadly defined to include companies with annual revenues between $10 million 

and $1 billion1 Overall, these middle market companies are responsible for one-third of private 

employment in the United States, amounting to nearly 44.5 million jobs. If it were to be a stand-alone 

economy, the middle-market would rank fifth in the world2 Fewer than 200,000 companies make up the 

middle-market ecosystem and create over $10 trillion in combined revenues annually. 

II. Association for Corporate Growth 

ACG was founded in 1954 and has more than 14,500 members with 45 chapters located within the 

United States and additional reach in Canada, Europe and China. ACG members are focused on 

investing, owning, advising or lending to middle-market companies across the United States. This 

includes professionals from private equity firms, corporations, banks and other lenders to middle market 

companies, as well as professionals from law firms, accounting firms, investment banks and other 

advisors to middle-market deal making. 

The mission of ACG is to drive middle-market growth. ACG helps to facilitate growth by bringing 

together middle-market dealmakers and business leaders. ACG accomplishes this by hosting hundreds of 

events every year, providing online tools for its members, structuring networking opportunities and 

providing leading-edge market intelligence and thought leadership. 

1 See Nationa l Ce nte r for th e Middle Ma rket (last accessed May 17, 2017), 

http://www.midd lemarketcenter.org/about-the-midd le-marke t-center (showing the National Ce nte r for the 

Middle Ma rket's purpose is to "ensure th at the vitality and robustn ess of Middle Ma rket companies are full y 

rea li zed and fund ame ntal to our nation's economi c outlook and prospe rity"). 2 See, http:/ /www.middlemarket cente r.org/ 
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III. Middle Market Private Equity 

A particular focus of ACG is middle-market private equity (MMPE). ACG's membership includes over 

1,000 private equity firms that specialize in the middle-market. Middle-market private equity firms 

invest in small and midsize businesses. According to Preqin data, private equity deals under $500 million 

accounted for 82 percent of all deals in 20163 

In 2015 , ACG updated its ground-breaking research survey using multiple independent databases to 

better understand the positive impact that private capital investment has on corporate growth and job 

creation in the United States 4 The research found that between 1998 and 2015: 

Private equity-backed companies grew jobs by 70.2 percent, while all other companies in the 

U.S. economy grew jobs by 23.7 percent; 

Private equity-backed companies grew sales by 83 .7 percent, while all other companies in the 

U.S. economy grew sales by 25.8 percent; and 

Middle-market private equity-backed companies were responsible for well over three-quarters of 

the job growth created by private equity5 

Almost half of all private equity investment comes from pension funds, foundations and university 

endowments. These investors have realized a 10-year annualized return in excess of 10 percent and 

superior to all other asset classes6

, helping enable these organizations to meet their ongoing obligations. 

MMPE firms provide this rate of return by improving the operational efficiency, governance, and market 

strength of the companies in which they invest. 

These data points are among the reasons that private equity continues to attract the investment and trust 

of highly demanding, sophisticated investors. 

Proposals: 

I. Preserve Interest Deductibility on Corporate Debt 

The tax deduction of interest paid on corporate debt has been an essential component of the tax code for 

over 100 years. Corporations use debt financing as a means of accomplishing everything from running 

day-to-day operations to pursuing growth. The ability to deduct interest on debt has been responsible for 

making capital affordable, helping to provide much needed liquidity to our capital markets. The removal 

of this important provision in the tax code would hurt America's status of having the most attractive 

capital markets in the world. 

The preservation of the tax deduction on corporate debt is of utmost importance to small and mid-sized 

businesses. Large corporations are able to issue equity and bonds as a means to raise capital; small and 

mid-sized companies have comparably fewer options, making debt financing essential. Many businesses 

3 Global Buyout Deals Set for Record Year in 2016 (2017), https://www.preqin.com/docs/press/Buyout-Deals2016.pdf. 4 Driving Growth: The Impact of Middle-Market Private Equity on the U.S. Economy, Growth Economy (2016), 

http://www.growtheconomy.org. 5 See fd. 6 Global Buyout Deals Set for Record Year in 2016 (2017), https://www.preq in.com/docs/press/Buyout-Deals2016. pdf. 

2 
238 

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may take on debt at the beginning of the fiscal year to finance operations, and have that debt fully paid 

off by the end of the same year. 

Nor does the proposed replacement of full and immediate expensing of capital expenditures provide a 

reasonable replacement for the interest deduction. If a corporation cannot afford a piece of equipment in 

the first place, the ability to fully expense the piece of equipment will provide no material benefit or 

incentive to expand one's company. 75 percent of start-ups use some sort of debt financing at inception, 

and four in five small businesses use some form of debt in their capital structure. 7 

The maintenance of interest deductibility is essential to sustained U.S. economic growth. A 201 3 study 

by Earnest & Young's Quantitative Economic and Statistics group revealed that limiting interest 

deductibility to finance lower tax rates reduced long-run economic growth by $33 billion in 201 3 dollars. 

The study shows that all industries and all states will see reductions in economic growth as a result of 

this crucial element of the tax code being repealed8 

II. Lower the Corporate Tax Rate 

The statutory corporate tax rate in the United States is 35 percent, with an average combined (federal and 

state) rate of 39.1 percent. Global competitors, on the other hand, have a combined average rate of 25 

percent, 

9 making America's current corporate rate the second-highest in the world- a significant 

competitive disadvantage. This is of concern to companies in the middle market as they are neither 

provided with the tax incentives many small businesses are, nor are they able to allocate the resources 

necessary to have a large team devoted to parsing through the onerous and complex tax code. 

ACG recommends a simpler and fairer tax environment for middle market businesses and capital 

providers and lowering of the corporate tax rate. This will lead to continued job growth, business 

creation and investment in companies of all sizes. 

Conclusion: 

ACG appreciates the opportunity to provide recommendations to the House Ways and Means Committee 

on how to encourage economic growth and welcomes the opportunity to discuss further any of the issues 

addressed in this letter. If you have any questions, or if we can provide any additional information, 

please feel free to contact me directly at cmelendes@acg.org or at (3 12) 957-4277. 

Sincerely, 

Christine Melendes 

Vice President, Events, Partnerships and Public Policy 

Association for Corporate Growth 

7 Why Businesses Use Debt- And How De bt Benefits Businesses (2017), http:l/buildcoalition.org/wpcontent/up loads/2013/06/BUILD WhyBusinessUseDebt RebeiCole.pdf 8 Macroeconomic analysis of a revenu e-neutral redu ction in the corporate income t ax rate fin anced by an ac rossthe-boa rd limitation on corporate interest expenses (2013), http://buildcoalition.org/wpcontent/u p loads/2013/07/EY ·Bu i ld·Stu dy· July· 2013. pdf 9 CBO Intern ational Comparisons of Corporate Income Tax Rat es (2017), 

https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf 

3 
239 

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I, ROBERT D. REIMERS, OFFER COMMENTS ON BEHALF OF BASIN ELECTRIC POWER COOPERATIVE TO THE 

COMMITTEE ON CERTAIN PROVISIONS IN THE REPUBLICAN HOUSE BLUEPRINT FOR INCOME TAX REFORM 

ISSUED JUNE 24, 2016 "A BETTER WAY--OUR VISION FOR A CONFIDENT AMERICA" 

Be neficial Tax Provisions for Taxa bl e Generation and Transmission Electric Coo peratives 

• The Unlimit ed NOL ca rry forward proposal is helpful. However, th e proposed annu al limitation on the use 

of NOLs to 90% of taxable income should be eliminat ed. All electric coo peratives operat e on a not-for-profit 

basis in which our patrons supply capital to the cooperati ve in the form of margins which are returned t o 

the patron over tim e thereby achieving not-for-profit operation. There is no accession t o wea lth from 

patronage income. Under existing t ax law, patronage dividends are taxed once at the patron leve l. This 

approach must be maintained in order to avoid the pot ential for double taxation. Creating t axable income 

from patronage income, whi ch must be returned t o the patron over tim e, is contrary t o cooperative t ax law 

as it has exist ed for many decades. If this limitation we re applied it woul d contrad ict the longstanding lega l 

principl es that excl ude patronage allocations from t axation at the cooperative leve l. 

• The proposed red uction in the corporat e t ax rat e to 20% is helpful and should be retained. 

• The proposed elimination ofthe corporat e Alternative Minimum Tax is helpful but any AMT Cred it 

ca rryovers experienced to date shou ld be refunded to the G& T cooperative; oth erwise, the governm ent 

would be effectively rece iving a net benefit in the form of the "lost" credit ca rry-overs. 

Provisions Harmful to Taxable Generati on and Transmission Electric Cooperatives 

Limiting Interest Expense t o Interest Income. While this approach may seem logica l, it rea lly only works for 

a fin ancial entity w hich leverages investment capital for profit. Consider the implications t o entities which 

are capital intensive with debt financed physical assets such as ge neration and transmission electric 

cooperatives. In order for the tax law t o properl y reflect the economic reality of a t axa ble generati on and 

transmission cooperative, a full dedu ction for interest expense incu rred t o invest in new and expand 

existing electric infrastructure shoul d be allowed. Additionally, interest income is ancill ary and limited, at 

best, t o electric ge neration and transmission cooperatives. Our patrons depend upon our capital assets and 

improvements t o the electric power infrastructure to kee p th eir rat es affordabl e and their electric service 

reliable. The Ameri ca n not-for-profit electri c cooperative business model is unique, and serves th e vast 

majo rity of the nation's persistent poverty counties (327 out of 353, or 93%). These counties have deeply 

entrenched pove rty with rates consist ently 20% or above for the last three decades. In all, one-in-six ofthe 

42 million Ameri cans served by cooperatives live below the poverty line, many of them in these counties. 

See, for example, http://www.ers.usda.gov/topics/rural-economy-popu lation/rura l-poverty-we llbeing/geography-of-poverty.aspx. It is imperative that we ensu re ou r patron's costs are kept as low as 

possible and all owing the continued deduction for interest expense would ensu re that t axa bl e income is 

not created w hich does not reflect the economic income of the taxable ge neration and transmission 

cooperative. 

Req uiring the write-off of assets in the yea r purchased or constru cted. This provision could only work for 

taxa ble ge neration and transmission cooperatives if there was an unlimited NOL ca rry forward. Typica lly, 

our assets are depreciat ed over 40-60 yea rs for financial reporting purposes. An unlimited NOL ca rryover 

would allow a mechanism t o match the financial book depreciation period to the immediat e tax write off 

proposed and also if this provision is dropped would fi x the issue that cu rrently exists with a mismatch of 

the depreciabl e lives. It is important for intergenerati onal equ ity that depreciation ove r the economic lives 

of our assets be included in rat es so our patrons are charged the appropriat e costs for their use of the 

electric assets of th e cooperative during the period in which th ey take se rvice. An imm ed iate tax w rite off 

of capital assets w ithout an unlimited NOL carry over wou ld ca use significant economic dist orti on and 

create th e potential for patrons t o be treated differently and their costs to vary greatly depending on whi ch 

yea rs th ey are t aking service. 
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The Honorable Kevin Brady. 

Chairman, House Ways and Means Committee 

1102 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady: 

5/26/2017 

p gf~ 

CRAFT SPIRITS 

'~" 

Thank you for the opportunity to submit testimony in support of excise tax reform for the alcohol 

beverage industry as part of your May 18'", 2017 hearing on how tax reform will grow our economy and 

create jobs across America. This important hearing was a great way to continue the dialogue about 

comprehensive tax reform. 

Since the Craft Beverage and Modernization and Tax Reform Act was introduced in the 114"' Congress, 

the bill has received favorable comment in public hearings in the House Ways and Means Committee, 

the Senate Finance Committee, and the House Small Business Subcommittee on Economic Growth, Tax, 

and Capital Access. This legislation was reintroduced earlier this year as H.R. 747/S. 236 and already 

enjoys strong bipartisan support from 192 members of the House and 45 members of the Senate. 

Every congressional district in the United States includes a brewery, winery, distillery, importer, or 

industry supplier. While these businesses are often cornerstones of their communities, they are 

laboring under outdated regulations and unreasonably high tax rates that impede their growth. 

The alcohol beverage industry remains one of the most regulated and taxed industries in America. 

Brewers, winemakers, and distillers pay state, local and federal taxes on their production. Federal 

excises taxes, which are regressive taxes, are simply too high. The compromise agreement to H.R.747 

would recalibrate and simplify federal excise taxes for brewers, importers, winemakers, and distillers. It 

would also update and streamline outdated regulations. 

The excise tax relief and regulatory reforms embodied in H.R.747/S.236 have earned support from 

throughout the U.S. hospitality, manufacturing, and agriculture sectors. This broad, bipartisan, 

bicameral support signifies how important excise tax relief is to many in Congress. We hope that the 

House and Senate make will excise tax relief a priority as they consider tax reform in the 115"' Congress. 
241 

f 


33393.169

Sincerely, 

ra. /1£_~:= 

Jim McGreevy, President & CEO Sob Pease, President & CEO 

Beer Institute Brewers Association 

v Robert P. "Bobby" Koch, President & CEO James Trezise, President 

Wine Institute Wine America 

Mark Gorman, Senior Vice President Margie A.S. Lehrman, Executive Director 

Government Relations American Craft Spirits Association 

Distilled Spirits Council 
242 


33393.170

May 16, 2017 

The Honorable Kevin Brady 

Chairman 

U.S. House Committee on Ways and Means 

The Honorable Richard Neal 

Ranking Member 

U.S. House Committee on Ways and Means 

Submitted electronically to waysandmeans.submissions@mail.house.gov 

Dear Chairman Brady and Ranking Member Neal: 

The Bipartisan Policy Center (BPC) requests that following report on Reforming the Taxation of PassThrough Businesses, be entered into the hearing record for the May 18, 2017, hearing on How Tax 

Reform Will Grow our Economy and Create Jobs. 

Sincerely, 

G. William Hoagland 

Senior Vice President 

Bipartisan Policy Center 

bipartisanpolicy.org I 202-204-2400 I 1225 Eye Street NW, Su1te 1000 I Washington. DC 20005 
243 


33393.171

Executive Summary 

The Trump administration and Coogross are actively developing tax rcfoon legislative proposals. One key issue policymakers will 

address is how to reform the tax treatment of pass-through businesses. Pass-through bus1nesses are businesses, large and small 

(including S Corporations, partnerships, LLCs, and sole proprietorships), where the business rtsc~ docs not pay lax but instead where 

taxes arc paid directly by lhc individual owners of lhc business. 

In this type of business structure, income, credits, and deductions reaized by the businesses 'pass through 'lo the individual owners, 

who pay lax on that inoomc according to the tax rates and brackets on the individual side of the lax code, as opposed to the rate for C 

corporations. Thus. if tax reform eliminates or curta1ls busincss~rclatcd credits or deductions and docs not provide them wrth a 

oorresponding reduction in the tax rates. these types of businesses could experience a significant tax increase. 

In 2013, lhe latest year for which IRS slalistics arc available, 3.6 miDion partnerships and 4.3 millionS corporations filed lax returns. 

This compares with 5.9 million C corporations who filed lax returns that year.' These pass-through businesses indudc small start-ups 

and mom-andi)Op businesses that represent the entrepreneurial spirit of the U.S. economy. How pass-through businesses are treated 

in any lax reform agenda is critical to the future of American business. 

This paper ptov1des a menu of options policymakers could consider when reforming the taxa6on of pass-through businesses. This 

paper docs not assume that the tax rates for pass-through businesses have to be identical to those applied to income eamed by 

indiViduals unrelated to the pass-through business. These options attempt to balance tho desire to avoid tax increases on pass.through 

businesses while also ensuring that pass-through businesses do not become a means for wealthy individuals to avoid tax on inoome 

that should be property subjeclto tax atondividualtax rates. These options include: 

Limiting what types of businesses or business activity could benefit from klwcr tax rates on pass.through businesses; 

Creating incentives lor the owners of pass-through businesses to reinvest profits into the business; and 

Rules lo limit the total amount of income that could qualify for a lcwer pass-through rate. 

Introduction 

The Bipartisan Policy Center engaged in a yeartong examination of the issues surrounding corporate- and business-tax reform. BPC's 

goal throughout has been to increase and enhance the competitiveness of U.S. companies and workers. oncrease economic growth. 

and thereby increase job aeation, wage growth, and investment. 

This paper, which results from that effort, focuses on one aspect of business-tax reform: pass-through businesses. It is intended to 

identify the issues that must be confronted by policymakers when integrating corporate-tax reform with pass-through entities. II also 

provides policymakers with a range of options for addrcss1ng !Ius integration as they reform the business aspects of the U.S. lax code. 

The project focused on reform of the business-related aspects of the tax code and therefore is net dependent on tax reform that might 

make changes to the individual oodc. tn addition, when considering ltlc various policy options, it is necessary to be able to consider 

them in the context of what the current tax rate on C corporations would be after reform. For the purposes of this paper, BPC has 

assumed a post.reform corporate-tax rate of 25 peroenl • 

II is assumed that the revenue Joss associated with lowering the corporate rate to the post-reform rate of 25 percent (an estimated 

reduebon in tax revenues of approximately $1.21nllion over ten years) woold be o~t. at least in pan, by broadening the tax base.• 

This would be accomplished through the elimination or curtailment of cred~s . deductions, and other poficies that businesses currently 

usc to lower their effective tax rates. Because BPC's work focused oo business-tax refonn, it docs not assume changes in individual 

tax rates. Therefore, any broadening of the lax base would increase the pass-through businesses' tax liability, w11hout any offsetting 

benefit of a reduction in tax rates.• 
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This paper describes a series of opbons for addressing broad policy issues to ensure pass:.through businesses arc not made less 

competitive by tax rcf0f111 thai docs nol simultaneously lower individual rates. 

Proposed options for four broad policy questions: 

1. What tax rate should be applied lo pass-through busmesscs? 

2. What types of business activity should qualify fO< the pass-through tax rates? 

3. What share of qualifying income should benefit from the pass-through tax rates? 

4. What por.cies should be included to prevent abuse and simplify adm s~ation of the ref0f11led code? 

This paper also concludes with a discussion of other related poliCY changes that could be incorporated into the integration process. 

Question 1: Wbat Tax Ratr Should Be Applied to Pass-Th•·ough Businesses? 

Options fo•· Tax Rates for Pass-Th•·ough Businesses 

EHecllve Federal Marginal Tax Rates 

BPC's wor1< on business tax reform does not assume the eliminabon of the existing second layer of tax on corporate income that 

results from the taxation of diY!dends. As a result, the effecbve tax rate on corporate income paid out to shareholders may be higher 

than the 25 percent assumed in this paper, as this income is stjl subject to taxes on dividend income received by shareholders. Passthrough entities, which arc not subject lo corporate tax at the entity level, do not faoc this double-lax situation. As a rcsutt, policymakcrs 

may consider that full parity between the corporate rale and the maximum rate on the business income of pass.throughs is not 

essentiaL 

Analysis by the Treasury D<lparlment has found that under current law, C corporations face an effective federal marginal tax rate of 

approximately 30 percen~ while pass-through enli1ies face an effective tax rate of approximately 25 percent.• (This analysis does not 

indude state corporate tax rates that can increase the effective marginal tax rate.) In a simaar anatysis, the Congressional Budget 

Office found that C corporations in 2014 paid an effective rate of 31 percent, while pass-throughs paid an average rate of 27 percent. 

Thus, because pass-throughs are not burdened by the double tax, ourrenUy their marginal rates are effecbvely between 4 and 5 

percentage peints lower than those for corporate-rate taxpayers. As a rcsun, pass-throughs could be subjected to a somewhat higher 

tax rate than C CO<PO<ations and still be effectively on parity with the effective tax rate for C corporations. 

Interaction with Progressive Individual Tax Rates 

In addition, under ourrentlaw. pass-throughs receive the benefit of the lower indivicluallax rates (retat1ve to the rate for OO<porations) 

that apply at lower income levels.• Thus, some amount of inoomc is taxed at rates much lower than the current C corporation rate of 35 

percent. If pass·through entities are provided with a lower rate on qualifying income, policymakers could choose to maintain passthroughs' access to the tq,ver individual rates. 

For example, if the maximum pass-through rate were 28 percent, pass-throughs could be taxed at the lower rates of 10, 15, and 25 

percent on income below $190,151-the threshold for entry into the current33 percent bracket. Allowing pass-throughs access to 

these lower rates would reduce the effective rate of taxation.• Altcmalively, pass-throughs could be subjected to one flat rate on all 

their bus1ness income, 1n a manner analogous to how various tax-reform proposals would treat C CO<PO<ations. 
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Fa< P<Jrposes of this options paper, as previoosly stated, BPC assumes that corporations W<lUid be subject to one flat rate of 25 

percent Therefore, poicymakers should consider whether applytng one flat rate could result in some small pass-through entities facing 

a tax increase. For example, a pass.through owner who had taxable 1ncome of $100,000 wookf face an effective tax rate of 

approximately 21 percent ff filing as an individual and approximately 19 percent ff filing a joint return. Both are below 25 0< 28 percent 

under current law. Thus, the application of one flat rate would result in a tax inacasc, even before the impact of any base broadening. 

"Claw Back" of High·lncome Pass·Throughs 

ff poficymakers are coocemed about the revenue loss or distribul>ooal consequences associated with permitting pass-through entities 

to mainl<lin access to the lower rates, policymakers could include a "claw-back" option for high-income pass-throughs.• A claw-back 

provision would recapture the benefit of the tower rates for pass.throughs with income ovCf a certain threshold. Such a policy oouJd be 

implemented in a way that protects smaller pass. through entities from tax increases that would result from the loss of access to the 

lower rates. For example, the phasc.oot could be implemented in a way that docs not increase the effective tax rate for pass-throughs 

with l<lxable income below the top pass-through rate. At the same time, this policy would reduce the overall revenue loss from the new 

top pass-through rate by 6miting the bonefit of the lower rates for high-income pass-throughs. 

Question 2: What Business Activity Should Qualify for The Pass-T hrough 

Rate'? 

Options fot· Determiuinf! What Business Activity Qualifies fot· Lown 

Pass-Tlll'ough Business Rates 

When creating a separate l<lx rate strucfure for pass-throughs, poicymakers must also identify what type of activity is eligible for the 

separate rate structure. Conceptually, policymakers may wish to pcrmn only certain types of income directly related to the business 

activity of the pass-through business to benefit from the separate rate structure. In particular, they may want to lmit the access to the 

loWCf rates to only what policymakers wouk1 consider non-labor income, which would resutt in the Jowcr rate apptying only to income 

that is generally analogous to the types of income that W<lUld bcnefrt fra<n a reduction in the corporate tax rate. 

As noted, policymakers may wish to treat certa1n types of activity, regardless of whether ifs related to a pass-through or a C 

corporaijon business, the same when the indiViduals engaging in that activity would typically be taxed under the indiVidual side of the 

tax code. For example, the provision of certain services can be done through both pass. through and C corporation businesses. 

Policymakcrs may wish to ensure that the individuals providing such scMccs arc taxed in the same manner. These types of activity 

inCIU<le, among omers, legal and accounung services wnere lnCIIViduais provide the same types or service In il0111 pass-Ulrough and c 

corporation businesses, but 1n the context of the pass-through businesses, the inoiVIduals may also be the owners of the business. If 

these types of activity were eligible for the poss-through bx rates, the income of the pass-through owners would qualify for the same 

pass-through rates • 

Policymakcrs, therefore, could limn access to the separate pass-through regime by excluding certain types of activity from qualifying. 

For example, they could exclude income arising from the provision of personal services from qualifying for the lower pass-through 

rates. Such personal services arc a~cady defined in the tax code as any activity performed in the fields of health, law, engineering, 

archrtccturc, accounting, actuarial science, architecture, performing arts, or consuHing.• 

Also, policymakers could limrt the type of income that qualifies by prohibiting passive income, fra<n investments or other sources, lra<n 

qualifying for the pass-through l<lx rates.• lncome lra<n such sources as royalties, rents, dividends, and interest would therefore be 

excluded fra<n qualifying. Such a i mitation would focus the benefits of the pass-through bx rates on active inoornc. 

Alternatively, policymakcrs could specify what types of income qualify, withal other income not qualifying for the pass-through rates. 

Fa< example, policymakers could determine that only certain manufacfuring income would qualffy. They could limit the benefits of the 

pass-through structure to only activity that currenUy qualifies under the Section 199 deduction for manufacfuring." There os 
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coosiderable p<cccdent as to what types of activity qualify for Scclioo 199, thereby making the adninistration of the separate rate 

easier. In cootras~ howeve~, there are several different types of busilless act1vities that would not qualify for Sccbon 199, such as retai 

businesses that are generally coosidered •smal b<lsinesses: 

Policymakers coold doorolop additional definitions to Section 199, such as for rctai establishments. The Census Bureau maintains a 

definition of wllat qualifies as retail sales for the purpose of rcpof1mg on economic indicators.D 

Question 3: What Sha1·e of Qualifying Income Should Benefit from The PassTtu·ough Rates? 

Options for Oeter·mining What Share of Qualifying Income Benefits from the Lower PassThrough Rntcs 

In addition to determining wllat types of inoomc can qualify for the SOjlaratc pass-through rate, policymakcrs can also make 

deterninations as to the amount of such moome that can qualify. Determining how much 1ncome can qualify is predicated on 

policymakers' goals for how the separate rate would impact taxpaye< behavior. For exampkl, if policymakcr.; have a goal of 

encouraging pass-through owne<s to illvest more ill their oompany, then IUies would be de$Qnad to encourage that activity. However, n they wish to reduce administrative oomplexity, they might pernit al the qualifying income to benefit from the pass-thrcugh tax rate. 

In addition, a certain amount of the income earned by the b<lsiness owner is ftkcly compensation for work performed by the owner, as 

opposed to a return on the owne(s capital. Therefore. some share of the inoome may be better qualified as analogous to wages Of 

salaJY and therefore taxed at the regular individual tax rates. Under amen! law, notions of "reasonable compensation' apply for S 

oorporations.ln this circumstance, the owner is required to receive a reasonable amount of compensation to ensure that income that is 

more accurately oonsidored labor inoomc is taxed at individual rates and therefore subject to payroll taxes. That same concopt can be 

applied in a separate rate siJUcture for pass-throughs. 

From a design standpoint, policymakers can approach this queslioo by distinguishing between income and assets. All income-based 

approach may be less complicated to administer b<lt also less likely to create incentives to reinvest in the business. All asset-based 

approach woold more directly tic to incentives for the owne< to increase their capital investment in the business, but ~ woold also be 

more complicated to account and administer. 

Income-Based Approach 

All income-based approach is less oomplex, and potentially, one structure could be applied to all types of pass-through entities. Under 

this app<oach, the pre-tax profit of the entity that is attributabk> to the owner based on their share of ownership in the entity would be 

eligible for the pass-through tax rates. Thus, ff an S CO!poration has four owners each with an equal share in the company and the p<ctax income of the entity is S1 million, then each owner would be able to qualify an amount up to $250,000 for the pass-through tax 

rates. 

Policymakcrs oould fuf1her limit the amount of income that qualifies by limiting the share of qualifying income to a ratio cqt.ivalent to inoome reinvested in the business by the owner or by imposing other explicit ratio limitations to be discussed below. 

Policymakers coold hmrt the benefit of the pass-through tax rates in circumstances where the business is in a loss position by 

p<ohibiting the owners from applying their share of those losses to othe<, non-qualifying income. In such a circumstance, the tosses 

coold be carried fOIWllrd as a net ope<ating loss applied against future positive qualifying inoome. 

Asset-Basad Approach 

Using an asset-based app<oach to determine the share of income qualifying for the pass-through rate, the income associated with the 

return on oontnbutions of capital by the owner of the pass-through entrty would determine the amount of income that qualifies. Income 
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associated with the retum on labor or services provided by the owner of the pass-through could continue to be taxed at the regular 

individual rates. 

Each of the types of pass-through entities-for example, S-Carp, partnerships, LLC, sole properties-have existing rules and structures 

that can be used as the basis for measuring the amount of retum on capital invested by the owner in the business. One asset-based 

policy that is common to all forms of pass-throughs requires that any capital-in the form of property, equipment, equity, etc.-

contributed to the business by an owner be valued according to fair market value at the time of the contribution. Any built-in gain at the 

time of the contribution would therefore be included in the valuation. 

S Corporations 

S corporations present a special case for determining the share of income qualifying for pass-through rates when using an asset-based 

approach for valuation. In an S corporation structure, the owners receive stock in the company. This stock forms the basis of the 

owner's share of the corporation. Stock is received in exchange for contributions of capital, including property. The owner's basis {i .e., 

the value at the time of contribution) in the stock changes over time based on earnings, distributions, and depreciation. One policy 

option would be to use the value of the owner's stock {i .e., outside basis) in the S corporation as the metric for tracking the amount of, 

and retum on, capital contributed and owned by the individual owner.xiv Such an approach would likely require some businesses that 

currently do not closely track the value of their stocks to begin doing so. It may also require companies to clearly establish basis value 

at the time of the new tax structure. 

This structure could be applied on a prospective basis only and require the owner to have identified and documented the value of their 

basis before being able to qualify income for the separate rate structure. Policymakers could also require that the owner's basis in the 

pass-through be positive before any income could qualify for the pass-through rate. Thus, capital invested to retum the owners basis to 

a positive basis would not be included in the calculation as to how much of the owner's income is eligible for the pass-through rate. 

The net change in basis at the end of a specified period would determine the amount of income received by the owner that qualifies for 

the pass-through rate. This rate would be applied to the share of the individual's ownership in the S corporation. In order to smooth out 

volatility, the change could be averaged over more than one year. For example, assume that after year one the owner's basis 

increased by 20 percent, at the end of year two the owner's basis declined by 10 percent, and at the end of year three the owner's 

basis increased by 8 percent. Over the three-year period, the owner's basis increased by an average of 6 percent. Thus, the owner 

could qualify 6 percent of any income for the pass-through rate ~ 

The change in basis could be calculated more simply. The owner's initial basis in year one is $1 million. In year two, the owner 

contributes $200,000 in new capital. In year two, the owner's share of the depreciation is $50,000. The net change in capital (new 

capital less depreciation) is $150,000. So, the percentage applicable for that year would be 15 percent (150,000/1 million x 100 = 15 

percent). 

This 15 percent would be used to detenmine the share of the owner's income from the pass-through that would be subject to the passthrough rate. Assuming the pass-through owner keeps access to the lower individual rates {as discussed in the prior section) this ratio 

would apply only to the share of income above the threshold for the top pass-through rate. For example, assuming the pass-through 

rate is 28 percent, the 15 percent ratio would be applied to any income received in excess of $190,151, the entry point of the 33 

percent bracket for single filers. In this tax structure, if the owner's basis in the company declines year over year, the owner could not 

qualify any income for the pass-through rate. 

Further, policymakers could limit this tax structure only to owners who have contributed capital to the corporation regardless of the 

owner's status as an active or inactive participant. Thus, passive owners who do not contribute capital to the business would not be 

eligible for the pass-through rate. In the case of ownership in an S corporation where the owner's share was a gift, policymakers could 

apply existing carryover rules under current gift rules. This would effectively reduce or eliminate any basis in the S corporation the 

recipient of the gift could claim. If policymakers took this approach, it would create a strong incentive for the new owner to invest new 

capital into the business in order to obtain the basis used to qualify income for the pass-through rate. 
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Partnerships and LLCs 

Unlike S corporations, partnerships already have a formal structure for tracking the partner's ownership interest and capital 

contributions to the partnership-the partner's capital account. This account tracks the partner's capital contributions to the partnership, 

profits and losses eamed by the partnership, and any distributions paid to the partner. Thus, the partnership capital account can serve 

as a reasonable measure of the amount of capital invested by the partner and the return to that investment. 

The percentage change in the partner's capital account from one tax year to the next or calculated as an average of a set period could 

serve as the percentage of the partner's distribution that qualifies for the pass-through rate. Any remaining distribution would be taxed 

at individual rates. 

Question 4: What Policies Should Be Included to P1·event Abuse and Simplify 

Administmtion of the Refm·med Code? 

Options for Preventing Abuse and Simplifying Administration 

A significant disparity between the top individual rate and the pass-through rate will create strong incentives for owners to try to qualify 

as much income as possible for the pass-through rate. Therefore, in addition to the options discussed above, policymakers may want 

to include certain explicit limitations on taxpayers' ability to qualify income for the pass-through rate. They may also wish to adopt these 

policies as guards against abuse with the understanding that these policies may be stronger protection against abuse than the current 

rules-such as reasonable compensation rules-that have led to concerns about abuse of pass-through structures. Among other 

ideas, this can be accomplished by: 

• Minimum or safe-harbor ratios of how much income could qualify for the pass-through rate; 

• Caps on the annual return to capital for each year; or 

• Maximum ratio for how much income could qualify for the pass-through rate. 

Safe-Harbor Ratio 

A minimum or a safe-harbor ratio could be established to determine how much income could qualify for the pass-through rate. For 

example, 90 percent of the income received by the owner could be taxed at the individual rate, and 10 percent of the income received 

by the owner could be taxed at the pass-through rate. The owner could opt instead to perform the calculations described in the 

previous section if that would provide a more beneficial tax result. By setting a default ratio that would deem at least some percentage 

of the income as eligible for the pass-through tax rate, the owner is guaranteed at least some recognition of return on ~sweat equity" if 

there is no other capital investment made in the business. In addition, it would ensure that in a situation in which the value of the 

owner's share in the business declines, the owner can still qualify some income for the pass-through rate. A safe harbor also provides 

administrative simplicity for businesses, therefore obviating the need for the taxpayer to conduct the calculations. 

Cap on Annual Return 

Incorporating a cap on the percentage increase as it is calculated and applied in order to determine what share of income qualifies for 

the pass-through rate would serve as a limitation in situations where large percentage increases result from relatively large gains off a 

small base. The proposal could rely on existing provisions in the code, such as the long-term applicable federal rate (AFR). Today, the 

AFR ranges from X percent for short-term toY percent for long-term investments. A formula to establish AFR plus a percentage (X) 

could be created.xvi Determining how much income qualifies for the pass-through rate would be the lower of the percentage calculated 

according to the asset-based approach described above, or AFR plus X. 

Maximum Cap 
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An alternative or oomptimcnt to the minimum.ratio or safe-harbor concept would be to set a maximum. or cap. on lho overall share of 

income that could qualify for lho pass-through rotc. For example, the maximum rabo could be sci al50150,1hcrcby establishing that a 

maximum of 50 percent of the mcome received by the owner could be taxed althe pass-through rate. If poilcymakers apply a maximum 

cop, they would need lo consider whether the cap might be more generous than typical practice for S corporatioos when satisfying 

reasonable compensation requirements. 

In addition,~ poficymakers provide more than one approach to the taxation of pass-through entities, they may wish to limit a business's 

ability lo pick and choose what approach to adopt. Compan•es could be required lo elect into one option and have such an election be 

pennanent. Alternabvely, po~cymakers could hmrt the number of times an entity could switch between optiOns over any specified period 

of time. 

Options fo•· Extending Tax Concepts to Othel' Income 

Finally, decision-makers will confront secondary issues thai need lobe addressed when decOding how to structure lhc new passthrough system. Among other nems,this would include how to apply payroll taxes, carried interest, standard deductions for small 

businesses, and a myriad of related issues. 

Application of Payroll Taxes 

The proposed structures described above could be extended to determine wllat income is subject to FICA/SECA taxes. The proposal 

could apply FICA/SECA to aa income subjecllo tax at individual tax rates (subject to the tax maximum for old age, survivor, and 

disability insurance, or 'OASDI"). For S corporations in particular, this would expand the amount of income subject to payroll taxes. 

However, such a policy would largely address any concerns about abuse of the S corporation structure as a means to avoid SECA 

taxes. tt would also significantly reduce the tax pccssurc on reasonablc-compcnsabon rules. 

Application to Carried Interest 

The undcrlymg thoory bchmd the asset-based option is thai returns to capital should be taxed al business rates, nol individual tax 

rates. The same theory can apply lo carried interest. Thus, policymakers could extend the asset-based option and caniod-inlercst 

profits. Some analysts have suggested that~ the carry were subject to individual tax rates. the investors would be able to claim a 

deduction fOJ the equivalent of wages paid to the service provide<.-

Standard Deduction 

For small pass-through businesses that already pay lower rates because they have low amounts of taxable income, base-broadening 

could result in a tax increase even if access to the lower rates is maintained. Therefore, policymakers should consider adding a 

•standard deduction• fOJ pass-through businesses. Such a doduclioo could be designed to ensure that these pass-throughs do not 

experience a sharp and unintended lax increase. This deduction oould be phased down as th-e amount of income that qualifies for the 

pass-through rate in<:reases. 

Other Issues 

Integrating corporate lax reform with pass-through entities means tackling the various related policy issues that reftcclthe complexity of 

the current system and lhe challenges decision-makers must confront to protect the integrity of the system. As an example, the 

proposal coukl incorporate some cxisbng S corporation lax-policy proposals, such as the existing rules that automatically terminate an 

S corporabon when tt has excessive passive income. Other changes coukltncludc making the time pcnod for electing S corporation 

status line up with the deadline for filingS corporation taxes for that tax year, there could also be provisions thai allow fDf an easier 

transition from C corporation to S corporation. 
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Similarly, lhc applicabon of a naw structure could impact partnerships. Various conforming changes could be made lo partnership rules 

to ensure p<oper inclusion of capital contributions into lhe partnefs capital accoont. Among such changes: 

• Repeal provisions penmitting guarantccd payments and liquidation dislributions. Under lhis structure, such contributions woold 

be included in tho partner's capital account and included in lhc calculation to determine lhc segregation of income between 

individual and corporate tax rates. 

• Extend current reqUIIements for mandatol)' basis adjustments upon the transfer of any partne<sh1p interests within the 

partnership or tho distribution of property to a partner. 

• Ensure proper tracking of any built-in gain in property contributed by a partncr to the partnership. 

• Ensure that partnership interests provided as a gift to a partncf arc excluded from the partner's capital account. 

• In order to prevent lhe unintended termination of lhe partnership when capital in the partnership is transferred, the proposal 

could repeal the existing rule that would terminate partnerships when 50 percent or mcxe of lhc capital in lhe partnership is 

sold or is exchanged in any 12-month period. 

Conclusion 

Tax refoon is inhcrenl!y difficult: It is not only intricate, with myriad potential interactions, but it also affects virtually cvcl)' American. 

Accordingly, it requires policymakers to weigh an array of potential y competing priorities and goals. 

The paramount mission for policymakcrs should be to develop a business lax code that is seen as fair and equitable in its treatment of 

businesses beth large and small, and to provide the incentives for individuals to become entrepreneurs who will, in turn, create jobs 

and economic growth. This app<oach is vital with respect to reforming the tax treatment of pass-through entities. Policymakcrs must 

resolve concerns about raising taxes on pass-through businesses whie also ensuring that any new rules or structures do not become 

an avenue of abuse. The options p<cscnlcd m this paper rcflccllhc breadth of issues, challenges, and potential palhs foiWard that 

policymakers should consider when wrestling with this crucial and complex undertaking. 

Endnot es 1

1RS, Statistics of Income, Business Tax Statistiu. Av~ilab e at: https:l/www.irs.gov/uac/tax·stats. 11 This paper assumes a flat corporate rate of 25 percent applied to the first dollar of taxable income. 

• $1.2 trillion assume-s each percentage.point re-duction In the- corporate- rate re-sults in approximately $120 billion in revenue loss 

over the ten·year budget window. 111 The Increase In taxes on pass·through businesses that would oeeur if tax re-form broadened the- tax base- on pass--through 

busines$es without any accompanying reduction in tax rates would make pasHhrough businesses less competitive vis·~·v s C 

corporation-S in situations where the pass·through business competes directly with the C corPQration . 

.. Economic Report of the President, february 2015, 230. Available at: httos://www.gpo.gov/fdsys/pkg/ERP·201S/Qdf/EAP·201S.pdf. 
251 

f 


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• For examp~. an individual filer is subject to a tax rate of 10 percent on the first $9,27S in income, a tax rate of 15 percent on 

income over thit but not exceeding $37,650, a rate of 2S percent on income over that but not exceedina S91,1SO, and so on with 

progre$Sively higher income brackets and rates. See: IRS, "IRS Tax Brackets & Deduction Amounts for Tax Year 2016: Federal Tax 

Rates, Personal Exemptions, and Standard Deductions," 2016. Available at: https://www.irs.com/articles/2016-federal·t-ax:·rates· 

personal· exemptions..and·standard·deductio-ns. 

,. Fo-r e)(ample, assume a pass·through with S2SO,OOO in qualifying income. The effective tax rate on that Income would be 

appro•imately 25.2 percent: (10%'59,275)•(15%'(537,GSO·S9,27G))+(l5%'($91,1SO·S37,GSIJ)•(l8%'(52SO,OOQ-S91,151)). 

• A similar concept applies In current law with regard to the cotporate tate. Although often glossed over, the current corporate tax 

rate is progressive with a rate of 15 percent on the first SSO,OOO in taxable income, 2S percent on the next $25,000 in ta~eab e 

income, and 34 percent on income between $75,000 and $10 million. As a corporation's ta.xable income rises, it loses the benefits of 

the 15 and 25 petcent rates {beginning when a corporation has taxable income o~r $100,000) and the 34 percent rate (beginning 

When a corporation has taxable Income over $15 million). See: Joint Committee on Taxation, Ovei"View of the Federal Tax System as 

in Effect for 2016, JCX-43_15, May 10, 2016. AvailabJe at: https:/!www.jct.gov/publications.html?func::startdown&id=4912. 

• An extreme option would be to require all companies providing such services to be t.axed as corporations, such as by subje<tlng 

them to taxation as personal sei"Vke corporations as define-d in IRC 269A. 

"lntNnal Re~nue Code 448(d)(2UA). 

,. Polkym.akers could define such income as income covered by Internal Revenue Code 1362(d)(3). 

"' section 199 {or the domestic·production deduction) provides a deducdon against qualified business income that is intended to 

provide tax relief equivalent to a 3 percent reduction In the taxpayer's effective tax rate. 

• u.S. Census, Monthly & Annual Retail Trade, March 2017. Available at: https://www.census.gov/retail/index.html. 

• Generally, the inside basis of an S corporitlon is a measure o f the value of the property held by the business entity. The outside 

basis is a measure of the value of the owner's S c-o-rporation stock. 

n Over the firn two years in which the pass--through entity partic:ipates in this structure, the calculation would be performed only for 

the years actually recorded. For example, year one the percentage would be measured relative to the owner's starting basis. In year 

two, the change would b<> measured averaging years one and two. 

lM The applicable federal rate (AFR} is an interest rate determined by the IRS for lncom~tax purpo~s. There are three AFRs: short· 

term, mid-term, and long· term. See: Internal Revenue Code 1274{d). 

,... Donald Marron, Goldifock.s Meets Private Equity: Taxing Carried Interest Just Right, Tax Policy Center, Urban Institute and 

Brookings Institution, October 6, 2016. Available at; http:l/www.tax:eolicycenter.orglsites/default/files/alfresco/publication· 

Odfs/20009S6-Goldiloclts·Meets•Ptivate·Eguity·Taxing·Carrie<l·lnterest•Just·Right.Odf. 
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for 

Business 

Fa ir 

BCF Competition 

Coalition ~ ~ ~ www.governmentcompetition.org 

Statement for the 

full Committee Hearing 

How Tax Refonn Will Grow Our Economy and Create Jobs 

Committee on Ways and Means 

U.S. House of Representatives 

May 18, 2017 

The Business Coalition for Fair Competition ~) is a coalition of private sector firms. large and small. trade 

associations, think tanks, organizations, and individuals who support the competitive rree enterprise system and 

seek relief from unfair government sponsored competition with private business. 

BCFC is deeply concerned that some non-profit organizations operate activities in direct and unfair competition 

with for-profit, tax-paying private businesses. At a time when small business is struggling and job creation is not 

being maximized in the private sector, small business cannot afford to compete against non-profits that don't pay 

their fair share of taxes. 

Private enterprise constitutes the strength of the United States economic system and competitive private 

enterprises remain the most productive, efficient, and effective sources of goods and services. 

There are thousands of legitimate non-profits that do exemplary work filling a societal need. The tax treatment 

of these organizations is not an issue for BCFC. However, when the organizations enctOach on private business 

activities, there are a number of undesirable consequences. 

Business Coalition for Fair Competition (BCFC) 

1856 Old Reston Avenue, Suite 205, Reston, VA 20190, (703) 787-6665 

www.governmentcompetition.org 
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Entities organized under various provisions in section 501 (c) of the Internal Revenue Code are provided special 

tax "exempt" treatment were clearly intended to perform activities and provide services otherwise considered 

"governmental" in nature, not those that are commercially available. A 1954 report by this Committee noted: 

"The exemption from taxation of money or property devoted to charitable and other purposes is based 

upon the theory that government is compensated for the loss of revenue by its relief from financial 

burden which would otherwise have to be met by appropriations from public funds and by the benefits 

resulting from promotion of the general welfare." 

Source: (Unfair Competition: The Profits of Non-profits, James T. Bennett, Thomas H. DiLorenzo, 

Hamilton Press, 1989, p. 26) 

The problem is, this policy has not been adequately codified by Congress or efficiently implemented by the IRS. 

The situation has become so pervasive that unfair government-sponsored competition has been a top issue at 

every White House Conference on Small Business. 

In 1980, the first White House Conference on Small Business made unfair competition one of its highest-ranked 

issues. It said, "The Federal Government shall be required by statute to contract out to small business those 

supplies and services that the private sector can provide. The government should not compete with the private 

sector by accomplishing these efforts with its own or non-profit personnel and faci lities." 

In 1986, the second White House Conference made this one of its top three issues. It said, "Government at all 

levels has fai led to protect small business from damaging levels of unfair competition. At the federal , state and 

local levels, therefore, laws, regulations and policies should ... prohibit direct, government created competition 

in which government organizations perform commercial services ... New laws at all levels, particularly at the 

federal level, should require strict government rel iance on the private sector for performance of commercial-type 

functions. When cost comparisons are necessary to accomplish conversion to private sector performance, laws 

must include provisions for fair and equal cost comparisons. Funds controlled by a government entity must not 

be used to establish or conduct a commercial activity on U.S. property." 

And the 1995 White House Conference again made this a priority issue when its plank read , "Congress should 

enact legislation that would prohibit government agencies and tax-exempt and anti-trust exempt organizations 

from engaging in commercial activities in direct competition with small businesses." That was among the top 15 

vote getters at the 1995 Conference and was number one among all the procurement-related issues in the final 

balloting. 

Non-profit organizations unfairly compete with private, for-profit businesses by engaging in commercial activities, 

but not paying taxes. 

Bill ions of dollars in economic activity occurs each year that is untaxed. Th is results in lost revenue to Federal, 

as well as state and local government agencies. And it creates an unlevel playing field for the private sector, 

particularly small business. When this occurs in universities , it unnecessarily drives up the cost of room , board, 

tuition and fees. 

The 2013 IRS Colleges and Universities Compliance Project studied the unrelated business income tax (UBIT) 

for which tax-exempt entities, such as most universities, are required to pay on any activities and revenue 

unrelated to their tax-exempt status. The April 25, 2013 IRS report "found increases to unrelated business 

taxable income for 90 percent of the colleges and universities examined, totaling about $90 million. There were 

over 180 changes to the amounts of unrelated business taxable income reported by colleges and universities on 

Form 990-T; and disallowance of more than $170 million in losses and net operating losses that could amount 

to more than $60 million in assessed taxes." 

Non-profit organizations are provided special tax status under section 501 (c) of the Internal Revenue Code. 

These groups are required to pay an "unrelated business income tax" or UBIT on its commercial or "non-exempt" 

activities. The IRS report showed this is not occurring. 
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The Federal Government first exempted charitable organizations from tax in 1913. In 1950, in response to 

outrageous examples of unfair competition, Congress changed the tax law by creating the UBIT. Under UBIT, 

revenues from sources unrelated to the non-profit's tax-exempt purpose are subject to taxation. 

Attempts by government to address the problem of unfair competition have been few and far between, and those 

few measures that have been taken have been largely ineffective. The UBIT which was intended to level the 

playing field by taxing the revenues of non-profits has, for example, proven difficult if not impossible to enforce. 

The courts have not been able to give a rigorous and consistent definition of just what constitutes an "unrelated" 

business activity by a non-profit. And because the UBIT tax was to apply only to "commercial activity which is 

not significantly related to the purposes for which the non-profit organization was established," enforcement and 

collection by the IRS has been less than successful. For their part, non-profits have taken an extremely expansive 

view of what constitutes a related purpose, making the under-reporting or non-reporting of revenues 

commonplace. 

Unfair non-profit competition impedes the development of small business by making it hard for them to enter 

markets and compete. This is significant because two-thirds of all new jobs are created by businesses with fewer 

than 20 employees. Because commercial enterprises run by non-profits are exempted from taxes and receive 

other subsidies, taxpaying businesses must bear an extra burden by paying higher taxes than they would 

otherwise to make up for exemptions enjoyed by their "non-profit" competitors. Unfair competition ends up 

crowding out of the market precisely those firms which are the principal source of new jobs- ultimately reducing 

the rate of economic growth. 

Unfair non-profit competition takes many forms. It is YMCAs competing with private health clubs; credit unions 

competing with community banks; rural electric and telephone cooperatives competing with investor-owned 

utilities; and universities venturing out of the classroom and into hotels, mapping services, and testing 

laboratories. A few examples follow: 

Credit unions' tax-exemption currently costs the U.S. Treasury $2 billion annually. By contrast, the more 

than 6,000 community banks that are the lifeblood of towns across the country contribute $4 billion 

annually in taxes that support our nation and those communities; 

• A bicycle rental business in Anchorage, Alaska faced competition from a non-profit entity approved by 

state gaming regulators- a free bike loan program for downtown Anchorage, known as the Earth Bike 

Program. The program lasted two years and forced other bike rental businesses out of business, and in 

one case, leave the state; 

• A privately owned inn in Fredericksburg, Virginia hosts functions such as banquets and weddings. The 

University of Mary Washington's Alumni Center not only competes for similar events and opportunities, 

but it also is building a hotel less than a mile away that will further compete with the hotels, motels and 

other lodging destinations that are not tax-exempt. The only reason provided by lost clients for choosing 

the university was the lower price thanks to the tax differential. University hotels and conference centers 

are proliferating across the country; and 

• A laundry and cleaner in San Antonio, Texas faces competition for its laundry services from a non-profit, 

Federal tax-exempt Bexar County (government) cooperative entity. The unfair business practice involves, 

in addition to competing with and eliminating the opportunity for private business services, the co-op 

going outside its members to provide laundry services to for-profit businesses and hospitals throughout 

South Texas. It is damaging to a long-time minority owned and operated for-profit business to have to 

compete in this arena with its taxing entity, Bexar County. 

Unfair university competition takes many forms. It is universities venturing out of the classroom and into activities 

unrelated to their core and exempt education mission, such as hotels, mapping services, bicycle repair, golf 

courses, gym and fitness centers, cultural resource assessments, testing laboratories and others. A few 

examples were highlighted in BCFC's 2013 and 2014 lists of the most egregious examples of unfair government 

competition as collected by media reports, include: 
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• The University of Mary Washington's Alumni Center in Fredericksburg, VA not only competed for similar 

events and opportunities as provided by a neighboring small business in the wedding, banquet, lodging 

and catering business, but it also was building a hotel less than a mile away that would further compete 

with the hotels, motels and other lodging destinations that are not tax-exempt. The only reason provided 

by lost clients for choosing the university was the lower price thanks to the tax differential. University 

hotels and conference centers are proliferating across the country; 

George Mason University in Fairfax, Virginia announced in December 2013 it would close its hotel, the 

Mason Inn, after losing $11 mill ion; 

• Towson University, a Maryland state University in the Baltimore suburbs, purchased air time 

on Washington, DC radio stations advertising a nursery school program for children 2, 3, and 4 years of 

age and a summer camp programs for pre-teens; 

"Bluffing" to win its first contract, St. Mary's University (MN) performed commercially available mapping 

services for the National Park Service and other clients; 

• The University of Houston operates the National Center for Airborne Laser Mapping (NCALM), mapping 

services utilizing aircraft equipped with Light Detection And Ranging (LIDAR), a technology 

commercialized by NASA in the 1990s. Towson also runs a mapping program that has purchased 

television ads touting a software system that is otherwise commercially available; 

Believing that bicycle repair is inherent to the success of higher education, Virginia Tech University 

opened its own shop and hired a mechanic to services to students in Blacksburg, VA in competition 

with local small business; 

James Madison University in Harrisonburg , VA operates a variety of charter bus and transit options to 

not only university students, but also to the general public including local school systems thereby in direct 

competition and duplication of the local market as would be provided by the small business operators; 

and 

Elan University in North Carolina started Live Oak Communications, a communications agency that 

provides public relations, advertising, special event marketing, vira l marketing, media relations, website 

development, video creation and graphic design services for businesses and not-for-profit organizations 

in the North Carolina region. 

The previously referenced 2013 IRS report listed the following activities as within its scope of UBIT research: 

Fitness, recreation centers and sports camps; advertising; facility rentals; arenas; and golf. 

Another form of university competition is in the schools' bookstore. These on-campus, university-owned retail 

operations go far beyond selling essential textbooks to students, but compete with local, for-profit, tax-paying 

business in offering office supplies, clothes and apparel, computer equipment and goods under the blanket of 

the institution's tax exempt status. Finally, universities historically competed with travel and tour companies by 

offering foreign trips that looked more like vacations rather than instructional endeavors. 

Schools of higher education are increasingly venturing away from their core missions of teaching and conducting 

basic research. Financial pressures, ranging from reduced government funding to pressures to limit tuition 

increases have led university presidents to transform academicians into entrepreneurs. Universities are 

generating revenues from commercial activities to supplement their budgets. 

University engagement in commercial activities could be called the "Gatorade Syndrome". Ever since professors 

at the University of Florida invented the popular sports drink to hydrate football players practicing in the heat, 

academicians have been trying to find the next big discovery. Most simply consume tax dollars, divert scarce 

resources including tuition , and fail to turn profits. These university-sponsored enterprises have cost their 

schools millions, exacerbating an unaffordable tuition system that has made a college education a financial 

burden, if not impossibility, for most students and their parents. 

Universities enjoy significant advantages over for-profit companies. They are eligible for billions of dollars in 

grants from Federal and State governments. They often have the ability to secure non-competitive, sole source 

contracts with government agencies. They pay no taxes. Their overhead - buildings, electricity, even equipment, 

is already paid for and is provided for "free". Their student labor force is either unpaid or compensated at well 
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below prevailing market wages. They carry no professional liability insurance, do not have to pay unemployment 

compensation and in many cases are exempt from social security contributions. When universities enter into 

contracts to perform services, they usually insist on "best effort" clauses, which absolve them of ever completely 

finishing a project. They are also recipients of millions of dollars in free or discounted hardware and software, 

donated from vendor firms so that students will learn on their systems, be proficient in their use upon graduation 

and instill a consumer loyalty that will translate into sales once these students move up in the ranks of their 

private sector employers. The advantages universities bring to the market make it virtually impossible for private 

firms to compete. 

Private sector and for-profit colleges and universities face unfair competition from government institutions. In 

recent years, such private schools have been singled out for attack from a bevy of regulations proposed by the 

federal government that create an unfair and unlevel playing field. The latest effort comes in the form of a retooled 

"gainful employment" regulation by the Department of Education that is impacting private sector schools and 

largely leaving traditional public and non-profit schools untouched. The "gainful employment" regulation prevents 

students- often low-income, minorities, and veterans- from having access to thousands of programs at private 

sector higher education institutions. 

In addition, federal actions, including the "90/10 rule", regulations dealing with state authorization, and the 

definition of a credit hour all threaten to punish private sector schools to the advantage of traditional public 

institutions. 

For too many years, the unfair government-sponsored competition issue has not been a top priority for Congress 

or Administrations of either party. The Small Business Administration's Office conducted a series of hearings 

and issued a report, "Government Competition: A Threat to Small Business" (March 1980), and "Unfair 

Competition by Non-profit Organizations With Small Business: An Issue for the 1980s" (June, 1984). The last 

serious look at non-profits and the UBIT by the Ways and Means Committee was by Congressman J.J. Pickle 

(D-TX) in 1987-88. 

In February 2013, BCFC testified before this Committee including "unfair university competition" and UBIT within 

the hearing entitled, "Tax Reform and Charitable Contributions." 

From April18 through April25, 1993, the Philadelphia Inquirer presented an exhaustive investigative exposition 

of the multibillion-dollar world of America's so-called non-profit industries, exposing, in several different contexts, 

the abuses of their unique tax-exempt status. Certainly, this sweeping indictment by the Philadelphia Inquirer 

encompasses the world of non-profit sometimes run amok. However, as you, Mr. Chairman, contemplate future 

oversight hearings and legislation to reform this multibillion-dollar, non-tax-paying competition for many of 

America's struggling small businesses, you will find valuable factual, albeit dated, information in the Inquirer 

series. 

Source: (Non-profits: America's Growth Industry They're Called Non-profit Businesses, But That 

Doesn't Mean They Can't Make Money. They Do -Billions Of Dollars. At The Same Time, Their 

Tax-exemptions Cost Government More Than $36 Billion A Year," by Gilbert M. Gaul and Neill A. 

Borowski, The Philadelphia Inquirer April18, 1993) 

In February 1987, a GAO report found: 

• The U.S. Department of Commerce estimates that $1.2 billion, or 1.3 percent, of the $91 billion gross 

national product (GNP) in 1930 could be attributed to non-profit institutions. This share grew to $131 

billion, or 3.3 percent, of the $3,989 billion GNP by 1985; 

• A 1975 IRS Statistics of Income (SOl) study found that for tax-exempt organizations (religious, schools 

and colleges, cultural and historical, other instructional, health-related services, scientific research , 

business and professional, farming and related , mutual organizations, employee or membership benefit, 

sports-athletic-recreational and social, youth, conservation and environmental, housing, inner city or 

community, civil rights, litigation and legal aid, legislative and political advocacy, other activities directed 
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to individuals, other activities directed to organizations, other purposes and activities, no activity reported) 

on average, 39% of their total activity receipts were business receipts; and 

Complete data do not exist to quantify the nature, extent, and impact of competition between non-profits 

and the private sector. However, the limited data available indicate that taxable businesses and some 

tax-exempt organizations are increasingly competing to provide similar services. 

Source: (GAO Briefing Report to the Joint Committee on Taxation; 'Tax Policy: Competition 

Between Taxable Businesses and Tax-Exempt Organizations", February 27, 1987- GGD-87-

40BR) 

In March 1980, a report of the Small Business Administration (SBA) Advocacy Task Force Group on Government 

Competition with Small Business found: 

The activities of foundations and universities were of particular concern to a number of witnesses; 

In Fiscal Year 1978, the IRS audited approximately 17,000 of the 150,000 requ ired fi lings by non-profits. 

Unrelated business income was discovered in 1,800 or 10.6 percent of these 17,000 audited cases. Of 

the 1,800 audits where unrelated business income was discovered, 46 percent (828 cases) resulted in 

successful action by IRS to levy additional taxes, and a combined total of $10 million was recovered. On 

average, the IRS recovered additional taxes at the rate of $12,078 per audited case where unrelated 

business income was discovered and recovery action succeeded; and 

The small business community's perception of the extent of abuse of the tax system by non-profits 

strongly suggests that a more extensive review of unrelated business income activities is warranted. 

Source: ("Government Competition: A Threat to Small Business" Report of the SBA Advocacy 

Task Force Group on Government Competition with Small Business, March 1980) 

Th is is a problem that is growing, not diminishing. From 1975 to 1990, the non-profit sector grew by 150 percent, 

while the gross domestic product grew about 50 percent. 

University competition is part of a larger problem of unfair government sponsored and tax-subsidized competition 

with private enterprise including government (including the insourcing of contracts performed by tax-paying 

private sector firms out of the private sector for performance by Federal employees), non-profits, prison 

industries, etc. The Federal government and universities can lower costs and increase revenue by applying the 

'"Yellow Pages' Test", a simple test that says if an activity is available from a private sector company found in 

the Yellow Pages, that activity should not be a responsibility of a college and university and, instead, should 

actually be performed by a tax-paying private sector firm . 

In December 2012, BCFC attempted to bridge the impasse in negotiations on the fiscal cliff and sequestration 

by providing President Obama and Congressional leaders budget savings of $795 bill ion by simply utilizing taxpaying private sector firms for commercially avai lable goods and services currently performed by a government 

or tax-subsidized entity. The federal government can achieve $795 billion in savings simply by getting out of 

activities that duplicate or compete with the private sector, which subsidize unfair competition with private, forprofit companies, or by privatizing activities for which there are current or potential private sector providers. Th is 

includes: 

Enforce UBIT on commercial activities revenue of non-profits- $36 Bill ion. 

Institutions of higher education should not be able to use their tax-exempt status to avoid paying income taxes 

on what are essentially commercial activities. These tax-subsidized entities should not be making the same kind 

of profits on activities that are virtually identical to those of a for-profit, tax-paying business. 

The IRS should more vigorously enforce current rules governing the tax status of universities to assure that 

academic activities are indeed related to research and education, not commercial production. Here are five very 

specific recommendations. 

1. The Department of the Treasury should be required to provide an annual public estimate of revenues lost 

through avoidance of UBIT. 
258 

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2. The Treasury Department should provide an official public estimate of potential new revenues to the Treasury 

if the UBIT law were expanded to require all commercial operations of universities to pay their fair share of taxes. 

3. The law should be modified or new legislation introduced that lets the Treasury Department collect taxes that 

insures that all commercial activities of universities are taxable. The IRS has only one option today - that is to 

revoke an organization's charter to do business. They simply can't administer the law the way it is. 

4. Congress should amend the Higher Education Act to focus universities on their core missions - education and 

basic research. Legislation should be passed to apply a "commerciality" test to all non-core university activities. 

Any university that receives direct federal funding, or indirect funding through tax-exempt or "non-profit" status, 

should be prohibited for using such institutions for the performance of commercial, tax generating activities 

otherwise available in the private sector. 

5. Universities entering a commercial undertaking should be required to form a for-profit subsidiary that must 

obey all the same laws and regulations that apply to for-profit enterprises. It is only when we move beyond hidden 

subsidies and the ineffectual regulations of UBIT that both consumers and producers, and all taxpayers, will be 

able to enjoy the benefits of even-handed competition. In form ing a commercial subsidiary , this would help 

implement a "commerciality clause", and thus implement the "'Yellow Pages' Test". 

Unfair non-profit competition with the private sector, and sma ll business, is a public policy issue deserving of 

immediate attention and reform . Th is hearing will provide an important forum for the private sector to discuss the 

broader aspects of this issue. As Congress seeks ways to grow the economy and create private sector jobs, as 

well as prepare comprehensive tax reform that lowers the corporate tax rate to make American business more 

competitive in the global market and simplify the tax code, BCFC respectfully recommends reform of the 

treatment of nonprofit organizations and UBIT so that unfairness is eliminated, appropriate revenue is raised, 

and counter-productive tax policy that disadvantages private, for profit companies, particularly small business, 

is implemented. 

We commend your efforts to further explore private sector complaints in this area and advance the debate. The 

private sector seeks a competitive environment in which all participants play by the same rules including reforms 

to the tax code that enable, instead of hinder, the private sector. 
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May 17, 2017 

The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

B U i L D COALITION 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

RE: Hearing On How Tax Reform Will Grow Our Economy And Create Jobs 

Dear Chairman Brady, Ranking Member Neal, and Members of the Committee: 

The Businesses United for Interest and Loan Deductibility (BUILD) Coalition is submitting this letter in 

anticipation of the House Ways and Means Committee's May 18 hearing entitled "How Tax Reform Will 

Grow Our Economy and Create Jobs." We commend the Committee for exploring ways in which progrowth tax reform can be achieved. As the Committee determines which of the various provisions of the 

tax code should remain or be reformed in order to encourage stronger growth, we want to reinforce the 

necessity of preserving the full deductibility of interest on debt. 

The BUILD Coalition's members represent industries throughout the economy, including agriculture, 

manufacturing, real estate, retail, and telecommunications. We believe that in crafting measures to 

catalyze economic growth in the U.S. , the last thing Congress should do is make it harder for 

companies to access capital that can be used to make investments, expand operations, and create 

more jobs. 

Our first-hand experience managing the daily operations of our respective businesses compels us to 

relay the real-world implications of eliminating or limiting interest deductibility. We also want to dispel 

some of the misconceptions about this key part of our tax code, including notions that interest 

deductibility distorts financing decisions, that equity is an equal or appropriate substitute for debt 

financing , and that interest deductibility can be replaced by immediate expensing of capital 

expenditures. 

Interest deductibility is a well-established, growth-promoting component of the tax code. Interest 

expense is a normal cost of doing business, and by guaranteeing businesses will not be taxed on the 

cost of accessing capital, interest deductibility affords us the correct tax treatment that encourages us 

to continue to invest in growing our businesses and creating more jobs. Not surprisingly, a study by 

Ernst & Young (EY) finds that limiting interest deductibility to help fund a lower corporate tax rate would 

negatively impact economic growth in the long-run.

1 

Businesses of all sizes borrow in order to finance expansions or meet obligations, and the ability to 

deduct the interest expense gives business owners the certainty to make such decisions with 

confidence. For many firms , access to credit is essential for working capital, and many of these 

companies use debt to weather shifts in demand. 

1 EY's Quantitative Economics and Statistics (QUEST) Group. "Macroeconomic Analysis Of A Revenue·Neutral Reduction In 

The Corporate Income Tax Rate Financed By An Across-The-Board Limitation On Corporate Interest Expenses." EY. July 

2013. 
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B U i L D COALITION 

Our debt capital markets are the most liquid and efficient in the world. Small- to medium-sized banks 

supply the credit that is in turn the life blood of American businesses of all sizes and types-the 

businesses that provide the core growth in our economy. 

Research has found that 75 percent of startups and 80 percent of small businesses rely on debt 

financing . Without access to affordable credit, these companies, along with medium-sized and larger 

businesses, will struggle to create jobs and grow the economy' 

Proponents of eliminating interest deductibility sometimes argue that the tax code favors debt over 

equity, and that this encourages companies to take on more leverage. And yet, research by economists 

from Duke, University of Pennsylvania, and Washington University in St. Louis3, as well as findings by 

Nobel Prize-winning economist Merton Miller', show that the tax code has little to no impact on 

companies' leverage ratios. 

Moreover, the argument that equity and debt financing are similar is a fallacy. Debt and equity do not 

serve identical purposes and are not interchangeable forms of financing. Thus, their differing tax 

treatment is appropriate. There are a variety of non-tax reasons that businesses like ours choose debt 

over equity when raising capital. To the extent that policymakers would like to assist equity financing , 

the answer is to eliminate the tax on dividends, not to punish and restrict debt financing by removing or 

limiting interest deductibility. 

For one thing, many businesses don't have access to equity markets, making debt their only option. In 

contrast to the dilutive effects of equity, borrowing allows owners to access capital while retaining full 

control of their business. Debt is also a more cost-effective financing solution than equity because it is 

more secure for investors, who charge a premium for the risks associated with equity. Therefore, on 

both sides of the equation, debt and equity play separate and distinct roles in capital formation. 

In addition, proposals to offer 100 percent expensing in place of interest deductibility miss the mark. 

Such proposals fail to account for the real-life implications of what such a trade-off means for 

businesses, namely that full and immediate capital expensing is not an acceptable alternative for 

interest deductibility. 

For starters, introducing 100 percent expensing would offer no benefit to small businesses, which are 

already able to expense annual capital expenditures. For larger companies, such plans would amount 

to Congress raising their taxes by eliminating interest deductibility and lowering them to a lesser 

degree, if at all, through expensing. That's a far cry from pro-growth tax reform. 

Once again, research supports these arguments. A recent Goldman Sachs Economics Research note 

predicts that proposals to eliminate interest deductibility in favor of 100 percent expensing "would raise 

the user cost of capital and reduce investment in the longer run." 

While 100 percent expensing might boost cash fiows in the near term by pulling forward depreciation 

schedules, "after the first year, however, the impact on cash flow would begin to decline and eventually 

turn negative," the Goldman Sachs study warns5 

2 Cole, Rebel A. "Why Businesses Use Debt- And How Debt Benefits Businesses." June 2013. 3 Graham, John R., Mark T. Leary, And Michael R. Roberts. "A Century Of Capital Structure: The Leveraging Of Corporate 

America ." June 2014. 4 Miller, Merton. "Debt And Taxes." Journal Of Finance. May 1977. 5 Mericle, David and Daan Struyven . "US Daily: Corporate Tax Reform: Trading Interest Deductibility for Full Capex 

Expensing ." Goldman Sachs Economic Research. November 2016. 
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BUiLD 

COALITION 

These harmful effects would not be cancelled out by lower rates, either. As UPenn professor Chris 

Sanchirico has explained, even proposals to lower the tax rate would "not temper" the harmful effects of 

the proposed trade-off between interest deductibility and expensing.' As businesses that make these 

financing decisions every day, we know first-hand that you can't expense what you can't afford. 

Lastly, some have claimed that debt inherently creates risk in the economy, and steps should be taken 

to discourage too much borrowing by businesses. This is by no means a given. In fact, a study 

published by the St. Louis Federal Reserve's Brent Glover, Joao F. Gomes, and Amir Yaron finds that 

limiting interest deductibility would actually increase volatility throughout the economy by raising the 

overall cost of accessing capital. The authors understand that limiting or eliminating the deduction for 

business interest expense would push firms to intentionally cap their size and rely more on operating 

leverage, making them more susceptible to default. 

Glover, Gomes, and Yaron conclude: "Contrary to conventional wisdom, we find that eliminating 

interest deductibility results in an increase in the default frequency and average credit spreads. The 

intuition for this lies in the fact that this policy change makes external financing more costly, which 

results in riskier firms and higher credit spreads."' 

All of these arguments also ignore the distributional impact of limiting interest deductibility. According to 

a report by the Small Business Administration (SBA), woman- and minority-owned small businesses 

typically have limited access to equity markets compared to businesses with male and white owners. 

Thus, woman- and minority-owned small businesses have to turn to bank loans, as well as alternative 

lending methods. By limiting interest deductibility, policymakers would further increase the existing 

financial burdens that woman and minority business owners face when trying to raise capital for 

investments.8 

These are just the immediate dangers. Numerous policy proposals would also suffer if interest 

deductibility is limited. For example, President Donald Trump has announced his desire for a $1 trillion 

infrastructure investment plan based in large part on public-private partnerships. Congressional leaders 

have discussed similar proposals, with anticipated leverage ratios of up to five-to-one. Of course, 

limiting interest deductibility would undermine these plans by increasing the cost of capital and making 

such investments less feasible for the private sector. 

As this Committee investigates ways to promote stronger economic growth and faster job creation 

through tax reform, it must maintain provisions in the tax code that help achieve these goals. Interest 

deductibility is one of these provisions, and has been since the creation of the modern tax code a 

century ago. 

While the BUILD Coalition fully supports the Committee's goal of achieving pro-growth tax reform, any 

proposal that seeks to limit interest deductibility will run counter this objective. We encourage the 

Committee, in any proposed tax legislation, to maintain the full deductibility of business interest 

expense as it exists under current law. By doing so, policymakers will give the U.S. economy the 

opportunity to achieve its full growth potential. 

6 Sanchirico, Chris William. "Expensing and Interest in the GOP Blueprint: Good Deal? Good Idea?" Tax Notes. April 2017 7 Glover, Brent, Joao F. Gomes, and Amir Yarons. "Corporate Taxes, Leverage, and Business Cycles." St. Louis Fed. July 

2011 

6 Robb, Alicia. "Access to Capital among Young Firms, Minority·owned Firms, Women-owned Firms, and High-tech Firms." 

U.S. Small Business Administration. April 2013. 
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Sincerely, 

The BUILD Coalition 

805 151

h Street NW, Suite 200 

Washington, D.C. 20037 

202-822-1205 

B U 5 L D 

COAL IT ION 
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Competitive Carriers Association 

Rural• Regional • Nationwide• 

The Honorable Kevin Brady 

Chairman 

House Committee on Ways and Means 

1102 Longworth House Office Building 

Washington, D.C. 20515 

The Voice of America's Broadband Providers 

May 11, 2017 

The Honorable Richard Neal 

Ranking Member 

House Committee on Ways and Means 

1102 Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Brady and Ranking Member Neal: 

The member companies represented by our trade associations provide broadband and other 

communications services to millions of customers living in rural and remote parts of our 

country. 

Millions of Americans reap the benefit of connectivity due in large part to the success of the 

federal Universal Service Fund ("USF"). The USF, including the Connect America Fund, Mobility 

Fund, and other legacy High Cost support programs have been successful public/private 

partnerships that have evolved from providing near-ubiquitous voice service, to supporting 

networks capable of providing broadband connectivity via fixed and mobile technologies. Our 

member companies are dedicated to offering the best service despite the many challenges 

associated with providing reasonably comparable services to rural America as those enjoyed in 

urban areas. 

As your Committee endeavors to reform the tax code, it is our hope that you will prioritize 

policies that encourage additional broadband investment. One area in which your Committee 

can immediately provide a boost to broadband investment is to clarify that funds received by 

companies from broadband programs such as the USF or future infrastructure funding 

mechanisms do not constitute taxable income. 

If disbursements from USF and other broadband funding programs are treated as nontaxable 

income, companies that receive this support will be able to use more of the funds they receive 

to deploy broadband networks deeper into rural America. This could be one of the most 

innovative, efficient, and effective ways to enhance broadband deployment and create new 

jobs in economically challenged rural areas. Clarifying the federal tax code to treat 

disbursements from all federal broadband programs, including the USF, as non-taxable will 

further the public interest by enabling the increased investment in infrastructure that is 
264 

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necessary to create jobs and serve rural consumers who are waiting to be connected to highspeed broadband. 

We remain committed to working with you and your staff to find creative policy solutions that 

will continue to drive our American economy forward and make us more competitive around 

the world. If you should have any questions please contact Tim Donovan, SVP, Legislative 

Affairs for CCA at 202.747.0718 or by email at tdonovan@ccamobile.org or Paul Raak, Vice 

President of Legislative Affairs for ITIA at 202.898.1514 or by email at praak@itta.us. 

Sincerely, 

Steven K. Berry 

President & CEO 

Competitive Carriers Association 

Genevieve Morelli 

President 

ITT A- the Voice of America's Broadband Providers 

CC: Members of the Ways and Means Committee 

The Honorable Greg Walden, Chairman, House Committee on Energy and Commerce 

The Honorable Frank Pallone, Ranking Member, House Committee on Energy and 

Commerce 

The Honorable Marsha Blackburn, Chairman, Subcommittee on Communications & 

Technology 

The Honorable Mike Doyle, Ranking Member, Subcommitt ee on Communications & 

Technology 
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Comments for the Record 

United States House of Representatives 

Committee on Ways and Means and the Subcommittee on Tax Policy 

Hearing on How Tax Reform Will Grow Our Economy and Create Jobs 

Thursday, May 18, 2017, 10:00 A.M. 

1100 Longworth House Office Building 

By Michael G. Bindner 

Center for Fiscal Equity 

Chairmen Brady and Roskam and Ranking Members Neal and Doggett, thank you for 

the opportunity to submit these comments for the record to the Committee on Ways and 

Means and the Tax Policy Subcommittee. As usual, we will preface our comments with 

our comprehensive four-part approach, which will provide context for our comments. 

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 $50,000 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%. 

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 fund entitlement spending and 

replace income tax filing for most people (including people who file without 

paying), the corporate income tax, business tax filing through individual income 

taxes and the employer contribution to OASI, all payroll taxes for hospital 

insurance, disability insurance, unemployment insurance and survivors under 

age 6o. 
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First, allow us to address the current state of tax reform and the comments in the press 

release announcing this hearing and the recent remarks by the President about priming 

the pump. We will then identify how our four-part approach meets the goal of this 

hearing to create economic growth and more jobs. The latter should be familiar to those 

who read our comments submitted to the tax reform hearing of one year ago. 

What the Center said in June of last year in response to the release of the Blueprint 

bears repeating. We have tried the reduce rates and broaden the base. In 1986, it 

actually happened, although second mortgage interest was left deductible, leading 

quickly to the savings and loan crisis and eventually the 2008 Great Recession, abetted 

by capital gains cuts which gave us the tech bubble. Efforts to call tax cuts a prelude to 

growth ring hollow and even those economists who backed them no longer support such 

theory. 

In The Economist, President Trump and Secretary Mnuchin cast doubt on their support 

for the DBCFT, instead preferring to simply cut rates for pump priming. This would 

mainly benefit the wealthy, which is ill advised. 

Lower marginal tax rates for the wealthiest taxpayers lead them to demand lower labor 

costs. The benefit went to investors and CEOs because the government wasn't taxing 

away these labor savings. In prior times, we had labor peace, probably to the extent of 

causing inflation, because CEOs got nothing back for their efforts to cut costs. 

The tax reforms detailed here will make the nation truly competitive internationally 

while creating economic growth domestically, not by making job creators richer but 

families better off. The Center's reform plan will give you job creation. The current 

blueprint and the President's proposed tax cuts for the wealthy will not. 

In September 2011, the Center submitted comments on Economic Models Available to 

the Joint Committee on Taxation for Analyzing Tax Reform Proposals. Our findings, 

which were presented to the JCT and the Congressional Budget Office (as well as the 

Wharton School and the Tax Policy Center), showed that when taxes are cut, especially 

on the wealthy, only deficit spending will lead to economic growth as we borrow the 

money we should have taxed. When taxes on the wealthy are increased, spending is also 

usually cut and growth still results. The study is available at 
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http: I lfiscalequity. blogspot.com I 2 o 11 I 09 I economic-models-available-to-joint.h tml 

and it is likely in use by the CEO and JTC in scoring tax and budget proposals. We know 

this because their forecasts and ours on the last Obama budget matched. Advocates for 

dynamic scoring should be careful what they wish for. 

The national debt is possible because of progressive income taxation. The liability for 

repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back 

trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. 

That means that for every dollar you pay in taxes, you owe $10.55 in debt. People who 

pay nothing owe nothing. People who pay tens of thousands of dollars a year owe 

hundreds of thousands. The answer is not making the poor pay more or giving them less 

benefits, either only slows the economy. Rich people must pay more and do it faster. My 

child is becoming a social worker, although she was going to be an artist. Don't look to 

her to pay off the debt. Trump's children and grandchildren are the ones on the hook 

unless their parents step up and pay more. How's that for incentive? 

The proposed Destination-Based Cash Flow Tax is a compromise between those who 

hate the idea of a value-added tax and those who seek a better deal for workers in trade. 

It is not a very good idea because it does not meet World Trade Organization standards, 

though a VAT would. It would be simpler to adopt a VAT on the international level and 

it would allow an expansion of family support through an expanded child tax credit. 

Many in the majority party oppose a VAT for just that reason, yet call themselves prolife, which is true hypocrisy. Indeed, a VAT with enhanced family support is the best 

solution anyone has found to grow the economy and increase jobs. 

Value added taxes act as instant economic growth, as they are spur to domestic industry 

and its workers, who will have more money to spend. The Net Business Receipts Tax as 

we propose it includes a child tax credit to be paid with income of between $500 and 

$1000 per month. Such money will undoubtedly be spent by the families who receive it 

on everything from food to housing to consumer electronics. 

The high income and inheritance surtax will take money out of the savings sector and 

put it into government spending, which eventually works down to the household level. 

Growth comes when people have money and spend it, which causes business to invest. 
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Any corporate investment manager will tell you that he would be fired if he proposed an 

expansion or investment without customers willing and able to pay. Tax rates are an 

afterthought. 

Our current expansion and the expansion under the Clinton Administration show that 

higher tax rates always spur growth, while tax cuts on capital gains lead to toxic 

investments - almost always in housing. Business expansion and job creation will occur 

with economic growth, not because of investment from the outside but from the 

recycling of profits and debt driven by customers rather than the price of funds. We 

won't be fooled again by the saccharin song of the supplysiders, whose tax cuts have led 

to debt and economic growth more attributable to the theories of Keynes than 

Stockman. 

Simplicity and burden reduction are very well served by switching from personal income 

taxation of the middle class to taxation through a value added tax. For these people, 

April 15th simply be the day next to Emancipation Day for the District. The child tax 

credit will be delivered with wages as an offset to the Net Business Receipts tax without 

families having to file anything, although they will receive two statements comparing the 

amount of credits paid to make sure there are no underpayments by employers or 

overpayments to families who received the full credit from two employers. 

Small business owners will get the same benefits as corporations by the replacement of 

both pass through taxation on income taxes and the corporate income tax with the net 

business receipts tax. As a result, individual income tax filing will be much simpler, 

with only three deductions: sale of stock to a qualified ESOP, charitable contributions 

and municipal bonds - although each will result in higher rates than a clean tax bill. 

For the Center, the other key motivator is expanding employee-ownership. We propose 

to do that by including an NBRT deduction, to partially reduce income to Social 

Security, to purchase employer voting stock, with each employee receiving the same 

contribution, regardless of salary or wage level. In short order, employees will have the 

leverage to systematically insist on better terms, including forcing CEO candidates to 

bid for their salaries in open auction, with employee elections to settle ties. 

4 
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Employee-ownership will also lead multi-national corporations to include its overseas 

subsidiaries in their ownership structure, while assuring that overseas and domestic 

workers have the same standard of living. This will lead to both the right type of 

international economic development and eventually more multinationalism. 

Simultaneously, the high income and inheritance surtax will be dedicated to funding 

overseas military and naval sea deployments, net interest payments (rather than rolling 

them over), refunding the Social Security Trust Fund and paying down the debt. 

Both employee-ownership with CEO pay reduction and paying off the debt will lead to 

two things - less pressure to deploy U.S. forces overseas and sunset of the income tax. 

Military spending both overseas and domestic will decline under this plan. The VAT will 

make domestic military spending less attractive and overseas spending on deployments 

will be fought by income taxpayers, who are currently profiteering from such expenses. 

Instead, defense spending can shift to space exploration, which also increases invention 

and economic growth while keeping the defense industrial complex healthy, although 

now they can pursue profitable enterprises rather than lethality. 

In short, our plan promises both peace and prosperity, not for the few but for the many. 

Prosperity bubbles up. It has never flowed down and tax reform should reflect that. 

Thank you for the opportunity to address the committee. We are, of course, available 

for direct testimony or to answer questions by members and staff. 

5 
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Contact Sheet 

Mich ael Bindner 

Center for Fiscal Equity 

14448 Parlcvale Road, Suite 6 

Rockville, MD 20853 

240-810-9268 

fiscalequit:ycenter@yahoo.com 

Committee on Ways and Means and the Subcommittee on Tax Policy 

Hearing on How Tax Reform Will Grow Onr Economy and Create Jobs 

Thursday, May 18,2017, 10:00 A.M. 

1100 Longworth Honse Office Building 

All submissions must include a list o f all clients, persons and/ or organizations on whose behalf the 

witness appears: 

This testimony is not submitted on behalf o f any client, person or organization other than the 

Center itself, which is so far unfunded by any donations. 

6 
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May 17, 2017 

The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington , D.C. 20515 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington , D.C. 20515 

RE: Hearing On How Tax Reform Will Grow Our Economy And Create Jobs 

Dear Chairman Brady, Ranking Member Neal, and Members of the Committee: 

I am submitting this letter ahead of the House Ways and Means Committee's scheduled hearing 

on May 18th entitled "How Tax Reform Will Grow Our Economy and Create Jobs." I commend 

the work your committee is doing in exploring different ways in which pro-growth tax reform can 

be achieved and help further strengthen the American economy. As the committee considers 

different proposals and ideas for reforming the tax code, I want to stress the importance of 

preserving the full deductibility of interest on debt. 

When it comes to reforming America's tax code, my support for supporting interest deductibility 

comes from my first-hand experience of running the daily operations of Centurion LV. While 

there is certainly an important role for policymakers and policy thinkers in reforming the tax 

code, I also firmly believe that input from business owners is critical to setting the record straight 

on the practical implications of certain tax proposals. My support for full interest deductibility 

stems from my knowledge of how the tax code affects my ability to grow Centurion LV, create 

new jobs and strengthen the local economy. 

Interest deductibility is a well-established, growth-promoting provision of the tax code that has 

been in existence for more than 100 years. Expensing interest is a normal cost of doing 

business. For me, it provides a peace of mind as well as a sense of stability and predictability 

by guaranteeing I will not be taxed on the cost of accessing capital , and that I can have more 

fiexibility when making important long-term financial decisions. 

If it weren't for interest deductibility, I wouldn't have been able to grow my business in such an 

effective manner. Being able to deduct interest has allowed me to employ many Utahns, and 

stimulate economic growth. 

As a business owner who has experienced first-hand what works and doesn't work in the tax 

code, I can tell you that full interest deductibility works. I ask that you keep it in place. 

Connor Pyle 

Centurion LV 
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How Tax Reform Will Grow Our Economy and Create Jobs 

Written Testimony of the 

Coalition for a Prosperous Ametica 

Before the Committee on Ways and Means 

U.S. House of Representatives 

May 18,20 17 

The Coalition for a Prosperous America (CPA) appreciates the opportunity 10 provide 

testimony to the Committee on Ways and Means regarding the likely impact of tax reform on the 

US economy. CPA is a national, non-partisan organization focusing upon improving American 

trade performance, eliminating our persistent trade deficit, and growing domestic supply chains 

as a means to achieving broadly based prosperity in the US. Our members are organizations, 

companies and individuals involved in or representing manufacturing, agricultural and worker 

interests. 

1. Summary 

1. 1 The Coalition for a Pros11erous America supports Chairman Brady's commitment 

to the principles of border adjustable, destination based taxation. Rate reduction is less impo•1ant 

for trade competitiveness and economic growth than moving our tax mix towards b01·der 

adjustability. However, CPA has no position on the optimum business tax rate. 

1.2. CPA supports a new border adjustable consumption tax (Goods and Services 

Tax) that funds a fuU credit against aU payr oll taxes. 

1.2.1. The US over consumes, under saves and undemlilizes our labor capacity. 

1.2.2. A new U.S. goods and sen•ices rax (GST) of approximately 12% should 

be enacted to shif\ taxation to consumption using the credit/invoice method. 

1.2.3. GST proceeds should be applied as a full credit against the 15.3% rate of 

payroll taxes to reduce the cost of labor in the US while increasing after tax wages. 

1.2.4. Exported goods and services would receive a filii rebate. Imports would 

pay theGST. 

1.2.5. Small business with less than, for example, one million dollars could be 

exempted without sacrificing significant tax revenue. 

1.3. CPA also supports a change to a border adjustable pt·ofil lax (sales faclot· 

apportionment - SFA) for all business entities to replace the current corporate tax system. 

1.3.1. SFA is a destination based profit tax. Pretax income is allocated to the US 

in proportion to the percentage of a company's total sales in the US. 

1.3.2. Pre-tax income earned outside the US is not taxed. 

1.3.3. Tax rates can be lowered substantially while still meeting revenue targets. 

2. Enacl a 12% Consumption Tax and Eliminate the 15.3% Payr oll Tax Burden 
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The US corporate tax system harms America's trade competitiveness, overtaxes income from 

wages, undertaxes consumption and is bad at actually collecting what is owed. It also enables 

rampant base erosion tlll'Ough economically fictitious oiTshoring of profits. Full reform centered 

around destination based, border adjustment principles can result in an efficient, trade 

competitive, and largely tamper proof tax system 

2.1. Neutralizing foreign VATS for trade competitiveness: Most countries in the 

world have shitled a significant portion of their tax mix to border adjustable consumption taxes -

value added taxes (VATs) or goods and services taxes (GSTs). GSTs are tariff and subsidy 

replacements - mimicking a currency devaluation - if a country raises tbe GST AND uses 

proceeds to lower purely domestic taxes and costs. 

The map below shows which nations have consumption taxes (red) and which do not 

(blue). Because foreign consumption taxes are border adj ustable, CPA members who exp01'! are 

double taxed. They pay US taxes and the foreign border tax. hnporters can ship cheaper 

products because they do not pay US taxe.s and receive a consumption tax rebate from their home 

country. 

Consumption taxes are called goods and services taxes in Canada, Australia, New 

Zealand or value added taxes in other countries. Goods and services are taxed as to the 

incremental value that is added at each level of the supply chain. This is called the credit/invoice 

method. It is WTO legal. The figure below illustrates how it works. 

2 
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The US should eliminate this global tax discrimination by enacting a goods and services tax 

(GST), using the added revenue to provide a full credit against both the worker and company 

share of the 15.3% payroll tax.

1 lbe most significant economic gains from this shift arise from 

reducing domestic labor costs by 15.3% which are embedded in all US goods aod services. 

A broad based 12% GST could raise $1.4 trillion in new revenue? Payroll tax revenue in 2015 

was 33% of total tax revenue at $1.056 trillion.

3 

Millions 

$1.400 

$1,050 

$700 

$350 

so 

Estimated 

2015 Revenue: 

Tax Policy Center 

12%GST 

I Actual 

2015 Revenue: 

Center for Budget 

and Policy Prior~ies 

15.3% Payroll Tax 

US trade competitiveness would be substantially improved because exports are freed from both 

the GST and payroll tax burden. Imports never include the cost of the US payroll tax but would 

pay the Gs·r. lbis effect has been called Fiscal Devaluation because it mimics a currency 

1 We do not propose eliminating the payroll tax, but rather to apply a full credit against it. 

Consumption then funds Social Security, Medicare, Medicaid system. By avoiding payroll tax 

elimination in favor of a full credit, unnecessary political battles are also avoided. 2 Toder, Nunns. Rosenberg, "Using a VAT to Reform the Income Tax.'' Tax Policy Center, 2012, 

pg 20. 3 "Policy Basics: Where Do Federal Tax Revenues Come From?" Center on Budget and Policy 

Priorities. March 4, 2016 

3 
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devaluation for trade purposes 4 It only works if you combine a new GST with a ubiquitous 

domestic tax or cost reduction. The optimal domestic tax reduction is the payroll tax burden. 

2.2. Domestic Prices vs. Wages would not Worsen: The domestic consumers and 

workers are held harmless for these reasons. The payroll tax is embedded in the cost of all goods 

and services. Thus eliminating it lowers goods and services prices - or increases wages 

depending upon the particular competitive forces in each product sector. A GST raises goods 

and services prices. The GST/payroll tax combination would largely cancel each other out 

thereby holding the domestic economy harmless. 

2.3. Improve upon the modern GSTs of Canada, Australia and New Zealand: The 

more modern GSTs implemented by free market economies are in Canada, Australia and New 

Zealand. The compliance and administration burdens are relatively low in comparison to other 

taxation methods. The US can learn from those and other countries' experiences to implement 

the most modern, streamlined GST in the world. 

3. Enact a Destination Based Profit Tax (Sales Factor Apportionment) to replace the 

Corporate Tax System 

CPA favors a border adjustable business tax (for all entity types) which allocates pre-tax 

income based upon the destination of sales. Formulary apportionment based upon a single sales 

factor (sales factor apportionment or SFA) is well established at the state level. It solves most of 

the base erosion/profit shifting and tax haven abuse problems facing tax writing committees. 

SF A eliminates the disparate tax treatment between domestic companies (who pay the full 

income tax burden on worldwide income), multinationals (many of which shift profits to tax 

havens), and foreign companies (which pay a territorial income tax). 

CPA's support is based upon our trade competitiveness preference for border 

adjustability. SFA taxes pre-tax income allocated to the US but not profits allocated to foreign 

sales. Domestic firms can legitimately "avoid" taxation by exporting more. Profits from imports 

are subject to tax. Domestic, multinational and foreign firms are on an equal tax footing. 

The current corporate tax system cannot be fixed because it allows the fiction of intrafirm transactions to erode the tax base. Multinational companies use them to self-deal, strictly 

for tax purposes, shifting income to tax haven jurisdictions. Companies sell products or services 

to themselves, governed only by an "arms length" principle which allows them to create their 

own pricing terms subject to a nearly unenforceable "fair market value" constraint. 

The intra-company transactions are not free market, arms length or true third party 

transactions. The only economically meaningful "sale" is one to a true third party outside the 

company. As much of 30% of tax revenue may be lost from profit shifting to tax haven 

4 Farhi, Gopinath, and ltskhoki, "Fiscal Devaluations", Federal Reserve Bank of Boston, 

Working Paper 12·1 0, (October 18, 2012) 

4 
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jurisdictions which have effective tax rates of 0-4%.5 These include Bennuda, Netherlands, UK 

Caribbean Islands, Ireland, Luxembourg, Singapore, and Switzerland. 

40 

30 

20 

10 

• Effective Corp Tax Rate 1 

IT ax Haven Comparison) 

Ne~-- therlands --~~ Bermuda Ir-------­ eland luxembourg Singapore UK Switzerland U.S. 

s Clausing, 2015 

5 

Islands 

Carribbean 
277 

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For example, assume a multinational corporation has worldwide sales of $100 billion, 

$50 billion sales in the US and company-wide pretax income of $10 billion. Fifty percent of the 

the profits, under SFA, are apportioned to the US. So the profits to be taxed in the USA in this 

case are $5 Billion. Using a 20% corporate tax rate yields an SFA tax of$1 billion. Intracompany transactions with a Bermuda subsidiary would be irrelevant. 

Merely lowering the US corporate tax rate to, for example, 15% without further reform 

would not eliminate the tax competition with tax haven jurisdictions. SFA would make tax 

havens irrelevant because true sales to any foreign country would be ignored. IRS litigation 

centered around the proper fair market value of intra-firm transactions would disappear. Only 

profits allocated to the US in proportion to true third party sales would be taxable. 

Virtually all states use formulary apportionment for their state corporate tax system to 

allocate pre-tax income fairly to the state tax base, ignoring income attributed to outside tax 

jurisdictions. Most states use a single sales factor, though some use payroll and property as 

factors. 

SF A would allow a significant reduction in the business tax rate while collecting similar 

revenue because base erosion is largely fixed. By one estimate, a 13% corporate tax rate under 

SFA would collect the same revenue as the current system6 Whether or not a 13% rate is the 

appropriate target given government revenue goals, it is clear that a lower rate is eminently 

achievable. 

4. Conclusion 

The US tax system should shift to more border adjustability through destination based 

taxation. If the House GOP Blueprint does not gain Senate or White House support, the Ways 

and Means Committee has solid alternatives to meet their goals. CPA supports enacting (1) a 

new GST to fund a full credit against payroll taxes, plus (2) a shift to sales factor apportionment 

of global profits as an alternative to our current corporate income tax system. 

Respectfully submitted, 

Daniel DiMicco, Chairman 

Brian O'Shaughnessy, Vice Chairman 

Michael Stumo, CEO 

6 Michael Udell and Aditi Vashist, "Sales Factor Apportionment of Global Profits as an 

Alternate Construction of a Corporate Income Tax Base," District Economics Group, July 14, 

2014 (pg 21). 

6 
278 


33393.206

COALITION FOR FAIR 

EFFECTIVE TAX RATES 

Statement for the record by the Coalition for Fair Effective Tax Rates 

May 18,2017 

The Coalition for Fair Effective Tax Rates appreciates the opportunity to provide this 

statement in support of your effort to reform our nation's tax code. In short, our coalition 

encourages you to pursue comprehensive tax reform and to view its progress through the 

lens of effective tax rates, the amou nt that businesses actually pay in taxes expressed as a 

percentage of their income. 

The Coalition for Fair Effective Tax Rates is a diver-se group of national, regional and state 

associations representing more than 1,500,000 businesses, large and small, that support 

comprehensive tax reform. Our coalition is bound together by the belief that rates should 

be reduced for both corporations and pass-through entities and that now-wide disparities 

in effective tax rates paid by various industries should be eliminated. 

The coalition believes that our federal income tax code is broken and must be overhauled. 

The tax system should be simplified and the tax base broadened to generate greater 

economic activity and job creation. To accomplish that, we believe that tax rates should be 

lowered for corporations as well as the vast majority of businesses that pay taxes through 

the individual rate system. 

La rge disparities exist between the amount of taxes paid by various industries regardless 

of how the companies ar·e organized. Successful reform should be measured by lawmakers' 

ability to create a more level playing field for businesses of all sizes across all industry 

sectors based on effective tax rates. 

The current disparity in effective tax rates paid by different U.S. industries is huge. 

According to the U.S. Treasury, effective actual federal corporate tax rates paid between 

2007 and 2010 ranged from 30.3 percent to 14.5 percent. The gap is not only unfair to 

high-effective-rate-paying companies, it is hurting our economy by distorting the allocation 

of investment among industr·ies and artificially subsidizing certain industries while 

penalizing others because tax preferences disproportionately favor one set of companies 

over other·s. 
279 


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COALITION FOR FAIR 

EFFECTIVE TAX RATES 

This fact should be a fundamental guide for your committee's reform efforts. Entities 

should not pay radically different amounts of tax if they earn roughly the same amount of 

money. This is not just a matter of fairness, it's also about having a tax policy that is 

economically sound. 

Thank you in advance for pressing forward with comprehensive tax reform. 

Management Committee, Coalition for Fair Effective Tax Rates: 

Associated Builders & Contractors 

Associated General Contractors 

International Foodservice Distributors Association 

International Franchise Association 

National Association of Wholesaler-Distributors 

Small Business and Entrepreneurship Council 
280 


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MEMBERSHIP: 

Alabama Retail Association 

American Apparel & Footwear Association 

American Council of Engineering Companies 

American Lighting Association 

American Rental Association 

American Subcontractors Association, Inc. 

American Supply Association 

American Trucking Associations 

American Veterinary Distributors Association 

Arizona Builder's Alliance 

Arizona Retailers Association 

Asian American Hotel Owners Association 

Associated Builders & Contractors 

Associated Builders & Contractors of Alabama 

Associated Builders & Contractors of Arkansas 

Associated Builders & Contractors of Central Texas 

Associated Builders & Contractors of Connecticut 

Associated Builders & Contractors of Delaware 

Associated Builders & Contractors of Greater Michigan 

Associated Builders & Contractors of Hawaii 

Associated Builders & Contractors of Metro Washington 

Associated Builders & Contractors of Michigan 

COALITION FOR FAIR 

EFFECTIVE TAX RATES 

Associated Builders & Contractors of M innesota & North Dakota 

Associated Builders & Contractors of M ississippi 

Associated Builders & Contractors of North Alabama 

Associated Builders & Contractors of Southeast Texas 

Associated Builders & Contractors of Virginia 

Associated Builders & Contractors-carolinas Chapter 

Associated Builders & Contractors-Central Florida Chapter 

Associated Builders & Contractors-Central Ohio Chapter 

Associated Builders & Contractors-Central Pennsylvania Chapter 

Associated Builders & Contractors-Eastern Pennsylvania Chapter 

Associated Builders & Contractors-Empire State Chapter 

Associated Builders & Contractors-Florida East Coast Chapter 

Associated Builders & Contractors-Georgia Chapter 

Associated Builders & Contractors-Greater Houston Chapter 

Associated Builders & Contractors-Illinois Chapter 

Associated Builders & Contractors-Inland Pacific Chapter 
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33393.209

Associated Builders & Contractors-Iowa Chapter 

COALITION FOR FAIR 

EFFECTIVE TAX RATES 

Associated Builders & Contractors-Keystone Chapter 

Associated Builders & Contractors-New Jersey Chapter 

Associated Builders & Contractors-New Mexico Chapter 

Associated Builders & Contractors-New Orleans/Bayou Chapter 

Associated Builders & Contractors-Northern California Chapter 

Associated Builders & Contractors-Northern Ohio Chapter 

Associated Builders & Contractors-Pelican Chapter 

Associated Builders & Contractors-Rhode Island Chapter 

Associated Builders & Contractors-Rocky Mountain Chapter 

Associated Builders & Contractors-San Diego Chapter 

Associated Builders & Contractors-Southeastern Michigan Chapter 

Associated Builders & Contractors-Southern California Chapter 

Associated Builders & Contractors-Texas Gulf Coast Chapter 

Associated Builders & Contractors-Western Michigan Chapter 

Associated Builders & Contractors-Western Washington Chapter 

Associated Equipment Distributors 

Associated General Contractors 

Associated General Contractors of America-Florida East Coast Chapter 

Associated General Contractors of Michigan 

Associated General Contractors of Ohio 

Associated General Contractors of Tennessee 

Associated General Contractors of Washington 

Associated General Contractors-Central Texas Chapter 

Association for Hose & Accessories Distribution (The) 

Association of Pool & Spa Professionals 

Auto care Association 

Business Solutions Association 

California Business Properties Association 

California Retailers Association 

Colorado Retail Council 

Connecticut Associated Builders & Contractors 

Construction Financial Management Association 

Convenience Distribution Association 

Education Market Association 

Equipment Marketing & Distribution Association 

Far West Equipment Dealers Association 

Food Industry Suppliers Association 

Food Marketing Institute 

Foodservice Equipment Distributors Association 

FPDA Motion & Control Network 
282 


33393.210

Gases and Welding Distributors Association 

Health Industry Distributors Association 

Healthcare Distribution Alliance 

COALITION FOR FAIR 

EFFECTIVE TAX RATES 

Heating, Airconditioning & Refrigeration Distributors International 

Independent Electrical Contractors 

Independent Insurance Agents & Brokers of America 

Independent Office Products & Furniture Dealers Association 

Industrial Supply Association 

International Association of Plastics Distribution 

International Foodservice Distributors Association 

International Franchise Association 

International Pizza Hut Franchisee Association 

International Warehouse Logistics Association 

Irrigation Association 

ISSA-The Worldwide Cleaning Industry Association 

Kentucky Retail Federation 

Kentucky-Indiana Aftermarket Wholesalers Association 

Louisiana Retailers Association 

Material Handling Equipment Distributors Association 

Metals Service Center Institute 

Mid-A me rica Equipment Retailers Association 

Motorcycle Industry Council 

National Association of Chemical Distributors 

National Association of Electrical Distributors 

National Association of Wholesaler-Distributors 

National Beer Wholesalers Association 

National Community Pharmacists Association 

National Confectioners Association 

National Electrical Contractors Association 

National Funeral Directors Association 

National Grocers Association 

National Insulation Association 

National Marine Distributors Association 

National Restaurant Association 

National Roofing Contractors Association 

Nebraska Retail Federation 

New Jersey Retail Merchants Association 

North American Equipment Dealers Association 

North Carolina Retail Merchants Association 

North Dakota Retail Association 

NPES-The Association for Suppliers of Printing, Publishing and Converting Technologies 
283 

f 


33393.211

Ohio Equipment Distributors Association 

Ohio-Michigan Equipment Dealers Association 

Outdoor Power Equipment & Engine Service Association 

Pennsylvania Retailers Association 

Pet Industry Distributors Association 

Petroleum Equipment Institute 

Power Transmission Distributors A.ssociation 

Printing Industries of America 

Retail Association of Maine 

Retailers Association of Massachusetts 

S Corporation Association 

Secondary Materials and Recycled Texti les Association 

Security Hardware Distributors Association 

Small Business and Entrepreneurship Council 

South Carolina Retail Association 

South Dakota Retailers Association 

Taco Bell Franchise Management Advisory Council 

Tennessee Retail Association 

Texas Retailers Association 

TEXO-The Construction Association 

Textile Care Allied Trades Association 

Truck Renting and Leasing Association 

Virginia Retail Merchants Association 

Water & Sewer Distributors of America 

West Virginia Retailers Association 

Wholesale Florist & Florist Supplier Association 

Woodworking Machinery Industry Association 

World Millwork Alliance 

COALITION FOR FAIR 

EFFECTIVE TAX RATES 
284 


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June I, 2017 

The Honorable Kevin Brady 

Chairman 

House Committee on Ways and Means 

II 02 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Richard Neal 

Ranking Member 

House Committee on Ways and Means 

II 06 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Peter Roskam 

Chairman 

House Subcommittee on Tax Policy 

1102 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Lloyd Doggett 

Ranking Member 

House Subcommittee on Tax Policy 

1106 Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Brady, Chairman Roskam, Ranking Member Neal, and Ranking Member 

Doggett: 

We write regarding the Committee's recent hearing on tax reform's potential to grow our 

economy and create jobs. These are goals that our companies and organizations share. To that 

end, we welcome the opportunity to highlight the positive contributions of tax incentives for 

energy efficient investment. In particular, the Section I 79D tax deduction for energy efficient 

commercial and larger multifamily buildings has leveraged billions of dollars in private capital, 

resulted in energy efficient enhancements to thousands of buildings, and created and preserved 

hundreds of thousands of jobs since its inception. 

These benefits are confirmed by a recent economic impact study conducted by Regional 

Economic Models, Inc. ("REM!"), the executive summary of which is attached to this statement 

as an appendix. REMI's conclusion is unequivocal, finding that "Section 1 79D is an engine of 

economic and employment growth. " In particular, an enhanced tax incentive for energy 

efficient commercial buildings could support up to 76,529 jobs and contribute almost $7.4 

billion toward our national GDP each year. These results represent a significant return on the 

taxpayer investment in Section 179D, well in excess of the provision's revenue cost. 

The study also confirms that extending the current version of Section I 79D or making 

more modest changes to the incentive would have a substantial positive impact on economic and 

employment growth. We encourage you to review the study in its entirety, by following this 

link. 

We urge you to keep the economic impact of Section 179D in mind as you consider 

comprehensive tax reform. Section 179D's proven ability to support economic growth and job 

creation aligns with the Committee's goals for tax reform. We look forward to working with you 

to ensure that tax incentives for energy efficient investment continue to be an engine of growth 

for our economy. Thank you for your consideration. 

Sincerely, 

Alliantgroup, LP 

Ameresco, Inc. 

American Institute of Architects 

BLUE Energy Group LLC 

Building Owners and Managers Association (BOMA) International 
285 


33393.213

Concord Energy Strategies, LLC 

Energy Systems Group, LLC 

Energy Tax Savers, Inc. 

National Electrical Manufacturers Association (NEMA) 

Natural Resources Defense Council 

U.S. Green Building Council, Inc. 

cc: Members of the House Ways and Means Cornmiuee 
286 


33393.214

11REMI 

Analysis of Proposals to Enhance and Extend the Section 

1790 Energy Efficient Commercial 

Buildings Tax Deduction 

Prepared by Regional Economic Models, Inc. (REMI) May 2017 
287 


33393.215

Executive Summary 

Section 1790 of the Internal Revenue Code, the Energy Efficient Commercial Buildings Deduction, was 

originally enacted by Congress as part of the Energy Polley Act of 2005 to promote energy 

independence. Section 1790 promotes the proper allocation of incentives in the real estate 

development process. A key challenge to realizing the benefits of energy-efficient improvements is that 

the associated cost savings flow to building occupants, not developers. By helping offset the cost of 

energy efficient investments, Section 1790 allows building owners to share in the incentive to install 

energy-efficient improvements that help their occupants save money on electricity, water, and climate 

control costs. In so doing, Section 1790 promotes private-sector solutions to improve conservation 

practices and modernize national infrastructure. 

In this analysis, REM I evaluates the economic impact of three potential approaches to the Section 1790 

deduction, which most recently expired at the end of 2016: 

1. Strengthening and Modernizing Section 1790,1 which would increase the value of the 

deduction to $3.00 per square foot from $1.80, increase the applicable energy efficiency 

standards, make it available to support improvements to existing as well as new buildings, and 

extend the deduction. 

2. Extension of Current Law Section 1790 plus Expansion to Non-Profits and Tribal 

Governments,' modeled on 2015 legislation developed by the Senate Finance Committee under 

Chairman Orrin Hatch (R-UT), which would extend the deduction, expand availability of the 

deduction to nonprofit organizations and tribal governments and increase the applicable energy 

efficiency standards. 

3. Extension of Current Law Section 1790,' modeled on the two-year extension of current law 

enacted as part of the Protecting Americans from Tax Hikes ("PATH") Act of 2015. 

The results of this analysis show that in addition to advancing the goal of energy independence, Section 

1790 is an engine of economic and employment growth. As captured in the table below, this study 

quantifies these impacts, finding that: 

Strengthening and extending the Section 1790 Energy-Efficiency Commercial Buildings 

Deduction will create jobs and expand the nation's economy. These benefits would be 

compounded by increasing the dollar value of the deduction in accordance with several 

Congressional and administration proposals. 

These enhancements to Section 1790 would support up to 76,529 jobs annually and contribute 

annually almost $7.4 billion to national gross domestic product ("GOP"), as well as over $S.7 

billion towards national personal income. 

Expanding the availability of the deduction to nonprofit organizations and tribal governments, 

while increasing the applicable energy efficiency standards, also provide clear positive impacts 

to the economy. 

1 Proposals along these lines include Title t of S. 2189, sponsored by Senator Cardin (O·MD) in the 113'" Congress 

and the President's FY 2017 Budget Proposal. See Description of Certain Revenue Provisions Contained in the 

President's Fiscal Year 2017 Budget Proposal, Joint Committee on Taxation, July 2016, JCS-2-16. 

' See Description of the Chairman's Mark of a Bill to Extend Certain Expired Tax Provisions, July 17, 2015, JCX-101· 

15, and Description of the Chairman's Modification to the Chairman's Mark of a Bill to Extend Certain Expired Tax 

Provisions, July 21, 2015, JCX-103·15. In addition to the Senate Finanoe Committee extenders bill, other proposals 

along these lines include H.R. 6376, sponsored by Congressman Reichert (R-WA) in the 114"' Congress. 1 General Explanation ofTax Legislation Enacted in 2015, Joint Committee on Taxation, March 2016, JCS·1·16. 
288 

f 


33393.216

Table 1. Average Annual Economic Impacts for First Ten Years 

Strengthen and Extension plus Extension of 

Modernize Expansion Current Law 

Jobs 76,529 39,388 40,749 

GOP (millions of dollars) 7,398 3,730 3,860 

Personal Income (millions of dollars) 5,729 3,017 3,128 
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33393.217

May 31, 2017 

JOINT STATEMENT FOR THE 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS AND MEANS 

ON BEHALF OF: 

American Hospital Association (AHA) 

National Association of College and University Business Officers (NACUBO) 

National Association of Health and Educational Facilities Finance Authorities (NAHEFFA) 

The associations listed above respectfully submit this statement to the House Committee on 

Ways and Means for the hearing on "How Tax Reform Will Grow Our Economy and Create 

Jobs" held on May 18, 2017. 

Together, we represent thousands of U.S. colleges, universities and hospitals as well as the 

finance authorities dedicated to providing capital financing for not-for-profit healthcare and 

higher education institutions. 

As Congress begins the hard work of reforming the nation's tax code: 

We respectfully urge Congress to protect and maintain tax-exempt bond 

financing, including qualified 501(c)(3) private-activity bonds, which is 

necessary for the missions and continued financial health of hospitals, 

colleges, universities, and other charitable organizations and which 

promotes critical infrastructure and economic development throughout the 

United States. 

Low-cost access to capital helps keep these institutions strong, enabling them 

to keep infrastructure expenditures low so that they can efficiently fulfill their 

mission and focus on the work they do for the public good- making our lives, 

our economy, and our nation stronger. 

While the recent hearing did not address the matter of tax-exempt bond financing, we observe 

the language in the House tax reform blueprint "A Better Way" which references repeal of 

"special-interest provisions" and are concerned that this may be construed to apply to taxexempt bond financing. 

One of the many ways the federal government invests in human capital and innovation in the 

United States is by granting tax-exempt status to hospitals, health clinics, colleges, universities, 

and other charitable institutions whose health, public service, education, and research missions 

provide a wide range of societal benefits. Hospitals, colleges, and universities are economic 

mainstays, providing stability and job growth in communities. 

Hospitals employed more than 5.7 million people in 2015, and purchased more than $852 billion 

in goods and services from other businesses. Each hospital job supports about 2 additional jobs, 

and every dollar spent by a hospital supports roughly $2.30 of additional business activity. 

There are more than 3,300 public and nonprofit colleges and universities in the U.S. educating 

nearly 19 million students, engaged in more than $67 billion in research and development, and 

contributing to a vast array of public service endeavors. 
290 


33393.218

May 31, 2017 

Public universities and hospitals are typically a component of state or local governments, while 

independent, community-based institutions are recognized as tax-exempt organizations under 

section 501(c)(3) of the Internal Revenue Code. Tax-exempt bond financing available to public 

institutions is also referred to as municipal bonds; it is available to nonprofit colleges, 

universities, and hospitals as qualified 501 (c)(3) private activity bonds. 

Our member organizations use these financial instruments to acquire, construct, renovate, 

and expand capital infrastructure such as clinics, sheltered workshops, hospitals, academic 

buildings, residence halls, modern energy plants, museums, and more. In 2016, higher 

education bond sales reached $18.4 billion and tax-exempt health care bond sales totaled$ 

49.6 billion. ' 

In general, for institutional borrowers, the interest rate on municipal bonds is significantly 

lower than on taxable bonds, thus creating beneficial financial terms. Indeed, the interest rate 

spread between taxable and tax-exempt bonds typically ranges between 150 and 200 basis 

points. The lower interest rates create significant savings by lowering the financing cost of 

multi-million dollar construction projects, often financed over a 30-year period. The lower 

financing cost allows hospitals and health care institutions to keep charges lower than would 

the case if taxable financing was used. For colleges and universities, the lower financing cost 

enables them to keep tuition lower than would be the case if taxable financing was used. 

For many institutions, public or private, revenue from operations or from restricted gifts simply 

does not provide sufficient funds to build, expand , and renovate the physical plant, property, 

and equipment needs necessary to meet their respective missions, and taxable debt is more 

costly, often by a material amount. 

These organizations employ bonds only after close scrutiny of risk and financial plans and 

manage them prudently. If an institution holds such tax-exempt debt, it is required to meet 

significant post-issuance disclosure and compliance requirements. 

Limiting the Interest Exclusion Will Raise Costs. A number of proposals have been made to 

Congress to alter the tax treatment of tax-exempt bonds. We believe a cap on the income tax 

exemption of tax-exempt municipal bond interest, or even a partial tax, will cause investors to 

demand higher returns , again leading to higher infrastructure costs. Higher borrowing costs can 

result in diminished investment in infrastructure, higher costs, fewer jobs, reduced public 

services, increased charges and fees, and constraints on the ability to fulfill their public mission. 

For example, according to a study conducted by IHS Markit2

, a 28 percent cap on tax-exempt 

interest exemption, based on average capital spending over the years 2003-2012, would reduce 

U.S. gross domestic product (GOP) by $8.3 billion per year, costing the nation more than 

104,000 jobs and $5.5 billion in labor income annually. A complete elimination of tax-exempt 

interest would reduce GOP by $23.6 billion and cost 299,000 jobs generating $15.6 billion in 

labor income. 

1 The Bond Buyer Decade in Public Finance statistics. 2 http://www .naheffa.com/uploads/2/9/2/5/2925 16 11 /naheffaeconomicimpach·eport. pdf 
291 

f 


33393.219

May 31, 2017 

Proposals to reduce or eliminate the interest tax exemption would cost nonprofits billions more 

in interest expenses. Nonprofit organizations relied on 501 (c)(3) tax exempt financing to raise 

$554 billion for capital projects from 2003-2012. A 28 percent benefit cap on tax-exempt interest 

would have increased total interest expenses for nonprofits by $58.2 billion from 2003-2012, 

while a complete elimination would have cost nonprofits an additional $166.3 billion over that 

period. 

Tax-exempt bond financing for not-for-profits is a proven tool with a decades-long record of 

success for providing cost-effective vital public services and strengthening communities. Bond 

issuance for private nonprofit hospitals and universities is typically overseen by a unit of state or 

local government or a municipal bond conduit authority, which is authorized by the state 

legislature to issue bonded debt. 

Direct Pay Bonds. A variety of proposals have been made to restrict or alter tax-exempt 

financing mechanisms. One example is direct pay bonds, such as Build America Bonds 

(BABs). While these bonds were not available to nonprofits, many public colleges, universities, 

and hospitals issued BABs when they were available. While we would need to review the detail 

of any new proposals, we generally support direct pay programs if they are designed with 

adequate financial support to result in a financial instrument whose total costs are comparable 

with a tax-exempt bond. Should BABs be reinstated in some form, we support expanding 

eligibility to include private 501(c)(3) institutions. 

However, if continuity of federal subsidy payments is unreliable, as demonstrated under recent 

sequestration orders, we are skeptical that institutions will see direct pay bonds as a 

dependable budget and planning tool to lower borrowing costs. We encourage Congress to 

c:onsidAr dirAc! P<'~Y bonds <'lnd othAr prnpns<'lls <'IS compiAmAnts, <'lnd not >'IIIArnlltivAs, to I<'IXexempt bonds. 

Contacts: 

Chuck Samuels, NAHEFFA, casamuels@mintz.com, (202) 434-7311 

Liz Clark, NACUBO, tclark@nacubo.org, (202) 861-2253 

Mike Rock. AHA, mrock@aha.org. (202) 626-2325 
292 


33393.220

June 1, 2017 

The Honorable Kevin Brady 

Chairman, Committee on Ways & Means 

House of Representatives 

1101 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

The Honorable Richard Neal 

Ranking Member, Committee on Ways & Means 

House of Representatives 

341 Cannon House Office Building 

Washington, DC 20515 

As Congress considers tax reform, we, the undersigned, write to express our strong support for 

preserving and expanding the tax-exempt status of Private Activity Bonds (PABs). PABs represent a 

critical source of funding for important qualified projects and programs, including infrastructure, 

mortgage financing, economic development, the funding and refinancing of student loans, and much 

more. PABs catalyze private investment in projects and industries that may otherwise not receive 

conventional financing and, as such, are a key tool for states and local governments. 

PABs, which are one of the oldest tax policies on record and were included in our nation's first formal 

tax code, finance numerous projects and initiatives that are critical to citizens across the country. PABs 

are issued annually on behalf of thousands of private enterprises including small manufacturers, 

non profits, veterans, housing developers, universities, first-time farmers, cultural institutions, hospitals, 

and renewable energy providers. PABs are also used to fund low-cost non-federal education loans and 

refinancing loans, as well as housing programs for low- and moderate-income individuals and families. 

These projects and initiatives are supported and approved for PAB financing by state or local 

governments with the understanding that the projects are important to the economic development and 

long-range stability of their communities. 

In addition to lowering the costs associated with the development of critical projects or initiatives, PABs 

are a highly efficient way for the federal government to support job creation and community and 

economic development initiatives. PABs are a non-recourse debt instrument that have zero impact on 

local, state, and federal tax revenues. As a result PABs lower the cost of capital for countless community 

and economic development ventures without endangering taxpayer dollars. Countless projects around 

the country have benefited from PABs, which have enabled projects that would not ordinarily be 

undertaken to succeed (see attached). 

The Trump Administration recently recognized, in their 20171nfrastructure Initiative, the vital 

importance PABs play in supporting program and project development. The Initiative calls for the 

expanded eligibility of certain non-federal public infrastructure projects to receive PAB funding, as well 

as a removal of the cap on PABs that finance highway and freight transfer projects. We, the 

undersigned, believe Congress should follow suit, by expanding and preserving tax-exempt Private 

Activity Bonds as it works to reform the tax code. 

Respectfully, 

Council of Development Finance Agencies 

Education Finance Council 

National Council of State Housing Agencies 

National Development Council 

Performance Based Building Coalition 
293 

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Projects Benefitting from Private Activity Bonds 

Project Name: Colgan Meadows Apartments 

Location: Santa Rosa, CA 

Jobs Supported: 290 

Description: Multifamily housing bonds assisted 

financing of 84-unit affordable rental complex. 

Project Name: Holt Dairy Farms 

Location: Enterprise, UT 

Jobs Supported: 90 

Description: Industrial development bonds 

financed the construction of a disposal and 

utilizations system for manure from a dairy farm. 

Project Name: Austral Shipyard 

Location: Mobile, AL 

Jobs Supported: 1,900 

Description: These bonds helped Austral USA 

nearly double both its workforce and shipyard to 

complete work on US Navy contracts. 

Project Name: Appalachian Power Co. 

Location: Winfield, WV 

Jobs Supported: 95 

Description: The company acquired, constructed, 

and equipped certain solid waste disposal 

facilities with these bonds. 

Project Name: 1-495 Capital Beltway HOT Lanes 

Location: Northern Virginia 

Description: This highway project was financed 

with Qualified Highway or Surface Freight 

Transfer Facilities bonds. 

Project Name: Rapid Bridge Replacement Project 

Location: Pennsylvania 

Description: This highway project was financed 

with Qualified Highway or Surface Freight 

Transfer Facilities bonds. 

Project Name: Andalzuas Highway Expansion 

Location: Mission, TX 

Jobs Supported: 210 

Description: The highway expansion, financed 

with tax-exempt bonds, will increase trade 

between Texas and Mexico. 

Project Name: Vermont Center for the Deaf and 

Hard of Hearing 

Location: Brattleboro, VT 

Jobs Supported: 228 

Description: Energy saving improvements and 

campus renovations were made possible with 

501(c)(3) bonds. 

Initiative Name: I Am College Bound/1 Applied 

Location: Concord, NH 

Students Supported: 1,054 

Description: This New Hampshire project helped 

1,054 students at 24 public high schools submit 

2,221 college applications. Each participating high 

school received one $500 scholarship. 

Project Name: Oconee Memorial Hospital 

Location: Seneca, SC 

Jobs Supported: 1,099 

Description: Acquisition of a 174,000 sq. ft. 

expansion and renovation to existing hospital 

facilities was made possible with these bonds. 

Project Name: North Tarrant Express 

Location: Fort Worth, TX 

Description: This highway project was financed 

with Qualified Highway or Surface Freight 

Transfer Facilities bonds. 

Project Name: Goethals Bridge Replacement 

Location: Staten Island, NY 

Description: This highway project was financed 

with Qualified Highway or Surface Freight 

Transfer Facilities bonds. 
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CoMMITTEE FOR A REsPONSIBLE FEDERAL BuDGET 

C HAIRMEN 

MITCH 0ANJEl.S 

l.E0.\1 i>ANE1T A 

nMI'tNNY 

PRESJO£NT 

MAYA MACCUiNtAS 

01RECTORS 

8ARRYANOf!ASON 

EltSKJNt80Wl.ES 

OtARLES BoWSHER 

KENT CONRAD 

DAN CRIPPEN 

VJCfAZIO 

Wu .. u SGRAOI$ON 

W ILUAM HOACl.AND 

jiMjONl!S 

LOU KERR 

jiMKOL.8E 

OAVEMCCUROY 

JAMES MCINTYRE. j'R. 

O.WIDMI:NCE 

MARNE. 08ERNAUE~ j R. 

j UNtO'Nt iU. 

f'AULO'NEfU. 

806 PAC:k.,VOOO 

RUDOlPH I:JtNNER 

l'nERI""""""" 

RoerRT REISCHAVllJl 

AliCI! RIVUN 

OtARI.ES R068 

ALAN K. SIMPSON 

JOHN SPRATT 

CHARl..IESnNHOUt 

Ge:... tSrWElti.E 

0AVIDSrocKMAN 

j0 HNTANN&R 

TOMTAUKE 

f'AUl VOLttER 

CAJtOI..COxWArr 

0AVIDM. WALKER 

)OS"'" IVRJCHT, JR. 

Committee for :t Rtsponsible Feder~d Budget 

Statentent for the Record for the Con1mittee on \Vays and lean s 

Oe;tring on "How Tax Reform \ViU Grow Our .Economy and Create J obs 

Across America." 

M:oy 18,2017 

Cbainuau Brndy, Ranking Member Neal, and dis1iuguished Members of Jbe 

Comminc-e on Ways and Means: 

Titauk you for tho opporruuity 10 provide wrinen testimony for tho ColUlllillcc's May 

18 hearing on «How Tax Refonn Will Grow Our Economy and Create Jobs Across 

AmeJica ... 

It has been more 1han 30 years sinoc Jhe Uniled Slates last reformed 1he federal lax 

code. and the need for modernization is as great as ever. TI1e cun·ent code is a drag on 

growth-discouragiug work, savings. aud investment while encouraging investment 

decisions based on rax planning rather than sound btL~i ess pracrice. Our statutory 

c.orporate income tax rate is among the highe-st in the world. discouraging foreign 

investment and putting American businesses at a disadvantage relative to inremarional 

competitors. The code also includes S 1.6 triiJion in aJU)ttal tax breaks that lose 

revenue. undennine faimess, and distort economic decision-making.; 

At a time \\oi1en demographic headwinds will make it much harder to achieve the high 

growth rates experienced in the past, tax rcfonn is one oftbe most importauttools for 

boosling gro\\1h that policymakers have allheirdis(>osal. 

Deficit-Financed Tax Cuts Can Be Counterproductive. \VItile c.ornprehensive tax 

refonn C3Il help grow the economy, debt-fmanccd tax cuts arc less likely to be 

effective and lllay even slow growth. Higher govemment debt crowds out private 

investment, which over time can dampen economic activity more than lower tax rates 

boost it. The best way to ensure tax refonu promotes economic growth is to reduce 

bolh tax rates and budge I deficils. 

Fiscally Responsible _Re(orm b J\fore Pro-Growth. The JoUu Cornmittee on 

Taxation (JCT) has cstiUUttcd that revenue-neutral i.udividual tax rcfonu that lowers 

rates and broadens the tax base could increase the size of the economy by 1. I to 1.8 

percent in the Jong-nm.ii JCT aJso estinlatt.-d that revenue-raising Ulx rcfonn of the 

same design would be even more pro-growth, increasing the long-nut size of the 

economy by 1.7 10 2.2 por<:cul. because it would help slow the uususlaiuable rise iu 

govemrnent debt that is orhenvise projected to crowd out private investment and hold 

the e<:ouonty back. 

19001\1 Street NW • Suile850 • Washington, DC 20036 • Phone: 202-596-3597 • Fax: 202-478-0l\S I • Wl,~v.crtb.org 
295 

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• Page2 

Faster Growth \Vould llelp the Fiscal Situation. There are cnonuous benefits to faster economic 

growth. including higher wages, more jobs, and greater economic security. Faster growth also 

weans more taxable income and tJtus tax revenue generated without increasing tax rates. A 0.2 

percentage point increase in the annual growth rate., for example .• would reduce deficits by about 

$550 billion over a decade and reduce debt in 2027 by about 4 percent of Gross D<>westic Product 

(GOP), a small bm meaningful down payment. 

Dyo:mtic Revenues Should Be Devoted to De[icit Reduction. Given our datutting loug-tenu 

fiscal gap, any revenue lax reform might genernle dtrough greater economic growth should go 

toward reducing projected budget deficits. Here you should follow the lead of fonucr Chairman 

Dave Camp. JCf estimnted that his ·"Tnx Refonu Act of20 14" would have generated between SSO 

and S700 billion in dynamic revenue, which Chairman Camp to deficit reduction rnther 

than additional rate cuts. n• 

lmpo1tandy, if d1e gains from growth are used to finance tax rcfonu, they CaJiliOt also be used 10 

help address our mounting debt. TI1e sante funds canuo1 be used twice. 

As the Couuuittce moves forward iu developing tbc pro-growth tax rcfonu the cowury needs, we 

stand ready to work with you to help develop a piau that is fair, pro-gro"1h, a11d fiscally 

responsible. Ow· principles for lUx rcfonn arc available here.'\' 

:. up //"~vw fu orglblogsljc -eslimales rc'(;()rd- 16 trill on lax brcaks-20 17 

"hups://www.fwaucc.senale.gov/imo/mcdia/doc/Comprchcnsive Tax Rcfo11u for 20 I 5 and 

!}eyondS.)xlf, p. 336 

:• lmp://www.crfu.orglblogslcamp-makes-more-fiscally-responsible-choices 

I\' http://www.crfb.orglpapers/principles-responsible-tax-refonu 

1900 M $I reel NW • Suite 850 • Washington, DC 20036 • Phone: 202-596-3597 • Fax: 202-478-0681 • www.crfu.org 
296 


33393.224

CompTIA 

United States House Committee on Ways 

and Means Hearing on How Tax Reform 

Will Grow Our Economy and Create Jobs 

May 18,2017 

CompTIA 

515 2nd Street NE 

Washington, D.C. 20002 

Th ank you for the opportunity to express our views on this very important subject . On behalf of 

th e Computing Techn ology Industry Association (CompTIA), I urge members of the House 

Committee on Ways and Means, and the Congress as a whole, to pursue much-needed reforms 

to our corpo rate tax code. 

Th e Computing Techn ology Industry Association is a non-profit trade association serving as the 

voice of the informati on techn ology (IT) industry. 1 With approximat ely 2,000 member 

compani es, 3,000 acade mi c a nd training pa rtne rs, and nea rly 2 million IT certifi cations issued, 

CompTIA is de di cate d to adva ncing industry growth through educa tio nal programs, ma rket 

resea rch, networking events, professiona l certifi cations, and public advocacy. 

A competitive t ax policy th at lowers th e corporate rate, employs t e rritori a lity, and incentivizes 

innova tion a nd investme nt in the United Stat es, is criti cal fo r Ame ri ca n technology compani es to 

thrive in the United Stat es a nd the world. Our industry and ma ny othe rs a re constrained by an 

outmoded and compl ex fede ral t ax code that is in need of overha ul to refl ect the dynamism of 

Ame ri can ingenuity. Th e U.S. corporat e t ax rat e is amo ng the highest in th e industri a li zed world, 

and of the countri es that employ a te rritori al t ax syst em, it is more tha n SO pe rcent highe r (39 

pe rcent) tha n th e next ranking country (23 pe rcent). 2 

Our membe rs s uppo rt leveling th e playing fi e ld both domesti ca lly and inte rna tio nally, see king t o 

e limin ate the inequities of th e curre nt t ax code, including the eve r-increasing costs assoc iat ed 

with t ax complia nce. Any corporate tax reform proposa ls must treat th e info rma tion t echno logy 

1 uAbout Us.u CompTIA. https://www.comptia.org/about-us 

2 uCorporate Income TaK Rates Around the World, 2016.u TaK Foundation. August 18, 2016. https://taKfoundation.org/corporateincome-taK-rates·around-world-2016/ 

515 2nd St ., N .E . Washington, DC 20002 

www.comptia.org 
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industry equitably- both large companies, as well as small- and medium-sized businesses. 

Specifically, CompTIA supports the following principles within the broader context of corporate 

tax reform: 

Reduce the corporate tax rate to 20 percent. U.S. companies are burdened with the 

highest corporate tax rate among OECD countries, making them less competitive with 

their foreign counterparts. We support reducing the corporate tax rate to no higher 

than 20 percent, without increasing taxes on small- and medium-sized businesses. 

Enact a territorial international tax system. The U.S. is one of a handful of developed 

countries that taxes corporate earnings on a global basis. This means that a U.S. 

company's foreign earnings are subject to U.S. tax when repatriated, increasing the 

foreign tax rate on these earnings to the U.S. rate. We support enactment of a territorial 

international system that would remove the punitive tax that prevents foreign earnings 

from being repatriated to the U.S. 

Tax repatriated profits at a lower rate. We support legislation that incentivizes U.S.-

based companies to reinvest profits back into the U.S. by allowing those repatriated 

profits to be taxed at a lower rate. Currently, companies are discouraged from 

repatriating their profits because of the high corporate tax rate that would result. 

Tax 11 innovation box profits" at a lower rate than the corporate rate. We support 

policies that foster innovation such as a 11patent box" to attract and retain domestic 

intellectual property development and ownership. A lower rate of taxation on 

innovation would encourage companies to continue to reinvest in domestic IP 

development while remaining competitive globally. 

Make the CFC look-through rule permanent. The territoriality provisions of most other 

developed countries allow domestically-based companies operating abroad to structure 

their foreign operations without the additional home country tax of the sort imposed by 

the U.S. Subpart F rules. In December 2015, the rule was extended through FY20 in the 

FY16 omnibus. Making the CFC look-through permanent would allow U.S. based 

companies to marshal their capital outside the U.S. in a way that would enable them to 

compete on a more level playing field with their foreign counterparts. 

The last major tax reform occurred in 1986. While many support reform, Congressional debate 

continues, and timing for action remains uncertain. Such uncertainty hinders growth. The United 

States has long been the global hub for innovation, but absent broad, commonsense reforms to 

our tax code, innovation, job, and economic growth could all be stifled, threatening our position 

as the global leader. 

CompTIA welcomes this opportunity to offer our perspective on this issue and others facing the 

IT industry and nation. The information, communication and technology sector is one of the 

largest industry sectors in the U.S. economy. The market is $3.7 trillion globally, and $1 trillion in 
298 

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the United States, employing approximately 7 million Americans' To put this into perspective, 

the gross output of the technology sector exceeds that of the legal services industry, the 

automotive industry, the airline industry, the motion picture industry, the hospitality industry, 

the agriculture industry and the restaurant industry, just to name a few examples (source: U.S. 

Bureau of Economic Analysis). 

The technology industry not only helps drive economic growth In a multitude of ways, but it 

continues to significantly enrich how we live, work, and play. We stand ready to work with you, 

and I am happy to address any questions you may have. 

Respectfully, 

Elizabeth Hyman 

Executive Vice President, Public Advocacy 

1 "Cyberstates 2017." CompTIA. March 2017. http://cyberstates.Ofg/# 
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~ CRANECOALITION 

Cost Recovery Advances the Nation's Economy 

STATEMENT FOR THE RECORD 

COMMITIEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON HOW TAX REFORM Will GROW THE ECONOMY AND CREATE JOBS 

MAY 18,2017 

CRANE Coalition 

cjo Ogilvy Government Relations 

111119'" St ., NW, Suite 1100 

Washington, DC 20036 

cranecoalition.org 

The CRANE Coalition is the voice of companies and trade groups representing industries that 

invest heavily in business equipment and machinery in the United States. The tax code can make a 

critical difference in the economics of domestic investment and thus can help d etermine the risktolerance and budget for investment by individual companies. In turn, the level of national investment 

in the latest and most productive equipment and machinery is a key determinant of t he country's future 

prosperity and standard of living. 

During the previous tax reform efforts in this committee and in the Senate Finance Committee, 

starting in 2011, CRANE members were deeply concern ed about efforts in both committees to cut back 

accelerated depreciation of capital investments-- cutbacks that that would have hiked the cost of 

capital for domestic investment. CRANE published a study in 2015 explaining the adverse economic 

consequences of cuts in MACRS-the tax code's longstanding system of accelerated depreciat ion. 

CRANE also published a study in 2015 showing the long-term revenue consequences of cuts in MACRS 

and demonstrating why such cuts are an inappropriate revenue offset for permanent tax reforms. 

What CRANE members understand well is that rapid cost recovery is fu ndamentally about cash 

flow and t hat, for most companies, cash flow is a key determinant of investment. While some U.S. 

companies may be in a position to freely access the capital markets for all their capital needs, most are 

not - for financial, prudential, or other reasons. For most companies, if cash flow declines because of 

cuts in MACRS, investment inevitably will decline along with it. 

In short, as we have pointed out for the last two years, accelerated depreciation promotes 

domestic investment and economic growth. Its repeal has no logical place in a tax reform measure 

meant to help get the t ax code out of the way of the country's economic growth. The superiority of 

rapid capital cost recovery as a tool for promoting economic growth in tax reform has been documented 

both in a study by the Treasury Department under President George w. Bush and in a 2011 article by 
300 


33393.228

three economists on the staff of the Joint Tax Committee on Taxation, among other sources. 1 The 

Treasury study determined explicitly that improvements in capital cost recovery would boost economic 

growth more effectively than other tax reform options. 

CRANE members strongly support the shift of thinking in this committee, reflected in the tax 

reform "blueprint," in the direction of more-rapid recovery of capita l costs and away from cutbacks in 

MACRS. Although a tax reform measure can serve multiple purposes, clearly the main driver of such a 

bill wil l be to spur faster economic growth for the benefit of all Americans. Rapid cost recovery is key to 

stimu lating investment and spurring growth. 

For today's hearing record, we believe it is important for the committee to understand 

accelerated depreciation from an historical perspective. For more than six decades, Congress has taken 

a series of steps to speed up the pace of cost recovery as a means of stimu lating domestic investment 

and boosting economic growth. Congress today wou ld be acting in a manner fully consistent with the 

history if it took further steps to speed up cost recovery to boost growth. 

Th e federal income tax was in place for four decades before the first permanent allowances for 

accelerated depreciation were added into the tax code, in 1954. The Internal Revenue Code of 1954 

authorized the use of the double declining balance method and sum of the years' digits method of 

depreciation for assets with a useful life of more than three years. In adopting those provisions, a 

committee report explained that the provision would boost investment and economic growth: 

More libera l depreciation allowances are anticipated to have far-reaching economic 

effects .... The acceleration in the speed of the tax-free recovery of costs is of critica l 

importance in the decision of management to incur risk. Th e faster tax write-off wou ld 

increase avai lable working capital and materially aid growing businesses in the financing 

of their expansion. For all segments of the American economy, libera lized depreciation 

policies shou ld assist modernization and expansion of industrial capacity, with resulting 

economic growth, increased production, and a higher standard of living.' 

Over the decades from 1954 to the present, accelerated depreciation has gradually become 

more deeply embedded in federal tax policy. In 1958 and again in 1962, Congress liberalized the rules in 

a number of ways, such as by enacting section 179, which then, as today, was meant to provide rapid 

write-oils for smaller businesses. During the 1960s and 1970s, the administrative rules and regulations 

under which taxpayers determined the depreciable lives for assets moved steadi ly toward shorter lives 3 

The asset depreciation range (ADR) system prescribed by the Treasury Department in 1971 expli citly 

allowed taxpayers to se lect depreciable lives shorter than the Treasury's calculation of industry average. 

1 U.S. Department of the Treasury, Approaches to Improve the Competitiveness of the U.S. Business Tax System for 

the 215t Century, Dec. 20, 2007, p 48; Bull, Dowd, and Moomau, "Corporate Tax Reform: A Macroeconomic 

Perspective," National Tax Journal, Dec. 2011, 64(4), p. 940. 2 See U.S. Treasury Department, Office of Tax Analysis, "A History of U.S. Tax Depreciation Policy," OTA Paper 64 

(May 1989), p. 13. 3 ld., at 12-19. 
301 

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In the 1980s, Congress further embedded accelerated depreciation in the tax law by enacting 

the accelerated cost recovery system (ACRS) and its scaled-back version, the modified accelerated cost 

recovery system (MACRS). As the rules settled out in 1986, most types of equipment were depreciable 

over either five years or seven years. Depreciation periods longer than five years applied to real 

property, public utility property, some transportation property, and certain other long-lived assets, but 

those periods were shorter than the periods applicable in the 1970s. Accelerated methods of 

depreciation (such as the double declining balance method) continued to apply to most types of assets 

other than real property. The accelerated depreciation rules adopted in the 1980s have persisted to 

the present day. 

During the last 15 years, rapid recovery of capital costs has become even more central to the 

U.S. tax system as Congress has provided an add-on system of bonus depreciation during most of those 

years. Bonus depreciation has allowed taxpayers to deduct in the first year a prescribed portion of the 

cost of assets, ranging from 30 percent to 100 percent, depending on the particular year. The regular 

depreciation allowance (computed with respect to portion of the cost basis, if any, remaining after the 

bonus depreciation deduction) has remained applicable. Most depreciable assets other than public 

utility property and other such long-lived assets are eligible for bonus depreciation. Bonus depreciation 

is currently in effect through 2019. 

Finally, in 2015 Congress made the expensing provision of section 179 permanent at the level of 

$500,000. 

In sum, accelerated depreciation represents an evolutionary process by the federal government 

over more than six decades to tilt the federal tax system in a direction that promotes investment and 

long-term economic growth. Tax writers today would be acting out of that tradition in further speeding 

up cost recovery and promoting domestic investment. The very gradual pace of adoption of MACRS, 

bonus depreciation, and the $500,000 level of section 179- over more than 60 years- is an obvious 

indication that the opportunities for such changes do not come along frequently. The current tax 

reform debate is the right time for Congress once again to consider deploying the tool of rapid cost 

recovery to boost the economy. 

Again, the CRANE coalition strongly applauds the renewed focus of the committee on the critical 

importance of domestic capital investment and on the tax tool that has long proved effective at 

stimulating it. 

3 
302 


33393.230

l' ~ Credit Union 

J --(.. National 

cu NA Association 

May 18, 2017 

The Honorable Kevio Brady 

Cbainnan 

Comminee on Ways and Means 

Jim Nussle 

President & CEO 

......,, 202-50U74S 

jnuulftkUN·.<oop 

601 P.wylv~ni~ AvetWO tNI 

Sou1h Building, Suit a 600 

WJrShington, D.C. 2()004..2601 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House of Representatives 

Washington, DC 20515 

United States House of Representatives 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of the Credit Union National Assoc iation (CUNA), I am writing in strong support of 

the preservation of the credit union tax status. CUNA represents America's credit unions and 

their more than 110 million members. Credit unions are Americans' best option for [mancial 

services, and the credit union tax stants represents one of the best investments that the 

government makes in its citizens. We urge Congress to retain and reaffirm the credit union tax 

status. 

The importance of having not·for·profit credit un ions as vibrant and viable alternatives in the 

finaocial services marketplace is as significant today as it has ever been. Credit unions provide 

accessible and affordable basic linancia l services to people of a ll means and encourage the 

equitable distribution of capital across all individuals, famiHcs, conununities and small 

businesses. Credit unions inft.tse financial market competition with multiple and differentiated 

competitive business models. 11tey help keep financial services accessible - and affordable - for 

all consumers, whether they are members of a credit union or not. 

In the aftennath of the financial crisis, more Americans are choosing credit unions as their best 

finaocial partner. In fact, more than 12 million Americans have joined credit unioos since 2008. 

Some may have joined because their bank fai led, moved or was acquired by another instinttioo; 

and others may have joined because they grew frustrated with the policies and fees of the for· 

profit sector. What's important is that when they needed an alternative, a healthy credit union 

system with the capacity to grow was ready to serve !hem, and as c redit union members, they 

benefit from conducting !heir financial servic.es with an institution that they own. The credit 

union tax stan1s is crucial to encourage and suppon the continued existence of this alternative, 

cooperative component of the financial system. 

America's credit unions were deeply appreciative that H.R. 1, the Tax Reform Act of 2014, 

would have retained the credit union exemption from federal income tax. This reflects what we 

believe is the Committee's deep understandiog that the stmcture and mission of credit unions are 

the bedrock upon which the tax status is based and what makes credit unions unique wi!bin the 

financial services sector. 
303 


33393.231

l' ~ Credit Union 

J --(.. National 

cu NA Association 

May 18, 2017 

The Honorable Kevio Brady 

Cbainnan 

Comminee on Ways and Means 

Jim Nussle 

President & CEO 

......,, 202-50U74S 

jnuulftkUN·.<oop 

601 P.wylv~ni~ AvetWO tNI 

Sou1h Building, Suit a 600 

WJrShington, D.C. 2()004..2601 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House of Representatives 

Washington, DC 20515 

United States House of Representatives 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of the Credit Union National Assoc iation (CUNA), I am writing in strong support of 

the preservation of the credit union tax status. CUNA represents America's credit unions and 

their more than 110 million members. Credit unions are Americans' best option for [mancial 

services, and the credit union tax stants represents one of the best investments that the 

government makes in its citizens. We urge Congress to retain and reaffirm the credit union tax 

status. 

The importance of having not·for·profit credit un ions as vibrant and viable alternatives in the 

finaocial services marketplace is as significant today as it has ever been. Credit unions provide 

accessible and affordable basic linancia l services to people of a ll means and encourage the 

equitable distribution of capital across all individuals, famiHcs, conununities and small 

businesses. Credit unions inft.tse financial market competition with multiple and differentiated 

competitive business models. 11tey help keep financial services accessible - and affordable - for 

all consumers, whether they are members of a credit union or not. 

In the aftennath of the financial crisis, more Americans are choosing credit unions as their best 

finaocial partner. In fact, more than 12 million Americans have joined credit unioos since 2008. 

Some may have joined because their bank fai led, moved or was acquired by another instinttioo; 

and others may have joined because they grew frustrated with the policies and fees of the for· 

profit sector. What's important is that when they needed an alternative, a healthy credit union 

system with the capacity to grow was ready to serve !hem, and as c redit union members, they 

benefit from conducting !heir financial servic.es with an institution that they own. The credit 

union tax stan1s is crucial to encourage and suppon the continued existence of this alternative, 

cooperative component of the financial system. 

America's credit unions were deeply appreciative that H.R. 1, the Tax Reform Act of 2014, 

would have retained the credit union exemption from federal income tax. This reflects what we 

believe is the Committee's deep understandiog that the stmcture and mission of credit unions are 

the bedrock upon which the tax status is based and what makes credit unions unique wi!bin the 

financial services sector. 
304 


33393.232

This letter provides a brief background on credit unions and their tax treatment as well as an 

overview of the reasons that Congress should retain the tax status. In addition, this letter 

addresses the issue ofUBIT, the Unrelated Business Income Tax. 

Congress should preserve the credit union tax status because: 

the tax treatment for credit unions continues to serve the purpose for which it was 

conveyed; 

the tax status represents good public policy, because it causes the creation of substantial 

benefits to the public, far in excess of its cost; and, 

taxing credit unions would represent a tax increase on II 0 million Americans-taxpayers 

who paid a total of $1.2 trillion in taxes in 2014-and would likely lead to the 

elimination of many, if not most, credit unions. 

Background on Credit Unions and the Credit Union Tax Status 

Credit unions are member-owned, democratically governed, not-for-profit cooperative financial 

institutions generally managed by volunteer boards of directors, with a specified mission of 

promoting thrift and providing access to credit for provident purposes to their members, 

especially those of modest means. 1 Membership in a credit union is restricted to its field of 

membership, a concept that was originally used as a creditworthiness tool. Today, credit union 

fields of membership can include geographical areas in addition to employee, church or 

associational fields. An individual is not eligible to join any credit union, but we believe there is 

at least one credit union that every American is eligible to join. Some of the earliest credit unions 

were formed to provide small business credit to members to fund entrepreneurial endeavors; over 

the years, credit unions have adapted to meet the credit needs of their members, whether it is 

short term, small dollar personal loans, mortgage loans, car loans or small business loans. 

Credit unions were established at the Federal level during the Great Depression, but existed in 

many states as far back as 1908; their inception was driven by a demand for access to basic 

financial services- loans and savings. Through the enactment of the Federal Credit Union Act 

and the credit union tax status, as well as enabling legislation in all 50 states, Congress and the 

states have sanctioned and encouraged the development of a dual-charter credit union system 

that is an alternative to the for-profit banking sector, comprised of financial institutions 

controlled by members and accessible to all. 

1 14 usc 12 § 1751. 
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33393.233

The tax code from its earliest days has properly recognized the unique status and structure of 

credit unions. From the beginning, credit unions' tax treatment has been based on their structure 

and mission2 This basis has been reaffirmed several times since 1917, including in 1937 when 

Congress made clear in statute the tax status of Credit Unions; and in 1998, when Congress 

enacted the Credit Union Membership Access Act. Today, federally chartered credit unions' tax 

status is made clear by Section 501(c)(1 ) of the Internal Revenue Code; state chartered credit 

unions tax status is made clear by Section 501 (c)(l4) of the Internal Revenue Code. These tax 

policies were reaffirmed by the Internal Revenue Act of 1986. This is an important distinction as 

other tax policies were not specifically affirmed by the Act. 

The Tax Treatment of Credit Unions Continues to Serve the Purpose for which Congress 

Conveyed it 

Credit unions' federal income tax treatroent has been conveyed in order to support and sustain a 

system of cooperative financial services in the United States. The existence of this thriving set 

of alternative consumer-owned financial institutions benefits not only the members of credit 

unions, but also customers of for-profit banks and other institutions. A safe, sound and growing 

credit union system is a clear indication that the tax treatment of credit unions continues to serve 

the purpose for which it was conveyed. 

As the years have passed, the financial services sector has developed, and the entities providing 

financial services-including credit unions-have evolved. Some have suggested that with the 

evolution of expanded services offered by credit unions, they have become simply untaxed 

banks. That position ignores the very real differences that distinguish investor-owned and 

cooperative firms. The fact of the matter is that even though credit union services have evolved, 

their structure and mission have remained the same. Precisely because of their cooperative 

structure, credit unions behave differently from investor-owned financial institutions, and that 

difference in behavior produces substantial benefits both to the nation's 110 million credit union 

members, and also to non-members and the economy as a whole. 

2 Credit unions were first made tax exempt in 1917 through a mling by the United States Attomey GeneraL The ruling 

noted that, «On examination of the pmpose and object of such association, it appears that they are substantively identical 

with domestic building and loan associations or cooperative banks 'organized and operated for mutual pmpose and 

without profit' [quoting fi:om the 1916 statute]. It is to be presumed that the Congress intended that the general tenns 

used in Section 11 should be construed as not to lead to injustice, oppression, or an absurd consequence." This seiVed as 

the basis for the exemption of state chartered credit unions from federal income tax tmtil 1951, when mutual savings 

banks lost their tax exemption because they were deemed to have lost their mutuality but credit unions retained their tax 

exemption because, as is the case today, they hold finn to their mutuality and cooperative principles. Federally chartered 

credit unions were made exempt from federal income tax in 1937. 
306 


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Two features of the cooperative structure are crucial in generating substantial benefits to society: 

their total focus on member value and service, and their tendency to risk aversion. Because of 

credit unions' strong member focus, driven by their democratic governance structure, credit 

unions have every incentive to not only "pass on" but also to leverage the benefits of their tax 

status rather than diverting it in some form of expense preference 3 The cooperative structure 

also discourages excessive risk taking by credit unions. Because they take on less risk, they tend 

to be less affected by the business cycle, and therefore can serve as an important counter cyclical 

economic force in local markets, softening the blow of economic downturns in local economics

4 

In addition, credit unions' member focus and the absence of a strong profit motive allow them to 

offer significant advantages to their members of modest means. 

The Credit Union Tax Status Is Good Public Policy and the Benefits Resulting From the 

Status Vastly Outweigh the Costs 

As a consequence of their member-focused, cooperative structure, credit unions confer on their 

members, and the rest of society reaps, benefits that far exceed the amount of revenue the 

Treasury would ever gain by imposing a new tax on credit unions. These benefits are multidimensional and include financial benefit, high quality member service and financial education. 

The financial benefits that credit unions provide to both members and others amount to an 

estimated $14.2 billion in just 20 16. Their tax status is leveraged because credit unions do not 

pay dividends to stockholders, generally do not compensate their directors, and do not 

compensate senior executives as highly as banks do when stock options and grants are taken into 

consideration. 

Credit unions provide benefits directly to their members in the form of lower fees, lower rates on 

loans, and higher yields on deposits than those available at other financial institutions. Applying 

rate differentials from a third party source (Informa Research Services) to the volumes of various 

loan and deposit accounts at credit unions, and applying fee differentials to credit union noninterest income, allow us to calculate the total amount that members benefit from using credit 

unions. In 2016, we calculate the total of member benefits to have been $10.2 billion. 

3 Expense preference refers to managerial behavior that places the preferences of managers (inflated salaries and 

benefits, perquisites, lavish offices, etc.) ahead of the othetwise recognized goals of the finn. In an investor owned finn, 

expense preference behavior would result in sacrificing profit (investor value) for managerial preferences. For taxexempt credit tmions, expense preference behavior would imply providing excessive managerial emolmnents rather than 

using or leveraging the tax exemption for the benefit of members. Titere is NO evidence of expense preference resulting 

from the tax exemption: Comparing similarly sized banks and credit tmions, both have expense-to-asset ratios in the 

range of 3 to 3.5%; the aggregate 11.0% credit union capital ratio is fom percentage points higher than the level 

regulators consider to be "adequate" but is no higher than the aggregate bank equity capital ratio; also, as noted 

elsewhere in this letter, compensation comparisons between banks and credit tmions show lower compensation for credit 

tmion senior executives at similar sized institutions - and substantially lower compensation when data on bank stock 

options, grants and similar non-cash compensation is considered. 

4 James A. Wilcox, The Increasing Importance of Credit Un ions in Small Business Lending, Office of Advocacy, Small 

Business Administration, September 2011. p v. 
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In addition, several independent researchers have found that credit unions have a moderating 

influence on bank pricing: raising bank deposit interest rates and lowering bank loan rates 5 

Based on this research, we estimate that bank customers saved about $4 billion in 2016 from 

more favorable pricing due to the presence of credit unions in their local markets. 

Compared to historical measures of these consumer benefits, the total of $14.2 billion in 2016 

was relatively subdued because of the unusually low level of most interest rates during the year. 

When all interest rates are compressed near zero, there is less room for typical differences 

between credit union and other rates. Prior to the financial crisis, the combined member and 

non-member benefits totaled more than $12 billion annually, and these levels are likely to be 

achieved again in the future once interest rates rise. 

In addition to these quantifiable benefits, credit unions also provide consumers of financial 

services significant intangible benefits. As member-owned and governed institutions, credit 

unions focus on providing exceptional member (customer) service. This too places competitive 

pressure on banks to follow suit. In the 21 years from 1985to 2005, the American Banker 

newspaper published an annual survey of consumers of financial services, and each year credit 

unions scored much higher than banks in customer service. We are aware of sessions at bank 

conferences with titles such as "Emulating the Customer Service of Credit Unions." This is just 

another way that the existence of a cooperative alternative to investor-owned banks has value not 

only to credit union members but also to bank customers. 

Credit unions offer full and fair service to all of their members, and credit union membership 

tends to be concentrated in the working class of Americans. Over half of credit union members 

who rely primarily on their credit union for financial services have incomes between $25,000 

and $75,000. Credit unions also do not shy away from serving their members where they are 

most needed. Nationwide, 49% of credit union branches are located in CDFI investment areas, 

compared to only 42% of bank branches in such areas. 

Compared to other providers, credit unions offer services to lower-income members at prices that 

are very attractive, and with less of a price differential to services offered to higher income 

members. In fact, credit unions sometimes charge their lower-income members less for a service 

than banks charge even their higher-income customers. For example, a recent study found that 

the fees banks collect on an annual basis on low balance checking accounts ($218) are two and a 

halftimes what they collect on their high-balance accounts ($90). In contrast, fees credit unions 

5 Robert J Tokle, The Influence of Credit Unions on Bank CD Rate Payments in the US, New York Economic Review, 

Fall2005. Timothy H. Hammn, The Influence of Credit U1dons on the Rates Offered for Reta;/ Deposits by Banks and 

Thrift Institutions, Federal Resetve Board ofGovemors, September 2002. Robett M. Feinberg, The Competitive Role of 

Credit Unions in Small Local Financial Services Markets, Review of Economics and Statistics, August 2001. Robert M. 

Feinberg, The Effects of Credit Unions on Bank Rates in Local Consumer Lending Markets, Filene Research Institute, 

2001. 
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loan loss Experience at Credit Unions and Banks 

1992 to 2016 

Source: FDIC, NCUA, CUNA. 

0.91% 

0.60% 0.60% 

Loan Net Chargeoff Rate Standard Deviation 

Because of this lower-risk profile, credit unions were able to continue lending during the recent 

financial crisis while other financial institutions failed or had to curtail operations due to 

damaged balance sheets caused by riskier practices leading up to the crisis. 

Homeowners benefited from having credit unions in the market during the financial crisis. As 

the secondary market for residential mortgages collapsed in 2007, the amount of first mortgages 

originated by credit unions actually rose by II% in 2007 and 18% in 2008. 

Likewise, credit unions were an oasis for small business owners when banks withdrew their 

offerings and exited the market. From June 2007, the onset of the financial crisis, to December 

2016, small business loans outstanding at credit unions grew by 145.3% while such loans at 

banks actually declined by 11. 7%. A Small Business Administration study found, "that credit 

unions are increasingly important sources of small business loans as a longer-run development 

and in response to fluctuations in small business loans at banks." 7 

The tax status, by fostering the continued existence of credit unions as a cooperative alternative 

in the market, supports this countercyclical lending role for credit unions. 

Taxing Credit Unions Would Increase Taxes on more than 100 Million Americans and 

Likely Lead to the Elimination of Many-if not most-Credit Unions 

Some in the for-profit financial services sector would like to see Congress repeal the credit union 

tax status. Doing so, however, would undoubtedly result in negative consequences for savers 

and borrowers, the most severe of which would be the erosion of a credit union option for 

millions of Americans. If taxed, a very significant number of larger credit unions are expected to 

7 Wilcox. p v . 
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covert to banks to take advantage of the much greater flexibility of a bank charter, and an equally 

significant number of smaller credit unions would simply liquidate. The remaining credit unions 

would have to pass the burden of taxation through to their members, because they are wholly 

owned cooperatives. This would substantially increase the cost of accessing mainstream 

financial services to American households, by far more than any additional revenue to Treasury. 

One of the motivations behind comprehensive tax reform is to reduce distortions of resource 

allocation caused by preferences and exemptions, thereby allowing a reduction in corporate tax 

rates by expanding the tax base. There would be little to be gained by imposing a new tax on 

credit unions. For the past two decades credit unions have accounted for only 6% to 7% of the 

assets in US depository institutions. Nevertheless, as I described above, more than II 0 million 

working-class Americans-taxpayers who in 2016 paid $1.2 trillion in taxes-benefit in an 

amount much greater than any possible amount the Treasury could collect from a misguided new 

tax imposed on credit unions. If credit unions were taxed in 2016, the receipts would have 

accounted for only 0.05% of 2016 federal government spending- an amount that would have 

funded U.S. government operations for five hours. It makes absolutely no sense to wipe out the 

substantial benefit Americans receive from having a credit union option for five hours of 

government operation. We encourage Congress to retain and reaffirm the credit union tax status. 

The Unrelated Business Income Tax (UBIT) Hinders Credit Unions' Fulfillment of the 

Statutory Mission 

All credit unions are exempt from the federal corporate income tax under §50l(c)(l) of the 

Internal Revenue Code for federally-chartered credit unions and under §50l(c)(l4)(A) for statechartered credit unions. However, income from state-chartered credit unions that the Internal 

Revenue Service (IRS) deems to be unrelated to the credit union's tax exempt purpose is subject 

to taxation under §511-513. 

Income that is subject to UBIT is defined as any net income derived from any "unrelated trade or 

business" - defined as "activity not substantially related to organization's exempt purpose." 

Income is "substantially related" if it "contributes importantly to accomplishment of the 

organization's exempt purposes." UBIT was designed to prevent unfair market competition by 

tax-exempt entities and taxpaying for-profit entities. Credit unions' "exempt purposes" include 

promoting thrift, creating a source of credit, mutuality and member service. 

The IRS requires that state-chartered credit unions file annual Form 990s, like most other taxexempt entities. These credit unions must also file a Form 990-T (UBIT Form) if the tax-exempt 

entity has unrelated business taxable income to report. 

State-chartered credit unions began operating in the United States in 1909, before there was any 

federal income tax. The purpose of these credit unions has always been defined by state law and 

vary from state to state. But those purposes can be boiled down to this: state-chartered credit 

unions are intended to promote thrift and provide a source of credit to their members on a 
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cooperative, not-for-profit basis. State-chartered credit unions have and continue to serve this 

purpose. 

In 1934, credit unions formed an insurance company, CUNA Mutual Group, concurrently with 

Congress's passage of the Federal Credit Union Act and the establishment of the first federal 

credit unions. Insurance products have been offered by both federal and state-chartered credit 

unions ever since. Congress was presumably well aware of this fact when it codified the 

exemption for state-chartered credit unions in 1951. 

In the 1970s, Congress adopted the Unrelated Business Income Tax ("UBIT") for tax-exempt 

organizations. It provides that certain income that is not substantially related to the tax-exempt 

purpose of such organizations is subject to corporate income tax. Over the years, individual 

state-chartered credit unions were occasionally audited by the IRS for unrelated business income 

taxes, but the IRS provided no guidance to credit unions or its field staff beyond three private 

letter rulings in the 1970's that said certain insurance products sold by credit unions were exempt 

from UBIT. 

H.R. 1, the Tax Reform Act of2014, included several provisions expanding UBIT. On the day 

that Chairman Dave Camp released his proposed draft of H.R. 1, his senior staff members 

acknowledged to CUNA that it was not the intention of the Ways and Means Committee to 

impart any additional taxes on federal or state credit unions. Further, they told us that anything 

that would impose taxes on credit unions--including UBIT --was unintentional and that was why 

they established a process that included the release of a discussion draft. It is our sincere hope 

that the Committee will avoid including these or any similarly harmful UBIT provisions in any 

future tax reform draft or legislation. 

On behalf of America 's credit unions and more than 110 million members, thank you very much 

for your consideration of our views. 

Sincerely, 
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To: Members, Committee on Ways & Means 

From: Douglas Holtz-Eakin 

Re: Border Adjustment and the House Blueprint 

Date: May 17, 2017 

Thank you for the opportunity to submit materials regarding the proposal to border-adjust the 

cash-flow tax contained in the House of Representatives "A Better Way" Blueprint for Tax 

Reform. Attached please find six papers on the topic by myself, Alan Auerbach of the University 

of California, Berkeley, and my American Action Forum colleague Gordon Gray. I hope you find 

them of use in your deliberations. 

Let me make a few additional comments on border adjustment that reflect the state of the 

debate. In particular: 

Border adjustment is a piece of tax policy and not trade policy. As such, it is neutral with 

respect to trade flows and adds to the desirable neutrality in the Blueprint regarding 

market of sale, location of production, length of asset life, type (tangible versus 

intangible) of asset, and form of financing. The Blueprint thus rewards competitive 

excellence over tax-based rent-seeking and tax law prowess. 

Border adjustment is not a new or separate tax. It is the simultaneous imposition of the 

cash-flow tax on imports and the exemption of exports from the same tax. The phrase 

"border adjustment tax" is an oxymoron that reveals a lack of understanding of the 

proposal. 

The most important role played by border adjustment is its elimination of the incentive 

for profit-shifting to tax havens. Some such base-erosion protection is essential in a 

territorial system; hence, the correct statement of choices is between the Blueprint with 

border adjustment or the Blueprint with, e.g., Camp-draft base erosion rules. Assertions 

that one could pass the Blueprint simply omitting border adjustment are simply 

incorrect. 

The economics dictate that the exchange rate should adjust once by roughly 25 percent 

to offset any trade impact of border adjustment (leaving it trade-neutral). I anticipate 

that this would happen quickly after passage. This is different from saying that the dollar 

will be 25 percent higher after passing tax reform. There are many influences on 

currency valuations- equity market performance, interest rates, innovating investment 

opportunities, confidence effects, and so forth- and the Blueprint itself has many 

provisions that will affect the dollar over a sustained period. I have no idea what the 

value of the dollar will be after tax reform. 
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There is no direct evidence of a currency responding purely to a border adjustment in 

isolation because border adjustments have always been adopted in concert with other 

tax changes that may also affect exchange rates. Previous reforms (like the Blueprint) 

have included other reforms that would influence growth rates, rates of return, the 

current account and the exchange rate. But the size and speed of the needed changes 

are well within historical experience and the success of border adjustment in 160-odd 

countries around the world should give lawmakers confidence in the reform. 

Border adjustment raises revenue in the 10-year budget window, easing the difficult 

task of revenue-neutral tax reform. Revenue neutrality is necessary for reform to be 

permanent when passed using reconciliation protections. Since permanent reforms 

provide powerful incentives to innovate, invest, hire and grow in the U.S., border 

adjustment can be a strong contributor to pro-growth tax reform. (I am aware of the 

reality that the U.S. cannot run a trade deficit forever, but the likely reversal is decades 

in the future and not a central concern at this moment.) Moreover, a reduction in profit 

shifting because of the border adjustment represents a permanent revenue gain. 

In closing, I would note that in many of my discussion with firms of the impact of the 

Blueprint on incentives, business leaders have expressed the desire for a more vibrant, 

faster-growing economy, while wishing to keep their business models unchanged. This is 

simply a nonsensical internal contradiction, as the economy changes only when the 

businesses operating in it do. Tax reform is deliberate, disruptive change for the purpose of 

great benefits to the population as a whole. I wish the Committee well in its efforts and 

stand ready to help at any time. 

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Index 

1.) Auerbach and Holtz-Eakin: "The Role of Border Adjustments in International Taxation" 

2.) "About that $1700: A Review of the Data on Border Adjustment and Tax Reform" 

3.) "Tax Topics: Border-Adjustments and Tax Avoidance" 

4.) "Tax Topics: Border-Adjustments and Off-Shoring" 

5.) "Tax Topics: Border-Adjustments and Importing Firms" 

6.) "Tax Topics: Border-Adjustments and Exporting Firms" 

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The Role of Border Adjustments in 

International Taxation 

Alan]. Auerbach, University of California, Berkeley 

Douglas Holtz-Eakin, American Action Forum 

November, 2016 

Executive Summary 

Border adjustments are taxes or tax exemptions that apply when payments for goods 

and services cross international borders. While familiar in the context of value added taxes, 

border adjustment has arisen in the context of possible U.S. tax reforms. In this regard, five 

points merit attention: 

Border adjustments may be implemented as taxes on imports and rebates on exports, 

or by excluding overseas sales and purchases from the computation of taxable income; 

Unlike tariffs on imports or subsidies for exports, border adjustments are not trade 

policy. Instead, they are paired and equal adjustments that create a level tax playing 

field for domestic and overseas competition; 

Border adjustments do not distort trade, as exchange rates should react immediately to 

offset the initial impact of these adjustments. As a corollary, border adjustments do not 

distort the pattern of domestic sales and purchases; 

Border adjustments eliminate the incentive to manipulate transfer prices in order to 

shift profits to lower-tax jurisdictions; and 

Border adjustments eliminate the incentive to shift profitable production activities 

abroad simply to take advantage of lower foreign tax rates. 

These conclusions apply to border adjustments per se; there may be many other impacts when 

border adjustments are implemented as one part of a larger reform. 

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Introduction 

Border adjustments are taxes or tax reductions that apply when payments for goods and 

services cross international borders. At present, they are used primarily in the context of the 

value added tax (VAT). Under a value added tax, taxes collected in a country are generally 

refunded through a border adjustment when goods or services produced in that country are 

exported; likewise, when goods and services are imported into that country a border 

adjustment is imposed on the value of imports. The main function of these existing border 

adjustments is to ensure that the VAT functions as a tax on consumption within the taxing 

jurisdiction; i.e., domestically produced goods and services consumed in other countries escape 

taxation, but goods and services produced elsewhere and consumed domestically are taxed. 

But border adjustments have other effects as well, notably to limit the extent to which 

companies operating across borders can manipulate the location of their tax base. This 

enhances the attractiveness of border adjustments as part of a well-functioning tax system. 

On the other hand, border adjustments lack some other apparent benefits that have 

been attributed to them. In particular, border adjustments, in themselves, should not influence 

international trade, either by discouraging imports or encouraging exports. The belief that they 

do have these influences on international trade has proved to be something of a mixed 

blessing, not only generating support for their adoption but also leading critics to conclude that 

they violate generally accepted norms of international taxation. As discussed below, border 

adjustments can play an important role in tax reform, but that role is to help generate a more 

efficient, equitable and administrable system of business taxation, not to encourage exports or 

discourage imports. 

How Border Adjustments Work 

Under the standard VAT, domestic producers collect tax on their value addedrevenues less purchases- at each step of production, including both intermediate production 

and final retail sales. As the value of imports included in the chain of production has not been 

taxed domestically at the production level, a border adjustment at the VAT rate is applied to 

imports. Thus, the entire value added in producing a good or service will have been taxed when 

the final sale occurs. If that sale is to domestic consumers, the result is a tax on domestic 

consumption. But if the final sale occurs to a foreign buyer the entire tax collected is refunded, 

through a border adjustment. Table 1 provides an illustration of how border adjustments 

operate. 

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Table 1. VAT and Border Adjustments 

Business Revenues Purchases VAT Base Border Net Tax 

Adjustment Base 

Farmer 50 25 25 25 50 

Manufacturer 80 50 30 0 30 

Retailer: 

Domestic Sale 100 80 20 0 20 

Export 100 80 20 -100 -80 

In the example in the table, there are three stages of production, with a farmer selling 

to a manufacturer, the manufacturer selling to a retailer, and the retailer making a final sale, 

either to a domestic consumer or a foreign buyer. The farmer's input is imported, and hence 

faces a border adjustment. Thus, all of the farmer's revenues are effectively subject to tax. If 

the retailer sells to a domestic consumer, the total VAT base is 100, equal to the revenues from 

consumer sales. If the retailer sells abroad, the border adjustment wipes out all levels of the 

VAT and hence there is no net VAT collected. Note that the border adjustment is typically 

implemented by imposing tax or providing a refund to the foreign party. In this case, the 

foreign buyer would receive a tax refund equal to the VAT rate times 100, and the foreign seller 

to the farmer would pay tax on the import value of 25. This means that the Retailer's tax base 

is positive, even if it sells abroad and there is a border adjustment on the sale. 

An alternative, and in some respects simpler, approach to implementing a border 

adjustment (as discussed in Auerbach, 2010) would be to impose the border adjustments on 

the relevant domestic businesses, adding 25 to the Farmer's tax base and subtracting 100 from 

the Retailer' s in the export case. This approach would effectively exclude any export revenues 

from the tax base, since the 100 in revenues included in the tax base would be exactly offset by 

the 100 border adjustment; likewise for the costs of imported inputs, where the deduction of 

25 would be exactly offset by the border adjustment of 25. This "netting" approach would 

leave only transactions between domestic parties in the tax base. Under this alternative 

approach, however, the Retailer would have a negative tax base, even though its value added is 

positive. How to deal with such losses is discussed below. 

Thi s alternative method of implementing border adjustments is helpful in understanding 

why border adjustments eliminate an important avenue for tax base shifting. Suppose, for 

example that the Retailer's foreign buyer is the Retailer's own foreign subsidiary, and that the 

Retailer wished to reduce its domestic tax base by selling its export at a below-market price of 

90. This would reduce its domestic tax base from 20 to 10, ignoring the border adjustment. 

But with the border adjustment in place, there would be no net change in the Retailer's 

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domestic tax liability. Hence, it would have no incentive to underprice its exports. Indeed, to 

the extent that its subsidiary's corresponding understatement of the cost of its imported inputs 

increased tax liability abroad, the Retailer might actually face higher taxes overall from 

understating its export revenues in this manner. 

Border Adjustments and International Trade 

It is generally accepted by economists that border adjustments themselves do not 

distort international trade (see, for example, the discussion in Auerbach, 1997). But this view 

often puzzles others, given that each of the components of border adjustments- a tax on 

imports and a tax refund for exports, equivalent to an export subsidy- are commonly seen as 

trade distortions and in violation of international norms and trade agreements. The key point is 

that the rate of border adjustments is paired and symmetric. Thus, the effects on trade of 

these two components- the import tax and the export subsidy- are offsetting. Adopting them 

together imposes no trade distortions even though adopting either separately would do so. 

To see this, consider them in turn. An export subsidy would make domestic exporters 

more competitive internationally, increasing foreign demand for their products. If adopted by 

the United States, such a policy would also strengthen the dollar as a result of the surge in 

demand for exports, which would partially reduce this demand surge by raising the cost of US 

goods abroad . But we would expect only a partial offset to the initial increase in export 

demand. With the exchange rate rising, there would also be a rise in US imports (due to foreign 

goods being cheaper as a consequence of the stronger dollar). If the dollar rose fully to offset 

the impact of the export subsidy, there would be a worsening of the trade balance, since only 

imports would be rising. A worsening trade balance is inconsistent with the rise in the dollar, so 

one can conclude that in isolation the export subsidy would raise net exports. 

A tax on imports, on the other hand, would raise the US price of imports and reduce 

demand for them. This would also lead to dollar appreciation (because of weaker US demand 

for imports), but not enough to offset the increase in import prices and the reduction in import 

demand. The same logic applies. A higher dollar and no decline in imports means there would 

have to be a fall in exports, and worsening of the trade balance, which again is inconsistent with 

the rise in the dollar. Once more, in isolation the import tax would raise net imports. 

However, imposing the same rate of export subsidy and an import tax would lead to 

dollar appreciation, the first by stimulating net exports and the second by discouraging net 

exports. Combining the two policies, at the same tax rate- that is, introducing border 

adjustments- would result in a policy in which each component leads to dollar appreciation, 

but where the effects on trade would offset. For, if the dollar appreciates by enough to 

eliminate any price changes facing purchasers that result from the border adjustments (i.e., 

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raising the foreign cost of exports to offset the export subsidy and lowering the domestic cost 

of imports to offset the import tariff), there would be no change in US exports or US imports, 

no change in the trade balance, and no inconsistency of the trade balance with dollar 

appreciation. 

A corollary is that the border adjustment also does not distort domestic sales and 

consumption. Firms that sold domestically will continue to do so and consumers will continue 

their same pattern of purchases. 

These conclusions hold when the export subsidy and import tariff are at equal rates, as 

is the case with border adjustments. It would not be true if the rates differed, in which case the 

net effect would be in the direction of the policy instrument with the higher rate. Nor is this 

analysis valid in the case of targeted export subsidies or import tariffs, which would favor 

exports and discourage imports for the domestic industries affected at the expense of 

unprotected domestic industries. But for a broad-based VAT, or any other broad-based 

domestic tax system that includes border adjustments as they exist under the VAT, the border 

adjustments themselves neither encourage nor discourage trade. 

It should also be stressed that this neutrality with respect to trade applies to border 

adjustments specifically, but not necessarily to a broader change in the tax system. This is an 

especially important caveat in the context of current U.S. tax proposals. For example, if the US 

were to adopt a tax system that encourages saving relative to consumption, the resulting 

weakening of demand for imported consumer goods could well improve the US trade balance. 

But this would be a consequence of the change in the incentive to save, not because of the 

border adjustments. 

One final question might be what might happen if exchange rates are managed, for 

example if some US trading partners seek to peg their exchange rates to the dollar. There are 

two potential responses to this question. First, countries pegging exchange rates typically do so 

to maintain competitiveness of their domestic producers, and in this case maintaining 

competitiveness means allowing the dollar to appreciate to offset the effects of border 

adjustments. Second, to the extent that countries do seek to maintain their existing exchange 

rates relative to the dollar, they would be making the US more competitive with respect to their 

own economies. 

Border Adjustments and Business Tax Reform 

While border adjustments are a familiar part of existing VATs, there is no logical reason 

why their use should be limited to VATs. The original use of border adjustments may have been 

motivated by their role in making the VAT into a tax on domestic consumption. But border 

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adjustments also effectively shift the locus of taxation from the country of production to the 

country of sale, and this can be a considerable benefit in reducing the incentives and ability of 

multinational companies to shift taxable profits to low-tax jurisdictions. 

In recent years, border adjustments have been put forward as a component of business 

cash flow taxation in proposals by the President's Advisory Panel on Tax Reform (2005), 

Auerbach (2010), Auerbach, Devereux and Simpson (2010), and the House Republicans (2016). 

A cash flow tax has many advantages over the existing corporate income tax, including 

encouraging new domestic investment through the provision of immediate investment 

expensing and balancing incentives to use debt and equity finance through elimination of 

interest deductions. These proposals also include a transition away from the current US 

approach to worldwide taxation, by excluding the offshore profits of US corporations from 

taxation. But adopting a cash flow tax on a territorial basis- that is, without border 

adjustments- would leave in place the existing incentive for companies to shift profitable 

operations and reported profits from the United States to low-tax jurisdictions. 

The most important difference between a cash flow tax and a VAT is that the cash flow 

tax would allow a deduction for domestic wages and salaries. Table 2 repeats the example 

from Table 1, showing how a cash flow tax with border adjustments would work, with changes 

from Table 1 indicated in red. 

Table 2. Cash Flow Tax and Border Adjustments 

Business Revenues Wages& Purchases Cash Border Net Tax 

Salaries Flow Tax Adjustment Base 

Base 

Farmer 50 5 25 20 25 45 

Manufacturer 80 15 50 15 0 15 

Retailer: 

Domestic Sale 100 10 80 10 0 10 

Export 100 10 80 10 -100 -90 

Because of the deduction for wages and salaries, the cash flow tax base is narrower than 

that of the VAT. But the border adjustment would work exactly as under a VAT, applying to 

export revenues and import purchases. As such, it would be possible, as discussed in the case 

of the VAT, to combine the border adjustments with the tax calculations of domestic producers, 

as offsets to the inclusion of export revenues and the deduction for import costs, effectively 

leaving both export revenues and import costs out of the tax base. The result would be a cash 

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flow tax on domestic transactions, with cross-border transactions (as well as offshore 

transactions) ignored by the tax system. 

Although a cash flow tax operates as just described, it could also be implemented 

through a combination of a VAT plus a reduction in payroll taxes. For example, suppose that 

there is an existing payroll tax of 15 percent (roughly the current rate of the combined 

employer and employee OASDI tax). Then, introducing a 15 percent VAT and eliminating the 

payroll tax would be equivalent to introducing a 15 percent cash flow tax. For example, the 

manufacturer in Tables 1 and 2 has 30 of value added, consisting of 15 of cash flow and 15 of 

wages and salaries. If the 15 of wages and salaries currently faces a payroll tax, then replacing 

the payroll tax with an equal-rate VAT would increase the tax base from 15 to 30, subjecting 

cash flow, in addition to wages and salaries, to tax. This is precisely what would happen if the 

payroll tax were left in place and an equal-rate cash flow tax introduced. 

With no VAT currently in place in the United States, there might seem little reason to 

dwell on this equivalence between tax policies. However, the equivalence is important for two 

reasons. First, economists believe that taxes with equivalent structures should have identical or 

very similar economic effects, including how businesses and individuals respond to taxes and 

who ultimately bears the tax burden, i.e., the incidence of taxation. Second, international 

agreements and tax treaties aimed at ensuring that tax policies adhere to particular norms 

regarding trade and other economic activities should, to be coherent, treat two equivalent 

policies in the same manner. 

Border Adjusted Cash Flow Taxation: Some Illustrations 

Suppose that the current system of corporate taxation were replaced with a business 

cash flow tax with border adjustments. How would this affect the tax liability and the after-tax 

earnings of different types of firms? We consider several examples, in each case asking how the 

tax base and after-tax earnings change from those under the current tax system. It should be 

kept in mind that a company's taxes and after-tax income would also be affected by a change in 

the applicable tax rate. Importantly, for purposes of illustration, we shall assume that the rate 

remains constant under the two systems. Thus, this analysis focuses on border adjustments per 

se, and not an economic analysis of broader tax reforms. 

1. Company A, with production operations exclusively in the United States 

The next six examples consider the case of a firm that has operations exclusively in the 

United States, but may export or import. 

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A. With all sales to domestic buyers and all purchases from domestic sellers 

Assume that company A has the characteristics of the manufacturer in Tables 1 and 2, 

with domestic sales of 80, domestic input purchases of 50, and wages and salaries of 15. 

Suppose also that that A has interest expense of 5, that 20 of the input purchases are for capital 

goods, and that under existing rules the company receives depreciation deductions of 15 on its 

current and past purchases of capital goods. Table 3 shows the tax base for company A under 

the current system and the new cash flow tax. 

Table 3. Current and New Tax Base: Domestic Firm with no Exports or Imports 

Tax Base Revenues Wages & Capital Depre- Other Total 

Salaries Purchases dation Purchases 

Interest 

Expense 

Current 80 15 15 30 5 15 

New L-~8~0~----~1~5~----~2~0 ______________ ~3~0 ____________ ~1~5~~ 

In this example, the firm has the same tax liability under the new system as under the current 

system, because the higher deductions for expensing rather than depreciation just offset the 

elimination of the interest deduction. Firms with more debt in their capital structure would 

generally fare worse under the new system, while firms with more capital investment would 

generally fare better. 

B. With some sales to foreign buyers and all purchases from domestic sellers 

Suppose now that the same firm has one eighth of its sales to foreign purchasers, so 

that revenues from taxable sales equals 70 under the cash flow tax. The firm's tax base is now 

lower under the new system, as illustrated in Table 4. 

Table 4. Current and New Tax Base: Exporting Firm 

Tax Base Taxable Wages& Capital De pre- Other Interest Total 

Revenues Salaries Purchases dation Purchases Expense 

Current 80 15 15 30 5 15 

New 70 15 20 30 5 

However, this tax saving does not mean that the firm does better after-tax under the 

new system, because the revenues from exporting will fall. Assuming that the world price- the 

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price in the currencies of other countries, where economic circumstances have not changedof the goods being exported remains the same, and that the dollar appreciates to offset the 

border adjustment- as would be consistent with no change in the US trade balance- the firm's 

export revenues will be less than 10, because foreign-currency sales receipts buy fewer 

appreciated dollars. If the tax rate is 20 percent, then the firm's export revenues will be 8 

rather than 10. This, in turn means that the firm's after-tax cash flow will be the same in the 

two cases, 80 percent of 15 = 12 under the current system, and 80 percent of 5 = 4 + 

nontaxable receipts of 8 = 12 under the new system. 

C. With all sales to domestic buyers and some purchases from foreign sellers 

Suppose now that the firm's sales are all domestic but that it purchases one third of its 

inputs from foreign sellers, so that expenses from deductible (non-capital) purchases now 

equals 20 under the cash flow tax. The firm's tax base is now higher under the new system, as 

illustrated in Table 5. 

Table 5. Current and New Tax Base: Importing Firm 

Tax Base Revenues Wages& Capital Depre- Deducted Interest Total 

Salaries Purchases ciation Purchases Expense 

Current 80 15 15 30 5 15 

New 80 15 20 20 25 

However, this higher tax cost does not mean that the firm does worse after-tax under 

the new system, because its costs of imported goods will fall. Again assuming that the world 

price of the goods remains the same, and that the dollar appreciates to offset the border 

adjustment, the firm's import costs will be 8, rather than 10, if the tax rate is 20 percent. This 

again means that the firm's after-tax cash flow will be the same in the two cases, 80 percent of 

15 = 12 under the current system, and 80 percent of 25 = 20- nondeductible expenses of 8 = 12 

under the new system . 

D. With some sales to foreign buyers and some purchases from foreign sellers 

Combining the two previous cases, suppose that one eighth of the firm's sales are 

exports and one third of its inputs are from foreign sellers, so that revenue from taxable sales 

equals 70 and the cost of deductible purchases equals 20 under the cash flow tax. The firm's 

tax base is now once again the same under the two systems, as illustrated in Table 6. And, once 

again, the firm's after-tax cash flows are the same, 80 percent of 15 = 12 under the current 

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system versus 80 percent of 15 +nontaxable receipts of 8- nondeductible expenses of 8 under 

the new system = 12. 

Table 6. Current and New Tax Base: Importing and Exporting Firm 

Tax Base Taxable Wages& Capital Depre- Deducted Interest Total 

Revenues Salaries Purchases ciation Purchases Expense 

Current 80 15 --- 15 30 5 15 

New 70 15 20 --- 20 --- 15 

E. With substantial sales to foreign buyers and all purchases from domestic sellers 

Consider again case B, but with the firm exporting a larger share of its production, say 

one quarter rather than one eighth. The effect of this increase in exports is shown in Table 7. 

Table 7. Current and New Tax Base: Firm with Substantial Exports 

Tax Base Taxable Wages& Capital Depre- Other Interest Total 

Revenues Salaries Purchases ciation Purchases Expense 

Current 80 15 --- 15 30 5 

New 60 15 20 --- 30 ---

In this case, the firm shows a net loss for tax purposes. But its underlying economic 

profitability is unchanged. Mechanically, the after-tax cash flows are 80 percent of 15 = 12 

under the current system versus 80 percent of -5 (= -4) plus nontaxable receipts of 16 = 12 

under the new system. The only issue is how to handle the losses. 

15 

-5 

While one approach to dealing with this loss is to follow the current system's approach, 

i.e., allowing loss carrybacks and carryforwards, the reasons for the loss are different in this 

case, because the firm has underlying profitability. The usual logic of using carrybacks and 

carryforwards as an averaging mechanism may not suffice- a firm for which exports may 

account for a large share of revenues may remain both very profitable and yet in a loss position 

indefinitely. Thus, alternative approaches may be needed if further analysis suggests that an 

important share of business activity is among firms facing such circumstances. One option 

would be to allow companies to offset losses against other taxes they pay, such as payroll taxes. 

An alternative is to maintain a separate calculation for border adjustments and make those 

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refundable, rather than taking the simplified approach of netting border adjustments against 

export revenues. 

F. With all sales to domestic buyers and substantial purchases from foreign sellers 

Suppose now that the firm's sales are all domestic but that it purchases two thirds of its 

inputs from foreign sellers, up from the one third in the example in Table 6. The expenses from 

deductible non-capital purchases now equal10 under the cash flow tax. The firm's tax base is 

now even higher under the new system, as illustrated in Table 8. 

Table 8. Current and New Tax Base: Firm with Substantial Imports 

Tax Base Revenues Wages& Capital De pre- Deducted Interest Total 

Salaries Purchases dation Purchases Expense 

Current 80 15 15 30 5 15 

New 80 15 20 10 35 

Once more, however, this higher tax cost does not mean that the firm does worse aftertax under the new system, because its costs of imported goods will fall. Again assuming that 

the world price of the goods remains the same, and that the dollar appreciates to offset the 

border adjustment, the firm's import costs will be 16, rather than 20, if the tax rate is 20 

percent. This again means that the firm's after-tax cash flow will be the same in the two cases, 

80 percent of 15 = 12 under the current system, and 80 percent of 35 = 28- nondeductible 

expenses of 16 = 12 under the new system. 

2. Company B, producing in the United States and a low-tax foreign country 

We now consider the case of a multinational company with operations in the United 

States and abroad, perhaps a US parent company with a foreign subsidiary. For the sake of 

simplicity, we assume that the foreign subsidiary does not repatriate profits to the US parent 

during the period under consideration. We further assume that the US parent company 

purchases some of its inputs from its foreign subsidiary and exports some of its output to the 

foreign subsidiary. Finally, we assume that the foreign jurisdiction has a territorial system with 

a low tax rate. 

A. Arm's length transfer prices 

In this example, the US parent sells one-eighth of its output (10) for export and imports 

one third of its non-capital inputs (10). just as in case 10 and Table 6. The foreign subsidiary's 

inputs include the US parent's exports (10) as well as purchases from third party companies 

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abroad (10), and its exports include those to the US parent (10) as well as sales to third party 

companies abroad (20). 

Table 9. Current and New Tax Base: Arm's Length Transfer Pricing 

US Tax Taxable Wages& Capital Depre- Deducted Interest Total 

Base Revenues Salaries Purchases ciation Purchases Expense 

Current 80 15 15 30 5 15 

New 70 15 20 20 15 

Foreign 

Tax Base 

Current 30 20 10 

New 24 16 8 

In this example, the US tax bases under the old and new system are just as in Table 6. 

For the foreign tax base, and assuming again that the US tax rate is 20 percent, there is a 

decline, measured in dollars, in the sales by the foreign subsidiary (from 30 to 24, including a 

decline in the value of sales to the US parent from 10 to 8), and in input purchases (from 20 to 

16, including a decline in the value of purchases from the US parent from 10 to 8), with a 

corresponding change in the foreign tax base, valued in dollars (and no change when expressed 

in the foreign currency). Note that this effect on the value of the foreign tax base applies more 

generally to everything measured in foreign currency; because of dollar appreciation, the values 

of cash flows and assets abroad will also decline in dollar terms. 

B. Manipulated transfer prices 

In the next example, the US company understates the value of its exports to its foreign 

subsidiary and overstates the value of its imports from the foreign subsidiary. 

We assume that exports are reported at half their true value (5) and imports at 150 

percent of their true value (15). This results, under the current system, in an increase in the 

reported value of US imports from the foreign subsidiary equal to 5, and a decline in the 

reported value of US exports to the foreign subsidiary equal to 5, and a shift in profits equal to 

10 from the US parent to the foreign subsidiary. (Compare the results in Tables 9 and 10.) This 

shift reduces the company's overall tax burden, because the tax rate in the foreign country is 

lower than that in the United States. 

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Table 10. Current and New Tax Base: Manipulated Transfer Pricing 

US Tax Taxable Wages& Capital De pre- Deducted Interest Total 

Base Revenues Salaries Purchases ciation Purchases Expense 

Current 75 15 15 35 5 5 

New 70 15 20 20 15 

Foreign 

Tax Base 

Current 35 15 20 

New 28 12 16 

Under the new system, however, there is no change in the US tax base as a result of the 

change in transfer prices- it remains at 15, its value in Table 9- while the foreign tax base 

doubles from 8 to 16. Thus, the multinational would have no incentive to use transfer prices to 

shift profits away from the United States, even if the tax rate in the foreign country is very low. 

Indeed, it would benefit by shifting profits to the United States, to reduce the taxes it pays in 

the low-tax country. 

3. Company C, producing only in the United States or a low-tax foreign country 

Border adjustments do not just eliminate the incentive for multinational firms to shift 

profits to low-tax countries. They also eliminate the incentive to shift actual operations to lowtax countries. Consider the case of a company selling in the United States and deciding 

whether to produce exclusively in the United States or in a low-tax country. For simplicity, we 

assume that aside from taxes the costs of production are the same in the two countries. Tables 

11 (for domestic production) and 12 (for foreign production) show how the US and foreign tax 

bases would be affected by the tax reform, assuming the same revenues and costs as in 

previous examples. In the case of foreign production, we assume that the final sale to US 

purchasers is still made by the company's US operation. 

Under current law, the tax base would be 15 in the United States and 0 abroad for 

domestic production, and 0 in the United States and 15 abroad for foreign production. Thus, 

profits before tax would be 15 overall regardless of whether production occurs in the United 

States or abroad. The company would have a very strong incentive to locate its production in 

the low-tax country, where its after-tax profits based on the before-tax profits of 15 would be 

higher. 

Under U.S. adoption of the destination-based cash-flow tax, there would be no change 

in the company's tax base if it produces domestically- it would still be 15 in the United States 

and 0 in the foreign country. If the company produces abroad, its foreign tax base would 

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remain the same in foreign currency, but reduced from 15 to 12 by the dollar's appreciation. 

The company's US sales would be fully taxable, because the border adjustment would eliminate 

the deduction of its import from its foreign operation. This would leave after-tax domestic 

profits at 0, as the after-tax revenues of 64 {80 percent of 80) would just cover the nondeductible import costs of 64. Thus, the company's overall revenue would be the foreign 

before-tax profits of 12 less foreign taxes. As after-tax profits with domestic US production are 

12, the company would choose to produce in the United States, even if the tax rate in the 

foreign country is very low. 

Table 11. Current and New Tax Base: Domestic Production and Sales 

US Tax Taxable Wages& Capital Depre- Deducted Interest Total 

Base Revenues Salaries Purchases dation Purchases Expense 

Current 80 15 15 30 5 15 

New 80 15 20 30 15 

Foreign 

Tax Base 

Current 0 0 0 0 

New 0 0 0 0 

Table 12. Current and New Tax Base: Foreign Production 

US Tax Taxable Wages& Capital Depre- Deducted Interest Total 

Base Revenues Salaries Purchases dation Purchases Expense 

Current 80 0 0 80 0 0 

New 80 0 0 0 80 

Foreign 

Tax Base 

Current 80 15 15 5 15 

New 64 12 12 4 12 

Border Adjustments, Tax Revenue and Tax Burden Distribution 

Leaving aside any other elements of a business tax reform plan, US adoption of border 

adjustments would have a positive impact on tax revenue for two distinct reasons. First, with a 

large trade deficit, the US would collect far more from taxing imports than it would lose from 

forgiving tax on exports. This effect could well change in the future, to the extent that the US 

trade balance improves, as many expect must happen. 

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Second, because multinational companies would have strong incentives to expand US 

production activities, dynamic scoring of the effects of border adjustments should increase 

projected revenues. 

The economic incidence of border adjustments comes about through dollar 

appreciation, which, as discussed in relation to Tables 9-12, reduces the dollar value of foreign 

cash flows to US owners. Thus, it is these owners who bear the burden of the border 

adjustment. It should be kept in mind, however, that border adjustments will also induce 

behavioral responses that are likely to strengthen the US economy and benefit the owners of 

assets in the United States. 

Border Adjustments and the WTO 

There is an open question whether a destination-based cash flow tax (DBCFT) would be 

determined to be compliant with the rules of the World Trade Organization. There are two 

primary issues here. First, WTO rules currently limit border adjustments to "indirect" taxestaxes on transactions (e.g., sales, payroll, etc.) rather than "direct" taxes on individuals or 

businesses. It is not clear that a DBCFT would be successfully characterized as an indirect tax, 

even though it is economically equivalent to a policy based on indirect taxes (a VAT and a 

reduction in payroll taxes), and even though the distinction between direct and indirect taxes 

has little meaning and no bearing on any economic outcomes. 

In addition, there might be concern under existing WTO rules regarding the combination 

of border adjustments with a deduction for domestic labor costs, since the border adjustment 

assessed on imported goods applies to the entire cost of the imports, with no deduction for the 

labor costs that went into the production of these imported goods. Some might see this 

treatment as favoring domestically produced goods over imported ones. But such an inference 

makes little sense from an economic perspective. Again, consider the equivalent policy of 

introducing a VAT and reducing payroll taxes, both elements of which are compatible with WTO 

rules. A reduction in payroll taxes would indeed encourage domestic production and 

employment to the extent that it lowered domestic production costs. But this is true of any 

reduction in taxes on US production, and it is difficult to comprehend why international trade 

rules should dictate the tax rate a country applies uniformly to its own domestic economic 

production activities. 

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References 

Auerbach, Alan J. "The Future of Fundamental Tax Reform." The American Economic Review 87, 

no. 2 (1997): 143-46. http:ljwww.jstor.org/stable/2950901 

Auerbach, Alan J. "A Modern Corporate Tax." Center for American Progress/The Hamilton 

Project (2010). https://cdn.americanprogress.org/wpcont ent/uploads/issues/2010/12/pdf/auerbachpaper.pdf 

Auerbach, Alan J., Michael Devereux and Helen Simpson. "Taxing Corporate Income," in J. 

Mirrlees et al., eds., Dimensions of Tax Design (2010) Oxford: Oxford University Press: 837-893. 

https://www.ifs.org.uk/uploads/mirrleesreview/dimensions/ch9.pdf 

President's Advisory Panel on Federal Tax Reform. Simple, Fair, and Pro-Growth: Proposals to 

Fix America's Tax System (2005). http:ljgovinfo.library.unt.edu/taxreformpanel/finalreport/TaxPanel S-7.pdf 

Ways and Means Committee, U.S. House of Representatives, A Better Way Forward (2016). 

http://abetterway.speaker.gov/ assets/pdf/ABetterWay-Tax-PolicyPaper.pdf 

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About that $1700: A Review of the Data on Border Adjustment and Tax Reform 

Executive Summary 

Opponents of border adjustment claim the policy will dramatically increase prices for 

consumers, to the tune of $1700 per capita. 

The $1,700 figure is unsubstantiated, cannot be replicated without more 

methodological transparency, and has been called "baloney" by fact-checkers. 

The price effects associated with this claim ignore the economics literature related to 

currency effects, but even if taken at face value appear overstated. 

The $1,700 price effect claim appears inconsistent with other more objective analyses. 

Introduction 

The House Blueprint for Tax Reform would scrap the deeply flawed current tax regime and 

move the United States' tax code towards a more efficient and pro-growth system. As part of 

this reform, the Blueprint would move the U.S. business tax system to a destination-based cash 

flow tax1 Under this system, only domestic consumption would be taxed. To isolate these 

transactions, the Blueprint would include imports in the tax base, and exclude exports, a policy 

known as border adjustment. The consensus view in the economic literature is that this would 

leave trade flows unaffected. Accordingly, all else being equal, importing firms would be no 

worse off, nor exporting firms better off2 

However, some industry groups that rely heavily on imports have strenuously opposed the 

border adjustment element of the Blueprint. As part of this opposition, these groups have 

argued that the border-adjustment would harm consumers, specifically because the new taxes 

on imports would be passed along to consumers. The most conspicuous of these arguments is 

one advanced by the retail industry, which states that the border adjustment would increase 

prices for consumers by $1700. This brief examines this claim and identifies several critiques 

that this claim invites. 

The Central Claim and Its Flaws 

The claim that consumers would face a $1,700 price increase is an assertion made by the 

National Retail Federation (NRF) on its website. It offers no substantiation for this claim besides 

1 https://waysandmeans.house.gov/taxreform/ 2 See Alan J. Auerbach, "The Future of Fundamental Tax Reform" American Economic Review 87, 2 (1997): 143-46 and Martin 

Feldstein and Paul Krugman, "International Trade Effects of ValueAdded Taxation," in A. Razin and J. Slemrod, eds., Taxation in 

the Global Economy (Chicago, IL: University of Chicago Press, 1990), 263-82. Also see https://www.aei.org/publication/bordertax-adjustments-wont-stimulate-exports/ for a further review of the literature. 

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a broad explanation of the methodology behind it. Rather, it is asserted to be based on several 

data sources and third party analysis, but is ultimately just an assertion made by the trade 

group. Without greater transparency, it is difficult to replicate or verify. Indeed, it has already 

been labeled, "baloney," by a fact-checking organization' 

Setting aside this basic lack of substantiation, several observations about how this claim was 

constructed can be made. First, the claim explicitly dismisses any currency appreciation effects 

that would mitigate any consumer impact. Second, the claim is based on the share of imports 

by industry from the Bureau of Economic Analysis's (BEA) Input-Output tables 4 Using this 

dataset, it is possible to examine broad categories of industry with higher relative shares of 

imports. According to the NRF, these import shares are then further applied to consumer 

spending data from the BEA and the Bureau of Labor Statistics (BLS) to arrive at $1,700. The 

NRF doesn't provide these calculations or an associated table. Rather, the single data point (and 

presumably the most dramatic) that is provided is that households would face "an increase of 

over $350 per year for clothing alone." This is the only insight into the composition of the 

$1,700 price increase asserted by NRF. However, even this data point raises questions. 

The apparel industry is among the most heavily import dependent industries in BEA's dataset, 

at about 30 percent of domestic supply stemming from imports. Accordingly, it should 

represent the most dramatic price appreciation based on the assumptions made by NRF. And 

indeed, a $350 annual increase in clothing costs for a household would be dramatic. According 

the BLS Consumer Expenditure survey, the average household expenditure on apparel and 

related services (dry cleaning, tailoring, etc) was $1,846 in 20155 A $350 increase would 

represent more than an 18 percent increase in apparel costs for an average household, an 

increase that is dubious on its face. Taxing the 30 percent import share of apparel at 20 percent 

suggests a rough price effect, ignoring currency effects, of about 6 percent- a third of the 

figure that NRF has provided. While this discrepancy may be explained by legitimate 

methodological or data issues, without greater substantiation for the NRF claim, it suggests the 

effects are overstated. 

It is understandable that import dependent firms may be skeptical of border adjustment. 

However, and particularly with respect to industries such as retailers that face high-effective tax 

rates under current law, the dramatic price effect claims from detractors of border-adjustment 

appear to be overstated. Indeed, an analysis by Goldman Sachs bears this out' According to the 

Goldman analysis, virtually all industries are better off with border adjustable tax system and a 

20 percent rate. The Goldman analysis finds that the apparel industry- the most heavily 

affected in their dataset would only need to increase prices by 7 percent, again, assuming no 

currency effects. This analysis is very difficult to square with the NRF $1,700 claim. 

3 http://www. factcheck.org/2017 /02/border-adjustment-ba Ioney/ 4 https:ljwww.bea.gov/industry/io annual.htm 5 https://www.bls.gov/news.release/pdf/cesan.pdf 6 David Mericle, Alec Phillips and Daan Struyven, "US Daily: What Would the Tra nsition to Destination-Based Taxation Look 

Like?," Goldman Sachs & Co., December 8. 2016 

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Conclusion 

Tax reform as envisaged by the House Blueprint would represent a dramatic shift in the U.S. 

approach to taxation, and it follows that some industries are wary of the policy risk from such 

an overhaul. However, these industries should examine the totality of the proposal and 

evaluate it fairly. A revised tax system that lowers the corporate rate and moves away from a 

structure that encourages firms to locate facilities overseas would benefit the American 

consumer and prioritize economic growth. 

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Tax Topics: Border-Adjustments and Tax Avoidance 

The new administration and Congress have signaled their intention to undertake fundamental 

tax reform in the coming months. Lawmakers will need to weigh the costs and benefits of 

numerous policy trade-offs as they undertake this effort. Among the most visible debates 

already underway concerns "border adjustability," or moving the U.S. tax code to a cash-flow 

tax with a destination-basis7 

This reform, as proposed in the House Republican Tax Reform Blueprint, moves the U.S. toward 

a consumed-income tax base8 Under this proposal, the current system of depreciation for 

capital investment would be swapped for full expensing, while the current deductibility of 

interest expense would be repealed. Levying this tax on a destination basis would remove 

exports from the tax base, while fully taxing imports. 

The latter element has sparked considerable debate among policymakers, industry, and other 

observers. On its face, the reform appears to favor exports over imports, a misperception that 

the reform's proponents and detractors both seemingly feed. This view ignores the consensus 

in the economics literature that such a reform would be trade-neutral, owing to currency 

appreciation 9 Leaving this effect out of the debate provides as incomplete a picture as ignoring 

the tax rate or other key elements of the reform. 

This potential reform would chart a significant departure from current U.S. tax policy and 

should be scrutinized carefully. This policy brief seeks to build on existing analysis of this 

potential reform and provide additional examples of how this proposal would work in practice, 

in this instance by demonstrating how a destination-based system with border adjustments 

eliminates the need for complicated tax planning through manipulation of a multinational 

firm's internal costs (transfer prices) 10 

Table 1: Example Multinational Firm Under Current Law 

Tax Base Taxable Wages & Capital Depredation 

Revenues Salaries Pun:bases 

U.S. Tax Base 80 15 15 

Foreign Tax Base 30 

Other Interest 

Pun:bases Expense 

30 5 

20 

Total 

15 

10 

In this example, consider a multinational U.S. firm under current law. The U.S. parent has $80 in 

revenues, $10 of which comes from exports. It has $65 in deductible expenses: $15 in wages 

and salaries, $15 in depreciation allowances for certain business investments (such as machines 

7 https://www.americanactionforum.org/insight/tax-topics-destination-vs-origin-basis/ 8 https: //abetterway.speaker.gov I assets/pdf /ABetterWay-Tax-PolicyPaper.pdf 9 See Alan J. Auerbach, "The Future of Fundamental Tax Reform" American Economic Review 87, 2 (1997): 143-46 and artin Feldstein 

and Paul Krugman, "International Trade Effects ofValueAdded Taxation," in A. Razin and J. Slemrod, eds., Taxation in the Global Economy 

(Chicago, IL: University of Chicago Press, 1990), 263-82. Also see https://www.aei.org/publication/border-tax-adjustments-wontstimulate-exports/ for a further review of the literature. 10 https://www.americanactionforum.org/research/14344/ 

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or equipment) $5 in deductible interest (such as loans to finance its machines) and $30 other 

deductible business expenses, of which $10 are imported. This leaves a $15 taxable profit. 

Its foreign subsidiary has $30 in revenues, of which $10 are sold to the U.S. parent while $20 

are sold to ot her firms abroad. It also has $20 in deductible purchases, of which $10 are the $10 

in exports from the U.S. parent. 

Figure 1: Example Multinational Firm Under Current law 

$10 Exports 

U.S. Parent 

$80 Sales 

$65 Expenses 

foreign Subs1dwry 

$30 Sales 

S20 Expenses '" ,. ''"" '''" 

$10 Imports 

Now consider the firm's tax base in a move to a destination-based cash-flow tax. 

Table 2: Example Mult inational Firm Under a Destination-Based Cash-Flow Tax without 

Currency Effects 

Tax Base 

U.S. Tax Base 

Foreign Tax Base 

Tuable W&(DeS & C&pltal Depredation Other Interest Total 

Reveoues Salaries Purchases Pun:bases Expense 

70 15 20 20 15 

30 20 10 

Under the new t ax system, a few things change. First, the move to a cash flow tax also replaced 

the current syst em of depreciation and interest deduction in favor of full expensing. For t he 

sake of this example, we assume these are equivalent in dollar terms. More significantly for this 

example and consistent w ith a destination-based or border adjusted tax system, we exclude t he 

$10 in exports sales from t he firm's revenues and exclude the $10 in imports from the firm's 

deductible expenses. What is left is st ill a tax base of $15. For the purpose of illustrat ion, the 

example firm's new tax base calculation is shown without consideration of currency 

appreciation that should occur consistent with t he economics literature. 

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Table 3 Example Multinational Firm Under a Destination-Based Cash-Flow Tax with Currency 

Effects 

Tax Base 

U.S. Tax Base 

Foreign Tax Base 

Taxable Wqes a C&pltal Depredation Deducted Interest Total 

Reftaues Salaries Pun:bases Pun:ba- Expense 

70 15 20 20 15 

24 16 8 

Factoring in the effects of currency appreciation alters the prices of imports and exports vis-avis t he foreign subsidiary. These effects are not reflected in the U.S. parent's t axable sales or 

deductible expenses, because the exports are excluded from sales and t he imports are not 

included in the firm's deduct ible expenses. 

Figure 2: Example Multinational Firm Under a Destination-Based Cash-Flow Tax with Currency 

Effects 

$8 Exports 

U.S. Parent 

$70 Sales (wfo $8 Exports) 

$55 (w/o $8 Imports) 

Foretgn Subsultary 

$24 Sales (20% 

cleprenatton) 

$16 Expenses (20% 

depreciatton) 

$81mports 

The currency effects are reflected in the transact ions between the parent and subsidiary and in 

the dollar-value of goods sold abroad in foreign currency by the foreign subsidiary. However, 

the U.S. tax base remains the same. $15 in this example. 

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Table 4· Example Multinational Firm Under Current Law with Manipulated Transfer Prices 

~·· am5ylt-. Tu llue Real 'n'luurer Price Reported Deductlllle 'l'riiDsfer Price Reported Tu 

Sa .. Maalpalatloa Sa .. ~ Mulpalatloa ~ llue 

Current u.s. 80 ·5 75 65 +5 70 5 

Current Foreign 30 +5 35 20 ·5 15 20 

In this example, we consider the same multinational firm under current law, but with 

manipulated transfer prices. Multinat ional firms engage in sophisticated t ax planning and 

avoidance strategies to shift income to lower tax jurisdiction. In this instance, we assume that 

the firm artificially undervalues its exports to its subsidiary and inflates t he value of its imports 

by $5. The result is a higher tax base in t he low-t ax foreign jurisdiction. 

Figure 3: Example Multinational Firm with Manipulated Transfer Prices Under Current Law 

$5 ExportS 

U.S. Parent 

$75 Sales 

$70 Expenses 

Fore1gn Subs1d1ary 

$35 S:~les 

$15 Expenses 

,,, ,. """ '''" 

$15 ImportS 

While simplistic, thi s illustration reflects the underlying goal of these tax strategies and the 

incentive under current law to shift income to lower-tax jurisdictions overseas and shift costs to 

the U.S. 

Table 5: Example Multinational Firm Under a Destination-Based Cash-Flow Tax with Currency 

Effects and Manipulated Transfer Prices 

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New U.S. 70 -4 

New Foreign 24 

10 

28 

ss 

16 

•4 

-4 

ss 

12 

15 

16 

Table 5 illustrates how manipulating transfer pricing simply does not work under a destinationbased cash flow tax system. The artificially lower exports (-$4) are excluded from tax, regardless 

of their value, as are the artificially inflated import costs, which are not deductible, leaving the 

original vales of $70 and $55 for taxable sales and expenses, respectively, and thus the original 

$15 U.S. tax base, and a higher foreign tax base of $16. 11 

Figure 4: Example Multinational Firm Under a Destination-Based Cash-Flow Tax with Currency 

Effects and Manipulated Transfer Prices. 

$4 (net of 

transfer price 

manipulation) 

US Parent 

$70 Saleswfo$4 Export') 

$55 (w/o $12 1mports) 

Forc1gn Subsidiary 

$28 Sales (20% 

depreciation) 

$12 Expenses (20% 

deprec1at10n) 

$12 imports (net 

of transfer price 

manipulation) 

Under a destination-based cash-flow tax, manipulating transfer prices ultimately leaves the 

multinational worse-off, by leaving the U.S. tax base untouched, while increasing the foreign 

tax base. 

Conclusion 

These examples demonstrate that the switch to a border adjusted tax system, accounting for 

associated currency appreciation, does not result in a material change to a typical company's 

11 Note thnt this example by design Ignores the effects of moving from the current high race ton lower rate and the positive economic 

effects of elCpenslng for the purpose oflsolnting the lmpllcat10"$ of moving to" desdnaUon·base<l t>x system. 

27 
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U.S. tax base. Furthermore, this transition would remove the incentive for firms to manipulate 

transfer pricing, ensuring that the U.S. tax base remains intact. Discussions of a change to this 

kind of cash-flow tax with a destination basis should take these important considerations into 

account. 

28 
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Tax Topics: Border-Adjustments and Off-Shoring 

The new administration and Congress have signaled their intention to undertake fundamental 

tax reform in the coming months. Lawmakers will need to weigh the costs and benefits of 

numerous policy trade-offs as they undertake this effort. Among the most visible debates 

already underway concerns "border adjustability," or moving the U.S. tax code to a cash-flow 

tax with a destination-basis" 

This reform, as proposed in the House Republican Tax Reform Blueprint, moves the U.S. toward 

a consumed-income tax base13 Under this proposal, the current system of deprecation for 

capital investment would be swapped for full expensing, while the current deductibility of 

interest expense would be repealed. Levying this tax on a destination basis would remove 

exports from the tax base, while fully taxing imports. 

The latter element has sparked considerable debate among policymakers, industry, and other 

observers. On its face, the reform appears to favor exports over imports, a misperception that 

the reform's proponents and detractors both seemingly feed. However, this is a flawed view 

that ignores the consensus in the economics literature that such a reform would be tradeneutral, owing to currency appreciation. 14 Leaving this effect out of the debate provides as 

incomplete a picture as ignorance of the tax rate or other key elements of the reform. 

This potential reform would chart a significant departure from current U.S. tax policy and 

should be scrutinized carefully. This policy brief seeks to build on existing analysis of this 

potential reform and provide additional examples of how this proposal would work in practice, 

in this instance by demonstrating how a destination-basis system with border adjustments 

removes incentives for U.S. firms to move manufacturing and production overseas for sales 

back to the U .S1 5 

Table 1: Example Manufacturer Under Current Law 

Tax Taxable Wages & Capital Depreciation Other Interest Total 

Base Revenues Salaries Purchases Purchases Expense 

Current 80 15 15 30 5 15 

In this example, consider a U.S. manufacturing firm under current law. The firm has $80 in 

revenues, for the purpose of this example, all of which are to domestic consumers. It has $6S in 

deductible expenses: $15 in wages and salaries, $15 in depreciation allowances for certain 

business investments (such as machines or equipment) $5 in deductible interest (such as loans 

12 https://www.americanactionforum.org/insight/tax-topics-destination-vs-origin-basis/ 13 https: //abetterway.speaker.gov I assets/pdf /ABetterWay-Tax-PolicyPaper.pdf 14 See Alan J. Auerbach, "The Future of Fundamental Tax Reform" American Economic Review 87, 2 (1 997): 143-46 and artin Feldstein 

and Paul Krugman, "International Trade Effects ofValueAdded Taxation," in A. Razin and J. Slemrod, eds., Taxation in the Global Economy 

(Chicago, IL: University of Chicago Press, 1990), 263-82. Also see https://www.aei.org/publication/border-tax-adjustments-wontstimulate-exports/ for a further review of the literature. 15 https://www.americanactionforum.org/research/14344/ 

29 
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to finance its machines) and $30 other deductible business expenses, of which $10 are 

imported. This leaves a $15 taxable profit. 

Now consider t he firm's tax base in a move to a destination-based cash-flow tax. 

Table 2: Example Manufacturer Under a Destination-Based Cash-Flow Tax 

Tax Taxable Wages & capital Deprecladon Other Interest Total 

Base Revenues Salaries Pun:bases Pun:bases Expense 

New 80 15 20 0 30 0 15 

Under the new tax system, a few things change. The move to a cash-flow tax replaces the 

current system of depreciation and interest deduction in favor of full expensing. For the sake of 

this example, we assume t hese are equivalent in dollar terms. Since the example firm has no 

imports or exports, the firm is unaffected be the border-adjustment element s of the new tax 

plan. The firm's tax base remains $15. 

Now we consider the incentives of the current system to move production overseas. 

Figure 1: Example Manufacturer Moves Production Overseas Under Current Law 

$80 Exports 

Ofi·Shorc Parent 

$80 Sales 

S65 Expenses 

US Subsidiary 

$80 Sales 

$80 Expenses 

$80 Sales Revenue 

In this example, we assume the formerly U.S.-based firm moves its production facility to a lower 

tax jurisdiction and sells its products back to the U.S. through a U.S. subsidiary. 

30 
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Table 3: Example Manufacturer Moves Production Overseas Under Current law 

Tax Base Taxable WaiJI!S & Capltil Depredadoa Other Interest Tocal 

Revenues Salaries Purchases Purchases --

U.S. Tax Base 80 0 0 80 0 

Foreign Tax Base 80 15 15 0 15 

Under current law, the new U.S. subsidiary would have no taxable income, as it can deduct all 

imports received from the off-shored parent . The parent's tax base remains the same as if it 

remained in t he U.S., but insofar as we assume the tax rate is lower in the new jurisdiction, the 

firm's after-tax profit would be higher. 

Now consider how this firm would fare under a destination-based cash-flow tax. 

Figure 2: Example Multinational Firm Under a Destination-Based Cash-Flow Tax with Currency 

Effects 

$80 Exports 

Off-Shore Parent 

$64 Sales 

$52 Expenses 

U.S. Subsod.ary 

$80 Sales 

$0 Expenses (w/o 580 

om ports) 

.J:oo ""''" 

$64 Sales Revenue 

The off-shored manufacturer faces a much different calculation under a destination-based 

cash-flow tax. 

Table 4: Example Off-Shored Manufacturer Under a Destination-Based Cash-Flow Tax with 

Currency Effects 

Tax Base 

U.S. Tax Base 

Foreign Tax Base 

Taxable W81J1!S & Capital Deprecladoa Other Interest Tocal 

Reyeoues Salaries Purchases Purchases --

80 0 0 0 80 

64 12 12 24 4 12 

Table 4 illustrates the combined effects of currency appreciation and moving to a destination 

basis on the example firm. First, the U.S. subsidiary can no longer deduct the costs of its 

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imports, exposing the full $80 in sales to tax. For the purposes of this example, we assume the 

U.S. tax rate is 20 percent. This leaves $64 in after-tax income for the U.S. subsidiary, which 

covers the costs for the $64 in imported goods- the value of the goods will have declined in 

dollar terms owing to currency appreciation. Currency appreciation also would shrink the 

parent firm's costs in dollar-terms, leaving deductible costs at $52, and netting to a foreign-tax 

base total of $12 in taxable income. 

Table 5: After-Tax Profits of Example Off-Shored Manufacturer Under a Destination-Based 

Cash-Flow Tax with Currency Effects 

Tax Ta:mble Untaxable Deduc:dble Non· Pre- Tax Tax AfterSystem Scenario Bose Sales Sales ElqJenses Deductible Tax Rate Bose Tax 

ElqJenses Protlt (%) Protlt 

New Remain in U.S. u.s. 80 65 IS ( 20 X IS ) = I 2 

New Off-Shored u.s. 80 64 I6 ( 20 X 80 ) = 0 

New Off-Shored Forei n 64 52 I2 . r ? X I2 l > I 2 

As table 5 demonstrates, under a destination-based cash-flow tax the manufacturer has no 

incentive to move overseas for tax purposes. Under this example, if the firm had remained in 

the U.S., it's after-tax profit on its $15 taxable income would have been $12- while the 

example off-shored firm has pre-tax income of $12. 

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Tax Topics: Border-Adjustments and Importing Firms 

The new administration and Congress have signaled their intention to undertake fundamental 

tax reform in the coming months. Lawmakers will need to weigh the cost s and benefits of 

numerous policy trade-offs as they begin this effort. Among the most visible debates already 

underway concerns "border adjustability," or moving the U.S. tax code to a cash-flow tax with a 

desti nation-bas is

1 6 

This reform, as proposed in the House Republican Tax Reform Blueprint, moves the U.S. towa rd 

a consumed-income tax base.17 Under this proposa l, the current system of deprecation for 

capital investment would be swa pped for full expensing, while the current deductibility of 

interest expense would be repea led. Levying thi s tax on a destination basis would remove 

exports from the tax base, while full y taxing imports. 

The latter element has sparked considerable debate among policymakers, industry, and other 

observers. On its face, the reform appears to favor exports over imports, a misperception that 

the reform's proponents and detractors both seemingly feed. However, this ignores the 

consensus in the economics literature that such a reform would be trade-neutral, ow ing to 

currency appreciation18 Leaving this effect out of the debate provides as incomplete a picture 

as ignoring the tax rate or other key elements of the reform. 

This potential reform would chart a significant departure from current U.S. tax policy and 

should be scrutinized carefully. Thi s policy brief seeks to build on existing analys is of this 

potential reform and provide additional examples of how thi s proposa l would work in practice, 

in this instance w ith respect to an importing firm .

19 

Table 1: Example Firm under Current Law with $10 in Imports 

Tax Base Taxable Wages & Capital Depreciation 

Revenues Salaries Purchases 

Current 80 15 15 

Other Interest Total 

Purchases Expense 

30 5 15 

In thi s example, consider a firm that under current law has $80 in revenues. It has $65 in 

deductible expenses - $15 in wages and salaries, $15 in depreciation allowances for certain 

business investments (such as machines or equipment) $5 in deductible interest (such as loans 

to finance its machines ) and $30 other deductible business expenses, $10 of which are from 

imports. This leaves a $15 taxable profit. Now consider the firm's tax base in a move to a 

destination-based cash-flow tax. 

16 https://www.americanactionforum.org/insight/tax-topics-destination-vs-origin-basis/ 17 https: 1/abetterway.speaker.gov I assets/pdf /ABetterWay-Tax-PolicyPaper.pdf 18 See Alan ). Auerbach, "The Future of Fu ndamental Tax Reform" American Economic Review 87, 2 (1997): 143-46 and artin Fe ldste in 

and Paul Krugman, "International T rade Effects ofValueAdded Taxation," in A. Razin and J. Slemrod, eds., Taxation in the Global Economy 

(Chicago, IL: University of Chicago Press, 1990), 263-82. Also see https://www.aei.org/publication/border-tax-adjustments-wontstimulate-exports/ for a further review of the literature. 19 https://www.americanactionforum.org/research/14344/ 

33 
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33393.272

Table 2: Example Firm under Destination-Based Cash-Flow Tax with $10 in Imports 

Tax Base Taxable Wages & Capital Depreciation Other Interest Total 

Revenues Salaries Purchases Purchases Expense 

New 80 15 20 20 25 

Under the new tax system, a few things change. First, the move to a cash flow tax replaced the 

current system of depreciation and interest deduction in favor of full expensing. For the sake of 

thi s exa mple, we assume these are equivalent in dollar terms. More significantly for this 

exa mple we exclude the $10 in imports from the firm's deductible expenses. What is left is a tax 

base of $25. If there were no applicable tax rate, then despite the difference in the tax bases 

between the old and new system, the firm would still be left with $15 in both cases, since it still 

paid for the $10 in imports, even if it can't deduct them. 

Table 3: After-Tax Profits of Example Firm without Currency Effects 

Non- Tax Taxable Deductible Deductible Pre-Tax 

Base Sales Expenses Expenses Profit 

Current 

New 

80 

80 

65 

55 

0 15 

10 15 

20%Tax 

(Tax Base) 

3 (15) 

5 (25) 

After-Tax 

Profit 

12 

10 

In this exa mple, we consider the sa me firm's profitability under the old and new system w ith a 

20 percent rate applied without considering currency effects. In this hypothetical, the importing 

firm is cl ea rly worse off under the new system, which would seem on its face to be disfavor 

importers. But the goal of the tax system is not to favor exports or disadva ntage imports. The 

goal of the tax reform is to improve the tax system, and be trade neutral. Consideration of the 

economics of the proposa l and the effect of a proportional currency appreciation reveals thi s to 

be the case. 

Table 4· After-Tax Profits of Example Firm with Currency Effects 

Tax Taxable Deductible Non- Pre-Tax 20%Tax After-Tax Deductible Base Sales Expenses Expenses Profit (Tax Base) Profit 

Current 80 65 0 = 15 3 (15) = 12 

New 80 55 8 = 17 5 (25) = 12 

A 20 percent tax rate should lead to a 25 percent dollar appreciation, w hich makes foreign 

goods cheaper. This diminishes the cost of the example firm's foreign inputs to $8, leaving the 

exporting firm's profitability the same under both the current tax system and the new system. 

Thus, the firm remits higher tax payments, but it's fund amental profitability is the same20 

20 Note that this example by design ignores the effects of moving from the current high rate to a lower rate and the positive economic 

effects of expensing for the purpose of isolating the implications of moving to a destination-based tax system. 

34 
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33393.273

Tax Topics: Border-Adjustments and Exporting Firms 

The new administration and Congress have signaled their intention to undertake fundamental 

tax reform in the coming months. Lawmakers w ill need to weigh the costs and benefits of 

numerous policy trade-offs as they undertake this effort. Among the most visible debates 

already underway concern s " border adjustability," or moving the U.S. tax code to a cash-flow 

tax w ith a destination-basis." 

This reform, as proposed in the House Republican Tax Reform Blueprint, moves the U.S. towa rd 

a consumed-income tax base. 22 Under this proposa l, the current system of deprecation for 

capital investment would be swa pped for full expensing, while the current deductibility of 

interest expense would be repea led. Levying thi s tax on a destination basis would remove 

exports from the tax base, while full y taxing imports. 

The latter element has sparked considerable debate among policymakers, industry, and other 

observers. On its face, the reform appears to favor exports over imports, a misperception that 

the reform's proponents and detractors both seemingly feed. However, this ignores the 

consensus in the economics literature that such a reform would be trade-neutral, ow ing to 

currency appreciation 23 Leaving this effect out of the debate provides as incomplete a picture 

as ignoring the tax rate or other key elements of the reform. 

This potential reform would ch art a significant departure from current U.S. tax policy and 

should be scrutinized carefully. Thi s policy brief seeks to build on existing analys is of this 

potential reform and provide additional examples of how thi s proposa l would work in practice, 

in this instance with respect to an exporting firm. 24 

Table 1: Example Firm under Current Law with $10 in Exports 

Tax Base Taxable Wages & Capital Depreciation 

Revenues Salaries Purchases 

Cur rent 80 15 15 

Other Interest Total 

Purchases Expense 

30 5 15 

In thi s example, consider a firm that under current law has $80 in revenues of w hich $10 come 

from exports. It has $65 in deductible expenses - $15 in wages and salaries, $15 in depreciation 

allowances for certain business investments (such as machines or equipment) $5 in deductible 

interest (such as loans to finance its machines) and $30 other deductible business expenses. 

This leaves a $15 taxa ble profit. Now consider the firm's tax base in a move to a destinationbased cash-flow tax. 

21 https://www.americanactionforum.org/insight/tax-topics-destination-vs-origin-basis/ 

22 h ttps: II a betterway .spea ker.gov I assets/pdf I ABetterW ay-Tax-Policy Paper. pdf 23 See Alan J. Auerbach, "The Future of Fundamental Tax Refo rm" American Economic Review 87, 2 (1997): 143-46 and artin Feldstein 

and Paul Krugman, "International Trade Effects ofValueAdded Taxation," in A. Razin and J. Slemrod, eds., Taxation in the Global Economy 

(Chicago, IL: University of Chicago Press, 1990), 263-82. Also see https://www.aei.org/publication/border-tax-adjustments-wontstimulate-exports/ for a further review of the literature. 

24 .!illps://www.americanactionforum.org/research/14344/ 

35 
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Table 2: Example Firm under Destination-Based Cash-Flow Tax with $10 in Exports 

Tax Base Taxable Wages & Capital Depreciation Other Interest Total 

Revenues Salaries Purchases Purchases Expense 

New 70 15 20 30 5 

Under the new tax system, a few things change. First, the $10 in export income is removed 

from the firm's tax base, leaving $70 that was derived from domestic sales in this example. The 

move to a cash flow tax also replaced the current system of depreciation and interest 

deduction in favor of full expensing. For the sake of this example, we assume these are 

equivalent in dollar terms. What is left, is a taxable profit of $5. If there were no applicable tax 

rate, then the firm would end up with the same profit of $15 in both cases. 

Table 3· After-Tax Profits of Example Firm without Currency Effects 

Tax Base Taxable Untaxable Expenses Pre-Tax 20%Tax After-Tax 

Sales Sales Pro tit (Tax Base) Pro tit 

Current 80 + 0 65 = 15 3 (15) = 12 

New 70 + 10 65 = 15 1 (5) = 14 

In this example, we consider the same firm's profitability under the old and new system with a 

20 percent rate applied without considering currency effects. In this hypothetical, the exporting 

firm is clearly better off under the new system, which would seem on its face to be attractive at 

least for exporters. But the goal of the tax system is not to favor exports or disadvantage 

imports. The goal of the tax reform is to improve the tax system, and be trade neutral. 

Consideration of the economics of the proposal and the effect of a proportional currency 

appreciation reveals this to be the case. 

Table 4· After-Tax Profits of Example Firm with Currency Effects 

Tax Base Taxable Untaxable Expenses Pre-Tax 20%Tax After-Tax 

Sales Sales Pro tit (Tax Base) Pro tit 

Current 80 + 0 65 = 15 3 (15) = 12 

New 70 + 8 65 = 13 1 (5) = 12 

A 20 percent tax rate should lead to a 25 percent dollar appreciation, which would leave foreign 

buyers with 80 percent of their buying power of U.S. goods. This diminishes the foreign sales in 

our example in dollar-terms to $8, leaving the exporting firm's profitability the same under both 

the current tax system and the new system. 25 

25 Note that this example by design ignores the effects of moving from the current high rate to a lower rate and the positive economic 

effects of expensing for the purpose of isolating the implications of moving to a destination-based tax system. 

36 
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Economic 

Policy 

Institute 

Mayl7, 2017 

Representative Kevin Brady 

Chairman 

Committee on Ways & Means, U.S. House of Representatives 

Washington, DC 

Representative Richard Neal 

Ranking Member 

Conunittee on Ways & Means. U.S. House of Representatives 

Washington, DC 

Dear Chaim1an Brady, Ranking Member Neal. and Distinguished Members of the 

Committee: 

We welcome the opportunity to submit these comments to the Committee record on 

behalf of the Economic Policy Institute Policy Center (EPI-PC). EPI is a nonprofit, 

nonpartisan think tank created in 1986 to include the needs of low- and middle-income 

workers in economic policy discussions. 

The Commiuec will convene on May 18 tO discuss how tax reform could grow the U.S. 

economy and create jobs. While we agree that many tax policy changes could strongly 

benefit low and middle-income Americans, we do not think that Speaker Paul Ryan's 

"Better Way" tax reform proposal and other likely principles of the Congressional 

majority's plan for tax reform will do tlus. Instead, the omcome of efforts based on these 

plans and principles will simply lead to large. regressive tax cuts for corporations and the 

wealthiest Americans that will expire at the end of the budget window because they have 

not been paid for.

1 According to the Tax Policy Center. in the first year of Speaker 

Ryan 's "Detter Way" proposal. fully 76 percent of the benefits would go to the top 1 

percent.2 Ten years later, this share will be an astounding 99.6 percent going to the top I 

percent. This level of regressivity is sometimes hard to fully understand. An easy way to 

grasp it is to contrast it with a lump-sum tax cut that shared benefits equally. A lump-sum 

cut would provide benefits for the bouom 60 percent of American households I 0 times 

1 61air, ECOilOmic Policy Institute, 20 17 ... Likeliest outcome of tax reform is a de0ci[.f1nanced tax cut 

for the deb that will expjre jo a degde,• 

' Nunns. Burman, et al. Tax Policy Center, 201 6. "An analysis of the liouse GOP Tax Plan: 

Ecunmni(' Polic) ln:.;titutc 

1225 Eye St. NW, Surte 600. washington, DC 20005 • 202-775·8810 • ePt.org 
348 


33393.276

larger than what the "Better Way" plan would. But it would result in tax cuts for the top I 

percent that were 99 percent smaller3 

Of course, a lump-sum tax cut is just illustrative and proponents of"Better Way" style 

plans would argue that the incentive effects of their plan would spur growth. These 

effects are hugely overrated however. We would like to focus here in particular on the 

popular idea that corporate tax rate cuts are an effective way to spur economic growth. 

First, proponents of corporate tax cuts often argue that U.S. corporations face higher tax 

rates than those of our peer countries, and claim that this differential hurts U.S. 

"competitiveness" (a word these proponents rarely define) and discourages companies 

from investing in the U.S. Consequently, they further claim that cutting corporate tax 

rates would increase American companies' "competitiveness," which they imply (but 

rarely argue directly) would redound to the benefit of most American families. 

Our research has found this central argument-that U.S. corporations face high corporate 

taxes-to be empirically false 4 While U.S. statutmy tax rates are higher, the effective tax 

rate paid by corporations is in fact roughly equivalent to the effective tax rates of our peer 

countries, due to loopholes in the U.S. tax code. Further, we find that even if the effective 

corporate tax rate were higher (if loopholes were closed), economic theory and data do 

not support the idea that cutting these rates would encourage further investment in the 

U.S. or benefit the vast majority of Americans. Instead, such cuts would primarily benefit 

a small number of high-income capital owners while increasing the regressivity of the tax 

system overall. 

Claims regarding the economic benefits of cutting corporate tax rates rarely relate these 

cuts to the three influences that could boost living standards for the vast majority of 

American households: employment generation,productivity growth, and a 

more progressive distribution of income. Unless corporate tax rate cuts help boost any of 

these influences, they will not raise living standards for the vast majority and hence 

should not be a priority of policymakers. 

Corporate rate cuts are inefficient as employment generators 

Currently, the economy remains below full employment, with aggregate demand 

(spending by households, businesses and governments) still too low to absorb all the 

hours of work Americans want to offer. So, fiscal policy changes that spurred aggregate 

demand would be good. However, corporate tax cuts are the least-efficient way to boost 

aggregate demand and job creation. 

3 Blair, Economic Policy Institute, 2017. "Republicans' opening bid for tax reform is egregiously tilted 

l:l!..thtlil;h." 

4 Bivens, Blair, Economic Policy Institute, 2017. "Competitive' distractions: Cutting corporate tax 

rates will not create jobs or boost incomes for the vast majority of American families." 
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33393.277

In the short run, corporate rate cuts are passed through to shareholders, who are 

overwhelmingly well-off and much more likely to save rather than spend the extra 

money. If the government wants to cut taxes in the short run to spur employment, those 

tax cuts should be aimed at low- and middle-income households, not high-income 

shareholders. A better way to spur employment would be to boost public spending -on 

infrastructure or other public investments, or increases in income support programs. 

Corporate rate cuts will have trivial effects on productivity 

There is a better theoretical case that corporate tax cuts might help boost productivity. 

When the economy is at full employment, cutting the corporate rate should increase the 

post-tax return to capital. This should incentivize more private savings, which should in 

tum lower interest rates and increase capital investment. 

The increased investment would provide workers with more and newer capital goods, 

boosting labor productivity. But while the theoretical channel linking corporate rate cuts 

and productivity growth is valid, there isn' t real-world evidence arguing that this link is 

strong. First, there's already a well-known glut of savings. This savings glut has kept 

interest rates low for years and will likely continue to keep them low in the future. 

With savings already high and interest rates already low, corporate tax cuts just won't 

have much traction in boosting investment. Second, cutting the corporate rate can boost 

private savings, but if the rate cut isn' t paid for, this boost to private savings will be offset 

by decreased public savings (i.e., higher budget deficits). The deficit will increase, 

eventually pushing up interest rates and reversing the theoretical channel through which 

corporate rate cuts could increase productivity. 

Corporate rate cuts clearly exacerbate post-tax inequality 

Finally, besides being a terribly inefficient job-creator and having only weak real-world 

effects in boosting productivity, a strategy of cutting corporate rates is unambiguously 

regressive. The corporate income tax is typically assumed to ultimately fall largely on 

capital owners. Capital income is highly-concentrated at the top of the income 

distribution- with the top 1 percent of households holding 54 percent of all capital 

mcome. 

In theory, some of this regressive effect could be mitigated by a boost to productivity. 

But, as we noted, this is far from a sure bet. But even if productivity does increase, it 

turns out that most of the benefits of productivity growth haven't trickled down in 

decades. The hourly pay of the vast majority of U.S. workers has lagged far behind 

productivity growth due to rising income inequality. 

Any policy change-including corporate tax reform-that is supported by claims that it 

will boost the living standards of the vast majority of American households must tell a 

convincing story of how it will (a) generate employment, (b) raise productivity, or (c) 

distribute income toward the vast majority. Needless to say, any policy change that 

cannot claim to boost the living standards of the vast majority is not worth doing. 
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If we wish to reform corporate tax policy to benefit the vast majority of Americans- and 

not just a wealthy few- we should not be talking about lowering corporate tax rates or 

offering other tax breaks to corporations; we should instead be focusing on closing 

loopholes in the system that have eroded the corporate income tax base, to ensure the 

corporate sector is paying its appropriate share of taxes. 

Sincerely, 

Josh Bivens, Ph.D 

Director of Research, Economic Policy Institute Policy Center 

Hunter Blair 

Budget Analyst, Economic Policy Institute Policy Center 

Appendices: 

Figure A: Comparison of U.S. statutory and effective average corporate tax rates 

Figure B: After-tax corporate profits versus corporate tax revenue, as a share ofGDP, 1952-2015 
351 


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Appendices 

Figure A 

Actual U.S. corporate tax rates are about half the official 

35 percent rate 

Comparison of U.S. statutory and estimated average effective corporate tax 

rates 

40% 

35.0% 

30 

20 

10 

0 

Statutory rate Effective rate (CT J Effective rate 

estimate) (Zucman estimate) 

Effective rate 

(GAO estimate) 

Sources: Americans for Tax Fairness (ATF) and EPI ana lysis of Mcintyre, Gardner, and Phillips (2014a, 

i); Zucman (2014, 132-133); and GAO (2016, 13) 

Economic Policy Institute 
352 

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33393.280

FigureS 

Corporate profits are way up, corporate taxes are way 

down 

After-tax corporate profits versus corporate tax revenue, as a share of GOP, 

1952- 2015 

10% 

7.5 

0. 

0 5.9% 

(!) 5.5% 0 

., 5 

~ .r. 

<f) 

2.5 

0 1950 1960 1970 1980 1990 2000 2010 

Source: Corporate tax chaltbook: How corporations rig the rules to dodge the taxes they owe. 

Economic Policy Institute and Americans for Tax Fairness, 2016 

8.5% 

1.9% 

Economic l'olicy Instil11tc 
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EEl 

Edison Electric 

I NSTITUTE Power by Association· 

STATEMENT FOR TRE RECORJ): 

THE EDISON ELECTRIC INSTITUTE 

Hearing on "Now Tax Reform Will Grow Our EconOIIIJ' and Create Jobs" 

United States House of .Rept·escntativcs 

Committee on Ways and Means 

May 18, 2017 

The member companies of the Edison Electric Institute (EEI)-our nation's investor-owned 

electric companies-strongly support pro-growth tax reform that boosts the economy a nd 

increases U.S. competitiveness, encourages private investment in critical energy 

infrastructure, creates jobs, and keeps e nergy bills as affordable and predictable as possible 

for customers. 

The electric power industry is the nation's most capital-inte nsive industry and supports 

more than 7 million American jobs and contributes $880 billion (or 5 percent of GOP) to 

the U.S. economy. EEl's members invest more than $100 billion each year to build smarter 

energy infrastructure and to transition to a n even cleaner generation fleet. 

There are five tax provisions that we believe are essential to supporting long-term 

investments in America's critical energy infrastructure. These a re maintaining the federal 

income tax deduction for interest expense. as well as the federal income tax deduction for 

state a nd local taxes; providing for the continuation of normalization. including addressing 

excess deferred taxes resulting from a reduction in the tax •·ate; and keeping dividend tax 

rates low and on par with capital gains. 

Each of these provisions helps to keep the cost of capital low so electric companies can 

continue to invest in the infrastructure necessary to provide American homes and 

businesses with reliable and affordable electricily. 

Maintain the Federal income Tax Deduction for Interest Exnense 

Due to their capital-intensive nature, investor-owned electric companies use a balanced 

combination of equity and long-term debt a nd maintain high credit quality to Invest more 

than $100 billion each year in very long-life assets. These investments are overseen by 

independent state public utility commissions (PUCs). meaning that how much electric 

companies can earn on these investments and the rates they can charge their customers 

are highly regulated. 

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Our industry traditionally has maintained a capital structure of 55 percent long-term debt, 

which currently equates to more than half a trillion dollars. In addition to this stable capital 

structure, we have been steadily strengthening our credit quality, which is currently 888+. 

The goal of this debt-equity capital structure, which also is overseen by state PUCs, is to 

keep the cost of capital low so electric companies can continue to invest in energy 

infrastructure. 

The loss of interest deductibility will increase the cost of capital, which is reflected in 

electric rates paid by our customers. Moreover, unlike in other industries, full expensing 

will potentially lead to less, rather than more, investment by electric companies. The costs 

of an electric company's investments are factored into customer bills over time rather than 

immediately. As a result, the full expensing of capital does not have the same stimulative 

economic effect for investor-owned electric companies as it does for other industries. 

When the deduction for interest on debt is replaced with the ability to fully expense capital 

costs in the first year, a company is trading a permanent deduction for a temporary benefit. 

Applied to electric companies' rate-making formula, this means that the tax component of 

rates will increase. 

Electric companies work hard to achieve the lowest cost of capital, and they rely upon the 

federal income tax deduction for interest costs to help keep electricity rates as low as 

possible. If electric companies are unable to deduct interest costs for infrastructure 

projects, they would pass any tax increases and related higher costs on to their customers. 

To avoid potentially negative impacts on customers' electricity bills, we believe the interest 

expense deduction should remain in place. 

Maintain the Deduction for State & Local Taxes 

To support our energy infrastructure, electric companies own significant real estate. As a 

result, they pay a substantial amount in taxes to states and municipalities, and usually are 

the largest payers of property taxes in their respective states. 

Communities with a large electric company presence rely on this funding to support a 

myriad of programs. These state and local taxes support jobs, local schools, public safety 

departments (such as police and fire departments), local road construction and 

maintenance, and other important community infrastructure projects. 

The deduction for state and local taxes has long been considered a normal business 

expense. Removing it would increase taxes on electric companies, even with a reduction in 

corporate tax rates. These increased taxes would make it harder to support investments in 

the energy grid and would raise the cost of electricity. Electric companies support 

maintaining the deduction for state and local taxes as a normal business expense. 
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Maintain Tax Normalization and Address Excess Deferred Taxes 

Customers count on their electric companies and their state regulators to help keep energy 

bills as predictable as possible. That is why the costs of long-term investments, including 

tax benefits, are spread out or normalized over the life of the investment rather than being 

reflected immediately in customers' rates at the time the investment is made. 

At the same time, electric companies and regulators have long recognized that when tax 

policy changes are made that can destabilize rates in the short term, these changes should 

be treated in the same way as long-term investments and should be spread out or 

normalized over the same period as the long-life assets to which they relate. This concept 

of normalization has been around since the 1960s, and the policy should be continued 

going forward. 

One potential transition issue that could arise under tax reform is the treatment of excess 

deferred taxes, resulting from a reduction in the tax rate. If corporate tax rates are reduced, 

a company's future tax liability is also reduced because of the new, lower tax rate. This 

creates a situation under which excess deferred taxes that were collected in rates must be 

refunded to customers. 

Tax normalization should be retained in any fundamental overhaul of the tax code to 

provide a fair and equitable treatment of excess deferred taxes. This will ensure that these 

benefits are returned to customers over the remaining life of the investments and also will 

address any investment incentives that are retained in the code. 

Keep Dividend Tax Rates Low and On Par With Capital Gains 

EEl commends Congress for maintaining low tax rates on dividends that are at parity with 

the tax rates on capital gains as part of the American Taxpayer Relief Act of 2012 (ATRA). 

ATRA set the top tax rate for both dividends and capital gains at 20 percent. We also 

commend Congress for making these rates permanent instead of providing another 

temporary extension. 

EEl's member companies feel strongly that federal tax policy should not distort investment 

decisions, and taxing dividends at higher rates than capital gains would create a tax policy 

that favors growth stocks over dividend-paying investments. Maintaining low tax rates and 

parity between dividends and capital gains is essential. 

We recommend that the current tax rates on dividend income be maintained and kept in 

line with capital gains in any comprehensive tax reform legislation. 

Conclusion 

As you consider tax reform proposals, please remember that tax changes that may help to 

promote growth in other industries often have the opposite effect on rate-regulated 

industries like ours. We look forward to working with the Committee to find tax reform 
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solutions that will benefit customers and encourage much-needed investment in critical 

energy infrastructure by helping to keep the cost of capital as low as possible. 
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I 

Education EFC Finance 

Council 

Education Finance Council Statement for the Record 

Hearing: "How Tax Reform Will Grow Our Economy and Create jobs" 

House Committee on Ways and Means 

Submitted: May 19,2017 

Education Finance Council (EFC) is the national trade association representing nonprofit and statebased higher education finance organizations. These organizations are public-purpose entities that 

operate with the mission of increasing postsecondary access, affordability. and success. Collectively. 

they serve as critical resources for students and families in their states, assisting families with every 

facet of the higher education fina ncing experience. Ma ny of these organizations use the proceeds of 

Qualified Student Loan Bonds to fund s upplemental education loans as well as education 

refinancing loans. 

EFC shares the Committee's vision for a simpler and faire r tax system, and we appreciate the 

opportunity to provide the following important recommendations: 

Preserve Tax-Exempt Qualified Student Loan Bonds• 

As Congress works to reform the tax code, it is impe rative that policymakers preserve tax-exempt 

Qualified Student Loan Bonds to maintain the ability of nonprofit a nd state-based organizations to 

offer low-cost fina ncing options that afford middle-inc<>me families the a bility to pay for their 

college dreams. 

As college costs continue to rise, many middle·income families require low·cost financing options in 

addition to the Federal Direct Student Loan Program. Nonprofit and state-based student loan 

funding providers have the unique ability to utilize tax-exempt bond financing- in the form of 

Qualified Student Loan Bonds-to help families fill the gap with low-cost, consumer-friendly loans. 

Policymakers should keep in mind, as they work to reform the tax code, that repealing the tax 

exemption would dramatically increase the cost of these loans, adversely affecting middle-income 

families, who already bear a significant portion of the $1.4 trillion student debt burden. 

There are currently 19 state-based and nonprofit lenders who offer education loans with low 

interest rates, low or no origination fees, and lower monthly payments than many other education 

loan options, including the Federal Direct PLUS program. For example, families who work with one 

1

Quallfied Student Loan Bonds Fall urlder the 1nunkipal bond tax exemption. Initially. student loan bonds were treated as 

governmental bonds, and were not what the 1954 Internal Revenue Code described as Industrial development bonds 

(and that are now k1 own as Private Activity Bonds", which are subJect to many more restrictions than governmental 

bonds). In 1984, Congress changed the tax-exempt bond rules to make interest on what were described as "Private Loan 

Bonds• taxable. But "Qualified Student Lo;;m Bonds," under then·applicable Section 103(o),,.,.,ere not treated a.s "P1ivate 

Loan Bonds" for this purpose. 

When the 1986 Tax Act put the lnten al Revenue Code of 1986 1n place. the concept of a qualified student Joan was 

incorporated into Section l44(b) of the Code. Qualified Student Loan Uonds are now Private Activity Oonds and are 

subject to volume cap limitations. 

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EFC Statement for the Record Page 2 May 19,2017 

state-based program can save an average of $2,500 over ten years on a $10,000 loan, compared to if 

they had taken out a PLUS loan. 

Most of these organizations also provide the in-depth counseling that borrowers need to 

understand and manage their loan responsibilities and guide borrowers through all repayment 

options available to them- with special attention paid to working with borrowers who experience 

economic hardship. In the past year, EFC Members directly worked with over 2.5 million families to 

help them successfully plan, save, and pay for college. And, during the 2015-16 fiscal year, nonprofit 

and state-based organizations helped over 76,000 students and their families close the gap in 

college funding with more than 87,000 loans to more than 76,000 borrowers, totaling $1.1 billion. 

Collectively, their outstanding portfolios include 1.56 million in loans totaling $11.25 billion, 

representing more than 628,000 borrowers. 

Additionally, 13 nonprofit and state-based organizations offer refinancing loans, making education 

debt more manageable for families by providing a refinancing tool that consolidates high-interest 

rate education loans into a single loan, reducing overall debt burden and, in many cases, reducing 

monthly payments by as much as $200 or $300 per month- saving borrowers anywhere from 

$3,000 to $5,000 over a ten-year repayment term. 

Tax-exempt Qualified Student Loan Bonds also allow nonprofit and state-based student loan 

organizations to serve as critical resources for the citizens of their states, assisting families with 

every facet of the higher education financing experience. These organizations use any excess 

revenues to help fund extensive free programs to counsel students to choose the best-fit school, 

borrow appropriately, complete their degree, maximize their earning potential, and successfully 

repay their loans. 

In the past year, these organizations worked directly with 2.5 million students and families, and: 

Granted over $655 million in scholarships 

Hosted programs at over 14,000 schools, community centers, libraries, and other sites 

Assisted 1 million students with their college applications 

Awarded $577 million in grant funds 

Assisted in the filing of more than 76,000 FAFSAs 

Hosted over 16,000 community presentations for students and parents surrounding college 

planning and financial aid 

Presented programs on financial literacy, budgeting, and college planning to over 520,000 

high school students and their families 

Presented programs on financial literacy, budgeting, and college planning to over 50,000 

elementary and middle school students and their families 

Provided financial literacy training and programs to over 57,000 students and families 

Distributed over 4.5 million brochures, fact sheets, guides, newsletters, and webinars 

Held over 2,300 counselor- and teacher-training workshops 

In order to retain the ability of nonprofit and state-based organizations to provide low-cost, 

consumer-friendly loans to middle-income families, and their ability to offer extensive free 

outreach programs, it is critical to preserve tax-exempt Qualified Student Loan Bonds. 

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EFC Statement for the Record Page 3 May 19,2017 

Eliminate the Alternative Minimum Tax 

EFC supports the proposed elimination of the Alternative Minimum Tax (AMT), which would 

minimize costs to education loan borrowers. Congress' previous temporary elimination of the AMT 

on income earned from Private Activity Bonds resulted in lower borrowing rates for student loan 

issuers, with those savings passed directly to student loan borrowers. 

For example, a student borrowing $2 0,000 could save $500 or more in lower interest payments on 

a ten-year loan with the elimination of the AMT. Nonprofit and state-based education financ e 

organization are committed to once again passing any savings from the elimination of the AMT 

directly to borrowers in the form of lower interest rates. 

Update "Qualified Scholarship Funding Corporation" Rules 

As noted above, nonprofit and state-based education loan financing providers, through the issuance 

of Qualified Student Loan Bonds, are uniquely situated to make supplemental education loans with 

the best possible terms and to make education refinancing loans at low interest rates. However, 

certain nonprofit and state student loan funding providers- "qualified scholarship funding 

corporations" under Section 150(d) of the Internal Revenue Code- are currently ineligible to issue 

Qualified Student Loan Bonds to finance supplemental education loans and refinance education 

loans. 

Section 150(d) allows only qualified scholarship funding corporations to issue Qualified Student 

Loan Bonds to acquire education loans incurred under the HEA, which was the Federal Family 

Education Loan Program (FFELP). An update is needed to the Internal Revenue Code to allow 

qualified scholarship funding corporations to utilize Qualified Student Loan Bonds to fund 

supplemental education loans and refinancing loans. 

EFC endorses H.R.480, the Student Loan Opportunity Act, introduced by Rep. Bill Flores (R-TX), 

which would allow qualified scholarship funding corporations to issue Qualified Student Loan 

Bonds to fund supplemental education loans for students attending school and provide low-cost 

refinancing loans to borrowers once they leave school. We recommend that H.R.480 be included in 

tax reform efforts currently underway so as to extend the same opportunities to residents of all 

states. This would ensure that students and borrowers have the broadest access possible to lowcost supplemental education and refinancing loans. 

Stop Taxing Death & Disability 

EFC strongly supports efforts to exempt from federal income tax private and federal education 

loans that are discharged due to the death or total and permanent disability of a student, and to 

allow the parent of a student that becomes totally and permanently disabled to have their federal 

loan discharged. 

Adding federal and private student loan discharges as a result of death or total and permanent 

disability to the existing list of tax-exempt discharges is a common-sense and compassionate 

reform, modeled on current exemptions that public sector employees and borrowers with a closedschool discharge already receive. 

EFC endorses the bicameral, bipartisan Stop Taxing Death and Disability Act and recommends it be 

included in the current tax reform effort. 

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ES CA TH E AM ERICA N DREAM A T W OR K 

Statement for the Record 

House Committee on Ways and Means 

Hearing on "How Tax Reform Will Grow Our Economy and Create Jobs" 

May 18,2017 

Stephanie Silverman 

President & Executive Director 

Employee-Owned S Corporations of America 

1341 G Street, NW, 6'h Floor 

Washington, DC 20005 

On behalf of the Employee-Owned S Corporations of America (ESCA). thank you for the opportunity to 

submit comments to the House Committee on Ways and Means. We commend the Committee for its 

continued focus on policies to drive the economy thru tax policy and job growth, which is essential to 

not only the industry, but also to working Americans, their families and their communities. 

About ESCA 

ESCA represents private employee-owned companies operating in every state across the nation, in 

industries ranging from heavy manufacturing to construction to grocery stores. The expansion of 

subchapter S corporation employee stock ownership plans (S ESOPs). following Congress' creation of 

that structure in 1998, is testimony to the fact that this business model offers a valuable way to 

transition ownership, empower workers and boost productivity. 

Currently, there are about 3,000 S corporation ESOPs; they employ 470,000 workers across the country 

and support nearly a million jobs in all. We would respectfully suggest to the Committee that a vital 

means of promoting economic opportunity for working Americans is to expand the availability of S 

corporation ESOPs through targeted tax policy updates. 

S ESOPs Promote Jobs and Savings 

The evidence is compelling that expanding the availability of S corporation ESOPs for more companies 

and their workers would not only boost the retirement savings of countless Americans, but would also 

create more jobs, generate more economic activity, and help businesses be more stable and 

successful. 

A 2016 study by Jared Bernstein showed that ESOP companies provide more stable employment than 

other businesses, pay better wages and reduce wealth inequality. A 2015 study by EY's Quantitative 

Economics and Statistics practice found that S ESOPs outperformed the S&P 500 in total return per 

1341 G Street NW • 61h Floor• Washington, DC 20005 

T: 202-466-8700 F: 202-466-9666 

www.esca.us 
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participant by an impressively large margin (62%) and distributions to participants totaled nearly $30 

billion from 2002 to 2012. A 2008 University of Pennsylvania/Wharton School of Business study found 

that S ESOPs contribute $14 billion in new savings for their workers each year beyond the income 

they would otherwise have earned, and that these companies offer workers greater job satisfaction 

and stability. The study also found that S ESOPs generate a collective $19 billion in economic value 

that otherwise would not exist. 

S corporation ESOPs are doing exactly what Congress intended: generating economic activity, creating 

jobs, and promoting retirement savings. By any measure, these companies have been a remarkable 

success story, and a bright spot in an economy characterized over the course of the last decade or 

more by sluggish growth, anemic job creation, worker insecurity and wealth inequality. 

It stands to reason that companies with ESOPs have displayed a dynamism and vitality lacking in many 

others. An ownership stake in one's place of work is not only a reason for workers to help drive the 

company's success, it also inspires greater loyalty as workers consider themselves aligned with the 

fortunes of the business, and avoid adversarial dynamics that can emerge when employees are 

convinced that the interests of stockholders and corporate board members are at odds with their own. 

For workers inS corporation ESOP firms, what is good for ownership is good for them. 

Employee Ownership as a Transition Tool to Keep Jobs Local 

As the Ways and Means Committee contemplates pro-growth measures, we urge members to support 

tax policies that expand the availability of S corporation ESOPs, allowing more workers to own their 

businesses and benefit from the advantages that employee ownership holds. Today there are 

practical limitations, however, that hinder this goal, including a lack of information about employee 

ownership as a transition option. 

Ensuring business continuity in and of itself is a job-retaining play and creating employee-owners can 

help make businesses more powerful job engines. Alex Brill, CEO of Matrix Advisors, who has served as 

policy director and chief economist on the Ways and Means Committee staff, noted in his March 2017 

.Employee Stock Ownership Plans as an Exit Strategy for Private Business Owners, "For certain 

private business owners, a way to preserve a firm's continuity, foster employee commitment, and build 

lasting economic value in a community is to sell the business to its employees through an ESOP." 

This builds on earlier Brill studies from 2012 and 2013 that found: 

The number of S ESOPs and the level of active participation (number of employee-owners) 

have more than doubled since 2002. 

Employment among surveyed S ESOP firms increased more than 60% from 2001-2011, while 

the private sector as a whole had flat or negative growth in the same period. (2012) 

In the struggling manufacturing industry in particular, the S ESOP structure has buffered 

against economic adversity and job loss. (2012) 

S ESOPs have significantly expanded the pool of US workers who are saving for retirement, 

while also boosting company productivity- something that has greatly benefited their 

employee-owners. (2012) 

H.R. 2092 

Toward that end, H.R. 2092 --introduced in April by Committee members Dave Reichert and Ron Kind 

along with Reps. Pat Tiberi, Richard Neal, Erik Paulsen, Earl Blumenauer and Bill Pascrell --would help 

to grow the number of private ESOP businesses in the United States, giving more workers the 

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opportunity to build savings, reduce wealth and wage inequality, and retire with dignity. The measure 

includes provisions to extend the gain-deferral provisions of Code section 1042 to sales of employer 

stock to S ESOPs, encourage the flow of bank capital to ESOP-owned S corporations, provide resources 

to small businesses contemplating making the transition to an ESOP, and ensure that SBA-certified 

small businesses do not lose their status by becoming employee owned. Last Congress' version of this 

legislation, H.R. 2096, had 96 bipartisan cosponsors (including 22 members of the Ways and Means 

Committee). 

Economic Security for Employee-Owners 

One of the clearest benefits of job stability and strong savings among workers is how they feel about 

their own economic security and the evidence also tells us there is a marked difference between ESOP 

employees and other workers, with ESOP employees expressing less worry and more confidence about 

their fiscal health. A new survey by John Zogby Strategies found that employees who work at private, 

employee-owned companies feel more financially secure and feel they have more job security than 

other workers, whose economic anxiety continues to grow by comparison. The survey bench marked 

responses against the annual "Economic Anxiety Poll" put out by Marketplace/Edison Research. The 

survey also found these employee-owners feel financially stable enough that they worry less about 

being able to cover expenses- mortgage and rent payments, student loan costs or unexpected coststhan does the rest of the population. 

Conclusion 

Given the clear and compelling benefits to workers, communities, businesses and the national 

economy that are derived from S ESOPs, there is little doubt that a practical solution to the question at 

hand is to spur the creation of moreS ESOPs and create more employee-owners. With that goal in 

mind, we look forward to working with Committee members to advance provisions from H.R. 2092 this 

year. We thank the Committee for its continued championship of employee ownership through the S 

ESOP model, and more broadly for its work on pro-growth policies for working Americans. 

The Employee-Owned 5 Corporations of America {"E5CA") is the Washington, DC voice for employee-owned 5 

corporations. ESCA's exclusive mission is to advance and protect 5 corporation ESOPs and the benefits they 

provide to the employees who own them. These companies have an important story to tell policymakers about 

the tremendous success of the 5 ESOP structure in generating long-term retirement savings for working 

Americans and their families. ESCA provides the vehicle and the voice for these efforts. ESCA represents 

employee-owners in every state in the nation. 

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-

FEDERATION 

otEXCHAN GE 

ACCOMMOOATORS 

Tltc Vok~¢o/the 103/ lrtdw;try 

Statement for the Record 

1255 SW Prairie Trail Pkwy 

Ankeny, lA 50023 

Phone: (515) 244-6515 

Fax: (515) 334-1174 

www.1031.org 

Hearing on How Tax Reform Will Grow Our Economy and Create J obs across America 

Committee on Ways and Means 

U.S. House of Representatives 

June 1, 2017 

As the Committee seeks taxpayer and industry input on the important task of simplifying and reforming our 

tax code to generate jobs and economic growth, the Federation of Exchange Accommodators ("FEA") 

appreciates this opportunity to demonstrate the benefits and need for retention of IRC Section 1031, in its 

present form, in any tax reform bill. 

The House Republican Blueprint for Tax Reform proposes reduced tax rates and full, immediate expensing 

with unlimited loss carryforward for all investment and business-use tangible & intangible depreciable 

personal property assets, including real estate improvements, but not land. We understand that some 

policymakers believe that if these proposals are enacted, that §1031 like-kind exchanges will no longer be 

necessary. We disagree. 

The Blueprint proposals, taken as a whole, do not provide equal benefits, and are not as 

comprehensive, as the benefits provided to both taxpayers and our economy by §1031 like·klnd 

exchanges. Even with lower tax rates and immediate expensing, Section 1031 will still be necessary to 

remove friction from transactions and fill in the gaps. 

At its core, IRC §1031 is a powerful economic stimulator that is grounded in sound tax policy. The 

non-recognition provision is premised on the requirement that the taxpayer demonstrates continuily of 

investment in qualifying replacement properly with no intervening receipt of cash. There is no profit-taking, 

and at the conclusion of the exchange, the taxpayer is in the same tax position as if the relinquished asset 

was never sold. 

Since 1921, Federal tax law under IRC §1031 has permitted a taxpayer to exchange business-use or 

investment assets for other like-kind business-use or investment assets without recognizing taxable gain 

on the sale of the old assets. Taxes which otherwise would be due if the transaction was structured as a 

sale are deferred. Qualifying assets include commercial, agricultural and rental real estate, aircraft, trucks, 

automobiles, trailers, containers. railcars, agricultural equipment, heavy equipment, livestock and other 

assets involved in a broad spectrum of industries, owned by an equally broad spectrum of taxpayers ranging 

from individuals of modest means and small businesses to large business entities. 

Under current law, §1031 promotes capital formation and liquidity. A macro-economic impact study 

by Ernst & Young, and a micro-economic impact study on commercial real estate by Or. David Ling and Or. 

Milena Petrova. both published in 2015, concluded that Section 1031 removes the tax lock-in effect and 

permits taxpayers to make good business decisions without being impeded by negative tax consequences 1

• 

1 Economic Impact of Repealing Like-Kind Exchange Rules, Ernst & Young (March 2015, Revised November 2015) 

available at http:Uwww.l03ltaxreform.com/1031economics/: and The Economic Impact of Repealing or limiting 

Section 1031 like-Kind Exchanges in Reo/ Estate, David C. Ling and Milena Petrova (March 2015, revised June 22, 

2015), available at http:ljwww.l031taxreform.com/ling·petrova/. 

FEA Statement for Record Housq Ways & Means Committee Hearing on Tax Reform 6-1-17 
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Like-kind exchanges stimulate economic activity and promote property improvements that benefit 

communities, increase property values and local tax revenues, improve neighborhoods, and generate a 

multitude of jobs ancillary to the exchange transactions. These studies quantified that restricting or 

eliminating like-kind exchanges would result in a decline in GOP of up to $13.1 billion annually, reduce 

velocity in the economy and increase the cost of capital to taxpayers-' A 2016 Tax Foundation report 

estimated a significantly larger economic contraction of approximately $18 billion per year. 3 

Like-kind exchanges benefit the economy in a myriad of ways. Commercial real estate owners, 

individuals, and businesses of all sizes use like-kind exchanges to trade up from a small rental to a larger 

apartment building, from a factory or office space that met yesterday's needs to a business facility that 

positions the business for tomorrow, and upgrade machinery, equipment or vehicles into newer assets that 

better meet current and future needs. The ability to take advantage of good business opportunities 

stimulates transactional activity that generates taxable revenue for brokers, lenders, appraisers, surveyors, 

inspectors, insurers, equipment dealers, manufacturers, suppliers, attorneys, accountants and more. This 

transactional velocity also creates opportunities for smaller businesses to acquire entry-level facilities and 

used equipment from which to launch and grow their fledgling businesses. 

Farmers and ranchers use §1031 to preserve the value of their investments and agricultural businesses 

while they combine acreage, acquire higher grade land, or otherwise improve the quality of their operations. 

They rely on §1031 to defer depreciation recapture tax when they trade up to more efficient farm machinery 

and equipment. Farmers and ranchers trade dairy cows and breeding stock when they move their 

operations to a new location. 

Immediate expensing does not remove the lock-in effect on a host of real estate owners. Given that 

improvements would be eligible for immediate expensing, but the value allocated to land would not be 

deductible, it is important to recognize that land values represent on average, approximately 30% of the 

value of commercial improved properties, and up to 100% of agricultural land investments. If these property 

owners are faced with reducing the value of their investments and life savings through capital gains tax 

when they sell and reinvest in other real estate, even with lower rates, they will likely hold onto these 

properties longer. The ability to use §1031 to defer gain recognition removes the lock-in effect, takes the 

government out of the decision-making process, and permits taxpayers to engage in opportunistic 

transactions that make good business and investment sense without fear of negative tax ramifications. 

Repeal or restriction of like-kind exchanges would be especially troublesome for agricultural and 

commercial real estate investments in which the land value, relative to the value of improvements, 

is great. A taxpayer replacing low basis real estate would recognize substantial capital gains that would 

not be fully offset by the proposed expensing deduction for improvements on equal value replacement real 

estate if the improvements are minimal in value or non-existent, as in the case of agricultural land , or if the 

property is located in an area with high land to improvement ratios. Without additional cash to cover both 

the tax liability and the new investment, loss of §1031 would result in a government-induced shrinkage of 

agricultural and commercial real estate investment, retarding ability for grow1h as well as diminishing the 

net worth of farmers , ranchers , and real estate investors. 

Like-kind exchanges make the economics work for conservation conveyances of environmentally 

sensitive lands that benefit our environment, improve water quality, mitigate erosion, preserve wildlife 

habitats, and create recreational green spaces for all Americans. Farmers, ranchers and other landowners 

reinvest sale proceeds from conservation conveyances through §1031 like-kind exchanges into more 

productive, less environmentally sensitive land. These socially beneficial conveyances are dependent upon 

the absence of negative tax consequences. 

Many taxpayers benefitting from like-kind exchanges are not ultra-high net worth individuals or 

large corporations. These individual taxpayers do not have use for a large net operating loss carryforward 

2 Ernst & Young LLP, Economic Impact at (v) and Ling and Petrova, Economic Impact, at 6 3 Options for Reforming America's Tax Code, Tax Foundation (2016), p.79, available at 

https://taxfoundation.org/options-reforming-americas-tax-code/. 

FEA Statement for Record House Ways & Means Committee Hearing on Tax Reform 6-1-17 
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from the unused expense deduction for real estate improvements. They do not have sufficient related 

income to offset the expense, thus they would realize minimal benefit. These taxpayers would face a 

massive amount of depreciation recapture upon sale, for which they may not have sufficient liquidity, or 

may not have set aside enough cash to satisfy, creating further personal challenges, locking them in, and 

putting other wealth building options out of reach. The tax-deferral provisions of Section 1031 fill this gap 

by permitting full reinvestment of sales proceeds into like-kind property. 

Retiring taxpayers benefit by exchanging their most valuable asset, their farm, ranch, or apartment 

building, for other real estate that doesn't require a 24/7/365 workday, without diminishing the value 

of their life savings. With a §1031 exchange, farmers and ranchers can downsize or divest their 

agricultural operations, landlords can eliminate the "3 Ts" of tenants, toilets and trash , and these retirees 

can reinvest in other income producing real estate, such as a storage unit facility, or a triple net leased 

commercial property. The loss of §1031 would result in a direct reduction of the retirement savings of 

these taxpayers whose work has provided food for our nation and affordable living space for other 

Americans. 

Unlike the Blueprint, Section 1031 provides a mechanism for asset sales and replacement 

purchases that bridge 2 tax years. Absent §1031 , taxpayers would be forced to acquire new assets prior 

to year-end, or be faced with recapture tax on the Year 1 sale and less equity available for the replacement 

purchase in Year 2. This would create a disincentive to engage in real estate and personal property 

transactions during the 41

" quarter, resulting in tax-driven market distortions. Seasonal businesses in 

particular can benefit from exchanges in which assets are divested in late autumn and replaced in early 

spring, at the start of the new season, thereby eliminating off-season storage and debt-service expenses, 

without any tax-induced cash-flow impairment. 

Retention of §1031 in present form eliminates potential expensing abuse. The proposal to fully 

expense real estate improvements in the year of acquisition, with an unlimited carryforward, provides a 

tremendous incentive at acquisition for a taxpayer to inflate the value of improvements, so as to maximize 

the write-off. Conversely, upon sale, there would be great incentive to minimize the value of the buildings 

and over-allocate value to the land , thus minimizing recapture tax on the improvements at ordinary income 

tax rates, and benefiting from lower capital gains tax rates on the land. 

Appraising is not an exact science. There are different methodologies, and a considerable amount of 

subjectivity, particularly when there is a scarcity of market activity and relevant data upon which to rely. 

Given the multiple variables that can impact land and structure values, appraisals can vary widely. A 

taxpayer with a clear incentive could easily game the system to maximize tax benefit and minimize taxes 

owed on disposition . Section 1031 eliminates this conflict and simply encourages reinvestment of the full 

value. 

Professional Qualified Intermediaries simplify like-kind exchanges and promote compliance with 

tax laws. Treasury Regulations provide rules and a safe harbor for taxpayers engaging in nonsimultaneous exchanges under §1 031 that involve different buyers and sellers 4 1n these delayed, multiparty 

exchanges (which constitute the majority of like-kind exchanges), the taxpayer is prohibited from having 

receipt of or control over the sale proceeds from the relinquished property prior to receiving replacement 

property, or termination of the exchange. 

The Qualified Intermediary ("QI") is the independent third party that receives the sale proceeds from the 

relinquished property buyer, holds and safeguards the funds for the benefit of the taxpayer, and then 

disburses the funds to the seller of the replacement property. Although a Ql occasionally takes title to the 

exchanged properties, typically the Ql is only assigned into the chain of contracts , and the safe harbor 

treats the transaction, for tax purposes, as if the exchange occurs between the Ql and the taxpayer. Agents , 

such as the taxpayer's attorney, accountant, broker or employee, and parties related to the taxpayer, are 

disqualified from acting as a Qualified Intermediary. 

4 26 CFR 1.1031(k)-1 

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Professional Qualified Intermediaries facilitate §1031 like-kind exchanges, for a nominal fee , by 

providing necessary documentation, and by holding, safeguarding and disbursing the exchange 

funds for qualifying like-kind replacement property. 

FEA member Qls are subject matter experts in §1031 exchanges. Our members serve as a 

valuable resource to taxpayers and their advisors, providing a simple, streamlined process, and 

promoting compliance with tax rules. 

Qualified Intermediaries do not act as brokers, deal makers or advisors to the taxpayer- doing so 

would disqualify them from serving as a Ql. 

Qualified Intermediaries are subject to exchange facilitator laws in nine states. 

Capital intensive businesses rely upon like-kind exchanges and affordable access to debt to build 

and expand. Both tax-deferral and interest deductibility are important economic drivers that stimulate 

transactional activity, capital investment and grow1h in the United States. 

In summary, like-kind exchanges remove friction from business transactions and stimulate 

economic activity that would not otherwise benefit from the proposed Blueprint. Section 1031 

facilitates opportunistic investment of capital and community improvement. Like-kind exchanges assist the 

recycling of real estate and other capital to its highest and best use in the marketplace, thereby creating 

va lue and improving economic conditions for local communities, rural and urban. Landowners and other 

businesses would be disadvantaged if they had neither the option of a tax deferred like-kind exchange nor 

expense deductions for asset acquisition and interest on related debt. 

We are grateful for the opportunity to cooperatively work with you and your staff to provide productive, 

constructive, practical input toward achieving the goal of a fairer, simpler, pro-growth tax reform plan. 

Sincerely, 

Federation of Exchange Accommodators 

FEA Statement for Record House Ways & Means Committee Hearing on Tax Reform 6·1·17 
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FREEDOM 

PARTNERS 

May l8,20 17 

Dear Nlember·s of the Ways and Means Commiuce: 

We believe tax rcfonn done right is th e key to helping millions of Amerioms improve the ir lives -

especially those who have been struggling to lift themselves out of poverty. On behalf of our 

members, hundreds of business a nd philanthropic leaders throughout the country, we write to 

thank you for your work on tax rcfonn and express our commitment to this shared goal. 

It shouldn't surprise anyone that 72 per·cem of Americ~'ll S feel that the "economy is rigged to 

advantage the rich and powerful." It is. And there's no greater comributor to the rigged economy 

than the U.S. tax code. We want to wor·k wiah you and ahe adminisll'luion to fix these pi'Oblems, 

elimina te special interest carve outs and loopholes, ~mel help resto re equity and f<•imess so that all 

Americans have the equal opportunity to succeed. 

Ideal tax poliC)' would raise enough revenue to fund the p roper fw>ctions of government with 

limited maa·ket inte rference, and treat individuals and institutions equally in the pi'Ocess. But the 

U.S. tax code does just the opposite. 

It takes too much hard-eam ed money li·om ordinary Americans struggling to get by. 

It pirs the least fortunate against the wcll-com>ecred, who spend millions o f dollars on 

lobbyists seeking special tax u·eaon em and f.'lVors, instead of creating value th i'Ough 

economic means. 

It distorts market signals that are essemialto a free and innovative economy, one that grows 

and produces jobs and opportunities for all Americans. 

And it d•'ains the U.S. economy of billions of dollars in tax law compliance costs that could 

be used for· more p r·oductive purposes that lead to innovations and job cr·eation. 

With every change, complexity grows, the economy suffers, jobs and opportunities arc lost, and 

our nation becomes a mor'C cmrenched two-tie red society. 

We have a positive vision for a fi1irer, llattcr, and simpler tax code, tha t is understood and respected 

by the American people, and unleashes growth and opportunity so all Americans can improve 

their lives especially the least fortunate. 

Our vision for rax r·eform follows five simple principles: 

1. Simplicity: Lower ra tes, fewer brackets, and the elimination o f special loopholes, 

deductions, and exemptions "~Ll make tax compliance easier and more affordable. 

2iUU \\'il ... ,nlk all'\~11'\l Suiwo l(ll) I \ llill)t\olt, \'\ 1:!"1()1 

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FREEDOM 

PARTNERS 

America's byzantine tax policy, with the highest coq)()rate statutO!')' rates in the developed 

world, deters American business investments, stiOes economic &rrowth, and has caused 

America to lose as many as 3 million jobs. 

American workers and consumers arc hurt b)' higher taxes, whether they arc imposed on 

incli du s or coq>omtions. Most middle-class taxpayers, who take the standard deduction, 

do not benefit li·om the arn•y of special deductions and credits, and high di ual tax 

mtcs reduce badly needed take-home pay. Higher coq>on\le tax rates reduce jobs and 

increase consumer prices. 

Individuals and businesses waste billions of dollar'S and billions of hours compl)•ing with tl1e 

code's complex and convoluted r-eqttirements. ln 20 16, tax code complexity cost American 

taxpaye•'S and businesses 3409 billion dollar'S, and over 8.9 billion hours in compliance time 

- time and money that could be put to more productive usc. 

2. Efficiency: Broad-based, low-rate tax systems are the most eniciem way for tl1e 

govemmem to collect revenue causing as little disr"Uption ro me economy as possible. 

Eliminating distoriions allow people to make the best decisions about saving and investing 

for their families or businesses, ratl1er than focusing on tax outcomes. And it allows 

businesses to focus on producing real value for their customers, rather than gaining at the 

expense of others through the political system. 

3. Equitability: Corporate welfar·e and spccial-imercst handouts in the cun-ent tax code 

create <m unfitir, two-tier tax system and should be eliminated. 

From 2002 to 20 II , lobbyists spent $28 billion pleading with federal, state, and local 

govemmems for special tr-eatment for tl1eir clients. When government picks f.worites in our 

tax code, th is leads to higher tax rates for evcrrone else. The U.S. government pays out 

almost S I 00 billion per vcar in comorate welfare that's an average cost of almost S900 

per American family. 'll 1e u·ue cost to taxpayers is greater because the S I 00 biUion docs 

nm include the cost of preferential tax carve outs or trade restrictions. 

In addition, tax cxpcnditun:s, which include special exclusions, exemptions, deductions, 

credits, and preferential tax rates, ar-e estimated by the Congn·ssional l~ud gt·t OOice to 

exceed S 1.5 tt·illion in 20 I 7. 

4. Predictability: Tax ccrtaimy is essential to a pro-growt h tax system. 

Our current tax system relies on shon -ter·m fixes to help businesses deal with cxa-emely 

high tax rates. These tax extenders and the complex fonmtlas for· bringing for·cign-eamed 

income back home to the United States make it vcrr dinicult for businesses to plan longterm. 

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FREEDOM 

PARTNERS 

5. No Burden on Taxpayers: Comprehensive tax r·cfonn must be done without placing 

new burdens on the American people. 

Government has a spending problem, not a revenue problem. Tax reform can and must 

be done without sadcUing new taxes o n American consumers, whelher in the fonn of a 

BAT, VAT, carbon tax, or other tax inc rease. 

Freedom Panncrs Chamlx r of Commerce and o ur coalition ~r lli es hope to work closely with your 

committee to advance these pdnciples and help unify Americans behind a pm-growth tax r·eform 

agenda that changes the nation's trajectory away li·om a two-tiercel society, and bdngs opportunity 

back to those who are most in need. 

Americans deserve a tax code that is simple, efficient, equitable, and predictable - without new 

burdens o n ta>.-paycrs. If you can join us in championing these pri nciples, we will help ensure that 

the American peo ple will stand behind you in this important cflo rt. 

Sincerely, 

Nathan Nascimento 

Vice President of Policy, 

Freedom Partners Chamber of Commerce 

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*Freedom Works 

Statement of Adam B•·andon 

P•·esident, F•·eedomWo•·ks 

U.S. House of Representatives Committee on Ways 11nd Means 

"Hearing on How Tax Reform Will Grow Ou•· Economy and atc J obs" 

Thursday, May 18, 2017 
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On behalfofFreedomWorks' community of more than 5 million grassroots activists, J would 

like to thank Chainuan Brady and members of the committee for begitming their work on 

fundamental tax reform. This is an issue of tremendous importance to Freedom Works and a 

moment that comes only once in a g~ne at . 

As the Chaim1an and the members of the committee know, the United States tax code has not 

been overhauled sioce 1986, with the passage of the Tax Refonn Act, and that effort was years in 

the making. Thjs Congress, however, must approach tax refonn with a sense of urgency. The 

American people do not have years to wait. They need and expect action that will boost 

economic growth and provide opportunity and prosperity for all. 

The United States' economy has not seen an.oual economic growth of 3 percent or higher since 

2005. This is an indictment of the ec-onomjc policies of the past eight years. It is, however, an 

opportunjty for Congress to reverse this trend and promote policies that let Americans keep more 

of the money they ean1: and encourage investment. 

l 

f 

9 

8 

0 

Annual Economic Growth In lhe Unhed Statu: 11181 ·2~16 

The recovery from the "Great Recession" has been anemic. As the old axiom goes, "Those who 

fail to learn from history are doomed to repeat it." Indeed, we have been down this road before. 

During the Great Depression, President Franklin D. Roosevelt was able to gel his economic 

agenda passed through Congress, establishmg new agencies, programs, and rcgulatjons that 

greatly expanded the size and scope of government. Although President Roosevelt and his "New 

Deal" programs are heralded in the hist01y books as ending the Depression, more recent 

academjc research has put this assumption in doubt. 1 

1 Harold L Cole and Ltt E. Ohanilln. New Dt.nl Polidtt and the ersistnJC~ of the Grmt/)qN'-3Sitm: A Gem~ra/ EquWbrimn Annlysis, The 

Vnivers.ityofChicago Press, Augusl2004 hnp:l/www.jstor.org/saabk/3 ~~$138 

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"President Roosevelt believed that excessive competition was responsible for the Depression by 

reducing prices and wages, and by extension reducing employment and demand for goods and 

services," said Harold L. Cole, then a professor of economics at the University of California-Los 

Angeles. "So he came up with a recovery package that would be unimaginable today, allowing 

businesses in every industry to collude without the threat of antitrust prosecution and workers to 

demand salaries about 25 percent above where they ought to have been, given market forces. The 

economy was poised for a beautiful recovery, but that recovery was stalled by these misguided 

policies. "

2 

The aggressive tax and regulatory approach taken by President Barack Obama and his 

administration hampered the recovery from the Great Recession. The administration ramped up 

regulation on the financial and energy sectors of the economy, created or increased taxes through 

the so-called "Affordable Care Act,"3 or ObamaCare, as most of us know it, and signed a $620 

billion tax increase in January 2013 4 The "fiscal cliff' deal included the addition of a seventh 

individual income tax rate, a significant increase in the estate tax, and an increase in the capital 

gains tax and dividends tax. 

The tax and regulatory policies implemented by President Obama and his administration resulted 

in stale economic growth. Under ordinary circumstances, the economy would have been $1.4 

trillion larger and could have been $2 trillion larger if the economy had grown at the same rate as 

it did during the recovery under President Ronald Reagan. 5 

Some believe that Congress should keep its approach on taxation simple and pass only a net tax 

cut. Freedom Works, however, is focused on deficit neutrality, or budget neutrality, to ensure that 

changes to the tax rates are permanent. This was one of the flaws of the Economic Growth and 

Tax Relief Reconciliation Act of2001 , which expired after ten years. Moreover, it is imperative 

that Congress use this moment to simplifY the tax code, making it less costly and time 

consuming for individuals, families, and businesses to file their tax returns. 

As the committee begins its work on fundamental tax reform, Freedom Works hopes that 

members will keep these broad and basic principles in mind. 

Broaden the Tax Base: The approach Congress should take is: drain the swamp. The tax code is 

riddled with special interest tax breaks, deductions, and credits that reek of cronyism and put 

1 Meg Sullivan, "FOR's policies prolonged Depression by 7 years, UCLA economists calculate," UCLA Newsroom, August I 0, 2004 

hnp://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-Depression-5409http://newsroom.ucla.edu/releases/FDR-s-Policies-ProlongedDepression-5409 3 John Kartch, "Full List ofObamacare Tax Hikes: Listed by Size of Tax Hike," Americans forT ax Refonn, Jmte 29, 2012 

hnp://www.atr.org/full-list-obamacare-tax-hikes-listed-a7010 4 Joseph Henchman, "Details of the Fiscal Cliff Tax Deal," Tax Foundation, January I, 201 3 hnps://taxfmmdation.org/details-fiscal-cliff-tax-deal/ 

l Stephen Moore, "Obama 's $2 Trillion Deficit," Heritage Fotmdation, May I, 2014 hnp://www.heritage.org/budget-andspending/commentary/obamas-2-trillion-deficit 

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more of the tax burden on hardworking Americans and entrepreneurs. The foundation for a good 

and fair tax policy is a broad base, with as few deductions and tax credits as possible. 

Ideally, Congress would increase the standard deduction for all taxpayers and keep in place few 

deductions; eliminating the mortgage interest deduction, the federal deduction for paid state and 

local tax, and most other deductions. 

Lower and Consolidate Individual Tax Rates: The goal should be to take the projected 

revenue from broadening the tax base and use it to create a tax structure with as few brackets as 

possible, scrapping the current seven-tier tax bracket system created under the American Tax 

Relief Act in January 2013. Consolidating tax brackets will make the system easier to administer 

and promote fairne ss. 

Provided rates are kept reasonably low, fewer burdensome tax brackets would also boost 

household incomes, putting more of the money that they earned into their pockets. This will give 

Americans more purchasing power, as well as more money to save, and create more 

opportunities for businesses to invest and expand, which will, in turn, create more jobs. 

Reduce Corporate Tax and Investment Tax Rates: The United States' corporate income tax is 

the highest in the developed world, and, along with Washington's proclivity for regulation, is 

driving businesses overseas through offshoring and inversions. Congress should simplify the 

corporate tax code and reduce rates to encourage investment at home. Additionally, Congress 

must reduce the capital gains tax to encourage Americans to invest their dollars in the economy. 

Simplify the Tax Code: Today, there are nearly 75,000 pages in the tax code, up from 26,300 in 

1984. In 2016, Americans spent nearly 9 billion hours complying with the onerous tax code, at a 

cost of $409 billion to the economy, 6 which is greater than the gross domestic product of the 

state of Maryland. 

Because Congress has failed to reform the tax code, pages have continued to be added, making 

tax season a dreaded time for Americans. Simplification of the tax code and reducing compliance 

burdens should be a top priority of any tax reform effort the !15th Congress undertakes. The tax 

system should be so easy to understand that Americans can file their return on the back of a 

postcard. 

Repatriation of Overseas Cash: By some estimates, there is nearly $2.5 trillion in profits 

overseas,' money that could be invested right here in America. Because the United States' 

6 Scott Hodge, "The Compliance Costs ofiRS Regulations," Tax Foundation, Jlme 15, 20 16 https://taxfmmdation.org/compliance-costs-irsregulations/ 7 Chelsea Dulaney, "Dollar to Benefit if$2.5 Trillion in Cash Stashed Abroad Is Repatriated," Wall Street Joumal, November 25, 2016 

https://www.wsj.com/ru1icles/2-5-trillion-foreign-profit-stash-could-be-another-boon-for-u-s-dollar-1480096695 

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corporate income tax is so burdensome, companies are holding these profits in friendlier 

climates. Even as Congress takes the important step of corporate income tax reform, lawmakers 

should incentivize the repatriation of these overseas profits to the United States with a special, 

low-rate tax holiday. 

Budget-Neutrality, Not Revenue-Neutrality: Making tax reform revenue-neutral is the answer 

to the wrong question. If tax reform is attempted under budget reconciliation, Congress should 

seek to make the proposal budget-neutral. This ensures that tax reform will not increase the 

budget deficit. If changes to the tax code will lower revenues to the Treasury, Congress should 

seek to lower the deficit through cuts to outlays over the ten-year budget window. 

Additionally, Congress should use this opportunity to repeal the estate and gift taxes, as well as 

the individual and corporate alternative minimum tax. 

Freedom Works and our community of activists hope that Congress will begin to move on 

fundamental tax reform in the coming weeks. After eight years of economically crippling 

policies, the 1151

h Congress has been presented with a generational moment to restore prosperity 

and opportunity for all Americans and achieve sustaining economic growth. 

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Chairman Brady and Ranking Member Neal: 

CL\ FCHEA \P FUol'l Celt 4 Hydrogen 

EMrgy AsSOO.IJon 

June 1, 2017 

Thank you for convening the full Ways and Means Committee hearing on May 18'" - How Tox Reform Will Grow 

Our Economy and Create Jobs across America. 

As Congress considers tax reform, members of the Fuel Cell and Hydrogen Energy Association (FCHEA) have been 

greatly disadvantaged because of inequities in the existing code. As we note in the attached testimony, extending 

incentives for some technologies but not others, has distorted the marketplace and put the federal government in 

the position of picking winners and losers. We believe Congress should level the playing field, allowing all 

technologies to compete on their merits. 

Contained in the testimony is information concerning H.R. 1090, Technologies for Energy Security Act. This bill, 

which enjoys broad bipartisan support, extends advanced energy technology investment tax credits that expired 

last year. H.R. 1090 aligns directly with the goals of the hearing to show how tax reform policies generate 

economic growth and create well-paying jobs for Americans. 

v' Over 10,000 Americans are directly employed by these energy industries, and thousands more Americans 

are employed in the supplier networks that serve them. 

v' H.R. 1090 is a transition rule that creates a level playing field by fully phasing out the Section 48 

investment tax credit for all technologies over five years. 

v' Supporting this legislation will help ensure our global competitive edge and not cede our technological or 

workforce edge to foreign nations . 

./ These technologies support resiliency, reliability and energy security important to critical infrastructure 

and to keeping American businesses running in severe weather events or cyber-attacks. 

At the conclusion of this testimony, please find a letter in support of HR 1090 signed by 19 trade associations and 

43 companies. As the letter demonstrat es, there is broad support for parity for technologies formally covered 

under the Sections 48 and 250. 

Our testimony also makes the case for parity for our vehicle and hydrogen infrastructure technologies. As it 

currently stands, the tax code provides incentives battery electric vehicles, but not fuel cell vehicles. This is 

unfortunate considering that Department of Energy analysis indicates that today, 16,000 jobs are linked to fuel cell 

vehicles and hydrogen. The same analysis offered a forward looking projection of more than 200,000 jobs once 

market penetration hit 20 percent of volume. 

Thank you for your consideration, and we look forward to working with you on comprehensive tax reform that 

fosters economic growth and creates jobs. 

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Statement of the Fuel Cell and Hydrogen Energy AsSO<iation 

House Committee on W ays and Means 

2 

Hearing on How Tax Reform Will Grow Our Economy and Create Jobs 

Chairman Brady, Ranking Member Neal, and Members of the Committee, thank you for the opportunity to submit 

written testimony to this committee. The Fuel Cell and Hydrogen Energy Association (FCHEA) applauds your 

efforts to examine the tax code and look for ways to reform the existing system in a way that leads to more jobs, 

economic growth and opportunities for all Americans. 

The Fuel Cell and Hydrogen Energy Association is the national trade organization for the fuel cell and hydrogen 

energy industry. Our membership includes manufacturers; automotive companies; hydrogen producers and 

distributors; suppliers; government laboratories and agencies; and other end-users. 

We often refer to fuel cell technology as the •an-of-the-above• technology, meaning it applies to stationary and 

distributed power generation, back up power for telecommunications, material handling, and transportation, 

including passenger vehicles and buses. We utilize •an-of-the-above" fuels, because you can derive hydrogen from 

100 percent domestic resources, including natural gas, biogas, to renewables such as solar and wind. 

Our industry is well positioned to be a significant source of jobs and economic growth in the U.S. with the right 

polic1es in place. And while the applications I listed are very diverse, the single most important driver to this 

success rests on parity for our technologies In the tax code. 

My testimony will focus on current and future jobs. ongoing investment in our technology. the case for parity and 

certainty. and a list of our legislative priorities. 

Concerning jobs, FCHEA reviewed data from a subset of member companies that manufacture stationary and 

material handling equipment, just before the Section 48 lTC expired, more than 10,000 jobs can be attributed to 

this segment of the industry between manufacturers and suppliers. 

Additional analysis spearheaded by the Department of Energy, noted 16,000 jobs attributed to fuel cell vehicles 

and hydrogen. The same analysis offered a forward looking projection of more than 200,000 jobs for fuel cell 

vehicle sales once market penetration hit 20 percent of volume. 

In terms of investments, tens of billions of dollars have been committed to research and development, 

demonstrations, manufacturing plants and service facilities. These funds have overwhelmingly come from the 

private sector, with additional funding In the form of Department of Energy and/or state funds. 

For example, the automobile industry alone has spent more than $9 billion on fuel cell development, and today 

there are three fuel cell vehicle models on the road now with more expected. 

Manufacturers of stationary and material handling fuel cell tout 15 manufacturing facilities in eight states across 

the country, with suppliers for the industry spread across 43 states. 

The State of California, which has invested In stationary and fuel cell vehicles, has committed more than $400 

million for fuel cell and hydrogen systems. 

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And Honda and General Motors recently announced a notable manufacturing Investment in Michigan, inking an 

$85 million deal to manufacture fuel cells in the state by 2020. 

While the jobs numbers are encouraging, investment in the technology remains and we are making impressive 

strides in early markets. However. the federal tax code is currently working against us by favoring competing 

technology platforms. Therefore, we are asking for tax parity for all our technologies. 

3 

Parity for our stationary and material handling fuel cell products covered by Section 48 is a well·known issue to 

members of the committee. In 2015, Congress provided long-term certainty exclusively for solar technology, while 

fuel cells and advanced energy technologies were allowed to expire at the end of 2016. 

Congressman Reed, Meehan, and six other Ways and Means members have cosponsored H.R. 1090, which 

provides parity for these technologies with solar. If enacted, this would provide a phase· out of the lTC for fuel 

cells, and we feel it would serve as a good transition for larger reform efforts. 

Fulfilling the spirit of H.R. 1090 will provide our manufacturers, who are located in the United States, with a chance 

to compete on a more level playing field with solar technology. 

Since the lTC problem was created, fuel cell companies have or are planning t o cut employee rolls. Reports and 

estimates range from 20 to 2S percent reduction in workforce. These same companies who are scaling back 

activity have reported that with the lTC in place, projections by these same companies anticipated hiring to 

increase between 2(}.40 percent. 

Beyond hobbling domestic manufacturing, eroding confidence in the domestic market has increased pressure on 

these same companies to move overseas. This has been evidenced by recent attempts by Chinese companies and 

government officials approaching fuel cell manufacturers seeking to acquire greater access to the technology and 

our manufacturing knowhow. 

Reinstating the Section 48 tax credits will shore up domestic markets, lead to profitability, and help the United 

States maintain its leadership in these technologies. 

Parity for fuel cells also should be extended to credits for fuel cell vehicles and accompanying hydrogen 

infrastructure credits, found in Sections 308 and 30c of the tax code. These sections were also allowed to expire at 

the end of 2016. 

The timing of the expiration is particularly inconvenient, as three automobile manufacturers now offer fuel cell 

vehicles for sale or lease. At the moment, these vehicles are being sold exclusively in California, but automobile 

companies are looking to the northeast and Mid·Atlantic states for new markets. 

The expiration also created a situation where numerous vehicle manufacturers can offer two different electric 

vehicle platforms for sale, with one option eligible for a federal tax credit, and the other without a corresponding 

incentive. 

The push to include fuel cell vehicles {FCVs) in their vehicle fleets comes in part as manufacturers are working to 

balance the need to comply with numerous state and federal mandates, while offering consumers vehicles that 

they want to purchase. The availability of fuel cell vehicles will give consumers more choices as they look for zeroemission options. 

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4 

This committee can help states and consumers by providing Incentives for all electric vehicles, Including fuel cells. 

This could be accomplished by reinstating the expired credit (found in Section 308), or by allowing fuel cell vehicles 

to qualify under Section 300. 

Finally, I would like to point out that the committee can aid in efforts to jumpstart investments in infrastructure. 

Our members strongly favor reinstating credits for hydrogen fueling stations. This involves reinstating Section 30C, 

and raising the cap from $30,000, which was so prohibitively low, that compliance costs far outweighed the benefit 

ofthe credit. 

Addressing this, and allowing for hydrogen Infrastructure that supports material handling equipment to qualify, 

will allow the code to reflect Congressional intent, and help seed new stations. 

Below I have provided the options in more detail for the committee}s consideration: 

1. Investment Tax Credit Paritv · Sections 48, 2S 0 

o At the end of 2015, Congress extended the Section 481nvestment Tax Credit (lTC) exclusively for 

solar technologies. Fuel cells and other advanced energy technologies that have been eligible for 

lTC were not included in the extension provided by the Consolidated Appropriations Act of 2016. 

Congress should restore the inclusion of fuel cells in the lTC through the earliest available 

legislative vehicle. This will return fuel cells to parity with solar technology, and thereby help 

domestic manufacturers, prevent the unintended use of the tax code to pick technology winners, 

and recognize the contribution of industries that are providing resilient, efficient technologies. 

2. Electric Vehicle Tax Credits- Reinstatement or Modification 

o Option one simply reinstates the Section 308 credit for five years. Analysis by the Joint 

Committee on Taxation on a similar proposal introduced last Congress (which extended the 308 

and 30C credits to 2025) shows that the cost of this to be de minimis. 

o Option two would incorporate tax credits for fuel cell vehicles into Section 300 of the tax code 

which only incentivizes battery electric vehicles. The current lack of parity and uncertainty 

regarding zero emission vehicles is problematjc for states and consumers. Some companies have 

suggested that the merger could be pared with an increase in the manufacturer's volume cap 

and imposing a sunset date where one currently does not exist. 

3. The Alternative fuel vehicle refueling property credit- Modification of Section 30C of the IRS Code 

o The statute was intended to provide an incentive for new refueling Infrastructure, including for 

hydrogen and natural gas vehicles. However, the credit was not workable since compliance costs 

are higher than the credit. Eliminating the cap and maintaining the 30% credit would allow the 

credit to operate as intended. Additionally. Congress should clarify through a legislative 

modification that the credit should also benefit hydrogen infrastruc-ture for material handling 

equipment. 

4. Technical Correction· Section 6426 of the IRS Code 

o Section 6426 provided an excise tax credit only to retail sale of liquefied hydrogen. 

Reauthorization and a simple modification of the language to Include sale of gaseous hydrooen 

for use on board a vehicle, which is the pathway being considered by automobile manufacturers 

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and allows material handling equipment refueling to qualify, will provide the necessary 

framework intended by Congress. 

We again want to thank you for taking our comments into consideration. and ext end our gratitude to the 

Committee, the staff, and Congress for your past support. FCHEA strongly believes that t he legislative proposals 

suggested are not only a benefit to the fuel cell and hydrogen industry, but to the American economy. 

M orry B. Markowiu 

President & Executive Director 

Fuel Cell and Hydrogen Energy Association 

1211 Connecticut Ave. NW, Suite 650 

Washington, DC 20036 

202·261· 1331 

FCHEA Members 

5 

3M 

Air liquide 

Daimler 

ooosan Fuel Cell America 

Fuel Cell Seminar & Energy 

Exposition 

Nebraska Public Power District 

NEL Hydrogen 

Air Products and Chemicals 

Altergy Systems 

American Honda Motor 

Company 

Anglo American M arketing 

Limited 

ARC: Hydrogen 

A REV A 

Black & Veatch 

Bloom Energy 

BMW of North America, Inc. 

California Air Resources Board 

California Fuel Cell Partnership 

Center for Hydrogen and Next 

Generation Energy 

Ceres Power 

Connecticut Hydrogen·Fuel 

Cell Coalition 

CSAGroup 

Text of letter of support for HR 1090 

FueiCell Energy 

Fuji Electric 

GE Fuel Cell Svstems 

General Motors 

Global Tungsten & Powders 

Gore Fuel Cell Technologies 

Hydrogenics 

Hyundai 

Idaho National laboratory 

Intelligent Energy 

Johnson Matthey Fuel Cells 

LG Fuel Cell SyStems Inc. 

McPhy Energy 

Methanol Institute 

myFC 

National Renewable Energy 

l aboratory 

Nissan Technical Center North 

America 

Nuvera Fuel Cells 

Ohio Fuel Cell Coalition 

Pajarito Powder 

POC Machine-s 

Plug Power 

Sandia National laboratories 

Savannah River National 

laboratories 

Shell Oil Company 

Sout h Coast Air Quality 

M anagement District 

The Unde Group 

Toyota Motor North America 

Treadstone ree:hnotoeies 

United Hydrogen 

Volkswagen Group of America 

1211 ConneCittut Avenue NW, Sutte 650 I Washington. DC 2003611202)·261·1331 
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House Speaker Paul Ryan 

H-232, The Capitol Building 

Washington, D.C. 2051S 

House M inority leader Nancy Pelosi 

H-204, The Capitol Building 

Washington, D.C. 2051S 

Senate Majority leader M itch McConnell 

S-230, The Capitol Building 

Washington, D.C. 20510 

Senate Minority leader Chuck Schumer 

S-221, The Capitol Building 

Washington, D.C. 20510 

Dear Speaker, Senate Majority leader, House Minority leader and Senate Minority leader: 

We are writing in support of H.R. 1090, Technologies for Energy Security Act, which extends advanced energy 

technology investment tax credits that expired fast year. An extension of the business Section 48c and residential 

Section 2SD credits is essential to provide parity for all technologies in those sections of the tax code. These 

technologies incorporate an "All of the Above" energy strategy by utilizing clean, efficient natural gas and 

renewable technologies made in America. 

As Congress considers tax reform many businesses that compete in this space are at a severe disadvantage 

because of inequity in the tax code. The lTC is critical to a range of advanced energy technologies such as fuel 

cells, geothermal, small wind, Combined Heat and Power {CHP), microturbines, and thermal energy that help 

expand and diversify the nation' s electricity supply and lower costs for consumers. Additionally, by phasing these 

tax credits out, this legislation could serve as a transition for tax reform. 

6 

Extending the credits for some technologies but not others has distorted the marketplace and put the federal 

government in the position of picking winners and losers. We believe Congress should level the playing field in the 

marketplace~ allowing all the technologies to compete on their merits. 

Moreover, the use of these technologies enhances energy independence and security, all the while strengthening 

the resilience and reliability of the U.S. power grid. They improve efficiency and reduce long-term costs, while 

increasing sustainability for homeowners, hospitals, universities, small businesses, as well as Fortune 500 

companies. Advanced energy technology deployment drives innovation, business, job growth, economic activity, 

and manufacturing, much of it In rural America. 

In order to avoid further serious market disruption and provide businesses~ investors, and consumers with the 

ability to plan in the short· to mid·terml extending these credits should be a "'must pass" item on the first available 

and appropriate legislative vehicle. Both the business and residential credits are essential to help ensure fair 

competition and access in the marketplace for clean energy solutions. 

Thank you for your consideration. 

Sincerely, 

Advanced Energy Economy 

AEE is a coalition of business using policy advocacy, analysis and education to bring about a prosperous economy 

based on secure, clean, offordoble energy. 

The Alliance for Industrial Efficiency 

The Alliance for Industrial Efficiency is o diverse coalition of business, contractor, labor and environmental groups 

committed to advancing Industrial efficiency through the use of combined heat and power (CHP) and waste heat to 

power {WHP). 

American Farm Bureau Federation 

www.~htlo.org 1211 Conn('C•tCul Avcnut NW, Su~tl! 650 I W.uhlntton, 0 C 20036 I (202)·261·1331 
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33393.309

7 

AFBF is the unified national voice of agriculture, working through our grassroots orgonitotions to enhance and 

strengthen the fives of rural Americans and to build strong, prosperous agricultural communities. 

American Gas Association 

The American Gas Association (AGA) represents companies delivering natural gas safely, reliably, and in an 

environmentally responsible way to help improve the quality of life tor their customers every day. AGA's mission is 

to provide clear value to its membership and serve as the indispensable, leading voice and facilitator on its behalf in 

promoting the safe, reliable, and efficient delivery of natural gas to homes and businesses across the nation. 

Air Conditioning Contractors of America 

ACCA is a non-profit association whose membership includes more than 60,000 professionals and 4,000 businesses 

in the indoor environment and energy services community. We work together to promote professional contracting, 

energy efficiency, and healthy, camfartobfe indoor environments. 

CHP Association 

CHP Association (CHPA) brings together diverse market interests to promote the growth at clean, efficient focal 

energy generation in the United States. It is a private, non-profit 501{c)6 trade association, originally formed in 

1999 to promote the merits of combined heat and power {CHP) and to achieve public policy support for CHP. 

Distributed Wind Energy Association 

The Distributed Wind Energy Association {DWEA) is a cal/abarative group comprised of manufacturers, distributors, 

project developers, dealers, installers, and advocates, whose primary mission is to promote and foster all aspects of 

the distributed wind energy industry. 

Fuel Cell & Hydrogen Energy Association 

The Fuel Cell and Hydrogen Energy Association (FCHEA) is the trade association far the fuel cell and hydrogen 

energy Industry, and is dedicated to the commercialitation of fuel cells and hydrogen energy technologies. Fuel cells 

and hydrogen energy technologies deliver clean, reliable power to leading edge corporate, academic and public 

sector users. 

Geothermal Exchange Organization 

The Geothermal Exchange Organization {GEO) is The Voice of the Geothermal Heat Pump Industry in the United 

States. As o non·profit trade association, we promote the manufacture, design and installation of GeoExchonge• 

systems- the most energy efficient ond environmentally friendly heating and cooling technology in the world 

International Code Council 

The International Code Council (ICC) - The ICC is a U.S. not for profit organization which administers the 

development and maintenance of 15 model codes and 8 standards used to construct residential and commercial 

buildings in the U.S., including schools ond hospitals. The ICC is dedicated to off aspects of building safety including 

fire prevention, plumbing and sanitation, property maintenance, energy efficiency and resUience. The mission of 

the ICC is to provide the highest quality codes, standards, products ond services tor all concerned with the safety 

and performance of the built environment. 

International Ground Source Heat Pump Association 

The International Ground Source Heot Pump Association {IGSHPA) is o nan-profit, member-driven arganitation 

established in 1987 to advance ground source heat pump (GSHP) technology on focal, store, notional ond 

international levels. Headquartered on the campus of Oklahoma State University in Stillwater, Oklahoma, IGSHPA 

utilizes state-of·the·ort facilities far conducting GSHP system installation training and geothermal research. With its 

access to the most current advancements In the geothermal industry, IGSHPA is the ideal bridge between the latest 

technology ond the people who benefit from these developments. 

National Association of Home Builders 

www.kheo.otg 1211 Connec•ttut Avenue NW. Sutte 6SO 1 Wa$hington, OC 20036 1 (202)~261·1331 
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33393.310

The Notional Association of Home Builders (NAH8) helps Its members build communities. Each year, NAHB's 

members construct about 80% of the new homes built in the United States, both single·tomlly and multifamily. 

National Farmers Union 

To advocate for the economic and social well-being, and quality of life of family formers, ranchers, fishermen and 

consumers and their communities through education, cooperation and legls/otion. NFU advocates sustainable 

production of food, fiber, feed and fuel. 

National Ground Water Association 

8 

NGWA is a not-for-profit professional society and trade association for the groundwater industry. Our members 

from all 50 states include some of the country's leading public and private sector groundwater scientists, engineers, 

water well contractors~ manufacturers, and suppliers of groundwater·related products and services. The 

Association's vision is to be the leading community of groundwater professionals that promotes the responsible 

development, use and management of groundwater resources. 

National Rural Electric Cooperative Association 

NRECA is the notional service organization for more than 900 not-for-profit rural electric cooperatives and public 

power districts providing retail electric service to more than 42 million consumers in 47 states and whose retail 

soles account tor approximately 12 percent of total electricity soles in the United States. 

Plumbing-Heating-Cooling-Contractors- National Association 

The PHCC - Notional Association formed in 1883, provides legislative advocacy, education, and training to more 

than 3,500 plumbing and HVACR businesses and 70,000 technicians. Members of PHCC hove access too wide 

variety of services designed to increase their professiona/ism, grow their business, and improve profitabillty. 

The Sheet Metal & Air Conditioning Contractors' National Association (SMACNA) would like to sign on. 

The Sheet Metal and Air Conditioning Contractors' Notional Association (SMACNA) Is on international trade 

association representing 1,834 member firms in 103 chapters in throughout the United States, Canada, Australia, 

and Brazil. 

Solar Rating and Certification Corporation 

The SRCC"", is a member of the International Code Council• Family of Companies, whose primary purpose is to 

provide authoritative performance ratings, certifications and standards for renewable energy products, with the 

intention of protecting and providing guidance to consumers, incentive providers, government, and the industry. 

Tech Net 

TechNet is a CEO-led organization representing both Americo"s largest tech companies and most dynamic startups 

with on aim to educate government leaders on the importance of the growing technology industry and to promote 

a technology-led innovation ecosystem. 

Companies endorsing H.R. 1090 ~echnologies for Energy Security Act." 

Aegis Renewable Energy - Waitsfield, VT 

Advent Technologies - Sacramento, CA 

Air Uquide -Houston, TX (Multiple locations) 

Amberg Renewable Energy- Alberta, MN 

Ambor Structures, Inc. - St. Paul, MN 

Ameresco- Framingham, Massachusetts {Multiple locations) 

Aztech Geothermal - Ballston Spa, New York 

Bergey Windpower Co • Norman, OK 

Bloom Energy - Newark, DE 

Carrier Corporation- Indianapolis, Indiana 

ClimateMaster, Inc. - Oklahoma City, Oklahoma 

www,f<heo.otg 1211 Connec1tcul Avenue NW, Sutte 650 I Washin&ton. 0 C 20016 I (202}·261· 1331 
383 

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Comfortworks, Oklahoma City, OK 

Ooosan Fuel Cell America - South Windsor, CT 

Earthlinked Technologies, Lakeland, FL 

EcoSmart Solution, LLC-Austin, Texas 

Enertech Global-Greenville, Illinois 

Eocyde- Montreal (Quebec) Canada. 

EWT Direct Wind - M ultiple locations 

Flow Center Products, Inc. - Crawfordsville, Indiana 

Francis Renewable Energy-Tulsa, Oklahoma 

Fuel Cell Energy 

Geo Enterprises, Inc., Catoosa, OK 

Geo-Fio Products Corporation- Bedford, Indiana 

Hyster Yale Group 

Johnson Matthey Fuel Cells, Inc. -

LG Fuel Systems Inc. 

Linde 

Major Heating & Air-Wheat Ridge, Colorado 

Northern Power Systems - Barre, VT 

Nuvera Fuel Cells 

Ohio Fuel Cell Coalition 

Pika Energy- Westbrook, ME 

Plug Power - Latham, NY 

Primus Wind power 

Seminole Financial Services, l LC - Belleair Bluffs, FL 

Skylands Renewable Energy, lLC • Hampton, New Jersey 

Sono-Tek 

The Stella Group, ltd.- Washington, DC 

Taurus of Texas - Austin, Texas 

Treadstone 

United Wind Inc. - Brooklyn, NY 

WaterFurnace International - Fort Wayne, Indiana 

Watt Fuel Cell - Mount Pleasant, PA 

1211 Connecncut Avenue NW, Su1te GSO I WashH1g1on, 0 C 20036 11202)·261·1331 

9 
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May 17, 2017 

The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington , D.C. 20515 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington , D.C. 20515 

RE: Hearing On How Tax Reform Will Grow Our Economy And Create Jobs 

Dear Chairman Brady, Ranking Member Neal, and Members of the Committee: 

I am submitting this letter in regard to the House Ways and Means Committee's scheduled hearing on 

May 18th entitled "How Tax Reform Will Grow Our Economy and Create Jobs." I commend the work 

your committee has, and is , doing in exploring different ways in which pro-growth tax reform can be 

achieved and help further strengthen the American economy. As the committee considers myriad 

proposals and ideas for reforming the tax code , I want to stress the importance of preserving the full 

deductibility of interest on debt. 

When it comes to reforming America's tax code , my motivation to preserve interest deductibility to 

promote growth and enhance my contribution to the economy is rooted in my first-hand experience of 

running the daily operations of Gaspard & Morgan Construction and Gaspard Properties. While there is 

certainly an important role for policymakers and policy thinkers in reforming the tax code , I also firmly 

believe that input from businesses is essential to setting the record straight on the practical implications 

of certain tax proposals. My support for maintaining full interest deductibility comes from the knowledge 

I have of how the tax code affects my ability to grow my construction and property investment 

businesses, create new jobs and strengthen my local economy. 

Interest deductibility is a well-established , growth-promoting provision of the tax code that has been in 

existence for more than 100 years. Interest expense is a normal cost of doing business ; and , for me , it 

provides a peace of mind as well as a sense of stability and predictability when business owners are 

guaranteed they will not be taxed on the cost of accessing capital and can have more flexibility when 

making important long-term financial decisions. 

Companies like mine borrow in order finance expansions , purchase equipment and meet many other 

key obligations. Having the ability to deduct interest on such expenses gives business owners like me 

the certainty I need to make these decisions with confidence. It also allows my company to weather 

any shifts in demand. 

In my view, maintaining full interest deductibility is essential for achieving the stated top priority of tax 

reform: allowing the U.S. economy to reach its full growth potential. As a business owner who has 

experienced first-hand what works and doesn't work in the tax code , I can tell you that full interest 

deductibility works. 

s;:~ 

Jonathan Gaspard 

PresidenUOwner, Gaspard Morgan Construction , LLC 

PresidenUOwner, Gaspard Properties, LLC 
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33393.313

The Honorable Kevin Brady 

Chainn.an 

House Committee on Ways and Means 

I I 06 Longworth House Office Building 

Washington, DC 2051 5 

May 3 1,2017 

Global Infrastructure 

Investor Association PromoTing Private Investment In tntrastrvct11re 

The Honorable Peter J. Raoskam 

Subcommittee Chainnan 

House Tax Policy Subcommittee 

II 06 Longworth House Office Building 

Washington, DC 20515 

Dear Chainnan Brady and Subcommittee Chainnan Raoskam 

GllA submission : Hearing on how tax r eform will grow our economy a nd create jobs 

across America 

The Global Infrastructure Investor Association ("GJIA") is pleased to submit comments to the 

House Committee on Ways and Means on how tax reform in relation to US infrastructure 

investment will grow the US economy and create jobs. 

GilA is a member-driven organization focused on promoting the role of private investment in 

infrastructure. Our association represents the leading global investors in the unlisted 

infrastructure industry and other parties that play an active role in the sector. Our members span 

six continents and manage more than $400 billion in infrastructure assets globally, bringing 

economic growth, j obs, responsible stewardship a11d long term investment in sectors such as 

water and waste water, airports, ports, renewable energy, gas and oil pipelines, fiber, roads and 

rail. 

U.S. infrastructure has been identified by the current Administration as a national priority and 

noting that the American Society of Civil Engineers ("ASCE'') most recently graded the current 

stale of US infrastructure at D+ in the 2017 ASCE infrastructure report card, emphasizes that 

infrastructure has been underfunded and in need of urgent renewal. 

The current state of U.S. infrastructure has a direct impact on the U.S. economy and job 

~at n. As noted in the ASCE 20 17 report, failure to close the US infrastructure spend gap will 

result in $3.9 billio11 in losses to the US GOP and the loss of 2.5 million American j obs by 

2025.

1 l 'he Bipartisan Policy Centet' also acknowledged that infrastructu re investment creates 

jobs and prosperity, and over the long tenn allows the economy to operate with maximum 

1 10/ 7 Infrnsrrucwre Report Card- A Co prehet1s1\~ Assessmc:lll of Ameriro 'slnfmsrrucrure, America Soc-i~:ty ofCivU £up necrs 

available at www.infrasbl1CturereP-9'f1card.orgtwp.c:onteru/'Wioodsl20l ?IQ:I/20 I 7-lRC·Executive-Suma.nuy-FJNAL-FINALJ>d,f 

GilA · 40 Gt'aoecluch Skeet - I.Ot'IOOO ... EC3V 081 - VK .. Phone: t44 (0)20 3440 3922 .. Email: ln~9'8..net ... ww~t.gila nec 
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71t~ Honorable Ket•iu 8mdy & 11te Honornble Pe1er J. Ra0$kttm 

House Comruinee on Ways and .Me-ans bearing on bow tax refonu will grow our economy and create jobs across America 

Page 2 of4 

May 31.2017 

efficiency.' This has also been emphasized by the Administration in its recent 'Fact Sheet -

2018 Bud gel: Infrastructure Initiative' which recognized !hal the current infrastructure system is 

not working and that the Nation's infrastructure needs to be rebuilt and modernized to creale 

jobs, maintain America's economic competitiveness, and connect communities and people to 

more opportunities. 

A key issue associated with private capital investment in US infrastructure has been the lack of 

investable projects, not a lack of private capital. Although US tax reform is not itself the 

solution to this problem, it does have a role to play in attracting and leveraging private 

investment. In pa•·ticular, as consideration is given to the use of Federal funds to incentivize 

State and local goverrnnents to recycle capital into new infrastructure development and reduce 

reliance on additional govenunent debt, US tax refom1 (including the perceived stability of the 

US Federal tax regime) can posi1ively or negatively impact the success of such a program. 

We submit for your consideration commentary on two key issues that would have a materia l 

impact on pricing for US infrastructure projects and, C·onsequently, the funding requirements to 

pay for such projects: 

Impact of the GOP Blueprint lax reform measures 

2 Introduction of an infrastructure specific investment vehicle 

1m pact of the GOP 13luepl'int p•·oposed tax l'efol'm measul'es 

The 2016 GOP Blueprint proposed a number of US federal tax relonn measures. Some of these 

will have a negative or positive impact on the US infrastructure investment sector and they are 

summarized in the table below. 

T able 1 - GO P Bluep•·int iUustl'ative impact on infl'astl'uctm·e sectol' 

GOP Blueprint measure Positive Negative 

Reduction in corporate tax rates X 

Denial of deductions for net interest expense and the X immediate deduction for business expenditure 

Net operating losses: Indexation for inflation X 

Net operating losses: Remova l of carry forward X limitation 

Net operating losses: 90% restriction on net operating X loss offset 

Elimination of the corporate A !tentative Minimum Tax X 

2 Bri<lging tire GtJp Together: A New Mode/Jo Modemi:e U.S. lnfmstmctr~re. Mn.v 2016. Dipanisan Policy Center available at: 

https :/fb pru1isaJ_!pO___ligr~ibra l()dcrni e- nfnl fnK:ture/ 

2 
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33393.315

71te Hollomb/e Kel'iu JJrndy & tire Holfornble Peter J. Raosknm 

Honse Co'JlJn.ittee ou Ways and Means bearing ou bow ta.x refonn wiU ~ow oor economy and create jobs across America 

Page 3 of4 May 31.2017 

Large scale, long term infrastructure projects generate stable cash flows that typically support 

high [.,veragc levels and arc financed through stand-a lone entities. Tax deductions arc only able 

to be offset against revenue streams generated by that project. As such, the propos"d denial of 

deductions for net interest expense and the up front deductions for business investment costs, 

coupled with the 90% restriction on net operating loss offsets will have a disproportionately 

negative impact on after-tax retnms to private capital equity investors in US infrastmcture. In 

particular, as infrastructnre proje.cts are typically valued under a discounted cash flow model, 

the timing benefit of up front deductions for capital expenditure does not ofiset the negative 

in1pact of the interest deductibility and NOL restrictions noted above. 

Conseqnently, not only does this discriminate against the use of private capital, it will also have 

a flow-on impact on the pricing of projects, adversely affecting the costs to Govcflllllents and 

users. 

Some of our members have undertaken sensitivity modelling on existing US infrastructure 

investments and the net impact of the Blueprint measures listed above is estimated at an 

in1mediatc valuation reduction of 6% to 12%. For inlrastructure investors who have made long 

term and significant investment decisions under the existing tax regime assumptions, this 

represents a significant value reduction, and bas an adverse impact on investor confidence. 

Whilst grand fathering will assist in addressing the negative impact on existing investments, it 

does not alleviate the pricing impact on future infrastructure projects. 

In relation to regulated assets such as energy and water utilities, our members have estimated 

that the impact of the net interest denial with the reduction in tax rate would have a negative 15-

20% impact on current asset valuations. As tax is a business cost that is passed onto users 

througl: rate case negotiations, this would result in US tax refonn increasing the electricity and 

water bills of US citizens, creating a drag on spending capacity. 

Furthermore, beyond the direct tax impacts, changes relating to interest deductibility will have a 

negative impact on the cost of capital, which would in tum impact capital expendintre programs 

(especially where there is significant reliance on debt funding) critical to improving the essential 

services provided to the public. This not only reduces asset values, as noted above, but also US 

economic growth through lost opportunity in relation to research, trade, construction and 

employment generation. We submit that an exception or an "opt-in" mechanism be considered 

for infrastructnre projects. Any such exception will need to be defined to avoid abuse and could 

potentially be done by reference to projects that are designated to be of"national economic 

benefit". We also note that the "opt-in" mechanism is not inconsistent with that proposed in 

President Trump's 2016 Tax Plan. 

Ct·eation of a US infrastructure investment vehicle 

The US has created sector specific investment vehicles in the past, with the rea l estate sector 

having access to the Real Estate Investment Trust ("REIT") and the oil and gas sector having 

access to the Master Limited Parto~rsh p ("MLP"). Given the need for US infrastructure 

development and the role of private capital, consideration should be given to the introduction of 

an inve>tment vehicle for ownership of US infrastmctn.re. Such a vehicle could be based on the 

REIT regime with appropriate modifications. The vehicle would not itself be subject to US 

federal tax provided it fully distributed its eamings on an annual basis and distributions of 

3 
388 

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71te Ho,omble Ke"•in Brady & the Honornble Peur J. Rn0$knm 

House Committee on Ways and Means bearing on bow ta.x refom1 will grow ow ecooou\y and create jobs across America 

Page 4 of4 

May 31.2017 

earnings and capita l gains to non-residents would be subject to a conccssionallinal withholding 

tax rate. 

In order to maximize the availability of private capita l, such a vehicle would need to be 

attractive to both domestic and foreign institutional investors looking for stable, inflation-linked, 

long term investments. To be attractive, there would need to be no discrimination between the 

treatment of domestic and foreign investors, and the final withholding tax rate could be set at a 

level appropriate to compete globally fo•· private capital investment. Such investments are 

particularly attractive to pension funds looking for investments to match their long term pension 

liabilities and would make US infrastructure competitive in attracting foreign capital. 

In considering any specific vehicles or concessions for infrastructure investment, consideration 

will need to be given as to what types of infrastructure investment would qualify for these 

purposes and we submit that from a policy perspective, any such definition should be broad 

based and not narrowly defined. 

Role of tax .-efoml 

As noted earlier, whilst US tax reform will not resolve the spending shortfall on infrastructure in 

the: US, it can have: a powc:::rful po~itivc::: impact on the: pricing for .such projc:::cts, facilitate:: the::: 

involvement of domestic and foreign private capital and reduce an excessive reliance on public 

financing for future projects. 

* • • 

We thank you for the opportunity to make this submission and look forward to being an active 

participant as tax reform moves forward to drive the US economy and US jobs. 

Andrew Rose, CEO 

4 
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33393.317

June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

II 02 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

The undersigned agricultural organizations urge your support for several tax provisions related to 

renewable energy and environmental mitigation as part of any broader tax reform plan taken up 

by Congress. 

U.S. farmers and ranchers and the companies that process agricultural products provide food, 

feed, fiber and fuel for our nation and the world. Like all businesses, we must continue to 

innovate, establish new markets, and improve efficiency to remain viable and competitive in 

today's global market. Whether it is to help reduce regulatory compliance costs or to incentivize 

renewable energy and conservation benefits, there are a number of tax provisions that have been 

implemented or proposed for agricultural products and practices. 

In recent years, regulators have applied increasing pressure on the agriculture sector to reduce 

output of nutrients like nitrogen and phosphorus to improve water quality in various watersheds 

around the country, from the Chesapeake Bay to the Great Lakes region. To help solve this 

problem, tax-writers in Congress have introduced bipartisan legislation to spur adoption and help 

cover the upfront capital costs of nutrient recovery technologies, as well as biogas systems that 

mitigate the environmental impacts of farming by transforming manure into stable fertilizer for 

crops, bedding for cows, and fuel and electricity for farms and nearby homes. 

Tax incentives, such as the biodiesel tax credit, have also existed to support renewable energy and 

fuel derived from agricultural feedstocks, including animal fats. These renewable energy sources 

help diversity our fuel supply, establish new markets and add value to farm products, create jobs, 

and boost economic development, particularly in rural America. U.S. biodiesel producers have 

unused production capacity that stands ready to be utilized. Putting that capacity to work will 

encourage further market growth for agricultural products and create thousands of new jobs and 

billions of dollars in economic activity. 

As you move forward with tax proposals, U.S. farmers and ranchers support the inclusion of 

these tax provisions that help our businesses meet regulatory requirements, provide conservation 

benefits and incentivize renewable energy production. Thank you for your continued efforts in 
390 

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support of our nation's farmers and ranchers. We look forward to working with you as the 

process on tax reform continues. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Farm Bureau Federation 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

Co bank 

National Barley Growers Association 

National Com Growers Association 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Renderers Association 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

II 02 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of our nation's family farmers and ranchers, the undersigned groups would like to 

thank you for your efforts to reform the U.S. tax code in a meaningful way for individuals, 

corporations, and small businesses alike, including the 3.2 million farmers who generate food, 

fuel, and fiber for Americans and people around the world. With that in mind, we write today to 

express our concerns regarding the House Committee on Ways and Means blueprint proposal to 

eliminate the deduction for interest payments as a business expense. 

Agricultural production is capital intensive. While financing requirements will vary among the 

different commodities, the majority of family-owned farming operations are heavily reliant on 

credit. Even for everyday business, agricultural producers utilize credit in the form of operating 

and inventory loans. According to the United States Department of Agriculture (USDA), net 

farm income in 2017 is forecast to decline for the fourth consecutive year by 8. 7 percent to $62.3 

billion. In a weak farm economy, income is restricted to cover family farmers' living expenses 

and the repayment of debt. During tough times, producers are often forced to take on substantial 

annual interest expense. Interest paid on these loans should be deductible because interest is, and 

has historically been, considered a legitimate business expense. 

In addition, family farmers continue to grow their operations in order to remain profitable. 

Equipment and land acquisition necessary for long-term expansion is only possible through 

financing. USDA predicts that in 2017, farm real estate debt will reach a historic high of$240.7 

billion, a 5.2 percent increase from 2016. Eliminating the interest deduction will place further 

financial stress on an already debt-burdened industry, and prevent producers from staying 

profitable in challenging economic times. 

Finally, the need for debt financing is particularly important for the next generation of 

agricultural producers. Less than 2 percent of the U.S. population is directly employed in 

agriculture. Consistent with a 30-year trend, the average age of principal farm operators is 58, 

making farmers and ranchers among the oldest workers in the nation. As older producers exit the 

workforce, financing will be critically important for new and beginning farmers and ranchers 

looking to establish businesses. Eliminating interest deductions creates a significant barrier for 

the next generation. 
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As Congress works to enact comprehensive tax legislation, the positive reforms made should non 

be undermined by negative, unintended consequences as a result of eliminating the business 

interest deduction for agricultural entities. It is our hope that future legislative proposals do not 

ignore this important sector of the nation's economy, and that they will consider the unique 

utilization and importance of credit management across the entire agriculture sector. 

Thank you for your continued efforts in support of our nation s agricultural producers. We look 

forward to working with you on th is important issue. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Fann Bureau Federation 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association of Winegrape Growers 

Co bank 

Farm Credit Council 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Com Growers Association 

National Cotton Council 

National Council of Fanner Cooperatives 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Fanners Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Apple Association 

U.S. Canota Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Assoc iation 

Western United Dairymen 
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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

1102 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of our nation's family farmers and ranchers, the undersigned agricultural producer 

groups urge your support for maintaining the Section 199 deduction for domestic production 

activities income as part of any tax reform plan. 

The Section 199 deduction was enacted as part of the American Jobs Creation Act of 2004 as a 

domestic production and jobs creation measure. The deduction applies to proceeds from 

agricultural or horticultural products that are manufactured, produced, grown, or extracted in the 

United States, including dairy, grains, fruits, nuts, soybeans, sugar beets, oil and gas refining, and 

livestock. Farmer-owned cooperatives are able to apply their wages to the calculation of the 

deduction, and then choose to pass it through to their farmer members or keep it at the 

cooperative level, making it extremely beneficial to both. 

The Section 199 deduction is limited to the lesser of 9 percent of adjusted gross income or 

domestic production activities income or 50 percent of wages paid to produce such income. 

Reducing or eliminating the domestic activities deduction would result in a significant increase 

in taxable income for all farms that currently employ non-family labor. On the other hand, the 

benefit of the deduction would increase if agricultural producers were able to count non-cash 

wages paid, such as crop share payments of commodities. 

The Section 199 deduction serves as both a domestic production and jobs creation incentive and 

has provided needed relief for producers in times when prices are depressed. Section 199 

benefits are returned to the economy through job creation, increased spending on agricultural 

production, and increased spending in rural communities. 

Thank you for your continued efforts in support of our nation's agricultural producers. We look 

forward to working with you on this important issue. 

Respectfully, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 
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American Farm Bureau Federation 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association of Wine grape Growers 

Co bank 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Com Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

1102 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of the nation's farmers and ranchers, the organizations listed below are writing today 

regarding one of our priorities for federal tax reform: a reduction in capital gains taxes. 

Capital gains taxes have a significant impact on production agriculture and producers' long-term 

investments in land, breeding livestock and buildings. We believe a reduction of the tax rate on 

capital gains and assets indexed for inflation would enable producers to better respond to new 

market opportunities and facilitate the transfer ofland to young and beginning farmers. 

Taxation for capital gains upon the sale of farm assets creates a number of problems, particularly 

when an asset sale causes a sharp transitory spike in income that pushes farmers and ranchers 

into a higher than usual tax bracket. USDA has found that 40 percent of family farms have 

reported some capital gains or losses, compared to 13.6 percent for an average individual 

taxpayer. 

Another problem is the "lock-in" effect where the higher the capital gains tax rate, the greater 

disincentive to sell property or alternatively to raise the asking price. In today's agriculture 

economy, starting a farm or ranch requires a large investment due to the capital-intensive nature 

of agri-business, with land and buildings typically accounting for 79 percent of farm and ranch 

assets. Given the barrier created by the capital gains tax, landowners are discouraged to sell, 

making it even more difficult for new farmers to acquire land and agriculture producers who 

want to purchase land to expand their business to include a son or daughter. This lose-lose 

scenario also interferes with capital that would otherwise spur new and more profitable 

investments. 

At a time of heightened financial stress in our agriculture economy, it is more critical now for 

farmers and ranchers to have the flexibility to change their operations to respond to consumer 

demand in an increasingly dynamic market. Because of the capital gains taxes imposed when 

buildings, breeding livestock, farmland and agricultural conservation easements are sold, the 

higher the tax rate the more difficult it is for producers to cast off unneeded assets to generate 

revenue, upgrade their operations and adapt to changing markets. 
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As you continue your work on legislation to reform the tax code, we urge you to carefully 

consider our recommendations to address these concerns regarding the inadequacies and 

inefficiencies of current capital gains tax provisions. We acknowledge the extremely complex 

task of crafting legislation to adopt comprehensive tax reform and appreciate your support of 

America 's farmers and ranchers. 

Sincerely, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 

American Farm Bureau Federation 

American Farmland Trust 

American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association ofWinegrape Growers 

Co bank 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Corn Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Milk Producers Federation 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Apple Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
397 


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June I, 2017 

The Honorable Kevin Brady, Chairman 

House Committee on Ways & Means 

II 02 Longworth House Office Building 

Washington, DC 20515 

The Honorable Richard Neal, Ranking Member 

House Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

America's farmers and ranchers rely on various tax code provisions to survive the constant 

financial and economic ups and downs that come with farming and ranching. The undersigned 

agricultural groups ask for your robust support of these critical provisions that ensure their longterm financial well-being. 

Cash accounting allows farmers and ranchers to improve cash flow by recognizing income when 

it is received and recording expenses when they are paid. This provides the flexibility needed to 

plan for future business investments and in many cases provides guaranteed availability of 

agricultural inputs. Loss of cash accounting would create a situation where a farmer or rancher 

would have to pay taxes on income before receiving payment for sold commodities. 

Like-kind exchanges help farmers and ranchers operate more efficient businesses by allowing 

them to defer taxes when they sell land, buildings, equipment, and livestock or purchase 

replacement property. Without like-kind exchanges some farmers and ranchers would need to 

incur debt in order to continue their farm or ranch businesses or, worse yet, delay mandatory 

improvements to maintain the financial viability of their farm or ranch business. 

Farm and ranch businesses operate in a constant world of uncertainty with ongoing expenses and 

a fluctuating income. Income averaging, which permits revenue to be averaged over three years, 

allows farmers and ranchers to level out their tax liability and produces a more dependable and 

consistent revenue stream that aids financial management. 

As Congress moves forward with its tax reform proposals and debate, we urge your support for 

these important tax provisions. Thank you for your continued efforts to support our nation's 

farmers and ranchers whose work allows us to enjoy the safest, most abundant and affordable 

food supply in the world. We look forward to working with you on these important issues. 

Sincerely, 

Agricultural & Food Transporters Conference 

Agricultural Retailers Association 
398 

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American Mushroom Institute 

American Sheep Industry Association 

American Soybean Association 

American Sugarbeet Growers Association 

California Association ofWinegrape Growers 

Co bank 

National Barley Growers Association 

National Cattlemen's Beef Association 

National Com Growers Association 

National Cotton Council 

National Council of Farmer Cooperatives 

National Peach Council 

National Pork Producers Council 

National Potato Council 

National Renderers Association 

National Sorghum Producers 

Panhandle Peanut Growers Association 

Southwest Council of Agribusiness 

South East Dairy Farmers Association 

United Egg Producers 

United Fresh Produce Association 

U.S. Apple Association 

U.S. Canola Association 

U.S. Rice Producers Association 

U.S. Sweet Potato Council 

USA Rice Federation 

Western Growers 

Western Peanut Growers Association 

Western United Dairymen 
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Statement for the Record 

Hearing on How Tax Reform Will Grow Our Economy and Create Jobs across America 

Committee on Ways and Means 

U.S. House of Representatives 

June I, 2017 

As the House Committee on Ways and Means meets to consider how tax reform can create j obs, 

increase paychecks, and grow the economy, the 21 undersigned national real estate organizations 

appreciate the opportunity to share our views on tax reform and commercial real estate. While the 

comments below broadly represent the views and perspective of the real estate industry, individual 

property types or investment structures may have unique tax issues and policy concerns more 

appropriately addressed in separate communications. 

OVERVIEW 

Real estate is deeply interwoven in the U.S. economy and the American experience, touching every life , 

every day. Millions of Americans share in the ownership of the nation 's real estate, and it is a major 

contributor to U.S. economic growth and prosperity. Real estate plays a central role in broad-based 

wealth creation and savings for investors large and small, from homeowners to retirees invested in real 

estate via their pension plans. 

Commercial real estate provides the evolving physical spaces in which Americans work, shop, learn, 

live, pray, play, and heal. From retail centers to assisted living facilities, from multifamily housing to 

industrial property, transformations are underway in the "built environment. " Investment in upgrading 

and improving U.S. commercial real estate is enhancing workplace productivity and improving the 

quality of life in our communities. 

Among its vast economic contributions, the real estate industry is one of the leading job creators in the 

United States, employing over 13 million Americans-more than one in every 10 full-time U.S. 

workers-in a wide range of well-paying jobs. Real estate companies are engaged in a broad array of 

activities and services. This includes jobs in construction, planning, architecture, building maintenance, 

management, environmental consulting, leasing, brokerage, mortgage lending, accounting and legal 

services, agriculture, investment advising, interior design and more. 

Commercial real estate encompasses many property types, from office buildings, warehouses, retail 

centers and regional shopping malls, to industrial properties, hotels, convenience stores, multifamily 

communities, medical centers, senior living facilities, gas stations, land and more. Conservatively 

estimated, the total value of U.S. commercial real estate in 2016 was between $13.4 and $15 trillion, 

a level that matches the market cap of domestic companies on the New York Stock Exchange. 

Investor-owned commercial properties account for about 90 percent of the total value, with the 

remainder being owner-occupied. Based on the latest data available from the Federal Reserve, U.S. 
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commercial real estate is leveraged conservatively with about $4.2 trillion of commercial real estate 

debt. 

Industry activity accounts for nearly one-quarter of taxes collected at all levels of government (this 

includes income, property and sales taxes). Taxes derived from real estate ownership and transfer 

represent the largest source- in some cases approximately 70%- of local tax revenues, helping to 

pay for schools, roads, law enforcement and other essential public services. Real estate provides a safe 

and stable investment for individuals across the country, and notably, retirees. Over $370 billion is 

invested in real estate and real estate-backed investments by tax-exempt organizations (pension funds, 

foundations, educational endowments and charities). 

Commercial real estate is a capital-intensive asset, meaning that income-producing buildings require 

constant infusions of capital for acquisition and construction needs, ongoing repairs and 

maintenance, and to address tenants' ever-changing technological requirements. 

Today's commercial real estate markets are grounded in strong fundamentals, as indicated by 

vacancy rates near historic lows, positive growth of rents and stable net operating income. By most 

measures, commercial real estate conditions accurately reflect market supply and demand. 1 While 

certain policy reforms are clearly warranted (i.e. , removing unnecessary barriers to constn1ction 

lending, addressing internet sales tax issue), sources of equity and debt capital are largely available 

for economically viable projects. A broad-based acceleration of economic growth tluough tax 

reform would boost real estate construction and development and spur job creation. However, 

Congress should be wary of changes that result in short-term, artificial stimulus and a burst of real 

estate investment that is ultimately unsustainable and counterproductive. In order to improve the 

economy's long-term trajectory, growth must be predicated on sound reforms that change underlying 

economic conditions. 

TAX REFORM 

The real estate industry agrees that tax reform is needed and overdue. We should restn1cture our 

nation's tax laws to unleash entrepreneurship, capital formation, and job creation. At the same time, 

comprehensive tax reform should be undertaken with caution, given the potential for tremendous 

economic dislocation. Tax policy changes that affect the owners, developers, investors and 

financiers of commercial real estate will have a significant impact on the U.S. economy, potentially 

in unforeseen ways. 

We urge the Ways and Means Committee to be mindful of how proposed changes in commercial real 

estate taxation could dramatically affect not only real estate investment activities but also the health of 

the U.S. economy, job creation, retirement savings, lending institutions, pension funds, and, of course, 

local communities. 

Positive reforms will spur job-creating activity. For example, tax reform that recognizes and rewards 

appropriate levels of risk taking will encourage productive construction and development activities, 

ensuring that real estate remains an engine of economic activity. Tax reform can also spur job 

1 The Real Estate Roundtable, Sentiment Index: Second Quarter 2017 (May 5, 2017), available at: 

http://www.rer.org/Q2-2017-RER-Sentiment-Index. 

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creation, and assist the nation in achieving energy independence, by encouraging capital investments 

in innovative and energy-efficient construction of buildings and tenant spaces. 

Alternatively, some reforms might unintentionally be counter-productive to long-term economic 

growth. Of major concern are proposals that could result in substantial losses in real estate values. 

Lower property values produce a cascade of negative economic impacts, affecting property owners' 

ability to obtain credit, reducing tax revenues collected by local governments and eroding the value 

of retirees' pension fund portfolios. 

Thus, as much as we welcome a simpler, more rational tax code - and any associated improvements 

in U.S. competitiveness abroad- we continue to urge that comprehensive tax restructuring be 

undertaken with caution, given the potential for tremendous economic dislocation. 

As history illustrates, the unintended consequences of tax reform can be disastrous for individual 

business sectors and the economy as a whole. A case in point is the Tax Reform Act of 1986, which 

ushered in a series of over-reaching and over-reactive policies - in some cases on a retroactive 

basis. Significant, negative policy changes applied to pre-existing investments. Taken together, 

these changes had a destabilizing effect on commercial real estate values, financial institutions, the 

federal government and state and local tax bases. It took years for the overall industry to regain its 

productive footing, and certain aspects of the economy never recovered. 

We believe the four principles below should guide and inform your efforts to achieve a significant, 

pro-growth overhaul of the nation 's tax code: 

Tax reform should encourage capital formation (from domestic and foreign sources) and 

appropriate risk-taking, while also providing stable, predictable, and permanent rules 

conducive to long-term in tm nt ~ 

Tax reform should ensure that tax rules closely reflect the economics of the underlying 

transaction - avoiding either excessive marketplace incentives or disincentives that can 

distort the flow of capital investment; 

Tax reform should recognize that, in limited and narrow situations (e.g. , low-income housing 

and investment in economically challenged areas), tax incentives are needed to address 

market failures and encourage capital to flow toward socially desirable projects; and 

Tax reform should provide a well-designed transition regime that minimizes dislocation in 

real estate markets. 

In short, rational taxation of real estate assets and entities will support job creation and facilitate 

sound, environmentally-responsible real estate investment and development, while also contributing 

to strong property values and well-served, livable communities. 

A BETTER WAY- THE HOUSE REPUBLICAN TAX REFORM BLUEPRINT 

Last June, Chairman Brady, Speaker Ryan and the House Republican Conference put forward A 

Better Way , a bold tax reform proposal aimed at creating a modern tax code built for economic 

growth. The drafters made clear that this House Republican Tax Reform Blueprint ("Blueprint") was 

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the "beginning of our conversation about how to fix our broken tax code." Our industry has 

appreciated the open dialogue and opportunity to work constructively with Committee Members and 

staff to ensure that tax reform achieves its full potential. 

We support the Blueprint's underlying objectives, including the desire to reform the tax system to 

promote economic growth, capital formation, and job creation. The comments below are based on 

our current understanding of the Blueprint, as gathered from meetings and conversations with 

Members and staff Many of these perspectives have been transmitted to the Committee, formally or 

informally, in recent weeks. Our views and input will continue to evolve as additional information is 

made available. The comments are offered in the spirit of support for the Ways and Means 

Committee 's tax reform effort, and they are aimed at ensuring the legislation successfully spurs 

economic growth without unintentionally discouraging entrepreneurship or creating unnecessary 

economic and market risks. 

Cash flow taxation and real estate. The Blueprint would replace the existing system for taxing 

business income with a "destination-based, cash flow" tax system. Rather than taxing businesses on 

their net income, the Blueprint seeks to tax businesses on their net cash flow. For a domestic 

business, setting aside important aspects of the proposal that relate to cross-border transactions, the 

key conceptual change is that the full cost of a new investment would be recovered (deducted) 

immediately, rather than recovered (depreciated) over the economic life of the investment. The 

underlying expectation is that the shift to cash flow taxation will spur growth by reducing the tax 

burden on new investment. 

The Blueprint proposes to deviate from cash flow taxation in two key ways that would have critical 

implications for real estate. First, land would not quality for immediate expensing, only the value of 

structures. Second, businesses could not deduct currently their net interest expense. As a result, two 

major expenses associated with investing in real estate-the cost of the underlying land and the cost 

of borrowing capital to purchase the real estate- would be excluded from the basic architecture of 

the cash flow tax system. 

Treatment of land. Land represents a major share, on average roughly 30%, of the value of 

real estate. The Blueprint offers no express rationale for the exclusion of land from 

immediate expensing. The two suggestions offered informally to-date have been that land is 

a "non-wasting" asset and "we 're not making any more of it. " However, the actual economic 

life of an asset and its status as a manufactured good is irrelevant to a system that seeks to tax 

net cash flow. Under the Blueprint's own terms, land should quality for expensing. Denying 

taxpayers' ability to expense land would create the very same economic distortions that the 

Blueprint is seeking to remove from the tax code. It would shift resources to other asset 

classes for reasons that are ptuely tax-motivated. In addition, it would create new geographic 

disparities and distortions based on the relative share of land in the cost of real estate. 

Treatment of net interest expense. Access to financing and credit is critical to the health of 

U.S. real estate and the overall economy. The ability to finance productive investment and 

entrepreneurial activity with borrowed capital has driven economic growth and j ob creation 

in the United States for generations. In both an income tax system and a cash flow tax 

system, business interest expense is appropriately deducted under the basic principle that 

interest is an ordinary and necessary business expense. 

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The Blueprint states that allowing both expensing and interest deductibility "would result in a 

tax subsidy for debt-financed investment. " The Blueprint "helps equalize the tax treatment of 

different types of financing" and "eliminates a tax-based incentive for businesses to increase 

their debt load beyond the amount dictated by normal business conditions. " The Blueprint 

suggests less leverage is inherently preferable, "A business sector that is leveraged beyond 

what is economically rational is more risky than a business sector w ith a more efficient debtto-equity composition." 

Repealing or imposing limits on the deductibility of business interest would fundamentally 

change the underlying economics of business activity, including commercial real estate 

transactions. This could lead to fewer loans being refinanced, fewer new projects being 

developed, and fewer jobs being created. Legislation altering the tax treatment of existing 

debt could harm previously successful firms, pushing some close to the brink of insolvency 

or even into bankruptcy. Congress should preserve the current tax treatment of business 

interest. By increasing the cost of capital, tax limitations on business debt could dramatically 

reduce real estate investment, reducing property values across the country, and discouraging 

entrepreneurship and responsible risk-taking. 

Like-kind exchanges. Under current law, section 103 1 of the tax code ensures that taxpayers may 

defer the immediate recognition of capital gains when property is exchanged for property of a like 

kind. In order to qualify , a like-kind exchange transaction must involve property used in a trade or 

business, or held as an investment, and all proceeds (including equity and debt) from the relinquished 

property must be reinvested in the replacement property. Section l 031 is used by all sizes and types 

of real estate owners, including individuals, partnerships, LLCs, and corporations. While the 

Blueprint does not expressly address like-kind exchanges, we understand some policymakers view 

immediate expensing as a viable replacement for section 103 1 of the tax code. We disagree. 

Real estate like-kind exchanges generate broad economic and environmental benefits, and Section 

I 031 should be preserved without new limitations on the deferral of gains. Exchanges spur greater 

capital investment in long-lived, productive real estate assets and support job growth, while also 

contributing to critical land conservation efforts and facilitating the smooth functioning of the real 

estate market. Without Section 1031, many of these properties would languish underutilized and 

short of investment because of the tax burden that would apply to an outright sale. Recent academic 

research analyzing 18 years of like-kind exchange transactions found that they lead to greater capital 

expenditures, investment, and tax revenue while reducing the use of leverage and improving market 

liquidity2 Another study by EY concluded that new restrictions would increase the cost of capital, 

discourage entrepreneurship and risk taking, and slow the velocity ofinvestment. 3 A s currently 

understood, the Blueprint would not fully replicate the benefits of section I 031, particularly to the 

extent that the land component of real estate remains ineligible for immediate expensing. 

2 Professors David C. Ling (Univ. Fla.) and Milena Petrova (Syracuse U.), The Economic Impact of 

Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate (June 201 5), available at: 

http://warrington.ufl.edu/departments/fire/docs/paper LingPetrova EconomiclmpactOfRepealingOrLimitingSection l 03 l.pdf. 

3 EY, Economic Impact of Repealing Like-Kind Exchange Rules (Nov. 201 5), available at: 

http://www.l03l taxreform.com/l 03 l economics. 

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State and local tax deduction. State and local taxes are the principal source of financing for 

schools, roads, law enforcement and other infrastn1cture and public services that help create strong, 

economically thriving communities. Throughout the country, real estate is the largest contributor to 

the local tax base. Most state and local taxes, including real estate taxes, are deductible from federal 

income. Eliminating the deductibility of state and local taxes could disrupt demand for commercial 

real estate in many parts of the country while raising taxes on millions of Americans. It would shift 

power away from local communities in favor of the federal government. The deductibility of state 

and local taxes is grounded in the Constitution, federalism, and states' rights. The state and local tax 

deduction prevents an erosion of local governance and decision-making by prohibiting the federal 

government from double-taxing amounts already taxed at the state and local level. The burden of the 

change will fall disproportionately on those regions that generate the most tax revenue for the federal 

government-and the reduced demand for commercial real estate in certain regions could lower 

property values and limit the ability of the industry to continue creating jobs and driving economic 

growth. 

Blueprint impact on real estate investment and development. Economic modeling suggests that 

the proposed shift to cash flow taxation under the Blueprint would create different results for 

different taxpayers-even after all real estate has transitioned to the new regime. For investors with 

other income that can absorb the losses generated by immediate expensing, the Blueprint should 

increase after-tax returns. For others, as a general matter, the relative after-tax returns on new real 

estate investment, including construction, would depend heavily on the interest rate that applies to 

loss carryforwards. Under reasonable financial assumptions related to property costs, operating 

income, and project expenses, a loss carryforward interest rate of 5.0% would result in after-tax 

returns on real estate investment that are similar to current returns. In contrast, a loss carryforward 

interest rate equal to inflation would result in returns that are much lower than those under current 

law. As interest rates rise or debt-to-equity ratios increase, returns on real estate investment would 

decline further because of the change in the tax treatment of business interest. 

Thus, under the Blueprint framework, the tax burden may fall disproportionately on entrepreneurs 

and small developers-those most likely to own properties in small and medium-sized marketsbecause they use greater leverage to finance their activities and lack the deep portfolio of assets to 

absorb the losses generated from expensing. 

Moreover, depending on the structure of the transition rules, the Blueprint could result in 

substantially lower after-tax returns and reduced property values for existing real estate assets. The 

impact on existing properties is heavily dependent on the post-enactment treatment of tax basis, as 

well as the ongoing deductibility of interest on existing and refinanced real estate loans. The 

structure of any transition relief under the Blueprint is not yet clear. 

Economic and market risks. In the past ( 198 1-1 986), the accelerated tax depreciation of structures 

contributed to unsustainable levels of uneconomic, tax-motivated real estate investment and 

construction. Tax-driven stimulation of real estate construction that is ungrounded in sound 

economic fundamentals, such as rental income and property appreciation expectations, creates 

imbalances and instability in real estate markets. The negative consequences could harm state and 

local communities (tluough reductions in state and local property tax revenue), the financial security 

of retirees (through pension investments tied to real estate), and the banking system (through the 

declining value of real estate on bank balance sheets and systemic risk to the financial system). 

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Most capital assets other than real estate structures already are recovered on an extremely accelerated 

schedule. Therefore, the economic risks associated with immediate expensing are largely unique to 

real estate. According to Treasury Department economists, nearly half of all capital investment by 

U.S. corporations is in 3-year and 5-year property. 4 According to Goldman Sachs, under current tax 

policy, 70% of total capital investment is recovered within the first 18 months ofuse. 5 In addition to 

its longer life, real estate differs from other fixed capital assets because it is more likely to be sold for 

a gain. The income it generates often is treated as passive. In short, the tax attributes of real estate 

diverge greatly from other forms of capital investment. 

Lastly, the stock of existing real estate dwarfs in size all other depreciable capital assets. And unlike 

equipment and machinery, only about two percent of the stock is replaced with new construction 

annually. The large existing stock relative to new construction means that transitioning existing real 

estate into a cash flow tax system in a manner that treats current owners fairly and avoids severe 

market disruption and systemic risk would be extraordinarily expensive from the standpoint of lost 

revenue to the Treasury. 

Going forward- addressing the challenges of real estate taxation under the House Blueprint. 

In light of the unique status of real estate as a long-lived, fixed capital asset and the transition 

challenges generated by the large stock of existing properties, the Committee should consider 

excluding real estate from the basic Blueprint architecture of immediate expensing and interest nondeductibility. The Committee should preserve like-kind exchanges, an effective, time-tested tool that 

helps taxpayers internally mobilize capital to grow and expand their businesses and create jobs. Tax 

reform legislation could promote investment in manufacturing and other capital-intensive industries 

through a modified incentive that provides for permanent, immediate expensing of shorter-lived 

assets, such as equipment and machinery. Legislation could reduce the depreciation period for real 

estate to align more closely with its useful economic life, which is approximately 19 years, according 

to the Massachusetts Institute ofTechnology6 

Alternatively, if real estate is included in the cash flow tax system, it is critical that the House bill 

include carefully designed transition n1les. The transition n1les should ensure the new tax regime 

4 James Mackie III & John Kitchen, Slowing Depreciation in Corporate Tax Reform, TAX NOTES 

(Apr. 29, 2013), available at: http://www.taxnotes.com/tax-notes-today/budgets/slowingdepreciation-corporate-tax-reform/201 3/04/30/f2p4 (behind paywall). 

5 David Mericle & Dan Stuyven, Corporate Tax Reform: Trading Interest Deductibility for Full 

Capex Expensing (Goldman Sachs Economics Research, Nov. 30, 2016), available at: 

http://static.politico.com/c3/34/c99de58745b29f77b027a0f848d9/goldman-sachs-analysis-of-netinterest-deductibility-and-expensing-provisions-of-tax-reform.pdf. 

6 Professor David Gellner and Sheharyar Bokhari, Commercial Buildings Capital Consumption in the 

United States, (MIT Center for Real Estate, Nov. 2015), available at: 

https://mitcre.mit.edu/research-publications/commercial-building-capital-consumption-us; Andrew 

B. Lyon & William A McBride, Tax Policy Implications of New Measures of Building Depreciation, 

TAX NOTES (June 20, 2016), available at: https://www.pwc.com/us/en/taxservices/publications/assets/pwc-tax-implications-of-new-measures-of-building-depreciation.pdf. 

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does not put the owners of existing real estate assets at an economic disadvantage compared to new 

construction and new investment; does not result in lower property values and new systemic 

economic risk; and does not create a lock-up of properties that distorts real estate commerce and 

undermines productive economic activity. 

One approach to transition under consideration would grandfather current depreciation methods and 

schedules for existing assets. However, this approach would cement in law, for decades, two distinct 

tax systems for U.S. commercial real estate dependent on when the taxpayer acquired the property. 

This would result in two separate systems-one that is income-based for the $ 15 trillion of existing 

real estate and one that is cash flow-based for future investment. In so doing, Congress risks creating 

a cascade of new market distortions with unknown and potentially dangerous consequences. It 

would violate a fundamental principle of good tax policy-treating similarly situated taxpayers the 

same. It could cause a lock-up of properties that reduces market liquidity, drags down property 

values, and prevents properties from transferring into the hands of owners that would upgrade and 

improve the real estate, creating jobs in the process. 

In short, transition rules must address two powerful force s set in motion under the Blueprint-the 

loss of interest deductibility and the economic divergence that would result from the proposed 

acceleration of cost recovery for new investment. Both of these changes are challenges for the 

transition from one regime to the next. 

In fairness to borrowers who made investment decisions in reliance on long-standing tax principles in 

place since the inception of our tax law, debt on existing real estate should be fully grandfathered for 

purposes of interest expense deductibility. This relief should extend to debt secured directly by real 

estate, as well as debt that is effectively backed by real estate, such as bonds issued by REITs. In 

addition, the transition rules should not discourage the refinancing of existing real estate debt, which 

accelerates reinvestment, economic activity, and job creation. 

With respect to cost recovery, one viable option is to phase in immediate expensing over an extended 

period, while simultaneously accelerating the recovery of basis in existing assets. An alternative 

option would implement expensing immediately, but in contrast to the American Business 

Competitiveness Act (H.R. 4377, 114'" Cong.), would ensure that current owners get full recognition 

of their tax basis when selling an existing asset, thus avoiding a "lump sum" tax on all existing real 

estate. 

The importance of a well-designed transition regime cannot be overstated. The stock of existing 

commercial real estate is more than 12 times the size of total annual private investment in equipment 

and machinery. The risk of unintended consequences is real and past lessons should inform 

policymakers' decisions. Congress should approach transition as a primary focus and not a 

secondary concern. 

Other real estate issues in the Blueprint. There are several other areas where policy decisions in 

the legislative drafting of the Blueprint will have enormous consequences for commercial real estate 

activity. In brief: 

The 50% capital gains exclusion should fully cover individual gains from real estate 

investment, including real estate that is directly owned or owned tluough a pass-through 

entity; 

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With respect to depreciation "recapture," the tax law should recognize that a portion of the 

income received on the sale of real estate reflects the appreciation of the underlying land and 

is appropriately taxed at the reduced capital gains rate; 

The reduced tax rate on pass-through businesses should fully extend to partnerships, to 

distributions from REITs, and to other pass-through entities that generate real estate rental 

inco e~ 

The new system should continue to encourage taxpayers to reinvest capital and earnings 

through provisions such as section I 031 ~ 

In order to continue encouraging entrepreneurs and small developers to invest in U.S. real 

estate, the interest rate on loss carryforwards should include a real return that is sufficient to 

preserve the value of losses that cannot currently be se ~ and 

The character of real estate-related income, including carried interest, should continue to be 

determined at the partnership level and the new regime should continue to recognize that 

entrepreneurial risk-taking often involves more than just the contribution of capital. 

FIRPTA Repeal. The punitive Foreign Investment in Real Property Tax Act (FIRPTA) regime 

subjects gains on foreign equity investment in U.S. real estate or infrastructure to a much higher tax 

burden than applies to a foreign investor purchasing a U.S. stock or bond, or an investment in any 

other asset class. In addition to the tax burden, the withholding and administrative filing 

requirements associated with FIRPT A are frequently cited by foreign taxpayers as principal reasons 

for avoiding the U.S. real estate market. FIRPTA is a major impediment to greater private 

investment in both U.S. real estate and infrastructure. 

In 201 5, the Ways and Means Committee, led by Chairman Brady and Rep. Joe Crowley (D-NY), 

along with Senators Mike Enzi (R-WY) and Robert Menendez (D-NJ) in the Senate, helped enact the 

most significant reforms of FIRPTA since its passage in 1980. The Committee should build on its 

success by repealing FIRPTA outtight as part of tax reform. Unleashed by FIRPTA 's repeal, capital 

from abroad would create jobs by financing new real estate developments, as well as the upgrading 

and rehabilitation of existing buildings. Architects, engineers, construction firms, subcontractors, 

and others would be put to work building and improving commercial buildings and infrastructure. 

* * * 

Because commercial real estate is so ubiquitous, it is sometimes easy to overlook its positive 

connection to our nation. Commercial real estate is where America lives, works, shops, plays and 

invests. The right tax policy can help commercial real estate: create and maintain jobs, lift retirement 

savings for Americans, reduce energy consumption, and improve the quality of life in local 

communities. 

We are fully committed to working with you and your colleagues to achieve a bold tax reform 

outcome that serves the overall economy and appreciate your consideration of these issues. We 

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appreciate your consideration ofthe.se comments and look forw,.rd to working with you. 

cooperatively, as tax refonn moves fonvard. 

Sincerely, 

The Real Estate Roundtable 

ADISA- Ahernative & Direct Investment Securities Association 

American Hotel & Lodging Association 

American Institute of Architects 

American Land Title Association 

American Resort Development Association 

American Seniors Housing Association 

ApprAisal Institute 

Asian American Hotel Owners Association 

The Building Owners and Managers Association (BOMA) International 

CCJM Institute 

Federation of Exchange Acconunodators 

Institute of Real Estate Management 

International Council of Shopping Centers 

!PA- lnvestment Program Association 

Mortgage Bankers Association 

NAIOP. the Commercial Real Estate Development Association 

National Apartment Association 

Nationa l Association of REAL TORS® 

National Multifamily Housing Council 

REALTORS® Land Institute 

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HARD I 

May 18,2017 

Cbainnan Kevin Brady 

Committee on Ways & Means 

U.S. House ofRepreseD!atives 

Washington, DC 20515 

Chaim1an Peter Roskam 

Subcommittee on Tax Policy 

Committee on Ways & Means 

Washington, DC 20515 

RE: Comments on How Tax Rtljom1 Will Grow Our Economy and Create .Jobs Across America 

On behalf of Heating, Air-conditioning & Re(iigeration Distributors lntemational (HARD!), I 

write to offer comments on How Tax Reform Will Grow Our Economy and Create Jabs Across 

America. HARD! is the voice of nearly !,000 member C·Ompanie.s and 35,000 prof~s iona s 

worldwide in the HVACR industry. Our members provide the products that keep homes and 

businesses cool in the swnmer and comfortable in the winter. More than 80 percent of HARDI's 

distributor members are classified as small businesses, and ow· members help drive economic 

growth with more than $35 billion in annual sales and 40,000 small business jobs supported. 

HARD! member companies are faced with an increasingly complicated tax system that affects 

every aspect of business, including the products they sell, bow their inventories are shipped and 

warehoused, and the benefits they are able to pi'Ovide to employees. Given the impact that 

taxation has on businesses, Congress should focus on passing reforms that create certainty in the 

tax code so HARD I members can focus more on providing good-paying, quality jobs in every 

Congressional d istrict. 

We applaud your work to move the U.S. toward a commonsense tax system that works for a ll 

businesses. Many of the provisions of pro-growth tax refonn will be belpfttl to HARD I 

including: 

Simplifying the tax code - Making the tax code simpler allows more people to 

understand how actions such as purchases can affect their tax liability. The added 

certainty of a simplified code lets HARD! members effectively plan for the furure. 

Additionally, the usage of dynamic scoring will a llow for changes in taxes and 

spending to be evaluated based on the predicted changes in behavior, not inaccurate 

changes in revenue and expense. 

Lowering tax rates on individuals and family businesses - Small businesses currently 

pay some of the highest taxes in the industrialized world. They are taxed at the 

individual tax rates that can be as high as 39 percent. The President's plan calls or the 

rate to be reduced to 15%. HARD I members believe that equity in the top pass445 Hutchinson Ave nue, 5te. 550, Columbus, OH 43235 

888-253·2128/614-345·4328 ph /614-345·9161 fax 
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33393.338

through business tax rate and the corporate tax rate ensure competitiveness in the 

market. Furthermore, a decrease in the overall rates and reduction in special tax 

breaks would allow all industries to compete fairly. Of what tax breaks stay in place, 

the breaks need to be available across both pass-through and corporate tax structures. 

Full repeal of the federal estate and gift taxes - The nature of the distribution business 

requires our members to hold massive inventories in multiple warehouse locations. 

Upon a business owner's death, they oftentimes exceed the estate tax threshold but 

lack the cash on hand to pay a 40 percent tax on their lifetime savings because their 

value is tied up in the family-business inventory. If a family cannot pay the death tax, 

they must fire workers, sell off machinery and parts of the business, or in the worst 

cases close the business entirely to pay death taxes. Many of our members are 

multigenerational family businesses that have had to grapple with the estate tax in the 

past and have been forced to hire lawyers and accountants to help them pass their 

businesses to the next generation. This is all money that could be used to reinvest in 

the business and the economy. According to the Tax Foundation, nearly 160,000 jobs 

could be created by repealing the death tax. Karen Madonia, a second generation 

HARD I member, testified before the Select Revenue Subcommittee on March 8, 

2015 and described in her attached testimony why the estate tax hurts her family 

business. 

Immediate full expensing of HVAC equipment- As it currently stands now, 

commercial HVAC units must be depreciated over 39 years, which is significantly 

more than the units' typical lifespan. Commercial building owners oftentimes choose 

to keep older, inefficient machines in service and pass on the higher energy costs 

rather than invest in new equipment. Congress voted to fix this problem in the 2015 

PATH Act, which passed and was signed into law. The bill contained language to 

remove an exclusion from Section I 79 expensing that prevented heating and airconditioning units from qualifying. Responses from the IRS regarding their 

interpretation of this change make additional tax changes necessary. HARD I supports 

comprehensive tax reform that allows for the immediate expensing of HV AC 

equipment as was intended by Congress. We also support legislative efforts to create 

a real property exclusion for HV AC equipment which would codify immediate 

HV AC equipment expensing. 

Maintaining LIFO - Last In, First Out, or "LIFO" is a method of accounting that 

helps businesses, including many in HARDI's membership, to determine both book 

income and tax liability. The LIFO method of valuing inventory has existed for three 

quarters of a century as a means of helping to protect businesses from inflation. Its 

repeal would be disastrous to supply chains in every industry. 

Parity between corporations and pass-through entities - Today, more than 50 percent 

of jobs are created by so-called "pass-through" businesses - sole proprietorships, 
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partnerships, limited liability companies and S corporations. Corporate-only tax 

reform would hurt the largest supplier of jobs. We encourage any comprehensive tax 

reform to fix both tax rates in such a way that does not benefit only one group. As a 

result of reforming the tax code, many HARDI members will be able to keep more of 

their hard-earned profits and use those funds to grow their companies, raise wages, 

hire new workers and invest in their communities. 

Small businesses need a tax code that protects them and encourages them to grow and thrive in 

their communities. HARD I members are confident that your reform proposal will provide the tax 

environment they need to thrive, and we are excited to help you implement these pro-growth 

reforms. We look forward to working with you to create a business-friendly tax code that helps 

all businesses and individuals succeed in an expanding economy. 

Sincerely, 

JonMelchi 

Vice President, Government & External Affairs 

HARD I 

614-345-4328 (Office) 
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33393.340

A UTILE BIT ABOUT 

HARD I 

OUR TRADE ASSOCIATION HAS NEARLY 1,000 

O)IER 475 

ARE U.S. BASED 

WHOLESALE 

COMPANIES 

THESE SMALL BUSINESSES 

COLLECTIVELY EMPLOY 

MEMBER COMPANIES 

OF MEMBERS ARE 

CLASSIFIED AS 

SMALL 

BUSINESSES 

~ ~ ~ ~ ~ ~ ~ ~ HARD-WORKING AMERICANS 

HARDI MEMBERS HAVE OVER 

35 BILLION 

HARDI REPRESENTS AN ESTIMATED 

OF U.S. WHOLESALE 

DISTRIBUTION MARKET 

OF HVACR EQUIPMENT 

SUPPLIES. AND CONTROLS 

IN ANNUAL SALES 

THERE S A HARDI MEMBER IN !a ~.Y.~~!. -sTATE 
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Testimony of 

Karen Madonia 

Chief Financial Officer 

ILLCO, Inc. Aurora, IL 

On Behalf of 

Heating, Air-Conditioning and Refrigeration Distributors 

International (HARD!) 

HRRDI I leallng. Alr-rond1ti0!11ng & Relr.geratiOO O.SinbUiors lnteroabonal 

Submitted to the 

Subcommittee on Select Revenue Measures 

Hearing on the 

Burden of the Estate Tax on Family Businesses and Farms 

B-318 Rayburn House Office Building 

March 18, 2015 
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Chairman Reichert, Ranking Member Neal and Members of the Subcommittee on Select Revenue 

Measures, my name is Karen Madonia, and I am the Chief Financial Officer and next generation of 

Ill co, Inc., a Chicago-area distributor of heating, ventilation, air-conditioning and refrigeration 

equipment, parts and supplies. Thank you for giving me the opportunity to talk about the estate tax 

and its effect on the many small family businesses that comprise the United States economy. This is 

an issue that is very close to my heart as my family is in the midst of our own generational transfer. 

Let me provide you with some background: lllco was a very small company with only seven 

employees when my father purchased it back in 1973. At that time, my dad was only 32 years old, 

with a wife, three daughters and a mortgage, but he knew he wanted something more than just a 

job. He wanted to use his passion to create something permanent, to be in control of his own 

destiny. With help from my grandfather, my dad decided to take a risk and go into business for 

himself. A community bank took my grandfather's assets, my dad's assets and a guarantee from a 

vendor as collateral for a $340,000 loan to purchase the company. 

In those early years, my dad worked every job at lllco. During the day, he went to see customers and 

secure orders, then went back to the warehouse to pull and package them. The next day, he would 

make deliveries using my mom's station wagon before visiting more customers and taking more 

orders. Eventually, he was able to buy a truck and hire a driver, which left the station wagon free for 

my mom to pick up merchandise from lllco vendors while my sisters and I were at school. After the 

doors closed at 5:00, my dad would go to his office to perform both the accounts payable and 

accounts receivable functions. Every bit of profit he made got funneled back into the company so he 

could hire more people, buy more trucks and expand his inventory. My dad worked seven days a 

week, and most nights he did not get home until long after most people had finished their dinners. 

He had to give up any hobbies which took too much time away from his business, and our family 

vacations were mostly extended weekends because a week was simply too long for him to be away. 

Many weekends were spent entertaining customers, mostly over home-cooked meals, because that 

was the only way my parents could afford to wine and dine the people that were so necessary to the 

success of the business. But my dad's passion for the industry, his commitment to his employees, 

and his drive to grow his company empowered him to keep pushing even when interest rates 

hovered in the high teens during the late 1970's and early 1980's and things looked pretty ominous. 

Forty years later, he has a business with eight branches in three states, 97 employees and 

$42,000,000 in revenue. 

My sisters and I grew up understanding that if we wanted to be successful at anything, we had to 

work hard and stay focused on our goals. We are all proud to work alongside our dad now, and look 

forward to making our own mark on the family business in the coming years. There is also a 

generation behind us that is just beginning to consider career options. Perhaps some of them will 

join us ... that is certainly my hope. But after years of listening to us struggle to figure out how to 

grow the business while navigating the estate tax waters, I imagine that all of them will think twice 

before making that leap. 

For the last few years, I have come to Washington with our trade association, HARD I, to talk to 

Members of the House and Senate about the issues that are important to our companies and our 
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industry. Every year, estate tax is on the top of my list of topics to discuss. I personally find it 

fundamentally wrong to place a tax on death. If a person accumulates wealth through hard work, 

and if that person pays his fair share of taxes on income as it is earned, I do not understand how the 

government can justify taking a significant portion of what he has left simply because he opted to 

save and re-invest rathe r than consume. The United States has already benefited from that person's 

success because he has employed people who pay taxes, bought buildings on which he has paid 

property taxes and bought inventory and supplies from other companies, which can then afford to 

employ more people who pay taxes. He has created opportunity for the community as a whole 

while creating prosperity for himself. We all benefit when a small businessperson succeeds. To me, 

and probably to a large portion of the gene ration behind me, the estate tax serves as a tremendous 

entrepreneurial disincentive. Why wo rk hard to build something substantial if it is likely to die 

when you do? Why not be just another worker, make enough money to live comfortably, and not 

worry about gene rating any more wealth than that? If even a small pe rcentage of potential 

entrepreneurs decide not to turn their dreams into viable businesses because our tax policy 

discourages them from doing so, haven't we done a great disservice to our economy? 

Proponents of the estate tax will tell you tell it prevents the concentrated accumulation of wealth in 

our country. They'll tell you that our nation needs to increase taxes on the "wealthy" because they 

need to pay their "fair share". On the surface, that's a pretty safe argument to make. It's easy to say 

the solution to o ur fiscal issues is to increase the burden on those who can afford it the most. But 

what's fair about paying taxes your whole life only to have to pay even more at death simply 

because you're leaving a business behind? What is always overlooked in these discussions is the 

effect of the estate tax on the small family business. In most cases, we're not talking about passing 

on bank accounts with multi-million dollar balances. We're talking about businesses where most of 

the net worth is tied up in inventory, accounts receivable, equipment and real estate. At Illco, for 

example, we carry an inventory valued at $12,000,000 and accounts receivable of about $5,000,000. 

Our inventory has to be high- we provide vital heating, air- conditioning and refrigeration parts 

and supplies to hospitals, schools, nursing homes and grocery stores. When the refrigeration 

system in a grocery store goes down, it needs to be repaired within hours or the food is lost. When 

the air conditioning system in a hospital doesn't work, patients cannot be appropriately cared for 

until air is circulating again. The parts and supplies that we sell must be on hand in order to 

facilitate quick repairs and replacements, which means that we must carry a heavy inventory. We 

also own five buildings and operate a fl eet of twenty-four trucks, some of w hich cost upwards of 

$250,000. After paying our taxes and making our annual profit sharing contribution to our 

employees, the income that's left is put right back into the company so we can continue to carry an 

extensive inventory, extend payment terms to our custome rs and maintain our fl eet and our 

buildings. If something happened to my dad and we were left with a la rge estate tax bill, we would 

literally have to sell parts of the company in order to pay it. That would likely mean shutting down 

branches, laying off workers or liquidating inventory just to be able to pay a tax bill that only 

occurred because an owner died. Even worse, our company might have to be sold outright, which 

would likely mean that instead of our employees being part of our small business family, they 

would become part of a larger company that is beholden to Wall Street. That would not benefit 

them, and I would argue that it wo uldn't benefit the economy as a whole either. Small businesses 
416 

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employ over half of the nation's private sector workforce and create the vast majority of new jobs. 

With our economy in a relatively slow recovery, government should be encouraging us to grow and 

prosper. Instead, worry over the estate tax forces us to spend too much time and money focusing on 

things that have nothing to do with our businesses. 

Over the last few years, my dad has spent countless hours and entirely too much money trying to 

figure out how his company can outlive him. Instead of fo cusing on growing his business so he can 

open more branches and employ more people, he has had to strategize about how to pass his 

company on to his kids without having to dismantle it. Most of our strategic management decisions, 

whether they are about day-to-day operations or opportunities to expand, involve consideration of 

the estate tax in one way or another. We have opted to maintain a large cash reserve as a 

precaution. Other companies choose to protect themselves by purchasing insurance. Either way, 

money that could be used to grow and create jobs is sitting on the sidelines. The estate tax is a huge 

roadblock to successful family businesses undergoing generational transfers. Think about 

that...perhaps the greatest challenge in transitioning a business from one generation to the next is 

our own tax code. 

The United States has always been the land of opportunity. Small business owners take tremendous 

risk at great personal sacrifice, and they truly are the backbone of the American economy. No one is 

asking for it to be easy. In fact, my dad would probably be the first to tell you that working to 

overcome the challenges is the most rewarding part of owning your own business. But it shouldn't 

be the case that the thing that keeps you up at night is the worry that you may leave your kids with 

a huge tax burden when you die. I believe that most people would be proponents of an overhaul to 

our tax code. There probably are too many exemptions and loopholes that only upper income 

people can take advantage of, and those topics a re worthy of a national conversation. But taxing the 

estates of successful entrepreneurs is punitive, and that is not the role that our tax code should 

play. 

Two years ago, when Congress last addressed the issue of the estate tax, you gave the small 

business community some certainty by establishing an exemption and indexing it to inflation. While 

we still maintained that full repeal was the right answer, we appreciated that you understood that 

changing the rules on us every year made it impossible for us to properly plan for the future of our 

businesses. I respectfully ask that you again carefully consider all the ramifications of estate tax 

policy and then vote, once and for all, to permanently repeal the estate tax. Let's encourage families 

to create wealth by starting their own businesses, not threaten to take it away from them if the 

government thinks they have accumulated too much. Let's unleash the potential of those citizens 

willing to work hard and create something that will bene fit all of us, not discourage the ir ambition 

through our tax code. 

Thank you for the opportunity to share my family story with you. I would be happy to answer any 

questions that you may have. 
417 

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To: the Honorable Members of the Ways and Means Committee of the United States Government 

Re: Hearing on How Tax Reform Will Grow Our Economy and Create Jobs, May 18 2017, 10:00 a.m. 

Today, as you discuss tax reforms intended to grow the economy and create jobs, please consider the 

tax plight of the thousands of small business owners such as myself who are operating within the legal 

constraints of our respective states, and who have created tens of thousands of jobs in manufacturing, 

packaging, sales, and assisted in the creation of even more jobs in ancillary products and services 

companies such as marketing, advertising, consulting, legal, tax, and transportation. 

I'm talking about cannabis businesses and the billions we contribute to the economy each year. 

H.R. 1810, the Small Business Tax Equity Act, is the number one issue for small business owners in this 

industry. 

Please pass H.R. 1810 to help those of us who are struggling under the crushing weight of IRS Tax Code 

Section 280e, which currently has unfair tax consequences for businesses that are operating legally and 

within the guidelines of their respective states. 

When H.R. 1810 passes, I will offer health care benefits, and I will increase wages for all of my existing 

24 employees, I will add to my workforce of veterans, minorities, single mothers, and single fathers. I 

will further stimulate the economy by opening businesses in other industries and hiring even more 

people. 

You don't have to support cannabis legalization to get behind H.R. 1810. If you believe in the fair 

treatment of small business owners in this country, if you believe in helping women business owners, if 

you believe in creating jobs and building the economy, then please show it by showing support for H .R. 

1810 to exempt legally operating businesses from IRS tax code 280e. 

Thank you. 
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Home 

Performance 

Coalition 

~ATHE FUTURE 

BrianT. Castelli, President & CEO, Home Performance Coalition 

Stephen Cowell, President, E4Thcfuturc 

Tom Cartu, Executive Director, Efficiency Fit·st 

and 

Larry Zarker, CEO, Building Performance Institute 

Rouse Committee on Ways and Means 

Tax Incentives for Residential Enet'g)' Efficiency 

May 30,2017 

As leaders in the residential energy eflicicncy industry, the Home Performance Coalition, 

E4Thefulure , Efliciency First. and the Building Pcrfonnance Institute respectfully urge your 

support for residential energy etliciency tax incentives. These tax incentives are critical to 

reducing the up front cost of energy efficiency improvements. thereby allowing more Americans 

access to the efliciency market, reduce monthly utility bills, and increase the health and s.1fety of 

lheir homes. Energy efficiency is our nation's cleanesl, most cost-effective energy re-source, and 

energy efficiency incentives should be included in the tax code in a way that provides parity with 

other energy sources. 

Tite Home Performance Coalition (HPC) is a national non-profit 50 lc3 organization that works 

with industry leaders in the home performance and weatherization industries to advance energycflicient, healthy and safe homes retrofit policies, programs and standards through research, 

education, training and outreach. 

E4TheFuture is non-profit 501c3 organization which collaborates with industry stakeholders to 

provide expert policy solutions, education. and advocacy to advance residential clean energy and 

energy efliciency solutions on the federal, st~te and local leveL 

Efficiency First (EF) is a natioMl trade as oci~ ti n with members across the country that unites 

the home perfomlllnce workforce, building product m:muf.1c1urers and related businesses and 

organizations in an eflon to advance cost-effective energy efficiency solutions for residential 

customers 10 create jobs. boost d1e cc<>nomy, and tight rising energy costS. 

The Building Pcrfonnance Institute (BPI) is the nali<m's premier building perfonnance 

credentialing. quality assurance, and st:mdards sening organization. Approved by the American 

Pagel 
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33393.347

National Standards Institute, Inc. (ANSI) as an accredited developer of American National 

Standards and as a certifying body for personnel credentials, BPI develops technical standards 

and professional certifications that help raise the bar in home performance contracting. 

As you know, America 's homes and offices consume about 75% of all the national electricity 

and represent 40% of its total energy demand, thereby resulting in a significant impact on 

America's economy. The average homeowner spends approximately $2,300 a year on energy 

bills, and a comprehensive whole-house energy efficiency upgrade will likely reduce this cost 

20-25%.

1 To achieve these savings, however, the homeowner must pay for the upgrade measures 

(HV AC, insulation and air sealing, etc.) upfront. While most efficiency improvements more than 

pay for themselves over their lifetimes, these upfront costs remain a significant barrier for many 

homeowners. Tax incentives for residential energy efficiency projects help reduce the barrier of 

upfront costs, thereby allowing more Americans to enjoy the benefits of energy efficiency. 

Previous tax reform proposals have focused primarily on energy production, largely ignoring the 

key role of energy efficiency - America 's greatest energy resource. Only one tax provision 

provides an energy efficiency incentive for America 's homeowners, 25C. While this legislation 

should be updated and improved, the very modest tax incentive has motivated many homeowners 

to do more to save energy. Furthermore, the high-efficiency products that qualify for the tax 

incentive, are largely made in America - spurring local job growth in manufacturing as well as 

installations. Businesses, investors, and consumers need stable, predictable federal tax policy to 

create jobs, invest capital, and deploy energy efficiency technologies. Energy efficiency tax 

incentives will help ensure that the United States does more with less (energy) to the betterment 

of our economy, national security, and environment. It should be noted that utilities also benefit 

greatly when energy efficiency is recognized as a resource - energy efficiency reduces utility 

costs over time (tluough avoided costs of generating capacity and ancillary services, avoided or 

deferred construction of additional transmission and distribution assets, etc.), which translates 

into reduced rates for customers. 

Incentivizing energy performance also avoids "picking winners and losers" among resources. 

We support S. 1068, the "Clean Energy for America Act," in that it provides an extension and 

update of the 25C tax code and also amends the provision to become performance based over 

time, allowing for both innovation and the acceleration of whole-house performance-based 

1 https://www.energystar. gov/index.cfm?c=home _improvement.hpwes _for_ homeowners and http://aceee.org/factsheet/homeefficiency-retrofit-program-feb-2009. 

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retrofits. While we would like to see modest changes to this bill, we see this legislation as 

setting an excellent framework for tax reform. 

Energy efficiency is more than just a way to reduce energy waste and save consumers and 

businesses money on their monthly utility bills - it is by far the largest sector in the U.S. clean 

economy. A recent report from E4TheFuture, entitled "Energy Efficiency Jobs in America,"2 

found that three out of every four clean energy jobs is an energy efficiency job, and as of 2015 

the energy efficiency industry employed 1.9 million Americans. The report also found that most 

energy efficiency jobs are created by small businesses: of the 165,000 U.S. companies engaged 

in energy efficiency, 70% of them have 10 or fewer employees. 

A significant portion of the energy efficiency jobs in the U.S. are in the residential sector, and 

forty percent of those jobs involve the installation of energy efficiency products. These are the 

contractors -the "boots on the ground" - installing energy efficiency products and technologies 

and working to reduce energy waste in homes and buildings across the country. These jobs are, 

by their very nature, inherently local and cannot be exported. 

In addition to economic and jobs benefits, residential energy efficiency also plays a key role in 

public health. A U.S. Department of Energy report on the Weatherization Assistance Program3 

found that home improvements focused on energy efficiency can improve indoor air quality, 

which reduces respiratory illness and sick days, and boosts mental alertness and productivity for 

both children and adults. A recent report from E4TheFutnre, entitled "Occupant Health Benefits 

of Residential Energy Efficiency,"4 which reviews existing research on the link between resident 

health benefits and energy efficiency upgrades, also found that residential energy efficiency 

upgrades can produce significant improvements in asthma symptoms and help improve overall 

physical and mental health. 

Given the importance of energy efficiency to job creation, health and safety, and energy security, 

it is vital that incentives to encourage and facilitate energy efficiency improvements in homes 

and buildings be included in the tax code. Specifically, we recommend that a system of "good", 

"better" and "best" incentives be adopted for energy-saving retrofits for existing homes and 

commercial buildings. The incentives should be based on energy savings achieved 

2 httvs://e4thefurure.org/wp-content/uploads/2016/ 12/EnergyEfficiencyJobsinAmerica FINAL.pdf 3 https://energy.gov/eere/wipo/downloads/weathetization-assistance-program-national-evaluation 4 https://e4thefuture .org/occupant-health-benefits-of-re sidential-energy-efficiency/ 

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(performance-based), be technology neutral (any way to save energy counts) and phase out when 

specific market milestones are reached. 

The Home Performance Coalition, E4TheFuture, Efficiency First, and the Building Performance 

Institute believe that energy efficiency is vital to our economic growth and international 

competitiveness. Energy efficiency improvements pay for themselves many times over and 

improve energy security, help Americans save money, and create more comfortable and safe 

homes and buildings. We strongly urge members of the committee to support energy efficiency 

incentives and include them in the tax code in a way that provides for parity with other energy 

sources. Thank you for providing this opportunity to submit testimony. We look forward to 

working with you. 

Contact Information 

Kara Saul Rinaldi 

President and CEO, AnnDyl Policy Group 

On behalf ofHPC, E4TheFuture, Efficiency First, and BPI 

717 Kennebec Ave, Takoma Park MD 20912 

Phone (202) 276. 1773, Fax: (202) 747-7725 

kara@anndyl.com 

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May 18, 1017 

~!NOENT COMMUNITY 

BANKERS of AMERICA® 

Community Bank Principles 

for Tax Reform 

On behalf of the more than 5,800 conummity banks represented by ICBA, we thank Chain11an Brady, 

Ranking Mctnbcr Neal, and wcrubcrs of the Ways and Means Committee for convening today's hearing 

on " How Tax Refonn Will Grow Ow· Economy and Create Jobs." Tax rcfonn is a critical and ambitious 

policy cha11enge. Done properly, i1 will strengthen our economy and spm· job creMion for a generation or 

more. \Ve are strongly encouraged by the increasing momennun for change and are pleased to offer this 

st·arcmen1 for Lhc record which describes oouuuunity bank priorities in any tax rcfotnl lcgislaLiou. 

Lower l\•brginal Rates Nee-ded ror lndividuals, Corporations, :md Businesses 

lCBA strongly suppo11s tax rate relief for Arne1ican individuals. corporations. and businesses. 

Significant tax relief will provide a nu1c.h-needed boost to a sluggish economic recovery and possibly 

help stave otT another recession by spunlug consumer purchasiug, business iuvcstmcut. and hlliug. Rate 

relief must be a p01·t of "''Y Utx ref01m package. 

Preservation of the Business interest Deduction is VUal 

ICBA strongly opposes any Jimitation on the deduction for interes·t paid by business bOITowers. 

Conuuunity b01lks have long enjoyed a su·ong partnership with America ·s small businesses aud provide 

a pproximately half of a ll small business loans. CouUllunit)' bank credit is a c rit.ical - ru1d frequently the 

only viable - source of capital for small businesses, which typically have very limited or uo access to 

equity capital, cspecia11y in the early stages of their development. Moreove r, couummity bank c redit 

a llows small business owners to invest and grow the ir busine-sses without diluting their control. Many 

small businesses arc closely held to rctaiu control over strdtegic decision making and direction. Outside 

equity cnpital would change the essential character of these businesses. 

Eliminating the deduction for net interest expense amounts to double taxation of interest. interest would 

be paid fl·om taxable incorue and taxed a second time as iucome to the recipieut. Tltis would make 

community ba.nk c.redit significantly more expensive and thus less available to thousands of small 

businesses. 

The taxation of interest on business bOITOwing would represent a dramatic change in longstanding U.S. tax policy, the consequences of which are w1knowu. Couummity bankers across the cow1t1·y arc 

seriously concemcd with the practical rca) world implications. ln addition to impact on borrowers. the 

proposal also represents a threat to the ongoing viability of thousands of community banks that 

specialize in small business lending. having been priced out of consumer lending by tax-subsidized 

credit muons and lacking the sca le to lend to lru·ger businesses. 

1615 L S1rcct NW, Sui1c 900. Wadlington, DC 20036 • 202-ti59..SI II • Fax 202-659-92 l6 • www.icb:t.org 
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Parity in the Taxation of Different Entity Forms 

Over 2,000 cotwnuuity banks, approximately one third of the total, are organized under Subchapter S of 

the tax code. Under current law, the pass-through income of Subchapter S banks is raxed at the top 

individu;t) rate of 43.4 percent including Obamacare faxes, while c.orporate income is taxed at a top rate 

of 35 percent. lCBA bas long held tlte view tltat rate parity. which would ensure that one business fonn 

is not disadvantaged relative to another, should be an importam goal of tax policy. lCBA strongly 

supports the Main Street Fairness Act (H.R. 116), introduced by Rep. Vcm Buchanan. which would 

create rate parity and cnsme that it is preserved tu1dcr any future rate changes. 

Strengthen the Subchapter S BusiJieSS Model 

Any reforms to the tax code: should not only preserve tlte Subchapter S model but streugtlteu it as well. 

In pa1ticular, Subchapter S banks need new options to satisfy higher demands for capital from their 

rcgulators. ICBA-suppot1ed bills include tltc Capital Access for Small Business Banks Act (H.R. 2339), 

imroduced by Rep. Kctmy Marchant, which would raise tl1c shareholder lituit for Subchapter S b8llks 

from I 00 to 500 and allow Subchapter S banks to issue prefen·ed shares. 

The S Corporation Modcmizatiou Act (H.R. 1696), introduced by Reps. Dave Reichert aud Ron Kind. 

and its Senate counterpart. S. 711, introduced by Senators Jolm Thwte aud Ben Cardin, would, 81UOUg 

other provisions. allow Individual Retirement Accounts (IRJ\s) 10 invest in S c.orporation shares. A 

version ofS. 7 11 was arneodecl to the Retirement Enhancement and Savings Act of2016. which passed 

the Finance Conunittcc in September 2016 by a vote of26 to 0. 

The legislation noted above would allow Subchapter S banks to meet regulators' persistent demands for 

higher c.apital levels. ICB.A urges rheir i_nclusion in any rax refonu legislation. 

Expand Access to Credit '''i1h Tax lncenth·es for Targeted Community Botnk Lending 

Carefully designed tax incenrives for comamUlily bank lending would lower credit costs for rargered 

bo~rowcrs and help conwmnity banks diversify their loan portfolios aud comply wit.h t.he Comwtullt.y 

Reinvestmem Act. For exarnple) ICBA stroogly supp011s the Enhancing Credit Oppommilies in Rt1ral 

America Act of2016 (H.R. 2205), introduced by Rep. Lynn Jenkins, which would provide that interest 

canted on loans secured by ag~icultural real estate is tax exempt. This exemption would also apply to 

ime-rest e-arned on a mor1gage secured by a single-f.1mily home tba1 is rhe principal residence of the 

borrower. provided 1he home is located in a n.lral area with a population of 2,500 or less. JCBA believes 

tltat a similar tax incentive should be extended to other types of couuuuuity bank lending, including 

loans lO low-to-auiddlc iucome individuals and small businesses. 

16l5 L Street NW. SuiLc 900. \\ ashi1~gton, OC 20036 • 202-659-Bill • Fa.x 202-659-92 16 • www.icba.o rg 
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Parity in Taxation of Financial Services Providers 

Many oftoday's tax-exempt credit unions and Farm Credit System (FCS) lenders are multi-billion dollar 

entities competing against much smaller, taxpaying community banks. There are over 250 credit unions 

with assets over $1 billion. The largest holds approximately $75 billion in assets. The largest FCS lender 

is $9 1 billion, and collectively the FCS holds nearly one quatter trillion-dollars in assets and, as a 

govemment sponsored entetprise (GSE), enjoys massive tax and fimding subsidies. 

The National Credit Union Administration's new, highly pennissive (and, we believe, illegal) mles will 

allow credit unions to fmther expand into commercial lending and effectively remove any meaningfi.Il 

limit on their field of membership. These new mles will fi.1rther blm the distinction between credit 

tmions and conummity banks, as would proposals to allow credit unions to raise supplemental capital 

and thereby cease being member-owned entities. Many cmmnunity batiks that setve urban and submban 

areas have already been squeezed out of consumer lending by tax-subsidized credit unions. Now, 

community batik commercial lending is also under threat. FCS lenders pose a similar threat to 

agricultural community banks. 

The problem gets worse evety year as credit unions and FCS lenders continue to leverage their tax 

exemption to expand. What's more, since 2012 11 batiks have been pmchased by credit unions. With 

more deals reportedly in the works, this alanning trend should be addressed before it strengthens and 

becomes a real threat to the tax base. Tax refonn presents a once-in-a-generation opporttmity to conect a 

histmic injustice in the taxation of financial setvices providers. Credit unions and FCS lenders are 

becoming the equivalent of banks and should be taxed equivalently. 

Repeal Estate Tax 

ICBA supports fi.Ill, pennanent repeal of the estate tax as a tlueat to the intergenerational transfer of 

many community banks and small businesses setved by cmmnunity batiks. 

Many community banks have been held and operated within families for as many as four generations. 

This close family and cross-generational association is critical to the identity, the business model, and 

the competitive advantage of conummity banks in an evolving financial system in which it is becoming 

more challenging for them to presetve their independence. 

The estate tax jeopardizes the succession of community banks from generation to generation. A family 

estate should never be forced to sell its interest in a community bank to pay a transfer tax. Forced sales 

of once family-owned conummity banks to other cmmnunity batiks or, frequently, to larger regional or 

national banks, coupled with a recent surge in regulatmy burden, accelerate the cunent trend toward 

consolidation in the banking sector. Consolidation reduces competition and results in fewer product 

offerings, lower rates on deposits, higher rates on loans and higher fees. 

161 5 L Stree t NW, Suite 900, Washing ton , DC 20036 • 202-659-8111 • Fax 202-659-9216 • www.icba.org 
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The loss of widely-used discotmts for minority interests in a business and for lack of marketability 

would only increase estate tax liability and exacerbate consolidation. In this regard, ICBA urges the 

Treasury Deparuncut to withdraw its proposed regulations under Section 2704 of 1.he tax code, which 

would effectively end the use of such discounts.

1 Notwirhstanding the stahlS of these proposed 

regulations, fCBA 's prefeJTed solution is full repeal of the estate tax. \Ve urge you 10 use rax refonn to 

accomplish this loug held goal. 

Preserve Exemption for ~1unicipnJ Bond lnteresl 

Community banks are proud to suppo11 their cotnlllunities by investing i.n s1tate aud local government 

debt. ln this regard, ICBA urges you to preserve the cmwnt Jaw tax exemption for intere-st earned on 

municipal debt. The Joss of curtailment of this important exemption would depress municipal bond 

pricing for aU investors, ra.isc bonowiug costs for state aud local govcnuueuts. and reduce resources for 

vita) pttblic services and infi·astmcture. 

Opposition to New Commerci:d B:m_k Taxes 

ICBA bas cousi.stently opposed new laxcs or fees specifically 1arge1i.ug the COllllncrcial banking sector 

or their cus10mcrs. Ju ow· view, lax policy shotdd be ucutrnl and uotlarget a specific industry sector. 

Sector-specific taxes distort the market and generate counterproductive outcomes. Even when such taxes 

exempt community banks, they set a troubling precedent: Once the tax code is OJ>ened up to target a 

specific sccror it is difficuh to contain the size, scope. aud broader applicLuiou of the tax. 

Closi.ng 

Thank you again for convening this hearing and for your commitment to growth-oriented tax reform. 

ICBA looks forward to conrinuing 10 work w ith the committee as tax refonn <1dvauces. 

1 See ICBA ·s commeot lener a' bnp:l/www cba orgldocs/ddaull-source/public/leuers~roreguLAio OI 61cl ll0216 edf?sfvrsn::(l. 

1615 L S rn::c1 NW, Sui.tc 900. Washington , OC 20036 • 202-659-81 11 • F':lx 202-659-9216 • www.icba.org 
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The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

1102 Longworth House Office Building 

washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

Industrial Minerals Association - North America 

May 25,2017 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

1106longworth House Office Building 

Washington, DC 20515 

The Industrial M inerals Association- North America {IMA·NA) applauds Congress lor its 

recognition that the current tax system in the United States is in need of serious changes. 

However# as you are looking at how tax reform can grow our country's economy and create 

jobs, IMA·NA cautions the Committee against eliminating the percentage depletion deduction. 

The percentage depletion deduction is not a credit; it is not a subsidy; and, it is not a handout. 

This deduction is a form of depreciation that makes the development and production of 

industrial minerals economical. Without this provision in the tax code, it is l ikely that the 

domestic production of industrial minerals would decline substantially. 

IMA·NA represents the industrial minerals industry in North America. Industrial minerals are 

the raw material feedstock for the manufacturing sector. Without industrial minerals, 

production of homes, cars, glass, electronics, ceramic.s, and virtually any other product would 

not be possible. Industrial minerals are found throughout the United States. According to the 

United States Geological Survey (USGS), in 2016 the industrial minerals sector of the mining 

industry provided over 150,000 direct jobs and produced minerals valued at $51.6 billion. The 

data from the USGS also shows that our country is relying on foreign sources for an increasing 

share of these minerals. Industrial minerals are low margin products that require significant 

financial commitments to long~ term projects where the resource itself is depleted over time. 

The percentage depletion deduction is essential to our member companies and their business 

models. It allows companies to invest in land they need lor future mineral reserves in order to 

keep their businesses sustainable. The percentage depletion deduction also is reinvested in 

the form of capital expenditures or other growth-oriented investments. Most importantly, the 

deduction allows companies to hire and retain more employees each year than they otherwise 

would be able. 

1200 18th Street. NW Suote 1150. Woshongton. DC 20036 1 202·457·0200 1 lax 202·457-Q287 1 www oma·na org 
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The USGS keeps track of the nation's mineral dependency. Over the years, the level of 

dependency on foreign nations for minerals vital to the manufacturing sector has risen 

dramatically. The United States is largely reliant on nations such as China and Russia for these 

essential raw materials for manufacturing. Without the percentage depletion deduction in our 

country's tax code, we will only see our reliance on foreign nations for minerals increase as it 

become uneconomical for our members to do business. This will lead to job losses and hurt not 

just our industry, but the manufacturing sector as well. 

Without the percentage depletion deduction in place, we would likely see manufacturers in the 

United States become even more dependent on foreign sources of minerals, and potentially 

locate their facilities closer to those mineral sources rather than in the United States to save on 

the high transportation costs. Merely reducing the corporate tax rate or allowing for expensing 

would do little to offset the loss of eliminating the percentage depletion deduction for our 

member companies. Maintaining a strong natural resources production sector and limiting our 

dependence on foreign production is critical to the growth of the U.S. economy and growing 

jobs. Eliminating the deduction ultimately would result in increased raw materials costs for 

manufacturers, increased product costs for consumers, and a loss of American jobs in all sectors 

of our economy. 

Thank you for allowing us to comment on your tax reform efforts and its possible effects on our 

industry. The I MA-NA looks forward to working with you and the Committee throughout this 

process. 

Sincerely, 

Mark G. Ellis 

President 

2 
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INSURED RETIREMENT INSTITUTE 

IRI SUPPORTS PRO-GROWTH TAX REFORM THAT 

PROTECTS & ENHANCES RETIREMENT SAVINGS 

With 10,000 Americans retiring every day until2030, increased longevity, 

escalating post-retirement health and long-term care costs, retirement security 

could become a national crisis if we don't take it seriously enough and protect and 

build on what's working. The approach outlined below will advance tak reform 

goals and help Americans achieve the secure, dignified retirement they deserve. 

I. TAX REFORM SHOULD PROTECT AND PRESERVE CURRENT TAX-DEFERRED RETIREMENT 

SAVINGS INCENTIVES AND DIVERSE TYPES AND STRUCTURES OF RETIREMENT PLANS 

Key role in providin¥ for retirement needs 

75 to 85 percent of Baby Boomers, Gen-Xers, individual annuity owners and households with defined 

contribution plans say current incentives are important to their retirement savings. 

685,000 private-sector retirement plans cover 89.9 million participants and provide $650 billion in annual 

benefits according to the latest Department of Labor data (September 2016). 

75 million American families rely on annuities and other life insurers' products for peace of mind, long·t erm 

savings, and guarantee of lifetime income and receive annual benefits of $179.6 billion. 

lmportan! role In job,crealion and economic growth 

The insurance industry, annuities and other insurers' products generate 2.S million U.S. jobs. invest $5.9 

trillion (90 percent of industry assets) in our economy and hold 20 percent of all U.S. corporate bonds. 

• Annuities, employer-provided retirement plans and IRAs currently (Sept ember 2016) produce $25 trillion of 

retirement assets and account for 34 percent of all U.S. household assets. 

71 percent of U.S. pension assets are invested in equities and bonds, predominantly from the U.S. 

~iQg 4~~) and 457(b) plans Is important consolidation is harmful, but simplification is h~l 

It is important to retain 401(k), 403(bl and 4S7(bl defined contribution plans to meet particular needs of 

employees in private, church, governmental, educational and nonprofit sectors. Diversity, choice and flexible 

plan design help ma•imize savings. Employee confusion is not a problem. Each employee simply decides 

whether to participate in the defined contribution plan his or her employer offers. 

Consolidation (e.g .. having just 401!kl plans) is harmful because it takes away important benefits from many 

employees and increases complekity and costs. 403(b) and 457(b) plans cover many nonprofit employees, 

t eachers, police, fire and safety workers and can provide helpful features; e.g.,: 1) Lack of early withdrawal 

penalty tax; 2) Favorable catch·up provisions; and 3) Tailored compensation standards and nondiscrimination 

rules. 

Simplification is helpful because it either broadens the application of helpful provisions or makes positive 

changes for all types of plans. hamples include: 1) Conform harsher plan withdraw rules of 4S7(b) plans to 

those that now apply to 401(k) and 403(b) plans; and 2) Coordinate, streamline and allow f or electronic 

delivery of overlapping, sometimes confusing participant notices. 
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Expanding the role of Roth accounts is harmful 

Retirement security is too important to risk as a short-term exped ient to pay for unrelated tax cuts- a reason 

some cite for considering a greater role for Roth accounts. Roth accounts likely do not increase long-term 

revenue due to tax-exempt withdrawa ls. Deferred taxes from annuities, employer plans and IRAs increase 

revenue as a share of GOP between 2016 and 2046 according to a 2016 Congressional Budget Office report. 

Greater role of Roth could decrease retirement savings significantly. 75 to 85 percent of key groups say taxdeferred incentives for annuities, employer plans and IRAs are important to their retirement savings. These 

incentives come when people need them most- during their working lives when income, taxes and expenses 

are highest. Th e econom ic valu es of distant Roth benefits from conditional tax-exempt distributions are 

difficult to discern and require a great deal of speculation about what effective tax rate individual taxpayers 

will face, often decades into the future. 

Roth will not motivate the broad base of retirement savers as well as current incentives. Wh il e Roth has 

appeal to some segments, for most, when required to forego current consumption and conven iences, Roth's 

distant, speculative future benefits wi ll not motivate retirement saving nearly as we ll as the immed iate, clear 

benefits of current tax-deferred saving in centives. Roth IRAs have been available for almost 20 years, but 

Roth IRAs hold less than 10 percent of the total of all IRA assets. In addition, 54.8 percent of 401(k) plans 

offer Roth, but only 20.1 percent of contributing participants of those plans make any Roth contributions. 

Other developments could magnify risks. If pre-tax incentives play a greater future role in health care- as 

some have proposed- and there is an increased role of Roth accounts, the combined impact could greatly 

lessen retirement savings when the need is growing dramatically. 

II. TAX REFORM SHOULD BUILD ON WHAT IS WORKING BY ENACTING RETIRMENT SECURITY 

ENHANCEMENTS WITH BI-PARTISAN SUPPORT AND MODEST REVENUE COST 

The first four of these common sense enhancements were approved by Senate Finance Committee on 

September 21, 2016 on a bipartisan 26-0 vote as part of the Retirement Enhancement Savings Act of 2016. 

Multiple Employer Plans: Remove regulatory barriers that currently prevent many sma ll and start-up 

businesses from offering retirement plans and encouraging them to offer lifetime income options in 

these plans. 

Annuity Selection Rules: Clarify employer fiduciary responsibility to enable businesses to offer lifetime 

income options in retirement plans without fear of legal liability. 

Annuity Portability: Enable portability with a technical fix to prevent employees who invest in lifetime 

income options through an employer plan from losing these benefits if the employer changes recordkeepers or annuity providers. 

Lifetime Income Estimates: Require lifetime income estimates on workers' benefit statements to 

encourage workers to save appropriately by showing the amount of monthly income their nest egg w ill 

generate in retirement. 

Automatic Enrollment: Broaden coverage by encouraging employers to auto-enroll workers who la ck 

access to employer-provided plans into IRAs, auto-IRAs or other plans with employer tax credits to 

defray set-up costs. 

Default Savings Rates: Enhance retirement security by increasing the default savings rate of 

participants who are automatically enrolled from three to six percent and the limit on participants' 

auto-escalation savings rate to 15 percent. 
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INSURED RETIREMENT INSTITUTE 

IRIINPUT ON TAX REFORM ON 

PERTINENT INSURER ISSUES 

IRI member coll1l'anies., annuities., emJlloyer-providedplans and IRAs make key contributions to retirement 

security and the econ~ 

IRI member companies include major insurers, asset managers, and broker-dealers/distributors that 

account for 95 percent of annuity assets in the United States, with more than 150,000 financial 

professionals serving over 22.5 million households in communities across the country. 

Annuities, employer-provided retirement plans and IRAs currently {September 2016) produce $25 trillion of 

retirement assets and account for 34 percent of all u.s. household asset s. 71 percent of u.s. pension assets 

are invested in equities and bonds, predominant ly from the U.S. 

The insurance industry, annuities and other insurers' products generate 2.5 million U.S. jobs, invest $5.9 

trillion (90 percent o f industry assets) in our economy and hold 20 percent of all U.S. corporate bonds. 7S 

million American families rely on annuities and other life insurers' products for peace of mind, long·term 

savings, and guarantee of lifetime income and receive annual benefits of $179.6 billion. 

~~~1!1~ tax~ on insurers h~l_p minlmiz~ P.ric~~nd maximiz~ b~nefi~ for ann,!!iti~s~nd oth~___u~rod~s 

It is important that tax provisions be applied on a fair and consistent basis to insurance companies as 

compared to other entities in order to facilitate the ability of insurers to minimize the costs and maximize 

the benefits of annuities and other important retirement security products. We urge t hat 2017 tax reform 

continue avoid tax reform provisions proposed in 2014, which would have unfairly increased net taxes on 

the life insurance industry by 26 percent (e.g., reduced deductions for reserves, dividends received, 

deferred acquisition costs) compared to a one percent proposed net tax increase for all other industries. 

The 2016 House Republican Tax Reform Task Force Blueprint (Blueprint) set forth business tax proposals 

allowing immediate deductions for capital expenses and restricting net interest deductions. 

It is consistent with the Blueprint's concept of allowing immediate deductions for capital expenses to 

eliminate the current rules requiring insurers to capitalite and amortize so-called deferred acquisition costs, 

or "OAC", for commission payments over a period of 10 years. Other types of entities typically can deduct 

such expenses in the year they are paid. 

We urge the Blueprint's proposed net interest expense limitation be applied similarly to life insurance 

company affiliated groups and non-insurance affiliated groups. This can be accomplished by considering the 

interest expense and interest income o f all affiliated members despite current consolidated return 

restrictions Imposed only on insurer-affiliated groups {see below). 

Current law on consolidated returns adversely restricts life insurance company group members from joining 

a consolidated group that Includes non-life insurance companies. In practice, the rules also complicate and 

negatively impact how insurers conduct activities such as mergers, acquisitions and raising capital. We 

support repealing restrictions on life insurance company affiliated groups, putting them on equal footing 

with non·lnsurance groups. 
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23 May 201 7 

May 18th Hearing on How Tax Reform Will Grow Our 

Economy and Create Jobs 

From: James DiCampli 

5327 Fayette Street 

Houston, Texas 77056 

Ph: 713 870-7182 

Subject: Public Submission for the Record 

Representing: Self (not written or appearing for any persons and/or organizations). 

Key tenets of tax reform should fundamentally include a significant corporate-taxrate cut, immediate expensing for new equipment, and the repatriation of offshore 

cash. 

In recent articles (Houston Business Journal and self-published on Linkedln), I 

observed that sub-par economic growth and wage stagnation is largely due to low 

business investment and productivity, in part, because the U.S. corporate tax 

structure impedes business revenue and earnings growth. We need to revise the tax 

code and fiscal policies that enhance U.S. competitiveness and enables higher 

economic growth. 

Subsequently, during the House Ways and Means Committee hearings last week, 

there seemed to be bi-partisan support for tax reform. Taxes consume corporate 

profits that could go to capital reinvestment, job training, wage growth, or 
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shareholder dividends. But a key sticking point is how to maintain a deficit-neutral 

revenue balance if the corporate tax rate is reduced. The debate on Capitol Hill 

currently revolves around the border adjustment tax. Let me provide some context. 

The political aim of tax reform is to lower the rate and broaden the base, and 

thereby enable growth while not adding to the national debt. Lower rates mean less 

revenue for the Treasury. Eliminating tax breaks (deductions) would offset lost 

revenue. Striking the balance is the challenge, which is difficult pending specific 

deductions tied to a business segment. Capital depreciation and the R&D credit 

are two examples favored by manufacturing entities. 

Another way to make up revenue is a border adjustment tax, the focus of the 

current debate. With a border adjustment, the U.S. would tax imports (or disallow 

tax deductions), similar to value added taxes or border adjustment schemes used by 

most other countries. Examples were cited during the hearings. The European 

Union imposes a value added tax (VAT) that runs 17%-27% of the price of a 

good or service consumed in the EU. Goods which are sold for export or services 

which are sold to customers abroad are not subject to VAT. This generates 

revenue for the EU and provides a cost advantage over imports. So why not adopt 

a VAT in the U.S. and join the 160 countries that impose a similar tax? The 

border adjustment is generally opposed by those businesses that rely on imports, 

for example, retailers who sell imported electronics, clothes, etc. Such a tax could 

disproportionately impact lower income households by driving up the costs of 

everyday goods. Easing-in such a tax over a period would lessen the impact, and 

international exchange rates would likely adjust - a stronger dollar would lower the 

cost of imports. Still, the concept has detractors in the House. 
433 

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If the border adjustment is not palatable, there remains the mathematical 

option. Enable growth, business profits rise, and increased tax revenue 

follows. Treasury Secretary Steven Mnuchin told the Senate Banking Committee 

his belief that tax reform will lead to an estimated a 3 percent growth rate by 

2021. The difference between less-than 2 percent growth and 3 percent growth is 

well over $3 trillion in additional revenue per the CBO. Achievable? Yes. Over 

the last 70 years, government statistics show GDP Growth Rate in the United 

States averaged 3.21 percent. The last ten years have seen an average 1.3 

percent. Excluding the economic downturn of2008-2009 (negative GDP), growth 

still only achieved 2.2 percent. We need to get back to consistent >3% growth 

rates. 

The current tax code encourages the import of foreign-made goods while 

penalizing products made in and exported from America. It also encourages 

companies to keep foreign profits overseas instead of investing those earnings in 

their U.S. facilities. Washington must fix this. We need a tax system that supports 

American workers and encourages businesses to invest in the U.S. I am optimistic 

both sides of the aisle can come to a consensus on striking the balance and enable 

pro-growth tax policies. This should fundamentally include a significant corporatetax-rate cut, immediate expensing for new equipment, and the repatriation of 

offshore cash. 

Signed 

James DiCampli 
434 


33393.362

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The leadership Confertnee 

on Civllan<l Human Rights 

1620L Street. tf!V 

Sul•1100 

WOII>mgton.IX 

20036 

I r. " n.o LoaOe""'P Conference 

202 4663311 YOKe 

202 466.3435 fax w,w,<Mtlghts.onj 

St~ tement of Kristine Lu('ius} Executi\•e Viee l)rtsident 

T he Le:adtrshil) Conference on Civi.l ~nd Human Rights 

flea ring on " How T:u: Rdorm \ Viii Crow Our Economy :tnd Crr::tlt' Jobs,• 

Commi1tte on Ways:tnd Mt>ADS 

United S tall'S Rous<" ofRcpn'.St'ntatins 

May 18,2017 

Chairman Brady, Rankin~ Member Neal, and members of1he Committee: thank you for 

holding a bearing on "How Tax Reform Will Grow Our Economy and Create Jobs." On 

behalf of The leadersbip Conference on Civil and Human Rig.hts. I am pleased to provide 

this wriucu tatt~utnl for inclusion in the r~cord . 

The Leadership Conference on Civil and Human Risb.ts is the nation's oldest and most 

diverse coalition of civil and human rights organizations. founded in 1950 by Arnold 

ArOJ)SOn, A. Philip Randolph, and Roy Wilkins, The J,..eadersbip Conference seeks to 

fur1bcr the goal o f equality uud~r law tbrou{th legislative advocacy and public education. 

TIH~ Leadership Conf~reoce pro\•ides a J>owcrful uuified vo c~ for the various 

constituencies of the coalition and is charged by its diverse membership of more than 200 

oationaJ organizations to promote and protect the civil and human rishts of aU persons in the 

United States. Through advocacy and outreach to targ:ered constituencies. The Lc-ad('rship 

Conference works toward the goals or a more open and jusl society- :u.1 An1erica th:u is :'IS 

good as its ideals. 

Invoking the words of Or. Martin Luther King, Jr., civilrig.bts hero and icon Representative 

John Lewis powerfully rc•:uiudc<l us duriog 1he hearing that ''[ wJe may have all come ou 

different ships. but we're in tlle same boat now:• The Leadership Conference shares the 

belief that our economy and tax system must work for aU of us, not just the wealthy few, as 

we work togclhcr to ensure economic security for all Americ-aJtS. Faimess can and should 

animate the stntcture and incentives created within our ta.x system as Congress undertakes 

ta.'l:refoml. 

The Leadership Conference has long believed that civil and human rights are inexuicably 

linked to economic security. From the passage of the Universal Declaration of Human Rights 

in 1948 10 the Marcll on Washingtou for Jobs and Freedom in 1963, the e<:(mO.mic security of 

all Americans ba.s long been a priority of the civi_l and human rights community. 

l"oday our nation faces troubling income inequality and a tag.serin~ racial wealth gap. We 

believe that any kiod of chaug.cs 10 the tax system must help close those gaps. not exacerbate 

them. According to the Economic Policy lnstinue. the "fa]verage wealth for White families 

is seven times hie.ber than average weallh for Black families. Worse still. median White 
435 


33393.363

June I, 2017 

Page 2 of 3 

wealt11 (wealth for lhe family in the exact middle of lhe overall distribution- weahhier than half of aU 

families and less-wealthy lhan llllH) is 12 times bighcr than median Black weahh."

1 And in 20J3. 1hc 

Federal Reserve's Survey o f Consmuer Finances fomtd lhat rhe median White family possessed JO limes 

the wealth ofdte median Latino family.: ln order to truly be tax refonn, and not simply a tax giveaway to 

those already weU off, tax legislation at its core must be fair and not regressive, helping to lift up working 

people and families of every rncc, color, :utd creed across o ur nation. 

Much of the focus on tax reform and oftbis hearing bas centered around cutting the corporate tax rate. 

Many $<.-emro believe 1ba1 the corporate lax rate of35t~rccnl is roo high. and that it sriOes iuvesrment. 

1'his is a centerpiece of the Trump Administra6on's approach to taxes. The mnh bowever is that most 

companies pay far less than the 35 percelll statutory rare because of a myriad of tax loopholes. The U.S. 

T.-c-asury Oepat·tutenl bas found rba1 !he average effecrive lax rare for corponnions is in fact 23 perccnt.

3 

Moreover, today corporate 1axes are tbe source of only S 1 out of$9 of federal revenue. According to 

Americans For Tax Faimess. 65 years ago S I o ur o f every $3 iu federal revenue came from corp<m:ue 

taxes.• 

The one-page lax plan the Tnuu1> AdtJtinis1rMion released o n April 26 was li£,hl on derails. but a few 

lhinp.s were clear. ln add irionlo slashing I he corpomle lax rale, I he t2t"( phm would reduce I he oumber of 

individual income tax brackets to three. likely reducing federal revenue. It also proposes eliminating the 

estate tax and the alternative minimum tax. both of which predominantly aid only the wealthy. After the 

presidential election. now-Treas\ll'y Secreta!)• Steven Mnuchiu asserted 1hat "there would be no absoJ\Ue 

tAx cui for rhe upper cl.ass.',j We will h old borb rl:te Tnuup Adtuin_istnttion and Co ngr(."SS tO rhis promise. 

Why is a civil and buman rights coalition concerned about tax refonn'? Because we are deeply concerned 

in the abiliry of1be federal g.ovtnuuent to be able to invcs 1 in o ur people and communities. When 

policymakers siarvc the federal govcnunenr o f lax revenue. we arc mu,blc to make critical invcstmerliS in 

educ.atiou. affordable housing. beahbc.are. and iufrastmcture in underserved communities throughout our 

nation. And when policymakcrs starve tbc federal govcnuucnt ofrax revenues in ways thai further benefit 

millionaires, billionaires., and wealthy corporations at the expense ofworkinp: families, our nation suffers 

and income inequality worsens. 

1 Jones. Janelle. "The racial wealth gap: How African-Americans bavc been shortchanged out of the materials to 

build wcaltb.·· Ecouomic Policy I11stitute blog. feb. 13. 2011. http://Y.-oww.c=pi.oralbloglthe-raciRI-wcaltb-&aJ>·howafricau america -h been-shortcba ged ut-of-lh mtt!e i:tls -to--b d-w~lth/ 2 florido. Adrian. ··arack. Latino l'wo-l~rent families Have Half The Wealth Of Wbite Single Psm:nts:· Code 

S•wircJ. blog. feb. S. 201 7. 

bnp://wwv ... npr.org/sc-tlion$1codelowildV'2017/fYZ.IOS/514l056$9Jl>lack-btlincrtwo-parc=nt·families-havc-b:tlf-lhc· 

WC'a lth-of wbitc-s ingl~ parcnts 1 1- cr. Brian. "Why coq>Ontlc 1a.x re:fomt is so mcs.sy." Poliricopro.com. May 31. 201 7. 

hnps:/lwww.ooliricQpm.c-em/laxlsrorv12017/0S/tax-rsfonn-mcssy-l5 7465 

"T e Six Worsr Ft:anJres ofDouald Tnunp's Ta.'< Plan."' Amtricom For Ta:r. Faimu.s. Nov. 2.8. 2016. 

bnps://amcrkansfonaxfairuc:ss.orVthe-six-worsl-fe.arures-of-donald-tnunps-ta.'<-PiaQ/ 5 Cobeo. Patricia. ''Treasury Nominee- Vows No Tax Cut for Rich. Math Says the Opposite."' New Yor* Times. Feb. 

9. 201 7. 

hnps:/lwww.nytimes.com/201 7/02109/businessleconomy/mnuchin-mlc:-lax-cur.html, 
436 

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June 1, 201 7 

Page 3 of 3 ~~ f • The Leadership 

Conference 

This is not simply 1m just and immoral, it also does not make economic sense. Those who say that private 

investment in the United States is lower than it should be often h1m to cutting tax rates as the key to 

spurring investment. However, they fail to take into account the larger picture in their analysis. Private 

investment in our nation is low in part because consumer demand is low. Over the last several decades, 

wages have stagnated. For low income people, things have been particularly hard. The federal minimum 

wage has for the last 10 years remained at $7.25 an hour. Today, one in every three jobholders- 41.7 

million people-earns under $12 per hour, which is just above the poverty line for a family offour.6 

Working people must be paid fairly for the work that they do. And when they are paid fairly, these same 

hardworking Americans will have increased purchasing power, stimulating investment. 

Tax "reforms" that lead to disinvestment in our communities or that are not coupled with other growth 

inducing policies like raising the minimum wage are destined to fall short in stimulating economic 

growth. 

When the least among us succeed, those who have the most among us succeed. This basic principle 

should animate the Committee on Ways and Means as you deliberate on changes to tax policy in our 

nation. 

Thank you for the opportunity to submit this statement for the record. 

6 Economic Policy Institute and Oxfam America. "Few Rewards: An Agenda to Give America's Working Poor a Raise." 

Washington DC and Boston MA. 2016. 

h!_~s: //www .oxfamamerica.org/exp ore research publ cations/few rewardsJ 
437 

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33393.365

May 17, 2017 

The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

RE: Hearing On How Tax Reform Will Grow Our Economy And Create Jobs 

Dear Chairman Brady, Ranking Member Neal, and Members of the Committee: 

I am submitting this letter ahead of the House Ways and Means Committee's scheduled hearing 

on May 18 ~ entitled "How Tax Reform Will Grow Our Economy and Create Jobs." I commend 

the work your committee is doing in exploring different ways in which pro-growth tax reform can 

be achieved and help further strengthen the American economy. As the committee considers 

myriad proposals and ideas lor reforming the tax code, 1 want to stress the importance of 

preserving the full deductibility of interest on debt. 

When it comes to reforming America's tax code, my motivation to preserve interest deductibility 

to promote growth and enhance my contribution to the economy is rooted in my first-hand 

experience of running the daily operations of Leading Pointe Strategies, LLC. While there is 

certainly an important role for policy makers and policy thinkers in reforming the tax code, I also 

firmly believe that input from businesses Is essential to setting the record straight on the 

practical implications of certain tax proposals. My support for maintaining full interest 

deductibility comes from the knowledge I have of how the tax code affects my ability to grow my 

business. create new jobs, and strengthen the local economy. Most businesses use debt In one 

way or another to grow and create new opportunity. My business lakes comfort in the 

predictability of the deduction and the elimination of this deduction would make me less likely to 

take the risk of using debt to grow my business in the future. 

Interest deductibility is a well-established, growth-promoting provision of the tax code that has 

been in exiotence for more than 100 years. Interest expense is a normal cost of doing business; 

and, for me. it provides a peace of mind as well as a sense of stability and predictability when 

business owners are guaranteed they will not be taxed on the cost of accessing capital and can 

have more flexibility when making important long-term financial decisions. 

Companies like mine borrow in order finance expansions, purchase equipment, and meet other 

key obligations. Having the ability to deduct interest on such expenses gives me the certainty I 

need to make these decisions with confidence. It also allows my company to weather any shifts 

in demand. 

In my view, maintaining full interest deductibility is essenlial for achieving the stated top priority 

of tax reform: allowing the U.S. economy to reach ~s full growth potential. As a business owner 

who has experienced first-hand what works and doesn1 wo11< in the tax code, I can tell you that 

full interest deductibility works. 

Tom Willis 

President 

Leading Poinle Strategies, LLC 
438 


33393.366

The Honorable Kevin Brady 

Chairman 

House Ways and Means Conunittee 

II 02 Longworth House Office Building 

Washington, D.C. 20515 

May 31 , 2017 

The Honorable Richard Neal 

Ranking Member 

House Ways and Means Committee 

1139E Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Brady and Ranking Member Neal: 

In connection with the House Ways and Means Conunittee's recent hearing on How Tax 

Reform Will Grow Our Economy and Create Jobs, we are submitting as a statement for the 

record the attached letter urging you to preserve the current availability of like-kind exchange 

treatment as part of any business tax reform. Thank you for your consideration and your 

leadership on these important issues. 

Sincerely, 

The Like-Kind Exchange Stakeholder Coalition 
439 


33393.367

THE LIKE-KIND EXCHANGE STAKEHOLDER COALITION 

November 29, 2016 

Mr. Jim Carter 

Tax Policy Lead 

Presidential Transition 

1800 F Street NW 

Washington, DC 20006 

Dear Mr. Carter: 

As you consider ways to create jobs, grow the economy, and raise wages through tax reform, we 

strongly urge that current law be retained regarding like-kind exchanges under section I 031 of 

the Internal Revenue Code ("Code"). We further encourage retention of the current unlimited 

amount of gain deferral. 

Like-kind exchanges are integral to the efficient operation and ongoing vitality of thousands of 

American businesses, which in turn strengthen the U.S. economy and create jobs. Like-kind 

exchanges allow taxpayers to exchange their property for more productive like-kind property, to 

diversifY or consolidate holdings, and to transition to meet changing business needs. Specifically, 

section I 031 provides that taxpayers do not immediately recognize a gain or loss when they 

exchange assets for "like-kind" property that will be used in their trade or business. They do 

immediately recognize gain, however, to the extent that cash or other "boot" is received. 

Importantly, like-kind exchanges are similar to other non-recognition and tax deferral provisions 

in the Code because they result in no change to the economic position of the taxpayer. 

Since 1921, like-kind exchanges have encouraged capital investment in the U.S. by allowing 

funds to be reinvested back into the enterprise, which is the very reason section I 031 was 

enacted in the first place. This continuity of investment not only benefits the companies making 

the like-kind exchanges, but also suppliers, manufacturers, and others facilitating them. Likekind exchanges ensure both the best use of real estate and a new and used personal property 

market that significantly benefits start-ups and small businesses. Eliminating like-kind exchanges 

or restricting their use would have a contraction effect on our economy by increasing the cost of 

capital, slowing the rate of investment, increasing asset holding periods and reducing 

transactional activity. 

A 2015 macroeconomic analysis by Ernst & Young found that either repeal or limitation oflikekind exchanges could lead to a decline in U.S. GDP of up to $13.1 billion annually1 The Ernst & 

Young study quantified the benefit of like-kind exchanges to the U.S. economy by recognizing 

that the exchange transaction is a catalyst for a broad stream of economic activity involving 

businesses and service providers that are ancillary to the exchange transaction, such as brokers, 

appraisers, insurers, lenders, contractors, manufacturers, etc. A 2016 report by the Tax 

1 Economic Impact of Repeahng Like-Kind Exchange Rules, ERNST & YOUNG (March 2015, Revised November 

2015), at (iii), available at http://www .1 031 taxrefonn.cornlwp-contentluploads!Ling-Petrova-Economic-Impact-ofRepealing-or-Limiting-Section-! 031-in-Real-Estate .pdf. 
440 


33393.368

Foundation estimated even greater economic contraction- a loss of 0.10% of GDP, equivalent to 

$18 billion annually2 

Companies in a wide range of industries, business structures, and sizes rely on the like-kind 

exchange provision of the Code. These businesses-which include real estate, construction, 

agricultural, transportation, farm I heavy equipment I vehicle rental, leasing and manufacturingprovide essential products and services to U.S. consumers and are an integral part of our 

economy. 

A microeconomic study by researchers at the University of Florida and Syracuse University, 

focused on commercial real estate, supports that without like-kind exchanges, businesses and 

entrepreneurs would have less incentive and ability to make real estate and other capital 

investments. 3 The immediate recognition of a gain upon the disposition of property being 

replaced would impair cash flow and could make it uneconomical to replace that asset. This 

study further found that taxpayers engaged in a like-kind exchange make significantly greater 

investments in replacement property than non-exchanging buyers. 

Both studies support that jobs are created through the greater investment, capital expenditures 

and transactional velocity that are associated with exchange properties. A $1 million limitation of 

gain deferral per year, as proposed by the Administration4

, would be particularly harmful to the 

economic stream generated by like-kind exchanges of commercial real estate, agricultural land, 

and vehicle I equipment leasing. These properties and businesses generate substantial gains due 

to the size and value of the properties or the volume of depreciated assets that are exchanged. A 

limitation on deferral would have the same negative impacts as repeal of section 1031 on these 

larger exchanges. Transfers of large shopping centers, office complexes, multifamily properties 

or hotel properties generate economic activity and taxable revenue for architects, brokers, leasing 

agents, contractors, decorators, suppliers, attorneys, accountants, title and property I casualty 

insurers, marketing agents, appraisers, surveyors, lenders, exchange facilitators and more. 

Similarly, high volume equipment rental and leasing provides jobs for rental and leasing agents, 

dealers, manufacturers, after-market outfitters, banks, servicing agents, and provides inventories 

of affordable used assets for small businesses and taxpayers of modest means. Turnover of assets 

is key to all of this economic activity. 

In summary, there is strong economic rationale, supported by recent analytical research, for the 

like-kind exchange provision's nearly 100-year existence in the Code. Limitation or repeal of 

section 1031 would deter and, in many cases, prohibit continued and new real estate and capital 

investment. These adverse effects on the U.S. economy would likely not be offset by lower tax 

rates. Finally, like-kind exchanges promote uniformly agreed upon tax reform goals such as 

economic growth, job creation and increased competitiveness. 

2 Options for Reforming America 's Tax Code, Tax Foundation (June, 2016) at p79, available at 

http://taxfoundation.org/article/options-refonning-americas-tax-code. 3 David Ling and Milena Peh·ova, The Economic Impact of Repeahng or LimiNng Section 1031 Dke-Kind 

Exchanges in Real Estate (March 2015, revised June 2015), at 5, ava;/able at http://www.1031taxrefonn.com/wpcontentluploads!Ling-Peh·ova-Economic-Impact-of-Repealing-or-Limiting-Section-! 031-in-Real-Estate .pdf. 4 General Explanations of the AdministraNon's Fiscal Year 2017 Revenue Proposals, at 107, avadable at 

https:/ /www. t:reasmy .gov/resource-center/tax-policy/Docmnents/General-Explanations-FY20 17 .pdf 

2 
441 

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33393.369

Thank you for your consideration of this important matter. 

Sincerely, 

Air Conditioning Contractors of America 

American Car Rental Association 

American Rental Association 

American Seniors Housing Association 

American Truck Dealers 

American T ruckiJ1g Associations 

Associated Equipment Distributors 

Associated General Contractors of America 

Avis Budget Group, Inc. 

Building Owners and Managers Association (SOMA) lntemational 

C.R. England, .Inc. 

Equipment Leasing and Finance Association 

Federation of Exchange Accommodators 

International Council of Shopping Centers 

NAIOP, the Collllllercial Real Estate Development Association 

National Apartment Association 

National Association of Home Builders 

National Association of Real Estate Investment Trusts 

National Association of REALTORS® 

National Automobile Dealers Association 

National Business Aviation Association 

National Multifamily Housing Council 

National Ready Mixed Concrete Association 

National Stone, Sand and Gravel Association 

Truck Renting and Leasing Association 
442 

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33393.370

May 17,2017 

The Honorable Kevin Brady 

Chairman 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways and Means 

United States House 

1102 Longworth House Office Building 

Washington, D.C. 20515 

RE: Hearing On How Tax Reform Will Grow Our Economy And Create Jobs 

Dear Chairman Brady, Ranking Member Neal, and Members or the Committee: 

I am submitting this letter ahead or the House Ways and Means Committee's scheduled hearing 

on May 18~entitled 'How Tax Reform Will Grow Our Economy and Create Jobs.' I'd like to 

thank the committee for the work you're doing in exploring different ways in which pro-growth 

tax reform can be achieved and help further strengthen the American economy. As the 

committee considers myriad proposals and ideas for reforming the tax code, I want to stress the 

importance of preserving the run deductibility of interest on debt. 

Our organization plays a significant role in contributing to one of Louisiana and nation's most 

important economic engines- it's infrastructure. When it comes to reforming America s lax code, 

we believe that preserving interest deductibility is crucial to promoting growth and enhancing our 

contribution to the economy. While !here is certainly a key role for policymakers and policy 

thinkers in reforming the tax code, I also firmly believe that input from businesses is essential to 

setting the record straight on the practical implications or certain tax proposals. 

Interest deductibility is a well-established, growth-promoting provision of the tax code that has 

been in existence for more than 100 years. Interest expense is a normal cost of doing business: 

and, for many or our businesses, it provides a peace-of-mind as well as a sense of stability and 

predictability when business owners are guaranteed they will not be taxed on the cost of 

accessing capital and can have more fle>libility When making important long-term financial 

decisions. 

Our mcmbel' eomp~nio~ borrow in Ol'der finance expansions. purchase equipment, s.nd meet 

other key obligations or building the state's roadways. Having the ability to deduct interest on 

such expenses gives them the certainty they need to make these decisions With confidence. It 

also allows us to weather any shifts in demand. 

Maintaining full interest deductibility is essential for achieving the stated top priority of tax 

reform: allowing the U.S. and our state's economy to reach its full growth potential. We 

appreciate your consideration in this matter and look forward lo debate ahead on reforming our 

nation's tax struclure. 

Sinw;:~ =@ Erich Ponti 

~ 

Executive Director 

Louisiana Asphalt Pavement Association 
443 


33393.371

June 1, 2017 

STATEMENT FOR THE 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS AND MEANS 

ON BEHALF OF: 

Missouri Health and Educational Facilities Authority (MoHEF A) 

The Missouri Health and Educational Facilities Authority (MoHEFA) respectfully submits 

this statement to the House Committee on Ways and Means for the hearing on "How Tax Reform 

Will Grow Our Economy and Create Jobs" held on May 18, 2017. MoHEFA is an issuer of taxexempt bonds for dozens of not-for-profit and goverrnnental health and educational facilities 

throughout Missouri including hospitals, clinics, medical research organizations, long-term care 

facilities, universities, colleges, elementary and secondary schools and other educational entities. 

We respectfully urge Congress to protect and maintain tax-exempt bond financing, 

including qualified 50l(c)(3) private-activity bonds, which is necessary for the missions and 

continued financial health of the hospitals, colleges, universities, and other charitable 

organizations and which promotes critical infrastructure and economic development throughout 

Missouri. Low-cost access to capital helps keep these institutions strong, enabling them to keep 

infrastructure expenditures low so that they can efficiently fulfill their mission and focus on the 

work they do for the public good- making our lives, our economy, and our nation stronger. 

One of the many ways the federal government invests in human capital and innovation in 

the United States is by granting tax-exempt status to these health and educational institutions 

whose services provide a wide range of societal benefits. Hospitals, colleges, and universities are 

economic mainstays, providing stability and job growth in communities. 

Tax-exempt bond financing available to these institutions provides access to the capital 

markets at reduced cost which in turn reduces the cost of the health and educational services they 

provide. In general, for institutional borrowers, the interest rate on tax-exempt bonds is 

significantly lower than on taxable bonds, thus creating beneficial financial terms. The lower 

interest rates create significant savings by lowering the financing cost of multi-million dollar 

construction projects, often financed over a 30-year period. The lower financing cost allows 

hospitals and health care institutions to keep charges lower than would be the case if taxable 

financing was used. 

We believe elimination of, or a cap on, the income tax exemption of tax-exempt bond 

interest, or even a partial tax, will cause investors to demand higher returns, again leading to higher 

costs for health and educational services. 
444 

f 


33393.372

A study conducted recently in Missouri by illS Markit Economics determined the 

following economic impact with respect to MoHEFA's bond issuance activity from 2007 through 

2016: 

•Average annual bond issuance for new projects of$562 million 

• These financings supported 6691 jobs annually 

•This included $362 million in labor and $473 million in GOP annually 

• The issuance activity created long term economic value through the completed projects and the 

resulting reduction of health and educational costs 

• Health care and education is the second largest employment sector in Missouri accounting for 

16% of employment in the state 

•Had these projects not been completed Missouri could have lost another 2967 construction jobs 

•MoHEFA's financings provide low-cost options for capital projects when needed most and 

even in challenging economic times 

Missouri's fine health and educational institutions depend on tax-exempt bonds as their 

primary method of financing the capital projects so vital to performing their missions. We 

respectfully urge Congress to continue to support readily accessible and cost effective tax-exempt 

bond financing, including qualified 50l(c)(3) private-activity bonds to ensure the financial 

stability of health and educational institutions in Missouri and across the United States. 
445 


33393.373

The Honorable Kevin Brady 

Chairn1an 

House Ways and Means Committee 

~ 

~ 101111 PICTVU: UIICfATIU If &lUlU 

May 23, 2017 

The Honorable Richard Neal 

Ranking Member 

House Ways and Means Committee 

Re: Hearing on How Tax Reform Will Grow the Economy and Create Jobs 

Dear Chainn an Brady and Ranking Member Neal: 

TI1e MP AA and its member companies are very appreciative of the efforts by the Committee to 

examine and improve our tax system and are pleased to submit our comments for the hearing record. 

We believe tax refo11n similar to the Blueprint that lowers corporate rates and modernizes our 

international tax system is essential to promote job and wage growth, and enhance the ability of U.S. 

businesses to compete aod succeed in the global economy. 

Our industry is an importaot economic force in the United States, employing nearly 2 million 

people and generating Sl34 billion in wagc.s in 2015. As one of our coumry's most successful 

products, U.S. film and television production consistently garners a positive balance of trade with 

virtually every country to which we export, generating an overall $13.3 billion trade surplus in 2015. 

However, with each passing year, we are becoming more susceptible (and sensitive) to foreign 

competition. Many of our major trading partners are actively promoting growth in fi lm and other IP 

production, through tax incentives and other subsidies. Also, receot techoological advances have made 

film production more highly mobile than ever before. We believe the U.S. must act quickly or risk 

losing film and other IP developmem and the associated well-paying jobs to other countries. 

TI1e business environment in the United States offers numerous advantages, but our outdated 

tax system is unnecessarily holding us back. Our worldwide tax system, combined with high corporate 

tax rates, is an outlier among developed co n~'ies and has a munber of adverse economic 

consequences. It impedes growth, blocks reinvestment of foreign earnings, diverts other investment 

capital overseas, and causes our compaoies to be less competitive in foreign markets. 

\Vhilc our corporate and lntcrnational tax systcn1 has remained stat·ic for the past three de<:;, des, 

other countries have agg•·essively sought to attract investment by modernizing their tax systems 

through significantly lower statutory tax rates, adoption of territorial tax regimes, and use of targeted 

tax incentives and innovation box regimes to attract IP production and ownership overseas. Moreover, 

the Modified Nexus Approach in the OECD BEPS project will now require that companies shift 1P 

development activities and jobs to foreign countries to take advamage of these incentives. If the United 

States fails to respond, we are concerned these actions by the OECD and other highly developed 

economies 1vill pose a threat to U.S. jobs and tax revenue. 
446 

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Consequently, we are encouraged tl1at the Committee is focused on responding to iliese 

challenges by improving our tax system, and are extremely grateful for your leadership on iliese issues. 

We strongly support tile Committee's ongoing efforts to reduce the U.S. corporate tax rate significantly 

and to modernize our international tax system in order to increase domestic job growth, level the 

competitive playing field for U.S. businesses, and encourage the creation and ownership of films and 

oilier IP in the United States. We look forward to working wiili the Committee to help you successfully 

achieve iliese goals. 

Please contact Patrick Kilcur (202) 378-9175 if you have any questions or need anything else 

from us. We look forward to working wiili the Committee members and the staff on these important 

issues. 

cc: 

Sincerely, 

Joanna Mcintosh 

Executive Vice President, Global Public Policy and External 

Affairs 

Members of the House Committee on Ways and Means 
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Comments of the 

Municipal Bonds for America Coalition 

to the 

U.S. House Ways and M eans Committee 

Hearing on How Tax Reform Will Grow Our 

Economy and Create Jobs 

{Submitted May 22, 2017) 

..,. Municipal 

:'I Bondsfor 

America 

The Municipal Bonds for America Coalition' {MBFA) appreciates the opportunity to comment on how reform of 

the federal income tax system may affect the economy and employment. MBFA is a non-partisan stakeholder 

coalition including municipal bond issuers, state and local government officials, and regional broker dealers 

working together to explain the many benefits of municipal bonds. We strongly believe that the more than tOOyear old tax exemption of municipal bond interest has allowed state and local governments to build and maintain 

vital infrastructure projects at the lowest cost. State and local governments use municipal bonds to finance roads, 

bridges, schools, hospitals, airports, sewers, affordable housing, utilities, and other public projects. These 

Investments make commerce possible and our communities livable. 

In the last decade alone, state and local governments have made approximately $2 trillion in bond-financed 

infrastructure Investments.' State and local governments build nearly three-quarters of the nation's core 

infrastructure, utilizing low-cost borrowing in the tax-exempt bond market to provide a large majority of the 

financing. As a result, to ensure that tax reform grows our economy and creates jobs, it is vital that it not impose 

an unprecedented federal tax- in any form- on these investments. 

Bonds Build America 

State and local governments have issued tax·exempt municipal bonds for more than 200 years to finance 

construction and maintenance of public facilities and infrastructure. Interest paid on a municipal bond is generally 

exempt from federal income tax, just as interest paid on Treasury bonds is exempt from state and local tax. Capital 

investments financed with municipal bonds build communities and grow our economies. In 2015, state and local 

governments issued roughly $400 billion in municipal bonds. Of those issuances: about $85 billion financed repair 

and construction of primary and secondary schools; $39 billion financed investments in community colleges, 

colleges, and universities; $50 billion financed investments in roads, bridges, ports, airports, mass transit, and 

other transportation facilities; $38 billion financed water and sewer Investments; $27 billion financed hospitals 

1 A full list of MBFA coalition members joining In these comments are listed. along with contact Information for the MBFA, 

at the end of these comments. 

'"Bond Buyer Thomson Reuters 2016 yearbook." Feb. 2016. 
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and clinics; and $18 billion financed electric power utilities. These bonds also financed bridge repairs, convention 

centers, police and fire stations, solid waste facilities, seaports, flood control, libraries, and museums. These are 

the investments that make commerce possible and our commun ities strong and livable. 

One type of municipal bond is a qualified activity bond (also known as a private activity bond, a qualified facility 

bond, or Alternative Minimum Tax bond), which is used to finance certain qualifying public-private projects or 

other qualifying uses. These bonds allow state and loca l governments to join with the private sector to best 

achieve project and program goals. In 2015, about $8 billion of these bonds were issued to finance transportationrelated investments (airport terminals, toll roads and bridges, ports and the like). Another $6.7 billion financed 

affordable rental housing properties, and $4.6 billion financed affordable mortgages for working families. In 

addition, $700 million helped finance state and local government student loan programs. Qualified activity bonds 

also provide critical financing to non-profit hospitals and schools ($1 billion in financing to non-profit schools 

alone), and support community and econom ic development- w ith roughly $250 million in industrial development, 

farm, and related bonds issued in 2015. Qualified activity bonds are exempt from federal income tax, but can be 

subject to the alternative minimum tax (AMT). 3 

There is overwhelming consensus that for the foreseeable future there w ill be substantia l and sustained demand 

for the sorts of infrastructure investments financed w ith municipal bonds. A failure to make these investments 

could have significant negative economic consequences. The American Society of Civil Engineers estimates that 

by 2025 insufficient infrastructure investments wi ll lead to a $3.9 trillion decline in GDP; $7 trillion in lost business 

sales; and 2.5 million in lost jobs. 4 

Policymakers are looking for innovative ways to finance these investments, or to spur investments by privatizing 

some of these public facilities. These cou ld be helpful at the margin- a complement to bond-financed projects. 

However, policymakers shou ld not lose sight of the fact that state and loca l governments financed approximately 

$2 trillion in new infrastructure investments in the last decade and w ill invest $2 trillion to $3 trillion more over 

the next decade. They did so with the support of state and local residents (roughly 82 percent of bond referenda 

in the last election were approved) and whi le controlling overall debt (in real dollars and as a percentage of GDP, 

state and local debt borrowing has actually declined in the last decade). 5 

No Better Alternative 

3 Qualified hospital facility, 501{c){3), residential rental, and mortgage revenue bonds are private activity bonds, but are not 

subject to the AMT. 4 American Society of Civil Engineers., Infrastructure Report Card, {pg. 4). 2017. 5 Board of Governors of the Federal Reserve System, Data Download 

Program,https://www.federalreserve.gov/datadownload/Choose.aspx?rei=Z.l {providing access to historic state and local 

financial data from the Financial Accounts of the United States reports {Table l. 107, State and Local Governments)); OFFICE 

OF MANAGEMENT AND BUDGET, "Budget of the U.S. Government, Fiscal Year 2017, Historical Tables" {Feb. 9, 

2016){providing figures for annual Gross Domestic Product{ GOP) and GOP {Chained) Price Index). 
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It is a given that a tax on municipal bond interest will in crease state and loca l borrowing costs. That would mean 

state and loca l governments making fewer investments for much needed infrastructure and/or passing these 

higher costs onto state and loca l residents. 

Alternatives to tax-exempt bond financing exist, but each has substantial shortcomings-predominantly in creased 

borrow ing costs, in creased complexity, and a lack of access to capital for sma ll er issuers. In the case of publicprivate partnerships, where a for-profit compa ny operates or maintains a project after construction is completed, 

the ability to provide an ongoing eq uity-like rate of return to the compa ny's investors or partners must be 

considered, as well. Wh ile alternatives could supplement ta x-exempt bond financing, they do not replace bond 

financing. 

Simil arly, some suggest that a surtax on bond interest cou ld rai se revenue for the federal government w ithout 

increasing the interest rate demanded by bond buyers and impose additional taxes on the wea lthy. Such a surtax 

(or "cap") would reduce the va lue of all bonds in the secondary market by as much as $200 billion.6 About half of 

this loss would fall on households with income of less than $250,000. 7 It wou ld also disproportionately hurt 

seniors. About three-fifths of bond interest paid to individuals is paid to those aged 65 years and older, and 84 

percent is paid to those aged 55 and older.8 

Thi s cap/surtax would also increase the cost of borrow ing when state and loca l governments seek to issue a new 

bond. Investors will demand a higher rate of return: 

To accommodate this new surtax; 

To reflect the bond's loss of va lue in the secondary markets; and 

To compensate for the risk that Congress wi ll expa nd the tax to hit more bondholders, increase the tax 

rate imposed, or both. 

The real-world examp le of qualified activity bonds, most of wh ich are subject to the AMT, proves this point. The 

AMT is, effectively, a surtax beyond the regular income tax that is paid by taxpayers above a certa in minimum 

income level-similar to the "cap" or limits being proposed by some lawmakers for municipal bonds. And, in 

fact, a qualified activity bond typically cos ts issuers as much as SO basis points (0.5 percentage points) more in 

interest rates than a similarly rated municipal bond. Take, for example, Dallas/Fort Worth Internationa l Airport, 

w hich under tax law must use qualified activity bonds to finance its massive Term inal Improvement Project. The 

qualified activity bonds (subject to the AMT) financing $3.1 billion of this project are costing $268 million more 

than if they'd been issued as fully tax-exem pt municipal bonds. And yet, the Treasury derives no benefit, 

because investors who actually pay the AMT avoid these bonds. 

MBFA strongly encourages the Committee to support tax-exempt municipal bonds, including qualified activity 

6 Michael Kaske, Tax Cap Th reatens $200 billion Muni l oss, Citigroup Says, Bloomberg, Dec. 7, 2012 (reporting analysis that 

limiting the tax value of the exclusion for municipal bond interest will reduce the value of existing bonds in the secondary 

market); Brian Chappatta, Tax-Status Threat Fuels Worst l osses Since Whitney: Muni Credit, Bloomberg, Dec. 21, 2012. 

7 1nternal Revenue Service, Statistics of lncome-2012: Individual Income Tax Returns, (Publication 1304 (Rev. 08-2014)) at 

40 (2012) (showing that 48 percent of bond interest paid to individuals is paid to households with income of $250,000 or 

less). 

8 ld. at 73. 
450 


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bonds. The investments financed with these bonds have a proven track record to help our economy grow and 

create jobs. Conversely, a tax- in whole or in part- on these investments wou ld hurt economic growth and job 

creation. 

4 
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Municipal Bonds for America coalition members joining in these comments include: 

African American Mayors Association 

American Public Power Association 

Bond Dealers of America 

Capital Edge 

Council of Development Finance Agencies 

Court Street Group 

Education Finance Council 

Investment Company Institute 

Large Public Power Company 

National Council of State Housing Agencies 

National Development Council 

National League of Cities 

National Water Resources Association 

5 
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National Alliance of Forest Owners 

Statement for Record 

Dave P. Tenny 

President and CEO, National Alliance of Forest Owners 

House Ways and Means Hearing - May 18, 20 17 

How Tax Reform Will Grow Our Economy and Create Jobs 

I'd like to take this opportunity to mention the critical role that private working forests play in our 

rural economies. Many rural communities are located in heavily forested states where the forest 

products sector suffered historic economic setbacks during the Great Recession. In these 

communities forestry and forest products manufacturing have historically been a primary source 

of good paying jobs that provide lumber, paper, packaging, energy and more than 5,000 other 

economically valuable products. 

The economic importance of these forests is evident from the 2.4 million domestic jobs supported 

and $280 billion in value generated across a supply chain that includes foresters, loggers, truckers, 

mill workers, equipment suppliers, service providers, and many others. Most working forests -

over seventy percent nationally - are privately owned by families, small and large businesses and 

an increasingly broad array of Americans who invest in forest ownership through investment 

vehicles such as pension and mutual fuods. The economic value derived from working forests is 

directly connected to a 50% i.ncrease in overall tree volume domestically over the past 60 years -

because markets for forest products provide an incentive to keep working forests as forests. In 

tum, increased volume in forest products has enabled the United States to meet much of our 

domestic demand for wood products. 

The economic growth and opportunity fostered by private working forests is roote-d in tax policies 

that recognize the unique, capital-intensive,long·tcnu nature of timberland stewardship. These tax 

policies encourage sound management practices and investments that keep forestlands and the 

economy they support productive for generations to come. By ensuring tax reform recognizes the 

policies that make working forests strong, we secure a bright future for the mral fiunilies, 

individuals, and conmlllnities that rely on them. 

Timber is an attractive investment opportunity featuring a non-volatile asset, a hedge aga inst 

inflation, and access to significant long-term yield. Unlike stocks, investments in forests provide 

unique built-in, biologic growth that is immune from market volatility. That is one reason why 

public and private pension funds maintain sizable investments in timberlands through timberland 

investment management organizations (llMOs) and publicly traded timberland real estate 

investment tmsts (R£1Ts). Working torests are a part of most Americans' retirement portfolios. 

We urge Congress to recognize the long-term capital investmeots and risks associated with forest 

ownership and management by ensuring the federal tax code continues to encourage long-tenn 

investment in private forests. Provisions that ensure the continued capital gains treatment of timber 

revenue, the deductibility of timber growing and reforestation costs, and the treatment of 

timberland as rea l property are critical to the health of working lorests and rural communities. 
453 


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~NATIONAL ASSOCIATION OF 

ELECTRICAL OISTRIBUTORS 

May 18, 2017 

Chainuan Kevin Brndy 

Committee on Ways & Means 

U.S. House of Representatives 

Washington. OC 20515 

Chairman Peter Roskam 

Subcommittee on Tax Policy 

Committee <m Ways & Means 

Washington, DC 205 15 

R£: Written comments for the hearing entitled: How Tax Reform Will Grow Our Economy and 

Create Jobs Across America 

On behalf of National Associ:11ion of Electrical Distributors (NAEI)) I write to offer comments 

on the future of comprehensive tax rcfonn. NAEO is a trade association for the $70+ billion 

electrical distribution industry. Through networking. education, research. and benchmarking, 

NAED helps electrical distributors increase profitability and improve the channel. NAED 

represents more than 600 manufacturers and distributors of electrical products across the 

COLUltry. Our members are companies of all sizes - from small and mid-sized independents 10 

la.rge regional and naLional chains. 

NAED members have been faced with an increasingly complicated tax code and remain steadfast 

proponents of comprehensive tax refonn. Broadly speaku1g, our members want refonu that 

simplifies the lax code, eliminates double taxation, and lowers rates on businesses. Our team 

plans to look closely at the legislative language of all tax refom1 proposals offered in Congress. 

We will be pushing for key principles including: 

• Fairness for pass through entities- C\UTently, business ta.x rates for small 

companies can reach as high as 39.6 percent. which are some of the highest in 

the world. A higl1 business tax rate not only makes t'Omp;mies less 

competitive. but also serves ;ts a burden on employees by depressing wages. 

The vast majority ofNAEO members operate as pass through entities. NAEO 

members support reducing the top marginal tax rate for all businesses in an 

cquilable manner th;ll docs not give an advantage 10 either corpomtions or 

pass-througl1 businesses. If tax mtcs can be reduced. NA£1) members will be 

able 10 keep more of their bard-earned profits and grow their companies. raise 

wages.. hire new workers. and inve-st in their communi lies. 

Full business expen. ing- Currently. business owners must depreciate capital 

goods over many years when they purchase new equipment which 

disincentives new investment. Large purchases like delivery trucks or forklifts ctUTently take years to depreciate. The change to full business expensu1g 

would create an incentive for companies of all sizes to invest in new 

equipment. Allowing capital purchases 10 be deducted from business income 

would make it easier for our members 10 purch.1se the equipment and tools 

they need to expand. 

1181 Corporate lake Drive, SL louis. MO 63132 T 314.991.9000 F: 314.991.3060 www naed org 
454 

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Repeal of the estate tax- NAED members typically own multiple warehouses 

and millions of dollars in inventory. A typical NAED member business is 

valued at nearly $30 million. When a business owner dies, the large stockpiles 

of necessary electrical components and assets often put the business well over 

the estate tax threshold. The electrical wholesale industry is rapidly 

consolidating. One of the primary drivers of this consolidation is the estate 

tax. Several of our multi-generational family businesses have already incurred 

significant setbacks from the estate tax. Any business that is planning for the 

next generation must hire lawyers and accountants in order to minimize the 

damage from the death tax. Money that NAED members currently spend in 

tax compliance would be better used to reinvest in their businesses. 

NAED members are encouraged by steps taken this Congress to improve the regulatory and tax 

landscape for small businesses. Now is the time to take the next step by passing a complete 

overhaul of the antiquated tax code. Tax reform should help our members focus less on tax 

compliance and more on supplying the electrical equipment needed to build America. We look 

forward to reviewing the details of all tax reform plans offered in Congress. 
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NAESCO National Association of 

• Energy Service Companies 

Statement for the Record 

Submitted by 

The National Association of Energy Service Companies 

1615 M Street, NW 

Suite 800 

Washington, DC 20036 

For 

The House Ways and Means Committee 

Hearing on How Tax Reform Will 

Grow Our Economy and Create Jobs 

May 18, 2017 
456 


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NAESCO National Association of 

• Energy Service Companies 

NAESCO is the leading national trade association of the energy services industry. During the last 

thirty years, NAESCO member companies have delivered thousands of energy efficiency, 

renewable energy, demand response, distributed generation and combined heat and power 

projects across the United States and around the globe. Nationally, NAESCO member 

companies have delivered $SO billion in projects that have produced $55 billion in guaranteed 

and verified energy savings, which repay the cost of the projects and provide positive economic 

impacts to local communities. 

NAESCO supports the Committee's efforts to reform the tax code, and believes any reform 

must reflect the important relationship between the public policy goal of reducing waste 

through the reduction of energy consumption and tax policy. Of particular importance to 

NAESCO's members is the continuation of the §1790 deduction for commercial energy efficient 

property, which delivers demonstrated and widespread benefits to the U.S. economy. 

Reducing waste and costs through the reduction of energy consumption by using the §1790 tax 

deduction for efficient lighting, HVAC, and building envelope improvements, has proved to be 

an important public policy initiative and should remain a critical element of our nation's energy 

strategy. Tax incentives promoting energy efficiency, such as §1790, are a critical tool in 

advancing the country's budget deficit reduction, energy efficiency, and national security goals 

and result in a high value impact to taxpayers. 

The §1790 deduction enables accelerated cost recovery of energy efficiency investments made 

by commercial building owners, provides economic benefits of the deduction to government 

owned buildings, and assists designers of efficiency systems to develop advanced technologies 

that, when implemented, reduce energy waste. It does not reward the taxpayer simply for 

making an investment; rather, the deduction requires the achievement of verifiable reductions 

in energy usage. In its rules implementing this section of the code, the Internal Revenue Service 

requires inspection and testing of the energy efficiency {EE) project by qualified individuals to 

ensure the project qualifies for the deduction. 

§1790 advances our nation's energy policy priorities in a prudent and cost effective manner: 

Economic Value: Utilizing the §1790 deduction creates additional economic value for 

building owners and has contributed to the increased use of energy efficient building design 

strategies resulting in the retrofit of energy inefficient aging buildings, many with significant 

deferred maintenance problems. In addition, the dollars saved on energy costs by 

businesses through efficiency improvements can be reinvested in areas that produce 

greater economic activity. 

• Job Creation: §1790 serves as an engine of economic growth that generates job creation in 

a variety of industry sectors. The incremental energy efficiency projects enabled by the 

availability of this tax deduction create and sustain more jobs in the construction, 
457 


33393.385

NAESCO National Association of 

• Energy Service Companies 

engineering, manufacturing, and design sectors and reduce the need for investment in new 

energy supplies and production. 

Encourages Efficiency Improvements to Building Stock: The §179D deduction encourages 

energy efficiency improvements to aging commercial building stock, which otherwise may 

be neglected, by allowing for accelerated cost recovery of energy efficiency investments. 

Without §179D, energy efficiency retrofits are depreciated over a longer period of time as 

capital expenses. Even with full expensing provided for in the House Republican Blueprint 

on Tax reform, §179D is necessary to provide an incentive for projects to be implemented in 

government owned buildings that do not receive the direct benefit of full expensing. The 

benefit provided to the governmental entity from passing the deduction through to the 

energy service company delivering the energy efficiency retrofit allows for additional 

efficiency improvements to be provided and savings generated on behalf of the government 

entity at the same first cost. 

Saves Energy and Reduces Emissions: The acceleration of energy efficient building design 

and retrofits of inefficient aging buildings generates deep savings in building energy costs, 

significantly reduces energy demand, generates budgetary cost savings, and lowers the 

emissions of greenhouse gases - all of which benefit the nation's energy security and 

infrastructure improvement priorities. In terms of value, efficiency is a far more cost 

effective means of meeting energy demand than is the generation of a new unit of energy 

particularly energy generated and delivered during peak usage periods. 

• Technology Driver: The §179D deduction rewards achievement of significant energy savings 

regardless of the technology used to achieve those savings and places a premium on 

implementation of more sophisticated technologies. The incentive supports the 

modernization of aging U.S. building stock and enhances the overall performance of our 

nation's building infrastructure. 

Repealing the tax incentive for energy efficient commercial property undermines the significant 

advancements made to date in modernizing our nation's building stock. In fact, the expiration 

of the deduction in December 2014, its retroactive reinstatement in December 2015, and its 

expiration in December 2016 have resulted in tremendous uncertainty on the part of 

commercial building owners, as well as the energy services companies and other industry 

providers whose businesses are directly tied to developing and implementing efficiency 

retrofits. Additionally, removing the only incentive that provides accelerated treatment for 

commercial efficiency property could result in a strong disincentive to invest in efficiency 

improvements. The tax code allows commercial businesses the ability to immediately deduct 

money spent on energy consumption (utility bills) as an ordinary and necessary business 

expense, while without §179D the cost of efficiency improvements would be depreciated over 

many years. This asymmetry in the tax code is successfully addressed through the 179D 

deduction. Eliminating the 179D provision brings back the economic bias in favor of higher 

energy costs created by, in many cases, the wasteful use of energy that could have been 

avoided through the use of energy efficient technologies. 

3 
458 


33393.386

NAESCO National Association of 

• Energy Service Companies 

An analysis by Regional Economic Models, Inc. (REM I), released in May 2017, provides evidence 

of the benefits to the U.S. economy provided by §1790. The report shows that a long-term 

extension of §1790 would support up to 40,749 jobs annually and contribute almost $3.9 billion 

annually to national gross domestic product ("GOP"), as well as over $3.1 billion annually 

towards national personal income. Should Congress enact changes to §1790 (such as those 

proposed in S. 2189 from the 113'" Congress) that aim to strengthen and modernize the 

deduction, REMI forecast s 76,529 jobs would be supported and nearly $7.4 billion added to the 

GOP. 

According to the report, "Section 1790 promotes the proper allocation of incentives in the real 

estate development process. A key challenge to realizing the benefits of energy-efficient 

improvements is that the associated cost savings flow to building occupants, not developers. By 

helping offset the cost of energy efficient investments, Section 1790 allows building owners to 

share in the incentive to install energy-efficient improvements that help their occupants save 

money on electricity, water, and climate control costs."' 

In short, we strongly believe §1790 should remain a permanent component of a reformed tax 

code. Importantly, §1790 compliment s the goals of tax reform by delivering economic growth, 

job creation, and enhanced economic competitiveness. If near-term enactment of 

comprehensive tax reform is not expected to be forthcoming, we strongly support an 

immediate, multi-year extension of §1790. An extension of §1790 wil l provide needed 

certainty to the commercial and government building markets as well as the energy services 

company industry, and retain in the tax code the provision directed specifically at stimulating 

energy savings through investments in efficiency retrofits in the commercial building sector. 

Any discussion of a reformed tax code and energy tax policy is incomplete without a robust 

consideration of the positive budgetary impact of energy efficiency, and prudent and effective 

efficiency incentives- such as §1790 - belong permanently in a reformed tax code. 

1 Analysis of Proposals to Enhance and Extend the Section 1790 Energy Efficient Commercial Buildings Tax 

Deduction, Prepared by Regional Economic Models, Inc. (REMI) May 2017, Page 4 

4 
459 

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National Association of NAESCO • Energy Service Companies 

Introduction to NAESCO 

The National Association of Energy Service Companies proudly celebrates 33 years of leadership in promoting, 

developing, and advocating for the central role of energy efficiency as part of a comprehensive national energy 

agenda. NAESCO and its member organizations maintain a firm belief in the economic and environmental benefits 

of the widespread use of energy efficiency and embrace ethical market behavior as a core value. 

Advocacy Voice 

NAESCO represents every facet of the energy services industry and actively advocates for the cost effective 

delivery of comprehensive energy services to all end user market segments. The Association places a high priority 

on making the Association a home for the broadest spectrum of market participants which gives our advocacy 

voice additional resonance. Through its robust advocacy program, NAESCO has been a key catalyst in creating, 

among federal and state lawmakers, regulators, and energy program managers, a continuing commitment to 

developing and implementing energy efficiency solutions. 

Opening New Markets for Energy Services 

On behalf of Its membership, NAESCO works to help open new markets for energy services. NAESCO has focused 

during the last three decades on reaching out to end users by directly promoting the value of energy efficiency to 

customers in all market segments through its seminars, workshops, training programs, and conferences; 

publication of case studies, guidebooks, customer manuals, and original research; and the compilation and 

dissemination of aggregate industry data drawing upon the project database created and maintained by NAESCO 

and the Lawrence Berkeley National Laboratory. NAESCO also works collaboratively with allied trade groups, policy 

groups and customer representatives to accelerate market development and growth. 

Promoting Industry Best Practices 

NAESCO sponsors a rigorous accreditation program for ESCOs, Energy Service Providers and Energy Efficiency 

Contractors to recognize management capabilities, outstanding project experience, ethical business practices, and 

overall commitment to providing customers with comprehensive and successful energy solutions. NAESCO has 

ethical guidelines in place and has created an industry ombudsman to provide a transparent protocol for the 

review of ethical issues that may arise. 

Notionally, NAESCO member company projects have produced: 

• $50 billion in projects paid from savings 

• $55 billion in savings - guaranteed and verified 

• 450,000 person-years of direct employment 

• $33 billion of infrastructure improvements in public facilities 

• 4 50 million tons of C02 savings at no additional cost 

Most of these projects ore Energy Savings Performance Contracts (ESPC), which don't require new taxes, because 

they re-purpose the money that o customer Is currently spending on wasted energy into a payment streom for the 

energy· saving capitol improvements. 

5 
460 


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.. 

NAIFA National Association of Insurance and Rnancial Advisors 

STATE!\'fENT ON BEHALF OF 

THE NATIONAL ASSOCIATION OF INSURAt'ICE 

AND FINANCIAL ADVISORS (NAIF A) 

HEARJNG ON "ROW TAX REFORM WILL GROW 

OUR ECONOMY AND CREATE JOBS" 

COMMITTEE ON WAYS AND MEANS 

UNITED STATES ROUSE OF REPRESENT A TJVES 

MAY 18, 2017 

Introduction 

On behalf of The Na tional Association oflnsumnce and FiJHiltcial Advisors (NA rFA) 1 r appreciate the opponuuity to submi1 testimony for Lhe hearing referenced above pertaiuiug to the 

development of tax rcfonulegislation for consideration by the \Vays and Meaus Commiuee and 

the House of Re presenta tives. The Betre r \Vay Tax Refonu Blueprint (Blueprint) released las1 

Slnnmer and President Tnmtp 's tax re fonn p lan rele-ased last month provide he lpful fi·ameworks, 

but do not yet include much o f the key deta il tha t will need to be filled-in before enactment of 

dtc frrst major lax reform since 1986. 

NAIF A's ovcrarchi.ng couccm is t.hat as Congress considers tax rcfonn. it must not make it more 

difficuh or expensive for families co build dtcir own fiuaucial safety nets. Americans need 

public policy dtal couliuucs 10 cucow-age dtem 10 piau ahead. protect their families' liuaucial 

security and adequately save for retirement Well-prepa red families w ill have adequate 

retirement srwin{ts accounts, life insurance, medical insurance, and guaranteed income annuities 

to supplement social secln'ity benefits. With the strain on federal eutitlcmcut program.s as well as 

on state and local programs. tax rcf011U must not create new o bsmcles for families planning for 

their loug-tenu fmauci.al needs. 

\Vith ten thousand people reachi ng re tire-1nent age every day, it is importa nt that pub lic po licy 

inccutivizcs and encourages families to save and plan for rctircmem. Cun·cut rclircmcut savings 

options. that arc working welL sho uld be preserved. Aud, it is important for Cougrtss to ensure 

tha t families aud workers cau continue to protect against th e risks of dying 100 soon or o utliving 

1 Abou1 NAIF A: Fotwded iu 1890 as The National Association of life Uoden..,Titers (NALU). NAJFA isooeofche 

nation·s oldest and largest associations t"C))rCse:t)ling; d~ iulereslsofinsurance professioual.s from every 

Congressional district in the United Stales. NAif A members assist conswocrs by focusing lbcir prac1ices on ooc or 

more of1hc following: life insurance a.nd nnuit ~. health insurance and employee benefits, ull iliJ.~. and financial 

advising. and invcstlhents. NAIF' A ·s mission is 10 advocate for a posi1ive leSislative aod regulatory euviroumet)t, 

eubauce business and professional skills. and promote the ethical oondtJCt of its meu1bers . 

._><J:J1 To:cs-t.:u 1...;t 

"<I",Chwo, \A 70.'l-77c-fl100 1 \VWNNAIFAorg 

.J.!c ... :.,. 121 ~ 
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their savings. Life insurance and annuity products can help minimize these risks and are 

necessary to obtaining financial and retirement security. 

Insurance products and employer-provided benefits help Americans provide financial protection 

and security for themselves and their loved ones. Whether it is the economic loss from dying 

prematurely, becoming ill or disabled, or outliving savings in retirement, most families do not 

have the resources to manage these risks on their own. 

Life Insurance 

Life insurance products are unique in their ability to successfully and affordably transfer risk 

from the individual to a larger pool of savers or insureds. Policy benefits paid at the death of a 

breadwinner help families avoid the hardship of lost income. Sometimes life insurance can be a 

back-up savings source to be used in emergencies. Annuities pay a guaranteed, steady stream of 

income, protecting individuals from outliving their assets and can be purchased both in a 

qualified retirement plan or held personally. Disability income insurance protects workers' 

income by replacing a portion of their earnings if they cannot work due to accident or illness. 

Whether people seek protection and security products on their own or as part of a group with the 

assistance of their employer, our nation's tax system should not discourage these actions. 

Life insurance and retirement savings products are taxed appropriately under current law. The 

savings that build up in life insurance and annuities do not escape taxation; they are taxed at 

ordinary income rates when policyholders make a withdrawal from their annuity or cash in their 

policy if protection is no longer needed. Additionally, life insurance and annuity owners pay 

premiums with after-tax dollars. 

While 70 percent of American households rely on life insurance protection, 41 percent believe 

they do not own enough2 Changing the tax treatment of life insurance products may result in 

less protection for families that currently have these products, and little or no coverage for those 

still needing protection. 

NAIF A is pleased to note that neither the Blueprint nor President Trump's tax reform plan 

includes any proposal to change the tax treatment of life insurance or annuity products, and 

believes that is appropriate. 

Retirement Savings 

Nearly 90 million Americans rely on a private sector plan such as a 40l(k) defined contribution 

or defined benefit plan to save for retirement' and 42.5 million households own IRAs 4 Seventy-five 

million American families rely on annuities or other life insurance products for long term 

2 "Facts of Life and Annuities 2016 Update," Life Insurance Marketing and Research AssociaNon (LIMRA}, 2016 3 U.S. Depattment of Labor Employee Benefits Secmity Administration, Private Pension Plan BulleNn, Abstract of 

2014 Form 5500 Annual Report (September 2016). 4 "ICI Research Perspective," Investment Company Institute (ICI), 2017, available at https://www.ici.org/pdf/per23-

0l.pdf 
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financial security. 5 Unfortunately, Baby Boomers and GenXers are projected to have a retirement 

income deficit of $4.3 trillion and roughly 44 percent will lack adequate retirement income for 

basic expenses. 6 

NAIF A believes that tax reform should preserve the tax treatment of retirement savings options 

under current law. In particular, NAIF A believes that Congress should not eliminate or limit the 

current ability to contribute tax-deferred amounts to 40l(k), IRA, and other retirement plans. 

While these pre-tax retirement plan contributions do not give rise to immediate tax, they are fully 

taxed (along with any growth) when an individual draws them down in retirement. 

NAIF A is concerned that proposals, such as those included in former Chairman Dave Camp's 

2014 tax reform plan, to limit tax-deferred contributions and, instead direct taxpayers to Rothtype accounts, would create a disincentive to saving for retirement. Current tax -deferred 

retirement options give taxpayers a current tax saving when making a retirement plan 

contribution. Roth accounts, by contrast, provide no immediate tax incentive to prioritize longterm retirement savings over consumption. For many taxpayers with competing priorities, such 

as purchasing a home or saving for college for their children, the Roth option would not provide 

sufficient incentive to save for retirement. 

Limiting retirement savings options to Roth-type accounts would also have significant adverse 

effects on employer-sponsored retirement plans. Roth accounts (including in 40l(k) plans) do 

not permit employer-matching contributions except into a pre-tax account. If plans are "allROTH" there would not be employer matching contributions to retirement plans, and therefore 

employees would have significantly less incentive to make their own contributions. Moreover, 

without the ability to make pre-tax retirement plan matching contributions, many closely-held 

business owners may decide that it is easier to not offer a retirement plan at all. The behavioral 

response of employers and workers to limiting retirement savings to Roth-type options will lead 

to significantly less retirement readiness on the part of Americans. 

Some have suggested that rather than limit current tax-deferred savings options, Congress might 

expand the attractiveness of Roth retirement savings options. NAIF A believes such an approach 

could be beneficial. 

NAIF A is pleased that Trump Administration officials have clarified that the President's tax 

reform plan appropriately preserves the current tax treatment of retirement savings. NAIF A 

believes it would be helpful to provide a similar clarification with respect to the Blueprint. 

Treatment of Pass-through Businesses 

Both the Blueprint and President Trump's tax reform plan would provide a reduced tax rate for 

pass-through business income taxed directly to the business owner. Under the Blueprint the tax 

rate would be 25%, while it would be 15% under President Trump 's plan. As the Blueprint 

5 American Council of Life Insurers, 2016 Life Insmer's Fact Book 6 Employee Benefit Research Institute, EBRI Notes: Retirement Income Adequacy for Boomers and Gen-Xers: 

Evidence from the 2012 EBRI Retirement Security ProjecNon Model. 
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notes, "Millions of small and closely held businesses are organized as pass-through entitiessuch as partnerships and S corporations - that are taxed under the individual rate structure rather 

than at the corporate rate. These businesses often compete directly with businesses that are 

subject to the corporate tax, with the differential in tax treatment creating potential distortions 

and inequities." The vast majority ofNAIFA members (some 86%) do business in pass-through 

form. Accordingly, NAIF A supports proposals to preserve competitiveness by ensuring that the 

tax rate on pass-through business income is no higher than the rate on corporate income. 

Conclusion 

NAIF A thanks you for the opportunity to submit testimony for today' s hearing. In order to 

ensure families and workers have a secure financial future Americans need a tax system that 

reinforces and builds on the proven savings and retirement plan structures. Whether Congress 

considers a comprehensive approach to tax reform or something more concise, new polices 

should not disrupt the current tax treatment of insurance products that protect against financial 

risks through the use of life, disability income, health and long-term care insurance and provide 

guaranteed income for life through annuities. 
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Jiiio@O@§&f1. National BiOd'-"' Board NatloMal Blodit .. l So.rd 

605Cf8rk Ave. 1331PeM8yN'aN&Ave .• NW 

PO SOX 104896 Sui1e 505 

Jetlet$01'1 City. MO 6511()...4896 WaShington, OC 20004 

America's Advanced Biofuet (800)841-5&49phonr& (202}737·8801 pltrooe 

(573) ~7913 tax www.blodi&-.MI.OfV 

Wrillen Testimony of the National Biodiesel Board 

Suhmilled to the Ways and Means Commillee 

How Tax Reform Will Grow Our Economy and Create J obs 

May 18, 2017 

The National Biodiesel Board (NBB) is pleased to submit written testimony to the committee 

regarding the role of the biodiesel tax incentive in the continued growth of our industry and the 

resulting benefits for American competitiveness, job creation and the environment. NBB is the 

U.S. trade association representing the biodiesel and renewable diesel industries, including 

producers, feedstock suppliers and fl1el distributors since 1992. 

Biodiescl is a renewable, low-earbon diesel replacement fuel made from a diverse mix of 

resources, including recycled cooking <>il, anima l fats and agricultural oils such as soybean, 

camelina and canola oil. Based on the perfonnancc requirements established by the Energy 

Independence and Security Act, the U.S. Environmental Protection Agency (EPA) has 

dctennined that domestically produced biodiesel is an "advanced biofuel"- meaning it reduces 

greenhouse gas emissions by at least 50 percent when compared to petrolcmn diesel. Biodicsel is 

the nation 's first domestically produced. commercially available advanced biofuel. lt m~-ets a 

strict fuel specification set forth by ASTM International- the official U.S. fuel-certi6cation 

organization. Biodiesel is primarily used in blends of 5 percent to 20 percent and does not 

require special fl1el pumps or engine modifications. In fact. the majority of automobile 

manufacturers support biodiesel blends up to 20 percent in their engine warranties. 

History has shown that well-crafted and efficient tax incentives can be powerflll policy 

mechanisms to create jobs. achieve the nation's energy objectives and leverage private sector 

investment to promote the deployment and utilization of new energy resources here in the United 

States. Titis is certainly the case with the tax credit for biodiesel. 

We support H.R. 2383, the American Renewable Fuel and Job Creation Act of2017, introduced 

by U.S. Reps. Kristi Noem (R-S.O.) and Bill Pascrell (0-.N.J.). This bipartisan biodieseltax 

credit bill would convert the blender's credit for biodieselto a $1-per-gallon production credit 

for fuels produced in the United States for three years. The bill provides an additional I 0-ccntper-gallon credit for small U.S. biodiescl producers. 

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The biodieseltax incentive has played a key role in stimulating growth in the U.S. biodiesel 

industry, helping biodiesel become the leading EPA -designated advanced biofuel in the nation. 

Without question, the biodieseltax incentive has stimulated production. In 2004, prior to the 

enactment of federal tax incentives, our industry produced 25 million gallons. When the 

incentives were first implemented in 2005, the United States produced roughly 112 million 

gallons; last year, domestic production increased up to 2.9 billion gallons. 

By making biodiesel more cost-competitive with petroleum diesel, the $!-per-gallon credit 

creates jobs, strengthens U.S. energy security, reduces harmful emissions, diversifies the fuels 

market and lowers costs to consumers. Nonetheless, Congress has allowed the incentive to expire 

repeatedly in recent years, most recently on Dec. 31 , 2016. 

The biodiesel industry deserves predictable federal tax policy to continue attracting investment, 

developing infrastructure and creating jobs. We hear routinely from biodiesel producers who 

have tremendous capacity for growth and want to expand but who struggle to gain financing for 

new projects because of the uncertainty around the tax incentive. While traditional oil incentives 

are written permanently into the tax code, the biodiesel incentive has repeatedly expired, 

severely disrupting producers' access to capital, as well as their ability to hire and expand. TI1e 

expiration of the tax incentive has effectively amounted to a tax increase on the U.S. biodiesel 

industry-hampering job growth and stunting investment. 

We believe the public policy benefits of continuing the tax incentive are clear, including: 

Job Creation and Economic Benefits: With biodiesel plants nationwide-from California 

to Iowa to North Carolina-the biodiesel industry already is supporting some 64,400 

jobs, $11.42 billion in economic impact and $2.54 billion in wages paid. In many rural 

areas of the country, biodiesel plants are a driving force of the local economy. 

U.S. Competitiveness: Biodiesel already is one of the most diverse fuels in the world, 

produced using everything from soybean oil to animal tallow to used cooking grease. 

Industry demand for less expensive, reliable sources of fats and oils is simulating-and 

often financing-promising research on next-generation feedstocks. The development of 

these new technologies is critical to our global competitiveness. 

Energy Security: Biodiesel is diversifYing our fuel supplies so that we 're not so 

vulnerable to global oil markets that are heavily influenced by unstable regions of the 

world and global events beyond our control. Despite increased domestic oil production, 

consumers will remain vulnerable to volatile international oil prices without diversity and 

competition in tl1e fuels market. 

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Improving Air Quality and the Environment: The EPA has recognized biodiesel's 

environmental benefits by classifying it as an advanced biofuel. According to the EPA, 

biodiesel reduces greenhouse gas emissions by 57 percent to 86 percent when compared 

to petroleum diesel. In addition, biodiesel dramatically reduces most major air pollutants 

and take wastes out of landfills as well as the nation's waterways. Substituting higher 

amounts of biodiesel for traditional diesel fuel is the simplest, most effective way to 

immediately reduce emissions. 

In recent years, a version of the tax incentive was approved without objection by the Senate 

Finance Committee that reforms the incentive to a domestic production credit, ending a practice 

where growing volumes of imported fuel are eligible for the credit simply by being blended in 

the United States. Subsidizing foreign production is obviously not the intent of Congress, and we 

should close this loophole by reforming the credit to focus on domestic production. The reform 

would: 

Stop Subsidizing Foreign Manufacturing: U.S. tax dollars and energy policy should beand typically are-aimed at incentivizing domestic production, not foreign production. 

The current structure of the biodiesel tax incentive as a blender's credit increasingly 

allows foreign producers to access the credit if their fuel is blended in the United States. 

Importantly, reforming the credit to a production credit instead of a blender's credit 

would not block imported biodiesel from entering the U.S. market. In fact, significant 

imports would likely continue coming to the U.S. and receiving incentives under the 

Renewable Fuel Standard (RFS) and California's Low Carbon Fuel Standard. 

Create Jobs Here at Home: There is more than enough U.S. production capacity to meet 

U.S. demand. With significant underutilized capacity in the domestic industry, biodiesel 

producers across the country are waiting for the right policy signals to expand production. 

With most of the U.S. plants running at only 65 percent capacity, the industry is more 

than capable of meeting robust requirements under the RFS and would create jobs as 

production expands. 

Save Taxpayer Dollars: Biodiesel imports to the United States have grown sharply in 

recent years, largely as a result of the tax credit. According to the Joint Committee on 

Taxation, this reform would save U.S. taxpayers roughly $90 million. 

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Streamline IRS Administration and Reduce Potential for Tax Fraud: Today, thousands of 

blenders are registered to blend biodiesel, creating a decentralized system that is difficult 

for the Internal Revenue Service (IRS) to administer. However, fewer than 200 

companies are producing biodiesel and renewable diesel today. This reform would 

significantly streamline administration of the credit and avoid fraud or abuse by sharply 

narrowing the number of potential claimants for the credit. 

Continue to Lower the Cost of Diesel Fuel for Consumers: The $!-per-gallon production 

tax credit would be passed down through the biodiesel value chain throughout the 

distribution system, ultimately decreasing costs for retail consumers. Biodiesel producers 

and blenders already structure transactions with the value of the credit "baked into" the 

sale. The producer's credit would have the same value as the historical blender's credit, 

and blenders would continue to benefit. 

Strengthen the Bioheat® Market: The U.S. biodiesel industry has invested millions of 

dollars and spent years to help build the Bioheat® market, particularly in the Northeast, 

where biodiesel is increasingly blended into home heating oil to create a cleaner product. 

This reform will strengthen that market by continuing to grow a strong domestic 

biodiesel industry with regional production nationwide. The value of the tax credit will be 

the same for Bioheat® under a producer's credit. The credit would be negotiated and 

shared throughout the distribution chain just as it is under a blender's structure, and the 

reform will ensure that Bioheat® blenders incur no new tax liability. 

In conclusion, NBB would like to emphasize that the biodiesel tax incentive has helped achieve 

the desired goal of expanding domestic production of American energy resources and jobs here 

at home. In tum, the increased use of biodiesel has helped the United States realize economic, 

global competitiveness and environmental benefits. These benefits, however, will be jeopardized 

without long-term reinstatement of the biodiesel producers tax incentive in the Code to stimulate 

U.S. biodiesel production and job growth. 

Thank you again for the opportunity to submit this testimony. NBB would be pleased to serve as 

a technical resource on the industry as the committee moves forward with its deliberations. 

Should you have any questions regarding our comments, please don't hesitate to contact NBB 

Vice President of Federal Affairs Anne Steckel at 202-737-8801. 

w w w. b odiesel.org 4 
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Statement of the 

National Council of State Housing Agencies 

to the House Ways and Means Committee 

in Response to its Hearing on 

How Tax Reform Will Grow Our Economy and Create Jobs 

June 1, 2017 

On behalf of our Housing Finance Agency (HFA) members, the National Council of State 

Housing Agencies (NCSHA) appreciates this opportunity to provide comments to the Ways and 

Means Committee on how the Committee can further strengthen proven housing resourcesspecifically the Low Income Housing Tax Credit (Housing Credit) and tax-exempt private activity 

Housing Bonds (Housing Bonds)-to help grow the economy, create jobs, and improve the lives 

of households across the nation. These critical programs, which HFAs administer in virtually 

every state, are essential to our nation's ability to develop affordable rental housing and provide 

homeownership opportunities to people of modest means. 

NCSHA is a nonprofit, nonpartisan organization created by the nation's state HFAs more 

than 40 years ago to coordinate and leverage their federal advocacy efforts for affordable housing. 

HFAs are governmental and quasi-governmental, nonprofit agencies created by their 

jurisdictions to address the full spectrum of housing need, from homelessness to homeownership. 

HFAs effectively employ the Housing Credit and Housing Bonds, entrusted by Congress to state 

administration, to advance their common public-purpose mission of providing affordable 

housing to the people of their jurisdictions who need it. These indispensable financing tools 

contribute more significantly to HFA efforts to create housing, community, and economic 

opportunity than any other federal housing resources. 

Affordable Housing: A Vital Part of a Pro-Growth Tax Code 

Congress is embarking upon one of the most significant and challenging endeavors of 

recent decades-reform of the federal tax code. NCSHA understands there is bipartisan 

agreement that the current system is outdated, overly complicated, and not optimally structured 

to promote economic growth. We supports the Committee's plan to examine all aspects of the 

current code as it seeks to reform the tax system. 

The use of the tax code to provide affordable housing-both through the production and 

preservation of affordable rental properties with the Housing Credit and multifamily Housing 

Bonds and through the provision of lower-cost mortgages for working families with single-family 

Housing Bonds (under the Mortgage Revenue Bond (MRB) and Mortgage Credit Certificate 

(MCC) programs)-has been one of the singular successes of the current system. Since the 

Housing Credit's establishment in the Tax Reform Act of 1986, it has financed roughly 3 million 

affordable rental homes for low-income families, seniors, veterans, and those with special needs. 
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Approximately 40 percent of those rental homes rely on financing from multifamily Housing 

Bonds and would not exist were it not for those bonds. HFAs finance still more affordable rental 

housing with multifamily Housing Bonds alone. 

Using MRBs, state HFAs have helped over 3.1 million working families purchase a home 

for the first time. HFAs typically help about 75,000 families achieve this milestone each year. 

MRBs represent about the only hope for creditworthy families with modest incomes and limited 

resources to achieve homeownership. Moreover, they allow HFAs to serve as constant, reliable 

sources of flexible, affordable mortgage money for lower-income first-time home buyers, 

anchoring the first-time home buyer market. 

The Housing Credit and Housing Bond programs are highly successful public-private 

partnerships that combine state HFAs' sophisticated underwriting, asset management, and 

oversight capacity with private sector ex pertise and investment. Without question, the Housing 

Credit and Housing Bonds are the most effective means of targeting limited affordable housing 

resources to the people and places that need them, while transferring risk to private sector 

investors. 

Most importantly, the Housing Credit and Housing Bond programs make immeasurable 

investments in people and places. They transform lives by creating quality and sustainable living 

environments that lift up families; help children thrive; support seniors, people with special 

needs, and veterans; and permanently house persons experiencing homelessness. They 

contribute to community revitalization by inspiring business growth, infrastructure advances, 

transportation solutions, and much more. 

These programs also have an enormous impact on local economies through the creation 

of jobs and generation of tax revenue. The Housing Credit supports approximately $3.5 billion 

in federal, state, and local taxes; $9.1 billion in wages and business income; and 95,700 jobs across 

various U.S. industries every year. The National Association of Home Builders estimates that in 

its first year, a typical 100-unit Housing Credit property on average provides $8.7 million in 

additional wages for local workers and business profits; creates $3.3 million in additional federal, 

state, and local tax revenue; and supports 116 jobs. 

Housing Bonds also have a profound economic impact. According to models formulated 

by the National Association of Home Builders and the National Association of REALTORS®, in 

the 10-year period from 2006 to 2015, state HFA MRB homeownership programs generated 

almost 50,000 jobs annually. Multifamily Housing Bonds also spur important economic growth. 

Over the same period of time, state construction and rehabilitation of apartments financed with 

HFA multifamily Housing Bonds generated approximately 27,000 jobs and added over $2 billion 

to GOP annually on average 
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The Growing Housing Need Exacts an Economic Toll 

Unfortunately, while the Housing Credit and Housing Bond programs are extraordinarily 

successful, the resources devoted to them are woefully insufficient to meet the nation's affordable 

housing need, which is great and growing. In fact, we are losing ground in this battle as needs 

grow and resources shrink at rapid rates. 

Currently, 40 million U.S. households-more than one in three-pay an excessive share 

of their income for housing. The crisis is most acute for those earning the least. Of those 

households with incomes of $15,000 or less annually-approximately equivalent to working fulltime at the minimum wage-four in fi ve pay more than 30 percent of their income for 

housing. Two-thirds pay over 50 percent. This leaves little money left over for other critical 

necessities like food, tran sportation, childcare, healthcare, and utilities. 

The housing crisis affects both homeowners and renters. For many low- and moderateincome borrowers, purchasing a home is by far their best opportunity to build up savings, yet 

these families face significant challenges as they seek to achieve homeownership. Even as the 

housing market strengthens, many creditworthy home buyers, especially first-time buyers, 

struggle to obtain mortgages they can afford. According to the National Association of 

REALTORS®, first-time home buyers accounted for just 30 percent of all home sales in the past 

three months, compared to the historical average of 40 percent. 

As more and more people turn to the rental market, they find a severe shortage of 

affordable homes. Those available to extremely low-income (ELI) households, those earning 30 

percent or less of Area Median Income (AMI), are especially scarce. Since 2000, the rental housing 

shortfall for ELI renters-measured as the gap between the number of ELl renters and the number 

of units available and affordable to them- has grown by 57 percent. The rental shortage is 

exacerbated as hundreds of thousands of new renter households enter the market each year, 

while the nation loses countless affordable units from the housing stock due to conversion to 

market rate rentals or condominiums, demolition, or obsolescence. 

The success of affordable housing programs is most easily measured by the number of 

units created and preserved each year and the number of households served. But, these metrics 

do not begin to measure the impact affordable housing has on those families and the economic 

benefits it brings to society at large. Conversely, without affordable housing, everyone suffers. 

Affordable housing is the foundation of an economically vibrant country. Housing 

stability creates better health outcomes, improves children's school performance, and can help 

low-income individuals gain employment and keep their jobs. The Housing Credit and Housing 

Bonds provide families with greater economic stability and more discretionary income than lowincome families who are unable to access subsidized housing. This allows them to allocate more 

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money to other needs, such as health care and food, and gives them the ability to pay down debt 

and save for education, retirement, or unexpected needs. 

Homelessness and hypermobility suffered by unassisted low-income families have dire 

consequences for children's educational attainment. Numerous studies show that children who 

move frequently-as they often must without stable housing-are more likely to drop out of 

school, repeat grades, perfo rm poorly, or have numerous school absences compared to those with 

stable housing. 

Affordable housing also can promote economic mobility. A recent Harvard University 

study, The Equality of Opportunity Project, found that moving younger children from a highpoverty neighborhood to a more integrated, lower poverty neighborhood improves their chances 

of going to college, lowers their risk of becoming a single parent, and increases their ex pected 

income as an adult by as much as 30 percent. Housing production programs, such as the Credit 

and Bonds, which build and preserve affordable housing in lower-poverty neighborhoods, are 

critical to achieving these results. 

Affordable housing located near transportation and areas with employment opportunities 

provides low-income households with better access to work, which increases their financial 

stability and may help them eventually achieve independence from government assistance. It 

also provides employers in those areas with needed labor. 

Preserve, Expand, and Strengthen the Housing Credit 

As you consider changes to the current tax structure, NCSHA urges you to use this 

opportunity to build on what works, not only by preserving the Housing Credit and Housing 

Bond programs, but also by expanding Housing Credit resources so that we can better address 

the nation's severe affordable rental housing shortage, and by enacting policy modifications to 

strengthen this already successful program. 

Earlier this year, senior Ways and Means Committee member Pat Tiberi (R-OH) and 

Committee Ranking Member Richard Neal (0-MA) introduced H.R. 1661, the Affordable 

Housing Credit Improvement Act. NCSHA strongly supports this legislation, which would 

improve program flexibility, simplify requirements, support the preservation of existing 

affordable housing, and facilitate Housing Credit development in challenging markets and fo r 

hard-to-reach populations. 

In particular, NCSHA supports provisions of this legislation that would strengthen the 

bond-financed portion of the Housing Credit program; amend the Housing Credit income limits 

to allow for income averaging, thus allowing low-income families earning up to 80 percent of 

AMI access to Credit properties, while improving affordability for ELI households; provide parity 

in Housing Credit income rules fo r rural properties; simplify complex program rules, such as the 

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Housing Credit student rule; and establish a state-determined basis boost of up to 50 percent fo r 

units in Housing Credit properties reserved fo r ELI households. 

Already, the Affordable Housing Credit Improvement Act has drawn wide bipartisan 

support, with more than half of Ways and Means Committee members cosponsoring the bill. We 

urge you to prioritize this important legislation in any tax reform proposal the Committee 

considers. 

Moreover, we urge you to also ex pand Housing Credit resources. We know that Congress 

faces extraordinary pressure as it directs limited federal resources to so many priorities. 

However, we strongly believe that investing new resources in the Housing Credit makes sense, 

even in this time of budget austerity. Senate Finance Committee Chairman Orrin Hatch (R-UT) 

and Finance Committee member Maria Cantwell (0-WA) have sponsored legislation which 

would make the same improvements called fo r in the Tiberi-Neal bill, but also increase Housing 

Credit authority by 50 percent, phased in over a five-year period. Their bill, too, has strong 

bipartisan support in that chamber. 

Each year, state Housing Credit allocating agencies receive applications requesting nearly 

three times more Housing Credit resources than agencies have to allocate. Yet even this does not 

quantify the extent to which demand for affordable rental housing outstrips the supply of Credits, 

as many developers with worthwhile projects do not even bother applying because the 

competition for Credit is so fierce. 

State Housing Credit allocating agencies face difficult choices-not just whether to direct 

their limited Credit resources to preservation as opposed to new construction, but also whether 

to commit them to rural rather than urban areas or to neighborhood revitalization rather than to 

projects in high-opportunity areas. Agencies must balance whether to finance supportive 

housing for persons experiencing homelessness against assisted living for the elderly, housing 

fo r needy families, and projects for veterans-all of which serve populations with serious housing 

and service needs. And, in recent years, the federal government has turned to the Housing Credit 

time and again to achieve federal priorities such as transforming the nation's public housing 

through the Rental Assistance Demonstration program and producing housing for persons with 

disabilities in conjunction with the Section 811 program. Housing Credit authority is simply 

inadequate to fund all of the worthy developments that are so needed. 

Preserve the Tax-Exempt Private Activity Housing Bond Program 

For decades, the Housing Bond program - multifamily bonds for financing affordable 

rental housing and the MRB and MCC programs fo r financing affordable first-time, modest home 

purchases- has been an essential and successful tool in our affordable housing efforts. While 

these bonds are private activity bonds (PAB), Congress deemed that the affordable housing they 

make possible is worthy of a tax exemption, not just because of the direct housing benefits these 

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bonds provide but also because of the positive effects the housing opportunities they create have 

more broadly on families, communities, and the economy. 

In recent years, a few tax reform proposals have been advanced, both in Congress and 

from outside experts, which would eliminate the tax-deduction for interest on PABs while 

maintaining the exemption for other municipal bonds. This would be a mistake, and would 

drastically set back our efforts to provide affordable housing to those in need. 

While it is true P ABs provide direct financing to private entities, the bonds fulfill a very 

important public purpose that the market is often unable to meet. This is certainly the case of 

Housing Bonds. In addition to affordable housing, PABs support many other critical public 

priorities such as financing for airport renovations, sewage facilities, public power, and 

affordable student loans. Simply put, repealing or limiting the tax-exemption for PABs would 

severely hamper state and local governments' efforts to support affordable housing and other 

locally determined priorities. 

The Housing Bond market, like many financial markets, has not fully recovered from the 

financial, housing, and broader economic crises of recent years. The historically low interest rates 

we have experienced during the recovery have hampered further the Housing bond market by 

greatly reducing the Housing Bond tax-exempt interest rate advantage. However, interest rates 

now are beginning to rebound and are likely to continue to climb. As we enter a more typical 

interest rate environment, the tax-exemption afforded to Housing Bonds will be even more 

critical to helping lower income home buyers purchase their first homes. Already, the market 

for Housing Bonds has strengthened. The most recent available data shows that in just one yearfrom 2013 to 2014-state HFA bond issuance jumped by 39 percent, as demand for tax exempt 

bond-financed housing grew. 

Streamline and Simplify the Housing Bond Program 

NCSHA recommends Congress take a few modest steps to make the highly successful 

Housing Bond program even more effective. With tax reform, Congress has the opportunity to 

further strengthen Housing Bonds by making low or no cost changes to eliminate outdated rules 

and to give states more flexibility to respond to their unique needs and circumstances. For 

example, within the MRB program, the purchase price limit is no longer needed, as the income 

limits Congress later imposed much more effectively control the price of homes MRB borrowers 

can purchase. The considerable resources HUD and Treasury expend coming up with the 

purchase price limits annually could be deployed elsewhere. 

In addition, the MRB home improvement loan program, especially important now given 

the repair needs of foreclosed properties and the home maintenance families were forced to defer 

during the recession, would be much more useful if Congress increases its loan limit of $15,000 

by an amount at least adequate to reflect the rise in construction costs since it was first established 

6 
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in 1980 and indexes that limit to keep up with construction cost inflation annually. We also 

encourage Congress, as it did on a temporary basis from 2008 through 2010, to allow state HFAs 

to use MRBs fo r refinancing, so state HFAs can help otherwise qualified borrowers. 

In addition, we urge you to adopt proposals that would improve investor interest in the 

Housing Bond program. For example, NCSHA supports exempting interest earned on refunding 

Housing Bonds from the Alternative Minimum Tax. Conversely, we urge you to resist proposals 

that would undermine investor interest in Housing Bonds, such as limiting the value of the 

municipal bond interest deduction to a lower tax rate, as this would greatly diminish the value 

of Housing Bonds investments and, consequently, investor interest in them. 

We also have several suggestions for simplifying the MCC program, which the tax code 

provides as an alternative to MRBs and which states utilize more when the Housing Bond rate 

advantage is limited, as it has been in recent years. MCCs help lower-income families afford 

homeownership by allowing first-time home buyers who meet the MRB program's income 

requirements to claim a dollar-for-dollar tax credit fo r a portion of the mortgage interest they pay 

each year, up to $2,000. Specifically, we urge you to simplify the MCC calculation; permit HFAs 

to recycle MCCs, as you allow them to recycle Housing Bonds; provide HFAs the flexibility to 

shorten the MCC term and/or "front load" its benefits; eliminate the $2,000 annual credit cap on 

MCC benefits; and provide HFAs the flexibility to structure the MCC assistance to respond to 

diverse home buyer needs. We would be happy to provide further detail on any of these 

proposals. 

Thank you fo r your commendable efforts to promote a pro-growth, simplified tax code. 

NCSHA and our HFA members are pleased to have this opportunity to demonstrate to you the 

effectiveness of the Housing Credit and Housing Bond programs and provide to you our 

proposals for program improvements. We stand ready to assist you further with your evaluation 

in any way we can. 
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------------~l.f~ll~~· ------------

National Grocers Association 

Dear Chainnan Brady, Ranking Member Neal, and Members of the Committee: 

The National Grocers Association (NGA) appreciates this opportunity to submit for the record the 

following comments for the House Ways and Means Commiuec 's hearing: "How Tax Refonn 

Will Grow Our Economy and Create Jobs." Tax refonn is essential for moving the country 

forward and providing an economic boost to help Main Street businesses such as independent 

supcnnarkets thrive. We applaud the efforts of the House Republican Leadership and of Ways and 

Means Committee Chainnan Kevin Brady to advance tax reform by holding this hearing. 

NGA is the national trade association representing the retail and wholesale grocers that comprise 

the independent channel of the food distribution industry. An independent retailer is a privately 

owned or controlled food retail company operating a variety of fonnats. Most independent 

operators are serviced by wholesale distributors, while others may be partially or fully self· 

distributing. Some independents are publicly traded, but with controlling shares held by the family 

and others are employee owned. Independents are the tme " entrepreneurs" of the grocery indust•y 

and dedicated to their customers, associates, and communities. The independent supermarket 

channel is accountable for close to I% of the nation's overall economy and is responsible for 

generating $ 131 billion in sales, 944,000 jobs, $30 billion in wages, and $27 billion in taxes. 

NGA sees great promise in the possibility of reform to help Main Street businesses grow. NGA 

wants to be helpful in achieving tax refonn, but there are priorities that NGA is not willing to 

compromise to achieve lower rates. 

THE NEED FOR RATE PARITY 

Privately-held C- Pass-Through 

Corporation Entity 

Gross Income $100 $100 

COGS $90 $90 

S&A $8 $8 

Net Profit $2 $2 

Tax Rate 20% $.40 .. 

Tax Ratc 25% .. $.50 

After Tax $1.6 $1.5 

income 

NGA members are comprised of both pass-through entities and C-Corporations. The House GOP 

Blueprint fails a critical test of providing parity between various legal stmctures- namely passthrough entities verses C-Corporations. 
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Under the House GOP Blueprint, C-Corporations would pay a top tax rate of 20 percent. Passthrough entities would pay a top tax rate on "active business income" of 25 percent, but could face 

a higher top rate when other factors are figured in. 

The rate difference of five-percentage points or possibly more is troubling. This difference creates 

incentives for businesses to choose one legal form instead of another. The government should not 

be in the business of picking winners and losers based on legal formation. A business owner should 

choose the legal form that makes most sense for his business. 

It is likely that in a geographic area there will be two independent supermarkets competing against 

each other, where one retailer is setup as a C-Corporation and the other is organized for tax 

purposes as a pass-through entity. The difference of having a significantly lower tax rate between 

the two different types of entities could create a significant advantage in favor of the C-Corporation 

(see chart above). The C-Corporation will have more cash flow than its pass-through entity 

competitor. If the top line number in the chart is changed to $10 million or $100 million, the 

difference between the two businesses entities is magnified and the inequities becomes rapidly 

apparent. 

In addition to the inequity issue, there is a misconception on Capitol Hill that all C-Corporations 

pay a second layer of tax. The C-Corporation pays once at the corporate level and shareholders 

pay a tax when dividends are paid. There is a misconception about how NGA C-Corporations 

operate. NGA C-Corporations are privately-held or closely-held corporations. The owners are the 

shareholders, and there is not the pressure one would see with a publicly traded corporation to 

return dividends to shareholders. In fact, in a survey conducted by NGA, the majority of NGA 

member C-Corporations do not pay dividends. Instead these corporations reinvest their earnings 

back into the business. 

INTEREST EXPENSE DEDUCTION 

The House GOP proposal would allow businesses to deduct interest expense against interest 

income, with any net interest expense not being deductible but being carried forward indefinitely 

to use against future net interest income. 

Independent food retailers and wholesalers rely on loans from banks and other lending institutions 

to help finance their businesses. Independent retailers and wholesalers also issue debt. They do not 

issue equity to grow their businesses. Part of the calculus of taking out a loan or issuing debt is the 

ability to deduct the interest. Being unable to deduct the interest expense from a loan would hurt 

the ability ofNGA member companies to grow. 

The most obvious area where this would hurt NGA members is in the operations side of the 

business-for instance, to make payroll or hire an employee. A NGA survey showed that 80 

percent of NGA members incur debt in connection with operating their business. Independent 

retail and wholesale food businesses are committed to providing the best value to their customers. 

Making interest expense non-deductible increases the cost of capital. Higher costs of capital will 

squeeze margins hurting businesses and consumers. The loss of the interest expense deduction for 
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a non-depreciable expense is punitive, and should not be part of a plan that the House Ways and 

Means Committee adopts. 

ESTATE TAX 

NGA supports the full and permanent repeal of the estate tax. 

Well over half of the assets of a typical supermarket-the highest of any other industry sectorare not liquid, so the death of an owner creates a serious obstacle to continuation of the business. 

Because the estate tax is assessed on the value of a business at the owner's death, it often forces 

families to borrow funds to pay the tax. As a result, it forces the sale of the business or it reduces 

the ability to invest and hampers growth of the business. 

The estate tax is especially burdensome to family-owned retailers and wholesalers and undermines 

important American values of hard work, entrepreneurship, thrift, and intergenerational savings. 

Estate taxes put family-owned businesses at a severe disadvantage when they compete with 

corporations that will never face the prospect of being forced to borrow funds or liquidate an 

ongoing enterprise in order to pay an enormous tax. The estate tax can deal a fatal blow to a 

family-owned business at its weakest moment, costing communities jobs and tax revenue. 

BORDER ADJUSTABLE TAX 

The border adjustable tax outlined in the House GOP Blueprint is a serious issue for the retail 

community and supermarkets in particular. Nearly 20 percent of the products in supermarkets are 

imported, according toNGA data. In the fresh produce aisle, the percentage of imported products 

could be as much as 40 percent depending on the season. What's more, food products include 

items that are imported. The focus of the border adjustment tax thus far has been on bananas, 

coffee, coco, and certain types of fresh flowers- finished products- but if one considers all the 

products that contain imported ingredients, the amount of products that could be affected by a 

border adjustment tax could be much, much greater. 

Retailers operate on narrow margins of two percent or less. If the costs of goods goes up, it is going 

to squeeze margins. Independent supermarkets are committed to delivering the best value possible 

to their customers and to the communities they serve. If prices rise too much, however, it is 

conceivable that the rising costs of goods could possibly be passed on to consumers, meaning 

higher grocery bills. 

Higher grocery bills are not what NGA or NGA member companies want. As mentioned, 

independent supermarkets want to continue to deliver the best possible value to consumers and the 

communities they serve. To ensure this remains possible, NGA would encourage the House Ways 

and Means Committee not to include a border adjustable tax in its final tax proposal. 

LAST-IN, FIRST-OUT ACCOUNTING (LIFO) 

The Last-In, First-Out (LIFO) method of accounting is an accounting method widely used by the 

food retail and wholesale industry. Under LIFO, the last good taken into inventory is considered 

the first sold. In times of rising prices, the LIFO method more accurately matches the costs of 

goods sold to revenue and helps protect against price shocks. NGA believes it is imperative that 

3 
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Congress protect LIFO, which has been a widely accepted method of accounting since 1939. NGA 

also believes that Congress should not tax LIFO reserves. LIFO reserves are a book keeping entry. 

There is no money set aside in a "LIFO reserve". Nearly 40% of our members indicated that even 

if given 10 years they could not pay off their LIFO reserve. A tax on LIFO reserves could severely 

harm NGA members. 

MAKE TEMPORARY PROVISIONS PERMANENT 

Provisions that expire and are retroactively reinstated provide a limited benefit to businesses. 

Businesses need to plan and need certainty to take advantage of provisions in the Code that are 

designed to spur economic growth. The stop and start nature of certain provisions means that 

businesses will either not use or will not fully utilize the provisions, which is detrimental to 

economic growth. 

Two provisions that need to be made permanent are the Work Opportunity Tax Credit (WOTC) 

and the New Markets Tax Credit (NMTC). 

WOTC is critically important to businesses as a hiring incentive to create jobs. Small businesses, 

including independent supermarkets, use WOTC and other tax credits to expand the number of 

workers they hire. As a measure that helps drive jobs and the economy, WOTC is critical and it 

works. 

Under the Protecting Americans from Tax Hikes Act of2015 (PATH Act), Congress extended the 

WOTC for five-years. Unfortunately, this credit expires from time to time. The expiration of the 

credit and the uncertainty that it will be there consistently makes it hard for businesses that utilize 

this credit to plan. Moreover, it makes business more reluctant to use the credit if they are not sure 

it will be available. This program drives hiring, helps the economy, and boosts economic growth. 

It is time to make this credit permanent so that businesses can adequately plan for maximizing the 

credit. 

The NMTC provides an incentive to investors that invest in low income communities. Some lowincome communities are food deserts-a place where there is not a grocery store. The NMTC has 

been used by the industry to help spur development of new stores in some food deserts. The 

opening of a store in a food desert or a low-income community provides jobs to local residents, 

increased economic activity in a community, and access to more food options. The credit is set to 

expire on December 31 , 2019. For NGA members who make long-term investment plans, it is 

important that this credit be made permanent so that it can be maximized, which will lead to an 

overall economic benefit to the economy and benefits to local consumers. 

WHAT THE CODE NEEDS: LOWER RATES, SIMPLICITY, AND PERMANANCE 

First and foremost, tax reform needs to lower effective rates for independent food retailers and 

wholesalers. Food retailers and wholesalers pay high effective tax rates-in some cases more than 

30 percent. As privately-held and closely-held businesses, NGA members reinvest their earnings 

into their businesses for expansion purposes. A lower effective tax rate for independent food 

retailers and wholesalers will allow a business to reinvest in purchasing more equipment, 

expanding, and hiring more people-all of which will help grow the economy. 

4 
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The tax code also needs to be simpler. According to The Tax Foundation, the average business 

return takes 23 hours to prepare, and for NGA member companies a return can take significantly 

more time. Independent food retailers and wholesalers are experts at what they do, and are not 

necessarily experts at tax preparation. Doing taxes for their business requires having an internal 

tax department or using outside experts. This is money that is being diverted away from more 

productive uses such as hiring more employees and helping to grow the economy. 

Congress also needs to provide certainty to taxpayers. It does not help businesses plan from yearto-year if they do not know what the tax rate is going to be or if there are going to be provisions 

that could reinstated retroactively. 

INCLOSING 

NGA would like to thank the Chairman, Ranking Member, and Members of the Committee for 

allowing NGA to offer these comments on this critical matter. To restate, NGA is committed to 

tax reform. NGA believes it is critical for moving the economy forward. But the House Ways and 

Means Committee needs to carefully consider how the ramifications of tax reform could affect an 

industry that employs nearly a million people across the country, including in every congressional 

district, and how reform will affect the millions of consumers who rely on independent 

supermarkets for their groceries. NGA would encourage both parties to put partisan differences 

aside and work to help family-owned Main Street businesses. 

5 
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... NATIONAL LOW INCOME 

HOUSING COALITION 

Tax Reform Proposal to Grow the Economy and Create Jobs 

Submitted to the Committee on Ways and Means 

U.S. House of Representatives 

May 18, 2017 

The National Low Income Housing Coalition (NLIHC) urges Congress and the Trump 

administration to use tax reform as an opportunity to help address one of the most 

critical issues facing extremely low-income families today: the lack of decent, 

accessible, and affordable housing. Through smart, modest reforms to the mortgage 

interest deduction (MID)- a $70 billion tax write-off that primarily benefits higher income 

households - Congress can reprioritize and rebalance federal spending on housing to 

help make the deeply targeted investments in affordable rental housing that our nation 

needs to help the economy, our communities, and families thrive. All without increasing 

costs for the federal government. 

NLIHC is dedicated solely to ensuring that people with the lowest incomes in the United 

States have affordable and decent homes. Our members include state and local 

housing coalitions, nonprofit housing providers, homeless service providers, fair housing 

organizations, researchers, public housing agencies, private developers and property 

owners, local and state government agencies, faith-based organizations, residents of 

public and assisted housing, and concerned citizens. While our members include the 

spectrum of housing interests, we do not represent any segment of the housing 

industry. Rather, we work with and on behalf of extremely low income households who 

receive or need housing assistance. 

Research confirms that access to an affordable rental home is essential to economic 

prosperity and job creation. Having an affordable place to call home allows families to 

participate fully in the economy, making it easier for adults to find and keep good jobs 

and contribute to economic growth. An affordable home improves children's health and 

education in ways that increase their chances of economic success as adults. Federal 

investment in affordable housing boosts local economies and creates jobs. Despite the 

benefits of affordable housing, three out of four families eligible for rental assistance go 

without this help. 

NLIHC and our United for Homes campaign proposes modest reforms to the MID to 

provide 25 million low and moderate income homeowners with a greater tax break and 

to reinvest the $241 billion in savings over 10 years to provide affordable rental homes 

to families with the greatest needs. With these reforms , Congress and the Trump 

administration can help end homelessness and housing poverty once and for all, giving 

all families an opportunity to break through the cycle of poverty and climb the ladder of 

economic success. 
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I. The Need for Affordable Housing 

Today, the affordable housing crisis in America continues to reach new heights. Rents 

are rising , wages of the lowest income workers are flat, and more people are renting 

their homes than ever before. But the supply of affordable housing and rental 

assistance has not kept pace. As a result, record-breaking numbers of families cannot 

afford a decent place to call home. 1 Every state and congressional district is impacted. 

Unless we increase investments in affordable housing to keep up with the need, these 

challenges will only get worse as demand for rental housing grows over the next 

decade2 

The greatest need for affordable housing-on the local, state, and national level-is 

concentrated among extremely low income renters who earn no more than 30% of the 

area median income (AMI) or the poverty guideline. NLIHC's recent report, The Gap: 

The Affordable Housing Gap Analysis 2017, found that there is a shortage of 7.4 million 

affordable and available rental homes for the nation's 11.4 million extremely low income 

renters. Nationally, only 35 affordable homes are available for every 100 extremely low 

income renter households. As a result, 71 % of the poorest families are severely costburdened, spending more than half of their limited income on rent and utilities. These 

8.1 million households account for 72.6% of all severely cost burdened renters in the 

country. They are forced to make difficult choices between paying rent and buying 

groceries or visiting their doctor. This is the definition of "housing poverty." In the worst 

cases, these families become homeless. 

NLIHC's 2016 Out of Reach report shows the difference between wages and the price 

of housing in every state, county, and jurisdiction by estimating each locality's "housing 

wage," the hourly wage a full-time worker needs to earn in order to afford a modest, 

two-bedroom apartment. In 2016, the national housing wage was $20.30 per hour. A 

worker earning the federal minimum wage would need to work 112 hours a week-or 

2.8 full-time jobs-just to afford a modest two-bedroom apartment. While the housing 

wage changes from state to state and county to county, there is no jurisdiction in the 

United States where a full-time worker earning the prevailing minimum wage can afford 

a modest, two-bedroom apartment. And it's not just minimum wage workers for whom 

rents are out of reach: the average renter in the U.S. earns $15 per hour- $5 an hour 

less than the national housing wage. NLIHC's 2017 edition of this report will be 

published on June 8. 

The public is looking to the White House and Congress for solutions. According to a 

recent How Housing Matters survey, 81% of Americans believe housing affordability is a 

problem in America , and 60% characterize affordability as a serious problem. Three out 

1 According to HUD programs, households spending more than 30% of incom e for these housing costs are 

considered to be "cost· burdened." Households spending more than SO% are considered to be "severely cost· 

burdened." 2 https://www.washingtonpost.com/news/in-theory/wp/2016/10/11/better-housing-policy-could-save-us-allmoney-why-are-we-ignoring-it/?utm term=.7baa41ec3cb9 
482 


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of four (76%) Americans believe it is important for federal elected officials to take action 

on housing affordability, and 63% believe the issue is not getting enough attention. 3 

1. Impact on Economic Mobility 

Affordable housing is a long-term asset that helps families and children climb the 

economic ladder. According to the How Housing Matters survey, 70% of Americans 

agree that "investing in affordable, quality housing is investing in kids and their future."

4 

Increasing the supply of affordable housing and rental assistance-especially in areas 

connected to good schools, well-paying jobs, healthcare, and transportation-helps 

families climb the economic ladder and leads to greater economic and community 

development. In addition, children who live in a stable, affordable home have better 

health and educational outcomes, gain greater access to economic opportunities, enjoy 

better mental and physical well-being, and benefit from stronger communities. Research 

shows that increasing access to affordable housing is the most cost-effective strategy 

for reducing childhood poverty in the United Statess 

Ground breaking research by economist Raj Chetty offers persuasive evidence of the 

impact of affordable housing on upward mobility for children. Using new tax data, Chetty 

and his colleagues assessed the long-term outcomes for children who moved at a 

younger age to lower poverty neighborhoods. Chetty's study found that children who 

were younger than 13 when their family moved to lower poverty neighborhoods saw 

their earnings as adults increase by approximately 31 %, were more likely to live in 

better neighborhoods as adults, and less likely to become a single parent. 

Other research shows that children living in stable, affordable homes are more likely to 

thrive in school and have greater opportunities to learn inside and outside the 

classroom. Children in low income households that live in affordable housing score 

better on cognitive development tests than those in households with unaffordable 

rents.

6 Researchers suggest that that is partly because parents with affordable housing 

can invest more in activities and materials that support their children's development.7 

Having access to affordable housing allows the lowest income families to devote more 

of their limited resources to other basic needs. Families paying large shares of their 

income for rent have less money to spend on food , health care, and other necessities 

than those with affordable rents _a 

3 http://howhousingmatters.org/articles/affordable-housing-investment-kids-future/ 

4 http://howhousingmatters.org/articles/affordable-housing-investment-kids-future/ 

5 http://www.urban.org/research/publication/reducing-child-povertv-us 

6 http://www.tandfonline.com/doi/abs/10.1080/10511482.2014.899261 

7

https://www.macfound.org/media/files/Affordable Housing Child Enrichment Stronger Cognitive Developmen 

t£Q! 

8 http://www.khs.harvard.edu/sites/khs.harvard.edu/files/americas rental housing 2015 web.pdf 
483 


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2. Impact on the Economy and Job Creation 

Beyond the broad benefits to economic mobility, an investment in affordable housing for 

the lowest-income households bolsters productivity and economic growth. By 

connecting workers to communities with well-paying jobs, good schools, and transit, 

investments in affordable housing can spur local job creation and increase incomes. 

Investments in affordable housing also boosts local economies and contributes to 

neighborhood and community development. 

Research shows that the shortage of affordable housing in major metropolitan areas 

costs the American economy about $2 trillion a year in lower wages and productivity. 

Without affordable housing, families have constrained opportunities to increase 

earnings, causing slower GOP growth. Moreover, each dollar invested in affordable 

housing boosts local economies by leveraging public and private resources to generate 

income-including resident earnings and additional local tax revenue-and support job 

creation and retention. Building 100 affordable rental homes generates $11 .7 million in 

local income, $2.2 million in taxes and other revenue for local governments, and 161 

local jobs in the first year.

9 

II. The Need to Reform the Mortgage Interest Deduction 

Congress has a clear opportunity to enact tax reform that addresses the growing 

affordable rental housing crisis facing millions of low-income people in every state and 

community. That starts with reforming the mortgage interest deduction (MID), our 

nation's largest housing subsidy, and reinvesting these scarce resources to serve those 

with the greatest needs. 

MID reform is no longer a political "third rail." Experts from across the ideological 

spectrum are increasingly calling the MID what it really is: a wasteful use of federal 

resources that encourages households to take on higher levels of debt, disrupts the 

housing market by increasing costs for everyone, and mostly benefits those who do not 

need federal assistance to live in a stable home. This includes the Wall Street Journal 

editorial board, former President George W. Bush advisor Dennis Shea, the CATO 

Institute, the Ronald J. Terwilliger Foundation, former President Obama advisor Michael 

Stegman, former Labor Secretary Robert Reich, Pulitzer prize-winning author and 

sociologist Matthew Desmond, and many others. 

Each year, the federal government spends almost $200 billion to help Americans buy 

and rent their homes. A full 75% of all federal housing resources goes to subsidize 

higher income homeowners though the MID and other homeownership tax breaks. In 

fact, the federal government spends more to subsidize the homes of the 7 million 

households with incomes above $200,000 than to help the 55 million households with 

incomes of $50,000 or less, even those these families are more likely to struggle to 

afford a place to call home. 

9 https:l/www.nahb.org/-/media/Sites/NAHB/Economic%20studies/1-REPORT local 2015031611 5955.ashx?la=en 

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The MID is poorly 

targeted and largely 

benefits America's highest 

income households. 

According to the 

Congressional Budget 

Office, 75% of the 

benefits of the MID go to 

the top 20% of earners; 

15% of the benefits to the 

top 1%. Almost all of the 

tax break goes to 

households with incomes 

above $100,000. 

Deductions for homeowners rise with income 

The Home Mort&Oige Interest Deduction received by fJmilies d_ivicfed into 20 gtoups 

{vt'llhles) by modifted gross income 

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Everyone else gets WashinQton Center for Eouitable Growth 

almost nothing. Half of all 

homeowners receive no tax benefit from the MID because they do not itemize their tax 

deductions and instead take the standard deduction. At the same time, only one in four 

of the poorest households that are eligible for housing assistance get the help they need 

because of chronic underfunding. 

Economists across the political spectrum agree that the MID does little to promote 

homeownership. Higher income households that do benefit from the MID would likely 

choose to buy a home regardless of whether they receive a tax break. Similar countries 

without a MID have the same homeownership rate as the U.S. or higher. 

Moreover, the MID primari ly benefits affluent homeowners living in expensive urban 

areas in just a handful of states. More than 40% of MID dollars claimed go five states, 

skewed to the higher income homeowners. The rest is diw ied up between the 

remaining 45 states. 

Ill. The United for Homes Proposal 

NLIHC's United for Homes campaign - which has been endorsed by more than 2,300 

organizations, local governments, and elected officials - proposes to reform the MID. 

The changes are simple and modest. 

UFH calls for reducing the size of a mortgage eligible for the MID from $1 million 

to the first $500,000, generating $87 billion in savings over 10 years. An analysis of 

2013-2015 Home Mortgage Disclosure Data (HMDA) shows that just 6% of all 

mortgages in the U.S. are over $500,000. Moreover, homeowners with large mortgages 

would still receive tax relief on the first $500,000 of their mortgage. 

5 
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~~~ MORTGAGES OVER $500,000 BY STATE ~~,- ~ ... ~- I-~ 

JUST 6.0% OF MORTGAGES JN THE UNITED STATES FROM 2013 TO 2015 WERE OVER $500,000 

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UFH calls for converting the deduction into a nonrefundable, 15% capped credit, 

generating $191 billion in savings over 10 years. 

Half of all homeowners receive no benefit from the MID because they do not itemize 

their tax deductions. By converting MID to a credit, an additional 15 million 

homeowners-99% of whom have incomes under $100,000- who currently get no 

benefit under the MID would receive a much-needed tax break. In total, 25 million low 

and moderate income homeowners would receive a greater tax break than they 

currently do under the MID. 

UFH calls for reinvesting the $241 billion in savings into affordable rental housing 

for families with the greatest, clearest housing needs. The UFH reforms would 

generate $241 billion in savings over 10 years to be reinvested into targeted rental 

housing programs that serve families with the greatest needs, including the national 

Housing Trust Fund (HTF), the creation of a renters' credit, Housing Choice Vouchers, 

and public housing. 

6 
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1. National Housing Trust Fund 

The national Housing Trust Fund is the first new housing resource in a generation. It is 

exclusively targeted to help build, preserve, and rehabilitate housing for people with the 

lowest incomes. 

NLIHC led a national coalition that played a critical role in the creation of the Housing 

Trust Fund through the passage of the Housing and Economic Recovery Act of 2008. In 

2016, the first $174 million in Housing Trust Fund dollars were allocated to states. This 

is an important step, but far more resources are necessary to meet the need. 

The Housing Trust Fund is the only federal housing program exclusively focused on 

providing states with resources targeted to serve households with the clearest, most 

acute housing needs. Because the Housing Trust Fund is administered by HUD as a 

block grant, each state has the flexibility to decide how to best use Housing Trust Fund 

resources to address its most pressing housing needs. Each state distributes the 

resources based on its annual Allocation Plan, which identifies the state's priority 

housing needs. States decide which housing developments to support. 

The Housing Trust Fund is also the most targeted federal rental housing production and 

homeownership program. By law, at least 75% of Housing Trust Fund dollars used to 

support rental housing must serve extremely low income (Ell) households earning no 

more than 30% of the Area Median Income (AMI) or the federal poverty limit. All 

Housing Trust Fund dollars must benefit households with very low incomes earning no 

more than 50% of AMI. In comparison, most other federal housing programs can serve 

families up to 80% of AMI. The statute requires that at least 90% of the funds be used 

for the production, preservation, rehabilitation , or operation of rental housing. Up to 10% 

may be used for homeownership activities for first-time homebuyers: production, 

preservation, and rehabilitation; down payment, closing cost, and interest rate buy-down 

assistance. 

Currently, the Housing Trust Fund is funded with dedicated sources of revenue outside 

of the appropriations process. The initial source of funding designated in the statute is 

an annual assessment of 4.2 basis points (0.042%) of the volume of business of 

Freddie Mac and Fannie Mae, 65% of which goes to the Housing Trust Fund. 

The statute also provides that the Housing Trust Fund can be funded by other sources 

of revenue, such as any appropriations, transfers, or credits that Congress may 

designate in the future. However, the Housing Trust Fund should be funded with 

dedicated revenues generated outside of the appropriations process so that it does not 

compete with existing HUD programs. 
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2. Renters' Credit 

NLIHC supports proposals to establish a tax credit to help make housing affordable for 

renters with the lowest incomes.10 Our nation has long provided mortgage tax relief for 

higher income homeowners, most of whom would be stably housed without assistance. 

A renters' tax credit that could help ensure that the lowest income households can 

afford a safe, decent home is long overdue. 

A renters' tax credit could complement the existing Low Income Housing Tax Creditwhich works well as a subsidy for affordable housing development, but is rarely 

sufficient on its own to push rents down to levels poor families can pay-and rental 

assistance programs, such as Housing Choice Vouchers-which are highly effective, 

but reach only a modest share of the families in need of such assistance. 

Any renters' credit should be tailored to benefit primarily families with the lowest 

incomes. Efforts to ensure that extremely low income households do not pay more than 

30% of their incomes on housing should be prioritized. 

Proposals to establish a renters' tax credit offer a promising opportunity to address the 

affordable housing challenges of the many lowest income households who go without 

assistance and to help these families keep more of their incomes for other necessities. 

3. Housing Choice Vouchers 

Housing Choice Vouchers are a proven tool in reducing homelessness and housing 

insecurity, as well as helping families climb the economic ladder. Housing vouchers help 

people with the lowest incomes afford housing in the private housing market by paying 

landlords the difference between what a household can afford to pay in rent and the rent 

itself, up to a reasonable amount. Administered by HUD, housing vouchers comprise 

the agency's largest rental assistance program, assisting more than 2.2 million 

households. 

Despite the program's proven success in ending homelessness and reducing housing 

insecurity, limited funding means that a very low share of eligible families receives this 

needed assistance. Today, just one in four eligible families receive the rental assistance 

they need. 

Recently, NLIHC published Housing Spotlight: The Long Wait for a Home, which 

examined the waiting lists for federally assisted housing. NLIHC surveyed public 

housing authorities (PHAs) across the nation and found that more than half (53%) of all 

waiting lists for Housing Choice Vouches (HCVs) were closed to new applicants. Of 

these, 65% had been closed for at least one year. The average wait time for vouchers is 

10 Proposals have been developed by the Center on Budget and Policy Priorities (CBPP) and the Terner Center for 

Housing Innovation at the University of California Berkeley. Details on the CBPP proposal can be found here: 

http://www.cbpp.org/research/housing/renters-tax-credit-would-promote-eguity-and-advance-balanced-housingThe Terner Center proposal ca n be found here: http://ternercenter.berkeley.edu/fair-tax-credit 

8 
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1.5 years, and a quarter (25%) had waiting lists of at least three years. Some of the 

largest PHAs had waiting lists of at least seven years. 

Given the program's effectiveness, we recommend that Congress significantly expand 

housing vouchers provide families in need with housing choice. 

While housing vouchers offer families the prospect of moving to areas of opportunity, 

barriers to mobility prevent many from doing so. Many private-sector landlords refuse to 

accept housing vouchers-whether because of the administrative costs, because 

vouchers do not cover the full cost of rent in high-cost areas, or outright discrimination. 

There are a number of steps that can be taken to address these issues, including 

consolidating public housing authorities' administration of vouchers within a housing 

market, directing HUD to adopt small area fair market rents (SAFMRs) with strong 

tenant protections, barring source-of-income discrimination, and funding mobility 

counseling pilot programs, among others. 

4. Public Housing 

Public housing is home to more than 1.1 million households and plays a critical role in 

providing safe, decent housing to families with the greatest needs. The preservation of 

this important community asset must be a part of any strategy to end housing poverty. 

More than half (52%) of all households living in public housing are headed by a disabled 

and/or elderly resident, and nearly half (41 %) have at least one child residing in the 

home. Nearly three quarters (72%) of households are considered very low or extremely 

low income, making less than 50% of the area median income, and the average annual 

tenant income is about $13,400. 

Despite its critical role, public housing capital repairs have been chronically 

underfunded. Today, public housing faces approximately $45 billion in unmet capital 

backlog needs. As a result, HUD is unable to make the repairs needed to preserve its 

public housing stock and has lost 10,000 to 15,000 public housing apartments each 

year to obsolescence or decay. 

Research shows that the vast majority of the more than 2 million people who live in 

public housing are satisfied with their homes, even though they rightfully push for 

solutions to maintenance and management issues. In fact, far more people are trying to 

get into public housing than leave it. In NLIHC's Housing Spotlight: The Long Wait for a 

Home, we found that public housing waiting lists had an average wait time of 9 months. 

Twenty-five percent of them had a wait time of at least 1.5 years. 

The federal government has already invested significant resources to develop, maintain, 

and operate public housing. Communities will lose an important asset-and the federal 

government will lose all of this investment-if Congress continues to underfund public 

housing. We urge Congress to make a significant investment-through an infrastructure 

package or otherwise-in rehabilitating and preserving public housing throughout the 

country. 

9 
489 

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IV. Alternative Approaches 

President Trump's tax reform proposal would indirectly impact the MID. By doubling the 

standard deduction, fewer households would claim the MID and instead would take the 

increased standard deduction. This could provide many low and moderate income 

households a greater, much-needed tax break. 

However, without additional reforms, Mr. Trump's proposal would amplify the MID's 

regressive effect; only the wealthiest Americans would benefit. NLIHC agrees with the 

Wall Street Journal Editorial Board that if Congress doubles the standard deduction, it 

should also embrace other reforms to make MID less regressive -like reducing the size 

of a mortgage eligible for the MID from $1 million to $500,000- and reinvest the savings 

into deeply targeted affordable rental housing. 

V. Conclusion 

NLIHC and our members look forward to working with Congress and the Trump 

administration to address the lack of decent, accessible, and affordable housing, 

especially among families with the greatest needs, through tax reform legislation. 

Together, we can together help end family homelessness and housing poverty once 

and for all. 

10 
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NATIONAL 

MULTIFAMILY 

HOUSING 

COUNCIL 

The N<ttion<tl Multifamily Housing Council (NMHC) and the National Apmtment Association (NAA} 

respectfully submit this statement for the record for the House Ways and Means Committee's May 18,2017, 

tax reform hearing titled How Tax Reform Will Grow Our Economy and Create Jobs. 

For more than 20 years, the National Multifamily Housing Council (NMHC) and the National Apartment 

Association (NAA) have partnered in a joint legislative program to provide a single voice for America's 

apartment industry. Our combined memberships arc engaged in all aspects of the apartment industry, 

including ownership, development, management and finance. NMHC represents the principal officers of 

the apattment industry's largest and most prominent firms. As a federation of nearly 170 state and local 

affiliates, NAA encompasses over 72,000 members representing more than 8.4 million apartment homes 

throughout the United States and Canada. 

Background on the Multifamily Housing Sector 

Prior to addressing the multifamily housing industry's recommendations for tax reform, it is worthwhile to 

note the critic<tl role multifamily housing plays in providing safe and decent shelter to millions of 

Americans, as well as the sector's considerable impact on our nation's economy. 

Today, 111 million Americans, over one third of all Americans, rent their housing (whether in an apartment 

home or single-family home).• There are 18.7 million renter households, or over 15 percent of all 

households, who live in "Partmcnts (properties 'vith five or more units).• Oo an "ggregate basis, the value 

of the entire apartment stock is $3.3 ttillion.3 Our industry and its 38.8 million residents contributed $ t.3 

trillion to the national economy in 2013 while supporting 12.3 million jobs.• 

The U.S. is on the cusp of fundamental change in our housing dynamics as changing demographics a nd 

housing preferences drive more people away from the typical suburban house. Rising demand is not just a 

consequence of the bursting of the housing price bubble. In the five years ending 2016, the number of renter 

households was up by s.S million; homeowners were up by 1.3 million. Going back 10 years, there were 9-9 

million new renter households and approximately 1.6 million new owner households. In other words, the 

growth in renter households precedes the 2008 housing crisis.> 

Changing demographics are driving the dem<md for apartments. Married couples \vith childt·en now 

represent only 21 percent of households. Single-person households (28 (>ercent), single parent households 

(9 percent) and roommates (6 percent) collectively account for 43 percent of all households, and these 

households are more likely to rent.• Moreover, the surge toward rental housing cuts across generations. In 

fact, nearly 73 million Baby Boomers (those born between 1946 and 1964), as well as other empty nesters, 

have the option of downsizing as their children leave the house and many will choose the convenience of 

n.:ul iug.? Ovt:r lt;;tlf (56.6 pc;n.;t;::ut) (Jf Llu: ucl im.;n;a.:;~ iu n;:ul..:a· hvu~~ 1vh.l::; frvm 2006 lv 2016 .;cuu~;: frvru 

householders 45 years or oldet·.8 

Unfortunately, the supply of new apartments is falling well short of demand. Ao estimated 300,000 to 

400,000 units a year must be built to meet expected demand; yet, on average, j ust 244,000 apartments 

were delivered from 2012·20!6.• Furthermore, ac~-ord ng to Harvard's America's Rental Housing, the 

• 2015 ;\lnerican Communhy Survey, I•Ycar Estimates. US Census Bureau *'l"otal Population in Oocupie<.l I IOUS'ing Units by Tenure."' 

, 2015 Ameri¢an Community Sun·ey t·Year Estimates, US CensttS Bureau. ~Tenu re by Units in Structure.· 

.s NMHCestimate based on~ report by Rosen Consulting. Updated 6/ 2.014. 

"National Muhifamily llousing Council and National Apartm<'nt Association. ' NMJ IC tabulations of 2016, 2011, and 2006 Current Population Sun·ty, Annual Social and Eoonornic Supplement. US C<'nsus 

Bureau. 

t. 2015 Current Population Survey. Annual Social & EconomkSuppl<'ment., US Census Bureau. "Ameriea's Families 3J~d Uving 

A.mmg.ements: 2015: Households (H t~tb e series}, table H:i I Family group.s (FG series), table JCG6. 

' Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: April•. 2010 to Jul)• '• 2015, US 

Census Bureau. Baby Boomers arc defined as those born 1946throutb 1964. ' NMHC tabulatjons or 2016 Current Popubtion Sun·ey, Annual Social & Eoonomic.Supplement. US Census Bureau 

• US CcnSU$ Bureau, New Res-idential Constructjon. updated 2/ 20t6. 

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NMHCINAA Statement fOf the Record 

House WaY$ and Means Committee Hearing .. How Tax Refonn Will Grow Our Economy and Creat<J Jobs 

May 18,2011 

Pa!J<t2 

number of renter households could rise by more than 4·4 million in the next decade (depending upon the 

rate of immigration).•<> 

The bottom line is that the multifamily industry provides housing to tens of millions of Americans while 

generating significant economic activity in communities nationwide. Changing demographics and growing 

demand "111 only cause the industry's footprint to expand in the coming years. As will be described below, 

tax policy will have a critical role to play in ensuring the multifamily industry can efficiently meet the needs 

of America's renters. 

Key Priorities for Tax Reform 

Owners, operators and developers of multifamily housing, who favor pro-growth tax reform that does not 

disadvantage multifamily housing relative to other asset classes, have a considerable stake in the outcome 

of the debate over how to reform and simplify the nation's tax code. Industry participants pay federal tax at 

each stage of an apartment's lifecycle. Federal taxes are paid when properties are built, operated, sold or 

transfe rred to heirs. 

In providing our recommendations, which we respectfully make below, we are guided by the principle that 

real estate relies on the free-now of capital and that investment decisions are driven by after-tax rates of 

return rather than by statutory tax rates standing alone. Thus, t11e number oflayers of taxation, the marginal 

rate of tax imposed on income, cost recovery rules, investment incentives and taxes imposed when 

properties are sold, exchanged or transferred to heirs are all critical in assessing the viability of an 

investment. In developing reform proposals, we recommend that the Ways and Means Committee and 

COngress certainly consider·· but also look well beyond •• lowering statutory tax rates and focus on the 

ability of a reformed system to efficiently allocate capital and drive job-creating business investment. As is 

outlined in the pages below, NMHC/NAA believe that any tax reform proposal must: 

Protect Pass· Tiuough Entities from Higher Taxes or Compliance Burdens; 

Ensure Depreciation Rules Avoid Harming Multifamily Real Estate; 

Retain the Full Deductibility of Business Interest; 

Preserve the Ability to COnduct Like-Kind Exchanges; 

Maintain the Current Law Tax Treatment of Carried Interest; 

Preserve and Strengthen the Low-Income Housing Tax Ct-edit; 

Maintain the Current Law Estate Tax; and 

Repeal or Reform the Foreign Investment in Real Property Tax Act to Promote Investment in the 

Domestic Apartment Industry. 

NMH(,;JNAA recogmze that the Ways and Means t,;ommittee ts constdermg the House Kepubltcan Tax 

Blueprint that would move the nation from the CUL'rent income ta< toward a cash-flow ta<." This proposal 

would dramatically alter current-law cost recovery rules, principally by providing for the full expensing 

(instead of depreciation) of prope tty held for investment (except land) and denying the deductibility of 

business interest. The multifamily industry's recommendations for tax reform t11at are made below are 

provided in the context of reforming t11e current-law income tax. The multifamily industry continues to 

analyze the House Republican Blueprint and is committed to working with the House Ways and Means 

COmmittee to consider a full range of options to achieve a viable plan. Following the discussion of our tax 

reform priorities. the multifamily industry offers a few preliminaty thoughts on how the Blueprint may 

impact cost recovery. 

Priority 1 : Tax Roiform Must Not Harm Pass·1·hrough Entities 

The multifamily industry is dominated by "pass-through" entities (e.g., LLCs, partnerships and S 

corporations) rather than publicly held corporations (i.e., C corporations). Indeed, over three-quarters of 

10 H3rvard Joint Center for Housing Suadies," America's Rental Housing" (2015). 

u A Setter W\ly: Our Vision for* Confident America, Tax. June 24, 2016. 

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NMHCINAA Statement fOf the Record 

House WaY$ and Means Committee Hearing .. How Tax Refonn Will Grow Our Economy and Creat<J Jobs 

May 18,2011 

Pa!J<t3 

apartment properties are owned by pass-through entities." This means that a company's taxable income is 

passed through to the owners, who pay taxes on their share of the income on their individual tax returns. 

This treatment contrasts with the taxation of large publicly held corporations that generally face two levels 

of tax. Those entities remit tax at the corporate level under the corporate tax system. Shareholders are then 

taxed upon the receipt of dividend income. 

In addition to pass-through entities, a significant number of industry participants are organized as REB's, 

So long as certain conditions are satisfied, REITs pay no tax at the entity level. Instead, REIT shareholders 

are taxed on distributed dividends. 

The multifamily industry opposes any lax reform effort that would lead to higher taxes or compliance 

burdens for pass-through entities or REJTs. For example, while many are calling for a reduction in the 

nation's 35 percent corporate tax rate, now-through entities should not be called upon to make up the lost 

revenue from this change. 

Priority 2: Ensure Dep••eciation Rules Avoid Harming Multifamily Reai .Estate 

Enabling n11oltifamily developers to recover their investment through depreciation rules that reflect 

underlying economic realities promotes apartment construction, economic growth and job creation. Tax 

reform should ensure lhal depreciation tax rules are not longer than the economic life of assets by taking 

into account natural wear and lear and technological obsolescence. 

In this regard, NMHC/NAA recommend that the Ways and Means Committee consider a recent study that 

suggests the depreciation of multifamily buildings should certainly be no longer than the current-law 27.5-

year peoiod and perhaps shorter. In particular, David Geitner and Sheharyar Bokhari of the MIT Center for 

Real Estate in November 2015 published a paper, Comme•·cial Buildings CC1pital Consumption in the 

United States, which represents the first comprehensive study on this topic in nearly 40 years.'3 By 

including capital improvement e.xpendituo-es, the MIT study finds that residential properties net of land 

depreciatea17.3 percent per year on average, which is a significa.ntly faster rate than previously understood. 

Translated iolo tax policy terms, we belieue this data shows that the current-law 27-s-ycw· depn'Ciation 

period overstates the economic life of an underlying multifamily asset by over eight years. 

lbe apartment industry would be particularly concerned hy proposals to extend the depreciation period of 

multifamily buildings, such as those made in the past to set multifamily depreciation periods at 40 or even 

43 years. 1'hese proposals, which would create an arbitrary and discriminatory cost recovery system that 

does not reflect the economic life of actua.l structures, would have a devastating effect on the apartment 

indushy's ability to constnoct new apartment buildings, particularly when, as noted above, supply continues 

to fall short of demand. Extending the straight-line recovery period for residential rental property from 27.5 

years to 43 years, for example, would reduce a multifamily operator's annual depreciation deduction hy 36 

percent. This result would diminish investment and development in multifamily properties, drive down real 

estate values and stifle the multifamily industry's ability to continue creating new jobs. Put another way, 

the proposal would significantly impact cash flo"''S and investment returns that are at the heart of a 

developer's analysis of whether a paoticular project is economically viable. 

Furthermore, it is not just property owners who would suffer the consequences of depreciation periods that 

do not reflect the economic life of underlying assets. For example, pension plans and life insurance 

companies, which provide retio-emenl and income security to millions of working Americans and retit·ees, 

could be harmed as their real estate investments lose value. Local governments would also see lower 

revenues as the value of multifamily properties decline, leaving a smaller amount of prope1ty taxes to 

finance core services, including law enforcement and schools. In this regard,lhe Tax Foundation found that 

u US Census Bure;.1u & US Dept. of Housing & UrOOn De\·elopment, Renrol Housing Hnonce Suruey. 20 ~. 

tS David Geitner ~nd Sheharyar Bokhari, MIT Center for Real F.state, Commercial Buildings Qlpitol Con$umption in the United 

States, No\'ember 2015. 

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1n5EwSt~N.w .. s .. ~noo 1 Wuhinvton.OC200061 201tnLllOO WeAreApaf1~Mnrs.oro 
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NMHCINAA Statement fOf the Record 

House WaY$ and Means Committee Hearing .. How Tax Refonn Will Grow Our Economy and Creat<J Jobs 

May 18,2011 

Pa!J<'4 

in fiscal year 2014, property taxes accounted for 31.3 percent of state and local tax collections, more than 

general sales taxes individual income taxes and corporate income taxes.14 

Finally, a note is warranted regarding so-called deprecation recaptt1re. Under current law, when a 

multifamily property is sold, there are two types of taxes that apply. First, gain from the sale of the property 

is taxed as a capital gain, typically at a rate of 20 percent for a general partner and 23.8 percent for a limited 

partner. Second, the portion of the gain attributable to prior depreciation deductions is generally subject to 

a 25 percent tax. This second tax is referred to as depreciation recapture. 

NMHCfNAA believe that depreciation recapture taxes as they stand today can have a pernicious effect on 

property investment and should be made no worse. After decades of operations, many multifamily owners 

have a very low tax basis in their properties. If sold under current law, owners would have to pay large 

depreciation recapture taxes. To avoid this huge tax bill, many current owners of properties with low tax 

basis will not only avoid selling their properties, but they will also be reluctant to make additional capital 

investments in properties. The result is deteriorating properties that are lost from the stock of safe, 

affordable housing. The other alternative is for the long-time owners to sell their properties to an e ntity 

that is able to pay a large enough sales price to cover the recapture taxes. To make their investn1ent pay off, 

however, the new owner will likely convert the property to higher, market-rate rents, meaning a loss of our 

nation's affordable housing stock. 

·n,erefore, eitl1er scenario can have the same result: the possible loss of hundreds of thousands of affordable 

housing units. Increasing depreciation recapture taxes will exacerbate this result and fmther discourage 

owners from selling these properties to entities that can retain them as affordable housing. 

Priority 3: Re tain tile Fu/.1 Deductibility of Business Tnterest 

Under current law, business interest is fully deductible. However, efforts to prevent companies from 

overleveraging are leading to an examination of whether the current 100 percent deduction for business 

interest expenses should be curtailed. Unfortunately, curtailing this deductibility would greatly increase the 

cost of debt financing necessary for multifamily projects, curbing development activity. 

As mentioned above, over three-quarters of multifamily properties are owned by pass-through entities. 

Although such entities can access some equity from investors, they must generally borrow a significant 

portion of the funds necessary to finance a multifamily deveiOJ>ment. A typical multifamily deal might 

consist of 65 percent debt and 35 percent equity. Because such entities often look to debt markets, which 

lend money at a rate of interest, to garner capital, the full deductibility of interest expenses is critic.1l to 

promoting investment. Indeed, according to the Federal Reserve,as of December 3t, 2016, total multifamily 

debt outstanding was $1,186.7 billion.'S Reducing the full deductibility of interest would undoubtedly 

increase investment costs for owners and developers of multifamily housing and negatively impact 

aggregate construction. 

In addition to banning the multifamily industry, it is also instructive to note that modifying the full 

deductibility of business interest would be precedent setting. Drs. Robert Carroll and Thomas Neubig of 

Ernst & Young LLP concluded in their analysis, Business Tax Reform and the Tax 11·eatment of Debt: 

The current income Lax generally applies broad income tax principles to the taxation of 

interest. Interest expenses paid by borrowers are generally deductible as a business 

expense, while interest income received by lenders is generally includible in income and 

subject to tax at applicable recipient tax rates. With this treatment, interest income is 

generally subject to one level of tax unde1· the graduated individual income tax rates. This 

... Tax Fo~ d:.~tion, f'acts & Figures, How Does Your State ComJXmt?, ~017, p. 14. 

l$ Board of Governors o( the Federal Reser\'e System, Mortgage DcbtOutsrcmdin.g, By type of property, multifamily residen<::es, 

2016Q4, March 2017. 

APARTMENTS WE LIVE HERE NMHC/NAA ....... ~,.,,...,.., • .., 

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NMHC/NAA Statement for the Reeocd 

House Ways and Means CommiHee Hearing. H()w TaK Reform WiJI Grow Our Economy and Create Jobs 

May 18,2017 

Pa9"S 

is the same manner in which most other business expenses, such as wages payments to 

employees, are taxed, and also follows the practice in other developed nations.•6 

Priority 4: Pl·escrve the AbilihJ to Conduct Like-Kind Exchanges 

Since 1921, 1he Internal Revenue Code has codified the principle that the exchange of one property held for 

business use or investment for a property of a like-kind constitutes no change in the economic position of 

the taxpayer and, therefore, should not result in the imposition of tax. This concept is codified today in 

section 1031 oft he Internal Revenue Code with respect to the exchange of real and personal property,•7 and 

it is one of many non-recognition pwvisions in the Code that provide for deferral of gains.•& 

Like-kind exchanges play a significant role and are widely used in the multifamily industry. Current-law 

like-kind exchange rules enable the smooth functioning of the multifamily industry by allowing capital to 

flow more freely, which, thereby, supports economic growth and job creation. Multifamily property owners 

use section 1031 to efficiently allocate capital to optimize portfolios, realign property geographically to 

improve operating efficiencies and manage risk. By increasing the frequency of property transactions, the 

like-kind exchange rules facilitate a more dynamic multifamily sector that supports additional reinvestment 

and construction activity in the apartment industry. 

According to recent research by Drs. David C. Ling and Milena Petrova regarding tlte economic impact of 

repealing like-kind exchanges for real estate and the multifamily industry in particular:•• 

Assuming a typical nine-year holding period, apartment rents would have to increase by 

u.S percent to offset the taxation of capital gains and depreciation recapture income at rates of 

23.8 percent and 25 percent, respectively. 

Whether based on the number of transactions or dollar volume, multifamily properties, both large 

and small, are the property type most frequently acquired or disposed ofwitb an exchange. 

Nearly nine in 10 (88 percent) of commercial properties acquired by a like-kind exchange result in 

a taxable sale in the very next transaction. Thus, like-kind exchange rules are not used to 

indefinitely defer taxes. 

Governments collect 19 percent more taxes on commercial properties sold following a like-kind 

exchange than by an ordinary sale. 

rs. Robert C3rroll and Thomas Neubi.&t Buslneu T<u Reform amt the Tax 1h.atmtr~t of Debt: ktvenue "eutr(lf rate rM.uctiort 

fincmced by on acr'O$.S·the-/xKI1'd interest deduction limit II,.'Quld deter investme11c, Ernst & Young LLP, M~y 2012, p. 3 . 

• ,Section 1031 pemlits taxpayers to exchange assets used for investment or business pur-poses, ioch•ding moltifnmily properties, for other like-kind assets without the reoognition of gain. The tax on .such g.1.in is deferred, and, in return, the taxpayer c::an·ies over the basis of the original prOperty to the new property, losing the ability to take depreciation at tbe higher exehange ,·alue. Gain is 

inHnediately rtoognir.ed to the e.~tent cash is re<:eived as part of tlle like--kind excl~ange. and the taxes paid on such gain serve to increase the newly aequired property's basis.. Cong.ress has Large.ly left theUke-kiJ~d rule uncha..lgcd since 1928. though it h<tS nru·rowe<.l 

its.sco~. 

The Like--kind exch<Ulge rules art bastd on the. <..'Onocpt that whtn one property is exchanged for another property, th('.ru i.s no 1'\."'Ceipt of cash that gi,·es the owntr the ability to pay taxes on any uJu't.alizOO g,."'lin. The deferral i.s limited to illiquid assets.. such as real t"St:ate. and does not utend to investments that are liqt1id and readity convertible to cash, suc::h M securities. Furthem1ore, the person who excllanges one property for another property oftike-kjnd has not •·eallychnnged hisooonomic position: the taxpayer, having exehanged one property for another property of like·k.ind is in a nearly identic.'l.l position to the holder of an asset that has appreciated or depreciated in value. but who has not yet exited tJle iuvestn)ent •• Under the tax oode, the mere change in ,·aJue of an asset, without realizati.OJl of the &ain or loos, cJoe.s not gcneraUy tris;,&er a ta.xable: t\'t.nl. lr1 such situations. the proper tax treatment is to def('.r n'CO,&nition of any gain and maintain in the new J)I'Optrty the sruue basis as existed in the e.~changed property. This is similar ln oou<:ept to other non·rttognition. ta..~ defemll prO\'i.sions ill heta.~ code, 

intluding pr ~rty exchan&cs for stoc:k under Section 351, prOperty cxchM.gcs for all hHertSt in a partn('.rship under section 'J2l, and stock exchanges for stoc-k or property under section 361 ptwsuant to a corporate reorpni7...'ltion . .. David C. l.ing and Milena Petro~. The economic Impact of Repealing or Limiting Section 1031 Like· Kind 6.-.:chonges in Reol &tote, June 2015. 

APARTMENTS WE LIVE HERE. NMH</HAAJo<••L<9"'""'•••09""' 

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NMHC/NAA Statement for the Reeocd 

House Ways and Means CommiHee Hearing. H()w TaK Reform WiJI Grow Our Economy and Create Jobs 

May 18,2017 

Pa9"6 

Additional research suggests that like-kind exchanges play such a critical role in driving investment that 

repealing the ability to conduct them would harm the economy even if the resulting revenue were used to 

reduce tax rates. Indeed, Ernst & Young LI,P estimates that repealing like-kind exchange rules and using 

the resulting revenue to enact a revenue-neutral corporate income tax rate reduction or a revenue-neutral 

business sector income ta~ reduction (i.e., encompassing both C corporations and Oow-through entities) 

would reduce Gross Domestic Product by $8.1 billion each year and $6.1 billion each year, respectively.•• 

Put another way, a tax rate reduction fi nanced by repealing like-kind exchan,ge rules would, on a net basis, 

harm the economy. 

Ernst & Yotmg LLP summed up its analysis of how repealing like-kind exchanges would impair investment 

by conclud ing, "While ret)ealing like-kind exchange rules could help fund a reduced corporate income tax 

rate, its repeal increases the tax cost of investing by more than a corresponding revenue neutral reduction 

in the corporate income tax rate and reduces GOP in the long-run:•• This result, of course, moves in the 

opposite direction of one of the stated goals for tax reform put forward by many of its proponents . 

. Priority s: Maintain tl1e Current Law Tax 'freatment ofCarriccllntm·cst 

A can;ed interest, also called a •promote," has been a fundamental part of real estate partnerships for 

decades. Investing partners grant this interest to the general partners to recognize tile value they bring to 

the venture as well as the risks they take. Such risks include responsibility for recourse debt, litigation risks 

and cost overruns, to name a few. 

Current tax law. which treats carried interest a.s a capital gain. is the proper treatment of this income 

because carried interest represents a return on an underlying long·term capital asset, as well as risk and 

entrepreneurial activity. Extending ordinary income treatment to this revenue would be inappropriate and 

resu It in skewed and inconsistent tax treatment vis-a-vis other investments. Notably, any fees that a general 

partner receives that represent payment for operations and management activities are today properly taxed 

as ordinary income. 

Taxing carried interest at ordinary income rates would adversely affect real estate partnerships. At a time 

when the nation already faces a shortage of affordable rental housing, increasing the tax rate on long-term 

capital gains would discourage real estate partnerships from investing in new construction. Furthermore, 

such a reduction would translate into fewer constmction, maintenance. on·site employee and service 

provider jobs. 

Notably, former House Ways and Means Committee Chairman Camp recognized the devastating impact 

that a change in the manner in which carried interest is taxed would have on commercial real estate when 

he specifically exempted real estate from a change he sought to the taxation of carried interest in his 1'ax 

Reform Acl q( 2014.02 

Finally, some in Congress see the tax revenue generated by the carried interest proposal as a way to offset 

the cost of other tax changes. Enacting a bad tax law, such as changing the taxation of carried interest, 

merely to gain revenue to make other tax changes, is a d istorted view of good tax policy, which demands 

that each tax proposal be judged on its individual merits. 

Priority 6: Preserve and Strengthen the Low-Income Housing 1'ox Creclit 

The Low-Income Housing Tax Credit (LIHTC) has a long history of successfully genen•ting the capital 

needed to produce low-income housing while also enj oying broad bipartis.1n support in Congress. This 

public/ p•;vate partnership program has led to the construction of nearly 3 million units since its inception 

ao Ernst & Young LLP, Etonomit impac-t of repooling like .. kind exchange rult'S, Marth 2015 (Re\·ised No\'e1nber 201.5), 

'' Ibid. u H.R. t, TCJX Rfform Act o/2014, Section 3621, Ordinary income treatment in the case of partnership interest held in oonnection with performance of services. 

APARTMENTS WE LIVE HERE. NMH</HAAJo<••L<9"'""'•••09""' 

'1775E.,..st. N.W .. ~noo 1 W.uhi"Otcm, OC100061 202W4DOO WeAteApertments..oro 
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NMHC/NAA Statement for the Reeocd 

House Ways and Means CommiHee Hearing. H()w TaK Reform WiJI Grow Our Economy and Create Jobs 

May 18,2017 

Pa!J"7 

in 1986.•3 The LIHTC program also allocates units to low-income residents while helping to boost the 

economy. According to a December 2014 Department of Housing and Urban Development study, 

Unde•·standing Whom theLJHTC Program Se•·ues: Tenants in t..IHTC Units as af December 3J, 20J2, the 

median income of a household residing in a LIHTC un it was $17,066"' with just under two-thirds of 

residents earning 40 percent or less of area median income.'-< Finally, the National Association of Home 

Builders reports that, in a typical year, LIHTC development supports approximately: 95,700 jobs; $3.5 

billion in federal, state and local taxes; and $9.1 billion in wages and business income."' 

Maintaining and bolstering the LIHTC's ability to both construct and rehab affordable housing is critical 

given acute supply shortages. Indeed, the Harvard Joint Center for Housing Studies estimated that there 

were only 58 affordable units for every 100 very low-income households (those earning up to 50 pert-ent of 

area median income) in the United States in 2013.21 

The LJHTC has two components that enable the construction and redevelopment of affordable rental units. 

"!be so-called 9 percent tax credit supports new construction by subsidizing 70 percent of the costs. 

Meanwhile, the 4 percent tax credit can be used to subsidize 30 percent of the unit costs in an acquisition 

of a project or new construction of a federally subsidized projet1 and can be paired with additional federal 

subsidies. 

Developers receive an allocation of LIHTCs from state agencies through a competitive application process. 

"lbey generally sell these credits to investors, who receive a dollar-for-dollar reduction in their federal ta.~ 

liability paid in annual allotments, generally over 10 years. The equity raised by selling the credits reduces 

the cost of apartment construction, which allows the property to operate at below-market rents for 

qualifying families; L!HTC..financed properties must be kept affordable for at least 15 years, but, in practice, 

a development receiving an allocation must commit to 30 years. Property compliance is monitored by state 

allocating agencies, the Internal Revenue Service, investors, equ ity syndicators and the developers. 

First and foremost, Congress should retain the LJHTC as part of any tax reform legislation. In so doing, 

Congress must take cm-e to offset any reduction in equity LIHTC could raise attributable to a reduction in 

the corporate tax rate. Furthermore, NMHC/ NAA reminds Cong•-ess that tax-exempt private activity 

multifamily housing bonds are often paired with 4 percent tax credits to finance multifamily development, 

and that such tax-exempt bonds should be retained in any tax refonn legislation as they play a critical role 

in making deals viable to investors. 

Second, Congress should also look to strengtl1en the credit by both increasing program resources so that 

additional units can be developed or redeveloped and making targeted improvements to the prog•-am to 

improve its efficiency. Congress cou ld increase program authority by allocating additional tax credits. 

Additionally. a part ofthe UHTC that could benefit from a targeted adjustment involves program mles that 

require owners to either rent 40 percent of their units to households earning no more than 60 percent of 

area median income (AMJ) or 20 percent to those earning no more than so percent of AMI. If program 

rules were revised to allow owners to reserve 40 percent of the units for people whose average income is 

below 60 percent of AMI, it could serve a wider array of households. 

Priority 7: Preserve the Current Law Estate Tax 

., National Council of State Housing Agencies, 2016 Housing Credit FAQ, Febn.m.ry 25, 2016. 

bups:/b"'"w.ncsba.ort/ resourte/ 2016·housingo(:redit·fa9! a.. Department of Housing and Urban De.,.etopmeot, Underst<uuling W'ltom tl1e UHTC Program Sen.~: Ttmants in UJITC Units as 

of December 31, 2012, December 2014. p. 23. a) Ibid, p. 24. 

• Robert Dietz, 17te &t>nomic Impact oftht.J\jfordoble Housing Credit. National AssociatiOt\ of Horne BuilderS, Eye Ot) Housing. July 15, 2014. http_:} es®nhousing,o gl:lQ14 7Ll t:. JXlrt...-.o e;affQrilal'! e.: USin&:.creci it . 

~ Hatvard Joint Center for Housing Studies, -rhe St:,~te of the Nation's Housing 2015: Housing Challenges'" (2015), available at 

hnn.:.f/ ww-.,:.jchs.haryard.edu/s:ites/ichs harvard.edu/files0cbs-sonhr=20154 ch6.Mf 

APARTMENTS WE LIVE HERE. NMH</HAA Jo<••L<9"'""'• ••09""' 

'1775E.,..st. N.W .. ~noo 1 W.uhi"Otcm, OC100061 202W4DOO WeAteApertments..oro 
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NMHC/NAA Statement for the Reeord 

House Wa'f$ and Means Commi«ee Hearing. How Tax Reform Will Grow Our Ec:onomy and Create Jobs 

May 13.2017 PageS 

As part of the Amer·ican 'J'axpayer Relief Act of 2012 (P.L. 112-240), Congress in January 2013 enacted 

permanent estate tax legislation. The Act sensibly made permanent the $5 million exemption level (indexed 

for inflation) enacted as part of the Tax Relief, Unemployment Insurance Reauthorizotion cmd Job 

Creation Act of 2010 (P.L. !11·31.2) and set a top tax rate of 40 percent. Crucially, it also retained the 

stepped-up basis rules applicable to inherited assets. As many apartment executives prepare to leave a 

legacy to their heirs, it is vital to have clarity and consistency in the tax code with regard to estate tax rules. 

For this t-eason, the apartment industry remains supportive of the permanent estate tax legislation passed 

in early 2013. 

There are three key elements to the estate tax: (t) the exemption level; (2) the estate tax rate; and (3) the 

basis rules. While all three elements can be important for all types of estates, estates with significant 

amou nts of depreciable real proper1y are especially concerned with how various types of basis rules may 

affect them. 

Exemption Levels: The estate tax exemption level is, in simplified terms, the amount that a donor 

may leave to an heir without incurring any federal estate tax liability. In 2017, there is a $5-49 

million exemption. 

Tax Rates: 'l11e estate tax rate applies to the value of an estate that exceeds the exemption level. The 

maximum rate is 40 percent. 

Basis Rules: The basis rules determine the tax basis to the recipient of inherited property. There 

are generally two d ifferent ways that basis is determined-stepped-up basis and carryover basis. The estate tax today features stepped-up basis rules, and under this regime, the tax basis of 

inherited property is generally reset to reflect the fair market value of the property at the date of 

the decedent's death. lly contrast, under carryover basis, the tax basis of the inherited properties is 

the same for heirs as it was for the donor. This includes any decreases in tax basis to reflect 

depreciation allowances claimed by the donor in prior years. Retaining a stepped-up basis rule is 

critical for estates that contain significant amounts of depreciated real property as it helps heirs 

reduce capital gains taxes and maximize depreciation deductions. 

Priority 8: Refo•·m the Foreign Investment in Real Property Tax Act to Promote Tnveshn ent 

in tlte Domestic Aporhnent Jnclush·y 

The Foreign Investment in Real Property Tax Act (FIRPTA) (P.L. 96-499) serves as an impediment to 

investment in U.S. commercial real estate, including multifamily housing. The FIRPTA regime is 

particularly pernicious because it treats foreign investment in real estate d ifferently than investment in o ther economic sector::. and, thereby, prevent.:; commercia] real C-!:1totc from :::ccuring a key source o f private 

sector capital that could be used to develop, upgrade, and refinance properties. Congress should enact tax 

reform that either repeals FIRPTA or, at the very least, further mitigates its corrosive effect on foreign 

investment in U.S. real estate. 

Under current law, the U.S. does not generally impose capital gains taxes on foreign investors who sell 

interests in assets sourced to the U.S. unless those gains are effectively connected "~th a U.S. trade or business. This means that a foreign investor generally incurs no U.S. f~x liability on capital gains 

attributable to the sale of stocks and bonds in non-real estate U.S. companies. 

FIRPTA, however, serves as an exception to the general tax rules and imposes a punitive barrier on foreign 

investment in U.S. real estate. Under FIRPTA, when a foreign person disposes of an interest in U.S. real 

property, the resulting capital gain is automatically treated as income effectively connected to a U.S. trade 

or business. 11ws, the foreiSIJ investor is subject to a withholding tax on the proceeds of the sale only 

because it is associated with an investment in U.S. real estate. 

In addition to levying tax, FIRPTA also mandates onerous administrative obligations that further deter 

foreign investment in U.S. real estate. First, the buyer of a property must "~thhold 15 percent of the sales 

APARTMENTS WE LIVE HERE. NMH</HAAJo<••L<9"'""'•••09""' 

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NMHC/NAA Statement for the ReQOCd 

House Ways and Means CommiHee Hearing. H()w Tax Reform Will Grow Our Economy and Create Jobs 

May 18,2017 

Pa!J"9 

price of a property sold by a foreign investor so as to ensure taxes are collected. Second, if they overpay tax 

through the withholding, foreigners investi ng in U.S. real estate must file tax returns with the IRS to receive 

a refund of the overpayment. 

The taxes and administrative burdens FlRl"l'A imposes have negative consequences for U.S. commercial 

real estate and the multifamily industry. Because foreign investors can avoid U.S. tax and reduce their 

worldwide tax burden a.~ by investing in U.S. securities or in real estate outside of the U.S., they may simply 

choose not to invest in U.S. real estate. This is particularly hannful to an apartment industry that relies on 

capital to finance and refinance prope11ies. Furthermore, because it is the sale of a U.S. property interest 

that triggers FIRPTA, foreign investors may hold on to U.S. real estate solely for tax considerations. 

Repealing FIR PTA would ensure that tax considerations will not prevent capital from flowing to the most 

productive investments. Such reform could unlock billions in foreign capital that could help to both drive 

new investment and refinance real estate loans. If outright repeal proves impossible, Congress should 

consider additional targeted ref01ms to the FIRPTA regime. NMHC/NM were particularly pleased that 

Congress in late 2015 enacted legislation to both provide a partial exemption from FIR PTA for certain stock 

of real estate investment trnsts and exempt from the application of FIR PTA gains of foreign pension funds 

from the disposition of U.S. real property interests.•• 

The House Republican Tax Blueprint and Cost Recovery 

As noted abo,•e, the recommendations discussed in previous sections relate to reform of the current-law 

income tax. Tbe House Republican Tax Reform Blueprint released in June 2016 represents a fundamental 

change in the way multifamily real estate would be treated for tax purposes. While it would reduce tax rates 

for the flow-through entities (e.g., 1-LCs, partnerships, and S corporations) that dominate the multifamily 

industry, the proposal, by moving f1·om an income tax toward a cash-flow tax, dramatically alters the 

manner in which owners and investors recover their expenses. Under curtent law, mtlltifamily real estate 

is depreciated over 27.5 years, all business interest may be deducted and properties can be like-kind 

exchanged to keep investment dollars in the real estate sector. In contrast, the House Republican proposal 

would provide for the immediate expensing of all assets-other than land-while denying interest 

deductibility. lt is silent on like-kind exchanges. 

'l11e multifamily industry is continuing to evaluate the impact the House Republican proposal would have 

on the development of existing and future multifamily housing. The multifamily industry stands ready to 

work the Ways and Means Committee and Congress to refine this proposal as the policy development 

process moves forward . In the interim, we wou ld offer the following preliminary observations. 

First and foremost. the intel'<'-<t on debt. which has been fully tax deductible for 100 years. plays a critical 

role in developing multifamily real estate. Given the prevalence of the pass-through structure of ownership, 

multifamily entities are heavily reliant on debt markets- as opposed to equity markets that corporations 

access tl>rougb the issuance of stock - to finance development. Accordingly, reducing the full deductibility 

of interest would standing alone increase investment costs for owners and developers of multifamily 

housing and negatively impact agg.regate construction. 

Second, it is unclear whether the benefits of full expensing would fully offset the loss of interest 

deductibility. This result is dependent on factors that include whether an entity is able to use tl1e full value 

of an investment deduction in the year it is generated, the cost of capital, how much leverage a particular 

investor may choose to employ and statutory tax rates. In this regard, if the value of a deduction must be 

carried forward in the form of a net operating loss (NOL), it may be less beneficial. The House Republican 

tax plan proposes to allow NOLs to be carried forward indefinitely and to increase them by a.n interest factor 

that accounts for inflation and a real return on capital. It is uncertain how that real return on capital will be 

detennined, but the formula will be critical. Given that a multifamily building may cost millions of dollars 

to construct, it is likely that many developers will have to recognize NOLs. If a real rate of return on capital 

• Pub1i<: 1.-aw 114·U3. Con$olidcrted Approprioh·ons Act, 2016, Division Q. Pl·otecting Amen'cons.from Tax Hikes Act of 2015. 

APARTMENTS WE LIVE HERE. NMHC/HAAJo<••L<9"'""'•••09""' 

'1715 [.,. St,. N.W .. ~ 1100 I W•Jhl""tOI"', DC 10006 I 202W4ll00 WeAteAp&rltnel'lts..oro 
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House Ways and Means CommiHee Hearing. H()w Tax Reform Will Grow Our Economy and Create Jobs 

May 18,2017 

Pa!J"10 

is determined by reference to Treasury bonds, this will be substantially less valuable than a formula that 

references returns in equities markets. Until the Committee makes clear how NOLs will be calculated, the 

multifamily industry will be unable to fully analy7_e the House Republican proposal. 

Third, it is critical to view cost recovery rules as a whole i11stead of in isolation. As noted above, current tax 

law, provides for depreciation, inte1·est deductibility and like-kind exchanges. While expensing under the 

Blueprint may, in some cases, provide for a de facto like-kind e.~cllange,this is not the case for land. Under 

the proposal, land, which can represent 15 percent to 25 percent of the cost of a typical multifamily deal, 

may not be expensed. Moreover, interest on land purchases may not be deducted. Thus, the tax treatment 

of land is materially worse under the House Republican tax plan than under current law that allows for 

interest deductibility. Although the Blueprint is silent on like-kind exchanges, members may wish to 

address this problem by retaining like-kind exchanges for land or continuing to allow interest deductibility 

on land. 

Finally, while tax reform focuses on future investment, it is absolutely vital that policymakers do not 

diminish the value of current assets or adversely impact capital flows serving existing assets and the real 

estate industry. For this reason, transition mles to any futme tax system will arguably be as essential as any 

new tax rules. This is especially true when it comes to how interest, depreciation and basis will be treated 

on e.xisting multifamily debt. 

According to the Federal Reserve, as of December 31, 2016, total multifamily debt outstanding was $1.19 

trillion. l11e multifamily industry strongly believes that debt serving existing assets should continue to be 

fully tax deductible as an ordinary and necessary business expense. Depreciation deductions on existing 

assets should also continue to be allowed under current law. Furthermore, owners of existing assets should 

be able to use current-law basis rules. Basis should not be reset to zero on the date of enactment as some 

have proposed. Any action to cmtail interest deductions, diminish depreciation reductions or reduce basis 

attributable to existing assets has the capacity to greatly increase tax burdens and potentially lead e.xisting 

multifamily investments to be uneconomic. This would greatly harm our industry's ability to house working 

Americans. 

Conclusion 

In closing, NMHC/NAA look forward to working "~th the House Ways and Means Committee, as well as 

the entire Congress, to craft tax reform legislation that would promote economic growth and the nation's 

multifamily housing needs. In communities aci"Oss the country, apartments enable people to live in a home 

that is right for them. Whether it is young professionals starting out, empty nesters looking to downsize and 

simplify, workers wanting to live near their jobs, married couples without children or fam ilies building a 

better life, aparhnent homes provide a sensible choice. \Ve stand ready to work with Congress to ensure 

that the nation's ta~ code helps bring apartments, and the jobs and dollars they generate, to communities 

nationwide. 

APARTMENTS WE LIVE HERE. NMHC/HAA Jo<••L<9"'""'•••09""' 

'1715 [.,. St,. N.W .. ~ 1100 I W•Jhl""tOI"', DC 10006 I 202W4ll00 WeAteAp&rltnel'lts..oro 
500 

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33393.428

THE VOICE OF RETAIL 

Tbe Honorable Kevin Brady 

Cbain:m10. Conuniuce on Ways & Me:ms 

U.S. House of Representalives 

Washington, DC 205 IS 

Dear Chairman Brady and Ranking Member Neal: 

May 17,2017 

The Honorable R;cbard Neal 

Ranklug: Member, Couuuinec· on Ways & Means 

u.s. House ofRepJ'CSCni:UivC$ 

Wasbinglon, DC 20515 

As the House Ways and Means Committee holds a bearing today to discuss bow tax refonn can g.row 

the economy and create jobs, we write to express our support for comprehensive income tax reform but 

10 also voice conecm for proposals I bat would shill the tax burden to the consumer. 

By way ofback~round. NR.F is the world's largest retail trade assoc-iation, representing discount and 

d"panmcnl srorc-s. home goods and s~cialty stores, Main Str('etmerc-hants, grocers.. wholesaler$, chain 

r-estaursuus and l_oremet r-etailers from the Uu.ited States and more than 45 countries. Reta il is the 

nation's largest private sector employer and conuibutes S2.6 trim on to annual GDJ>. 

NRF believes the n1ost importaut aspect of any ta.x refonn measure is its impact on the ecouomy. jobs. 

and the consmner. Consumer spending represents two-l11irds of GOP, and the reta il industry supports 

d1e jobs of one out of four Americans. wore than 42 miHion people. NRF believes tax refonn 1bat shifts 

the burden of the corporate lax to the conSlmler would JH't'Sent au unnecessary risk to our nation•s 

('C()JIOJuy. lnstead. we. support a reform of the curre111 income tax s-rnrcture by providing a broad base 

and low rates. We believe that 8Jlproacb rather than a sbifl toward a coosmuption tax woul.d bring the 

greatest economic efficiency and stimulate economic growth without causing the economic disloc-ations 

ir.l_hereut in the transition 10 a new t.ax system. 

We arc par1icula.rly conocmed with clements oft he House DJucJJrintthat would increase 1hc tax burden 

on consu ~T$. including 1hc bord~r adj ustmeot t.ax. Our ud ~s show lh ~ Blueprint•s shift of the 

corporate tax base more towards consumption would likely cause retail spending to decline for si.x years 

compared with curren1 law projections, while retail employmenl would decline for the same period. lf 

the border adjustment tax proposal is included on top of this shift. there \vould be an even steeper 

decline in retail s~ di g. 

We bcli~ve there arc other options for tax refonn tbftl would acbi~ve (•<:onomic growth ftnd not shift the 

burden to the consumer. Reagan-style income tax ref onus s uch liS the 1986 Tax Refonn Act or the Tax 

Refonn Act of2014 proposed by fonner Ways and Means Conuniuec Chainuan Dave Camp would 

each have positive effects on both the economy and the consumer. 

We welcome the oppommity to work with the commhtee on this mucb.-oeeded effon to bring. about 

c()JIJ~ t.ax refonn. 

cc: Memb~rs. Conuninee on Ways and Means 

NATIONAl RETAIL FEDERATION 

1101 New York Avenue, NW, Su11e 1200 

Wa$>1"ungton, OC 2000$ 

'IMW.nrf.com 

Sincerely, 

~~~ David French 

Senior Vice President 

Govem.•.uem Rela1ious 
501 

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33393.429

NSGA....-

NATIONAL SPORTING GOODS ASSOCIATION 

Moy 16.2017 

The Honot~~ Ktvi.n Btady, CNlrtnin 

House Ways & Me~ns Committtot 

101li.OtliWOrth House Office Buildlnc 

wnhtneton, oc losto 

Dear Chairman BtidY ilnd Ranking Member Neal: 

1(101 FttbanviUe Drive, Soltc 300 

Mounc Prospect.IL 60056-«>3S Ph: (800) SJS.$422 • Fax: (1141) :191-9$27 

WW'Itt'.asaa.ora • Etn.ail:: inr•"IP·OtS 

The Hcf10(•b4e RlcNrd Heo~ Ronklnl Member 

House Ways & Mt:ans Committee 

341 Cannon House OfRc• Building 

Washington, OC20515 

I write today on beh;.tf of the hundreds of spoJ"ting goods retallers and Institutional dealers opere~tina 

more than 20,000 stores throu;g.hout the United States - many of which ere small, family-owned 

bus.i~s. These retailers ind deJ&ers woukf be unfalrty damaged if a Bo~r Adjust~nt Tax were to be 

Included in the upcomi"8 tax reform ~ss. 

Comblntd with the unfair sales tax adv3nUge our members fW.t agiinst, many of America's 42 miUion 

reun jobs are at risk if the cost of soods sold increases. It is estimated th.at 1he cost of everyc:fay essential 

products like food, clothing and medicine would Increase for consumers by more than $1,700 annualty. 

Those dollal's reduce discretionary spend Ina that comprise many sports. fitness ttnd recreation purchases. 

which keep our nation cu:tive and het~lthy. we oppose government choosing winners and losers, and the 

Border Adjustment Tax would do just that by penalizing American families Who struggle to keep up with 

growlnc t)(ptnses, while their incomes increase at a snafl's pace -If at all. Wfthtn the last 24 months, three 

of tile top ton full line sporting goods retailers have dedared bankruptcy, trlsaerins signifocant job lou in 

the retail soctor. These are facts, not lheo~s, ond these merchants need relief not hurdles. 

As taX relonn bqins to ta'"' sha~ • ..., a>lt the Committee to loolc favorobly on lhe many family-owned, 

job-ere at•,. businesses by creatine i tax reform package that rel1l0Yes the many ~ns placed on thew 

community .. ba~ businesses and to say no to the unfaiT Border Adjuslment Tax. Please consider 

leslslatlon,like the Remote Transa<»ons Panty Act (H.R. 2193) which allows state and local governments 

to collect l!J. taxes due, not just taxes from those of us who purchase thlnss at brk:k and mortar stores, as 

the beuer alternative. State and IO<:al pollee departments can use some of the estimated $26 billion In 

uncollected Internet sales taxes to achieve tht stated purposes of a Border Adjustment Tax. 

We woukf appl'etiate an OPPOr1unity to dl.scu.ss this issue and will be available to meet at your 

eonven1tnte. 

Sincerely, 

IK~ MattCattson 

President & CEO 

cc: NSGA Board of Directors 

Larry Welndruch, Director of Public Affairs 
502 


33393.430

Submitted by Bill Pat ks, President NRS Inc •• 2009 South Main Street. Moscow, Idaho 83843 

Written Testimony Before the Committee on Ways and Means. U.S.. Mouse or Representatives 

w•shington. oc May, 2011 Statement of 8iU Parts 

Chaltm< Brady, Rankint Membf.r Nut. ou~d members olthe cOMmlu e-e: I am a retired profeswr ol 

r~tYnce ;and the foundina PrC$1dent of Nit$, a 1~ empk)yc-e•owncd CQmp.Jny, whl~ b the ,.rgest 

supplier of t>addle s.poru accesSOries ift tiM! wond.l ha~ also published nutnHous artie'les in respecte-d 

jcMnals,. intlucllns TaK Notes. 

1 WOIIId like to address a ctilic:alpatt of our cuuet\1 corporate tax system that Is falll.._ becau~ It 

d iKourases "'"•II busi~» cal)ittl formation. Th,q cod•. Pt:rha;» ir.advtl1cntly, diU~Aades $mill 

cOMpi/lies from bri"C taKed iS corpotattOOS. Speak.er Ryan has pointed out the cori)Ofate rt~te for small 

~slness i$ 44,6" In thoe U.S. venus iS" In C;~~do 1 

An uninten6td co~equ~ of our corparatt t:.x systoem is that it di$COurqe$ $moll bu$ines$C'$ from 

crowlns.. This hapi)Ms because small busin~sesun easitv avoid double taxati<W\ and paylnaanv 

COtpora\e income t~ by slmpty org1nl:lng as •p.Ju-through"' ("'titles like Scorparatlons or limited 

5ibl5tV cOMpanies. Only d'le C co~atioA uneasily pro-Me al'lil'lcen-t!~ to ref~Wflt il'l the buiit'less il'l 

the fQtm of r,qtalncd eamlngs. Therefore, wt.lle being a ·~wthtCX~ch" entity provides obvious tax 

advan-ta,es to smali b~~Sk\.essowners. tt discourac~upit l formatiOn and crowth. A small btlslness 

C)(Canlzoed a$ a C WI»Qfat;ion, howcvltf. h.a$ an '""'ntlve to ret<~ n c.amlngs no! onlydite<tly for srowth. 

bcJt also be<.ause tl\ey ate uitical to obtalnif'IC loaM to futtl'ler flna~ crowtl'l. Those ret.ll'tled eatl'li"'CS 

ll provid~ the saftt.1.. most .lt«Ssl:blc $OUr« of funds to a row tht busl:n.cu.lt Is much more difficult fOf' 

an S cotporation or al'l llC to reinvest its earnin~ beca\lse mlJlt!ple owMtS l»~ d 1sparate 

lnvt$tm•nt obj«ti~$ and noeeds. Abo, t~ is a psytholqglcal barrier to retumi"' oearninp 10 tl-.c 

compa11y after llw!y hi:~ beef' taxed. 

Pass--through entitles arc dearly the right vehicle for most $1:t~tions; I .am not 41dVQCatlng their demise. 

Howtver.l am uraln8 you to MOdify tl'le corporate tax rate structure to make tl\e C corporation a mote 

.mractlvt option to small businc-»e'- Here .. ,, two Wa)'J to KC<Jmplfsh this: 

1 . t limiMt.e tiM "nuty notdl"" 

The TaK Reform N.t of 1986 made the C corport~tion even less auractiW to small busir.ess by Wdlng a 

su11ax tNt brousht th~ 10111 fecftfol marsir.at tax rate to 39" for Income betwee-n $100,000 and 

sus.ooo. Tl'li:s nasw notch had the un-tnte!\CSed coos~I.N!tiCes of not ont'(diSooutaglnc c corporation 

forma~lon. but allO c;~JUJing ~t.Klstin& $mt~ll C corporations to $Wllch to S corparatlon or L~C stlt\IS .c the 

flts.topportul'llty/ll'ldoln, so. small bl.tsi:Msses h.l\'eaVOicf.ed l1w! cotpor;ne ta~. bu1 at the same time. 

they 1\.lvt leu incentive to roetaln the cam•ncs that are critica-l to grow!f'll a succnsful business. 1 • The 

1 ftyfrt_ Paul kit eM- by Gr..U V"" S~,ti: tertl'l, On lh~ ll.«ord. I'OJtHews Tek!vl5ionHttworfl. Notw \'Oft. 4 

~rl01S. 

1 ~ 1986. whllt s (.(lrpariti0ti51'1M sr(M'tl it appt0l6tn•tttr"' Ptf .,..., and LLCS fftUI~il)lotd manyfOld, c 

COfi)OfftioM ~ dtc:lined by~p«!Kif'Ntely l.S.I)el' '(t'~. 

1

8111 Plrl!i,.CJn("orporJtt T•x lttform Build QllAppl.,., ~~. Toll Norts. April,., 2016. p.,!JJ. 

•(dwlrdO. Klfoinblrd, W'11yCorporott ToJtAt{orm Con Hoptl#ll, ToxNol~Apriff. 20JS,p. 94. 
503 

f 


33393.431

39K m.,rginal nne keeps all but the mcnt stubborn entrepreneurs frqm ctetcinc C corporation st~tus.s. 

lhe flrs:t s:tel> toward maki"C c (()(I)OtatiOIU mOfe attractiw to smal busllwu is to repeat the! -'nasty 

1\Qtch "', 

2. lltttO<fov<:e • pteferentlt.l corpcwate rate for smaJI buslf'leu 

OYtf the tau thirty years. tM I'IU.mber ofc corporatiOM hu l)fummeted. tn 1980, the White Hous.e 

Conference on Srnatllhrsln.Hs propo~d that the number on.c ~td for sm.,lt bY sine» Wf1 more 

ar~tiOn ir\<.orporate taxes. Howe\'er. thk has not l'lawene-6. Of'lf" teason ts tl\at tna.f'Vt' e)(J)ens h.a~ 

s«n corp~na c s~wtion as ;~s!ve away to "'hiah net w~;~rth in.dNidufJs" thft own~~ $11'10111 

~slnMses..' But e~n if It were UIJ(>,It is ollin le lmportaM:e compaft'd to tl\e need to Mtp small 

tK!slne» grow. Many sm.a!l twsine»es. indu'e-d into bteominc U,C$ or $<orpo~tlons.. may not be .awate 

of how ti.ited tl\e pb'ltnc field Is a,cairut thetn. They l«.k the r-etained eamln,s tl\at mate the-m cood 

~ndldatos for bans needed to fu('l their srowth. 

With onlv 2"of buslnMs it'I<Otl\e ta:.:comlnc ftom C corporations with IHs than SSOmllioft In s.ales.' 

&Ivins wn.atl busl~ a.n Incentive to tt. ttxcd .aswrPQratlons by lowering the;r rate could prov16e src~ t 

help to small and .med..um·s!ted businesses witOOUt serloiiSiy affe<-tin' reveooe. 

Tl'\etefOte, l sua.e« tl\at the <-«I)Or<ne tall. rate for the frtSt Sl milllorl\ in Income be 10%and JS"ftOm 

S1·S illion~ tt\at futtt.cf &ndu;,tion bcwMidtred. 

COtldt.Kton 

Professon of tax.Kcountlna: uv. or.ty partly in jest, that M accountant si'IO\M lOse his« hef license for 

helping c:re;te • sm;,ll bu,in~~ a~., C COfPQf"<llion. Profe»>r$ in llw sc.hoOisttte t~t an attorney .$hould 

be dlsbatred for creatlf\S a small C CO{poratlon. At\d of <OUrse. many new businesses sl\ould stan asS 

CQfporlliQ1'4 OC' lLCs in qrdc r to ftow throush intti;~l 'o$$C$ to off$et other lncomt:. &.ut aft('r a ttainina 

lKOfo:tabllltv, tht code $hould encou~ec arowfng comP'nlcs to be toxed as a)lpor~tions in orde r to 

cncour-se s.rowtb via c:t;~ ned tarnil'l&$· 

(limlnllt1"1 the .. n<~sty nootch" and introducing prcfcrentlal gr;lduatlon lor smal bv~u -Mil stimulate 

crowtl'l ar.d employmef\t. Grad~»tine corpotate taxes to be far below the lndivtc!Ual rates up to two 

milliQn doollars or mQfC would provide a pOWerful incentive for $11'1f;11 busine$$C$ to tH: ta•cd as C 

((l(potatioos 

• MVPtt$oOIWII $t\lbb0rnnt» tNblt4 NRS tO If OW oYtf 40 )'UN. from .,.lnlelil $.l:,OOO IIW't'Jtffttn.t to •tmos1 $40 

million inult' a$ • CCOIJIOI'•tion befor~~tlv b«OI'M'IstOO. tm~v~ow~ 

• This I$ !toniC b<t<if.IM' Tllt h;lflttfQtm Act of l tM pttwntt<lllip lncom.t._. Pl)'tf$ omti.WftlfiiO'IIm~ IMO 

cOIJIOI'•lJoM b«•us~ k r~llfd tht Gtrte1al Utilit!H Oo<:trl~. "'t~t Pft'mlttH a firm tolquldltt itJ nwtJ at 

mort: than bool Ylhlf 1od to f)IJ'l the proc~s of thetlquid1tion thc'OIIIfl to 'ltod.hotcltr'lwithout f'Nkin& the firm 

paytncom.t».H<II\ the ptn5. M a 'tS...ttof ttlt rt91al. .,.Y taln from llou16iUoni$ ~ twlu: onctto lht 

lqufdltin1 firm (C <Orpor ltior!)ltld "'"' to the ~OO:.hof6fn.: 1 l611MQNVQf TKE$lAFFQf THE JOI.Vf CQMMJntE<m lAXATIOH 8EFQR£ THESENATECOMMflTttQN 

JIHAH(:E KtAIUHG ON NAVIGATING 8US1Nl.SS TAX A;[~Ml APRil U, 2016 by Tho""'' 8.artho4d. f). S 
504 


33393.432

May 31, 2017 

The Honorable Kevin Brady 

Chairman, Committee on Ways & Means 

1102 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Brady and Ranking Member Neal: 

The Honorable Richard Neal 

Ranking Member, Committee on Ways & Means 

1139E Longworth House Office Building 

Washington, DC 20515 

As a pioneer and global leader in the business of employee recognition, we write to encourage you to 

maintain the employee achievement award exemption in tax reform. 

As you know, in most cases, all cash and in-kind gifts from an employer to an employee are considered 

compensation and taxed as such. However, one narrow exception since 1986 is for an employee 

achievement award defined by Sec. 274(j) of the Internal Revenue Code. This provision is good for 

workers, businesses and the economy. 

In 2013, we conducted an impact study- The Power of Recognition- about the economic impact of this 

provision. The results show: 

• Recognizing service and safety achievements of employees generates an estimated total of $44 

billion in economic benefits due to productivity improvements, safety achievement and 

decreased turnover costs. 

• Non-monetary awards have been found to improve worker productivity by an average ofl9 

percent. 

• Non-monetary awards reduce employee turnover by approximately 13 percent. 

Safety awards programs can reduce workplace accidents by as much as 25 percent. 

This study includes data from 2004 to 2012, so growth of employee achievement awards in the past five 

years could mean an even greater impact than reported in the impact study. 

With tax reform on the horizon, we want to remind Congress about the economic value of employee 

recognition awards and the importance of the tax code provisions that encourage employers to celebrate 

and appreciate their employees. 

Attached to this letter you will find the executive summary from the impact study mentioned above. As 

Congress moves toward tax reform, we are hopeful the Ways and Means Committee will keep the value 

of the employee achievement exemption and those businesses that provide those award programs in 

mind. 
505 


33393.433
506 


33393.434

American workers are what make 

American businesses great. Because 

of theirtenacity and dedication, 

the economy is recovering from the 

most serious economic crisis since 

the Great Depression. 

Since their creation, workplace awards that honor length of service and safety 

achievements have supported millions of jobs and helped build American 

businesses across the country. Indeed, employee recognition programs and 

reward strategies show hardworking employees they are appreciated and 

trusted by their employers, communicate employee value, and encourage 

employees to engage in the missions of their organizations. Regardless of the 

larger economic climate, all employees have a need to be connected-to a 

manager, to a company, to a purpose-and they want to be recognized for the 

work they do. 
507 


33393.435

The best companies, big and small, 

appreciate the power of recognition 

and there are thousands of businesses running recognition programs in 

everystote in the country. Companies as varied os Blue Cross Blue Shield, 

ConstellaHon Wines, AstraZeneca, and AT&T understand that awards con 

be significanfty more effective than salary Increases al influencing positive 

behavior. They know lhat workplace awards lead to quantifiable gains In 

worker productivity. tenure and overall safety. 
508 


33393.436

$44 Bi ll ion: measu r ing a nat ion's r e turn o n 

recognition 

Employee awards and recognition aren't just a nice thing to do; they are a 

necessary thing to do. Recognizing service & safety achievements makes good 

business sense, and leads to quantifiable gains in productivity, tenure, and 

workplace safety. 

Service and safety awards programs and their many benefits are encouraged 

through a provision that allows employees to receive an average of $400in 

qualifying service recognition every 5 years, tax-free. This small investment 

in the safety and productivity of American workers has a significant 

macroeconomic benefit, producing annual gains to the economy approaching 

$44 billion: $22 billion from productivity improvements, $7 b illion by improving 

safely, and $ 1 S billion in savings from decreased employee turnover costs. 

RETURN ON RECOGNITION 

~ 

~ $7BILLION + $22 BILLION saved due to safety 

improvements 

in productivity 

gains 

$15BILLION 

Execu1ive svmmory vu 
509 


33393.437

Improved worker performance and productivity 

When employees know they are a valued member of the team. they work 

harder, improving their overall performance. Setting objectives for employees 

to reach, such as a goal for safe behavior. can a lso increase desired 

performance. Non-monetary awards have been found to improve worker 

productivity by an average of 19 percent. And what's good for employees is 

good for business. A 2009 study by Towers Watson found that companies 

with engaged employees increased their operating income by 19 percent. 

as compared to companies w ith a less engaged workforce, which saw their 

operating income drop by a third. 

VIII lhePowerofRecognition 
510 


33393.438

Improved vvorkerretention and satisfaction 

Turnover con cost on organization up to 30%-50% of the annual salary of 

entry-level employees, ISO% of m iddle-level employees, and up to 400% for 

specialized, high level employees. 

COST OF TURNOVER 

30o/oto 

50 

entry•Jevel salary mid-level salary specialized/high-level salary 

Add in the non-quantifiable, but equally critica l. loss of knowledge and 

experience,ondthecostofturnoverconbedevastoting. 

Executive Svmmory IX 
511 


33393.439-440

Non-monetary awards have been 

found to reduce employee turnover 

by approximately 13% thanks 

to increased employee satisfaction. 

A recent global quantitative o nd qualitative study by the Cicero Group found 

organizations th at offer a service recognition program keep employees a n 

overage of two years longer thon organizations that don't. 

WITHOUT RECOGNITION PROGRAM WITH RECOGNITION PROGRAM 

avera e em lo ment 

Moreover, a 2012 study b y economist. Dr. Ike Brannon, Director of Research at 

the R Street Institu te. o public policy research Institute. estimated thot 

increases in worker retention linked to non-monetary recognition owords 

produced an annual economic benefit of $15 billion in reduced turnover costs. 

X The Power o f Recognition 
512 

f 


33393.441

lrnproved safety habits in the workplace 

Safety awards programs reduce workplace accidents b y os much as 25 

percent. Investing in reword strategies to boost safe work practices translates 

d irectly to a happier, healthier workforce a nd higher company profits through 

fewer lost workdays, fewer workers ' compensation claims, a nd less downtime 

in general. 

Executive Svmmory XI 
513 


33393.442

Statement by Chair of the Patriotic Millionaires Morris Pearl 

May 31 51,2017 

Chairman Brady, Ranking Member Neal, and other members of the Committee, 

Thank you for the opportunity to submit this testimony. 

I represent The Patriotic Millionaires. One of our organization's central tenets is that prosperity 

begins with a strong middle and working class-- people who can afford to shop in our 

businesses-- not with tax breaks for the rich. Wealth in America has become increasingly 

concentrated over recent decades, and our citizens and economy have suffered as a result. Our 

nation needs a tax code that works for all Americans, not just a wealthy few. We were troubled 

by Chairman Brady's remarks during the hearing on May 18'", and we urge you to set aside the 

comprehensively disproven theory of trickle-down economics when you consider tax reform 

proposals. 

Giving wealthy Americans and corporations large tax cuts will not help the actual job creators 

who enable economic growth, but will rather further concentrate wealth at the very top, giving a 

break to those who need it the least. It will grow the savings of the few, but do nothing to grow 

the spending of the many. Chairman Brady repeatedly claimed in his opening statement on May 

18'" that we are in desperate need of "pro-growth tax reform ," but evidence has shown time and 

time again that tax cuts for the wealthy do not cause growth for anything, except for the savings 

of the wealthy. 

Wealth doesn't trickle down; it flows up. 

You can neither cut your way to prosperity nor grow your way out of inequality, yet we continue 

to hear these suggestions year after year. Supply-siders argue they are growing the pie for all 

Americans, but rather than feeding all Americans, the result has been more pie for those who 

are already at the table. The rest of America is left scrambling for crumbs. 

Over the last few decades we, wealthy Americans, have done very well, in no small measure 

because we benefited from public education, government services, a civil society, and worldclass infrastructure, all provided by the government. However, our good fortune has not been 

shared by the majority of our fellow citizens, and since our success has been supported by the 

general public, we feel that we, and people like us, have an obligation to pay back. We know 

that growing inequality will make the way of life we now enjoy untenable, and we are afraid that 

Chairman Brady's proposals are moving in that direction. 

We are extremely concerned, based on Chairman Brady's statements, that upcoming attempts 

at tax reform will ask less of us, the wealthy, and ask more of our fellow citizens. We ask that 

you make a public statement upholding the Mnuchin rule, saying absolutely no new tax cuts for 

the wealthy. 
514 

f 


33393.443

Thank you, 

Morris Pearl 

Chair of the Patriotic Millionaires 
515 


33393.444

• ilil= I~ ASSOCIATION 

...• 

NAMIC' Pel :~~ . ...• ...• ..•. 

Statement for the Record 

American Insurance Association 

R¥\ REINSURANCE 

ASSOCIATION 

or AMERICA 

National Association of Mutual Insurance Companies 

Property Casualty Insurers Association of America 

Reinsurance Association of America 

Hearing on 

"How Tax Reform Will Grow Our Economy and Create Jobs" 

House Ways and Means Committee 

May 18, 2017 
516 


33393.445

The property and casualty ("P&C") insurance industry recognizes the importance 

of tax reform to ensuring the growth and competitiveness of the American economy. 

We welcome the opportunity to work with the Congress in developing changes to the 

Code that would improve the competitiveness of U.S. corporations, and simplify 

administration while still ensuring policyholder protection and overall tax fairness. 

Executive Summary 

The P&C insurance industry provides coverage of commercial risks and personal 

risks that are critical to the protection and expansion of the American economy. The 

industry is regulated for solvency and consumer protection by the states, which use the 

Annual Statement filed with state insurance regulators as the basis for accounting. 

Unlike other corporations, insurance companies receive premium income first, and pay 

claims and other expenses afterward. The Annual Statement accounting method 

provides deductions for future claims and expenses needed to obtain a clear reflection 

of income. 

The policy recommendations include: 

Preserve conformity with state insurance regulatory method of accounting, 

Maintain deductibility of reserves, 

Maintain current treatment of municipal bond interest, 

Modernize the Exempt Insurance Income definition and Active Finance 

Exception for deferral of underwriting and investment income, respectively, of 

foreign insurance subsidiaries, 

Allow capital losses on the bond portfolio to be treated as ordinary losses, 

Repeal the obsolete barriers to life/non-life consolidation, 

Preserve Net Operating Loss carrybacks, and 

Because P&C insurers' deduction for advertising expenses is already subject to 

restriction under current law, if advertising expenses are limited for ordinary 

corporations, avoid imposing a double denial of deductions for advertising 

expenses to insurance companies. 

A more detailed discussion of these policies follows. 

Profile of the Property and Casualty Insurance Industry 

The American Insurance Association, the National Association of Mutual 

Insurance Companies, the Property Casualty Insurers Association of America, and the 

Reinsurance Association of America (collectively the "Trades") represent the great 

majority of insurance and reinsurance companies underwriting property and casualty 

insurance throughout the United States. P&C lines of business include personal lines 

such as homeowners and automobile insurance, and commercial lines written for 

Page 2 of 6 
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33393.446

businesses and other organizations, such as workers' compensation, commercial 

general liability, commercial property and business interruption, product liability, surety 

and fidelity. 

The P&C insurance industry pays approximately $300 billion in claims annually, 

covering businesses and individuals. Without proper insurance protection for loss of 

property, injury or liability American businesses cannot open their doors for business, 

much less grow and expand. The insurance industry, including P&C, life and health, 

and related activities, employs more than 2.1 million people, accounting for about 28 

percent of the workforce in the U.S. financial activities sector. 

The insurance industry also plays a significant role in public financing of needed 

services and infrastructure. The P&C industry holds 21 percent of its investable assets 

in municipal bonds. The industry also invests in direct pay bonds, such as Build 

America Bonds, private activity bonds and as partners in public private partnerships. As 

major investors, the industry plays a role in facilitating the development of transportation 

projects, utilities, health care facilities, schools and affordable housing. As such, it is 

incumbent that policymakers carefully consider the implications of tax changes on the 

P&C insurance industry. 

Fairness, Efficiency and Simplicity 

Fairness, efficiency and simplicity are the principals that President Ronald 

Reagan outlined for successful tax reform. The Trades believe those serve as valuable 

guidelines for today and are essential to promote economic growth. The provisions of 

Subchapter L of the Internal Revenue Code, based on the Annual Statement method of 

accounting, provide the special rules necessary to treat insurance companies fairly in 

light of their regulatory requirements and unique business structure. 

Tax policies that mirror and work in concert with regulatory requirements reduce 

distortion and promote economic efficiency. The measure of true economic income for 

P&C insurers tracks the state regulatory framework. Lastly, simplicity in administration 

reduces complexity and compliance burdens. In the context of P&C insurance taxation , 

simplicity lies in following the accounting, financial solvency and investment standards 

imposed by state regulatory authorities. Conformity with the regulatory framework 

reduces administrative burdens and minimizes economic distortions. 

Conformity with Regulatory Framework 

Unlike most businesses, which generally make upfront expenditures and earn 

income in the future, insurance companies receive advance payments in the form of 

premiums in exchange for the promise to pay any covered losses (i.e. customer claims) 

that will occur in the future. As accepting premiums obligates insurers to pay losses on 

future claims, insurance companies record liabilities (i.e. reserves) when losses are 

Page 3 of 6 
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33393.447

incurred by policyholders. Under state regulatory accounting principles, a loss is 

incurred when the event giving rise to the liability occurs (i.e., a car accident), and 

P&C insurers may not establish a loss reserve before the underlying loss event 

occurs. The principle of "conformity" with the Annual Statement underlies the federal 

income tax system for P&C insurance companies. The accounting and tax treatment of 

insurers reflects the fundamental difference between insurance companies and other 

financial institutions- insurers receive premiums up-front and pay losses and related 

expenses later while most other businesses incur their expenses up-front and sell their 

products and services later. From a statutory accounting standpoint, a P&C insurer 

cannot treat premium income as its own until it is clear that these amounts are not 

needed to pay policyholder claims and expenses. Taxing premium income as received 

without deducting reserves for unpaid losses would distort income by overstating 

income in the year of the policy, and understating income in later years when losses 

under the policy are paid. 

Policy Recommendations 

Given the inextricable link between solvency regulation and insurance company 

economic income, it is imperative that the link between regulatory-based accounting 

and reserve requirements and federal income tax treatment be maintained. With this in 

mind, the Trades believe the following principles should guide Congress as it considers 

tax changes affecting the P&C insurance industry. 

Preserve Statutory Accounting as Basis for Tax Accounting: The basic 

components of insurance company taxable income are taken from the Annual 

Statement and are based on statutory accounting. Continued reliance on 

statutory accounting and the Annual Statement is essential for proper 

measurement of insurance company taxable income. 

Maintain Deductibility of Reserves: Central to the proper matching of income 

and expenses is the deduction for loss reserves and loss adjustment expenses. 

These expenses are estimated by professional actuaries based upon an 

adjuster's evaluation of the incurred loss and evaluations of trends in reserve 

components, such as court awards, inflation, or medical expenses. Maintaining a 

deduction for reserves in the year in which the premium is received and losses 

are incurred is essential to prevent a mismatch of income and expenses. 

Maintain Current Treatment of Municipal Bond Interest ("Proration"): P&C 

insurers hold more than $325 billion in state and local bonds, making the P&C 

insurance industry one of the largest holders of municipal securities. Since 1986, 

P&C insurers have been required to include in taxable income 15 percent of the 

interest received on otherwise "tax-exempt" bonds as a reduction of their 

deduction for reserves. Increasing the taxable percentage would discourage P&C 

Page 4 of 6 
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33393.448

insurers from investing in state and local bonds, and, at the same time, increase 

the borrowing costs of state and municipal governments. 

Modernize Exempt Insurance Income definition and the Active Finance 

Exception: Underwriting income of a foreign insurance subsidiary is deferred 

from inclusion in Subpart F if it meets the definition of Exempt Insurance Income. 

The "Active Financing" rule of Subpart F allows foreign insurance subsidiaries to 

defer investment income received as part of active insurance operations in the 

same manner as other active businesses. Briefly, we support revising the 

definition of "Exempt Insurance Income" and "Qualified Insurance Company" to 

be consistent with business models used in multinational insurance and 

reinsurance businesses. These changes are essential, given the modernization 

of insurance regulation since these two provisions were originally enacted. Any 

one-time tax on foreign accumulated earnings of insurance companies should 

not apply to income subject to local restrictions on earnings available for 

repatriation. 

Allow Capital Losses on Investments to be Treated as Ordinary Losses: 

The tax code currently permits P&C insurance companies in limited situations to 

deduct capital losses against ordinary income to fund operating cash deficits. 

The provision allows capital losses to be turned into "abnormal losses" and to 

fund operating cash deficits with sales of capital assets to allow insurers to meet 

the cyclical demands of policyholder claims. This provision should be broadened 

to allow all losses on investment assets to be treated as ordinary, rather than 

capital. 

Repeal the Life/Non-Life Consolidation Rule: Obsolete rules prohibit life 

insurance companies from fully consolidating taxable income with companies 

that are not life insurers, creating enormous complexity and distorting economic 

income. Due to changes in tax law made since the Tax Reform Act of 1986, the 

policy justification for prohibition on consolidation no longer exists. This rule 

should be repealed. 

Preserve Net Operating Loss ("NOL") Carrybacks: P&C insurers are subject 

to periodic large catastrophe losses, which create the situation in which insurers 

paying claims have more allowable tax deductions than taxable income. Under 

current law, an NOL incurred in one taxable year may be carried back to the two 

taxable years preceding the taxable year of such loss and carried forward to the 

20 taxable years following the taxable year of the loss. Utilizing a carry back to 

recoup previously paid taxes creates an immediate cash infusion and provides 

direct access to funds needed to meet policyholder claims. Congress should not 

reduce the current net operating loss carry back period for P&C insurance 

companies. 

Page 5 of 6 
520 

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33393.449

• Maintain Deductibility of Interest Expense- Insurance companies are subject 

to strict regulation intended to ensure the availability of funds to pay policyholder 

claims. As a result, the ability of an insurance company to issue debt, make 

payments on debt, or dividend funds to a parent holding company with debt, is 

limited. Mutual insurers have no other source of raising capital other than debt 

markets as they have no access to equity markets. Excluding insurance industry 

groups (insurance company as well as affiliated group entities) from any interest 

expense limitation recognizes the unique relationship between an insurance 

group's capital and related claims obligations, the role of an insurance holding 

company to issue debt to raise insurer capital, and the unique regulation of the 

industry that limits the ability to issue excessive debt. 

• Advertising: P&C insurers currently are taxed on twenty percent of their 

unearned premiums as a proxy for capitalizing certain "premium acquisition 

expenses," such as advertising expenses, even though such expenses otherwise 

would be immediately deductible. As a result of this special treatment, a 

substantial portion of the advertising expense of P&C companies is effectively 

deferred under current law. Proposals to change the deductibility of advertising 

expenses for P&C companies would result in a "double denial" of the advertising 

deduction and should not be applied to P&C insurers. 

Conclusion 

As Congress moves forward with comprehensive tax reform , it is imperative that 

policy makers understand the business of P&C insurance, its fundamental differences 

from other financial services sectors, and the unique tax provisions applicable to the 

P&C industry. The P&C industry is integral to the vitality of the economy and care 

should be exercised to avoid disruptions to a well-functioning, competitive, stateregulated P&C market. 

Page 6 of 6 
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215 Pennsylvania Avenue. SE • Washington, D.C. 20003 • 202/546·4996 • www.citizen.org 

PUBLICCITIZEN 

May 18,2017 

U.S. House of Representatives 

Committee on Ways & Means 

Washington, DC 20515 

Submitted via email to: waysandmeans.submissions@mail.house.gov 

Re: Submission for the Record for Hearing Entitled "How Tax Reform Will Grow Our Economy and 

Create Jobs" 

Dear Chairman Brady, Ranking Member Neal, and Honorable Committee Members, 

On behalf of Public Citizen's more than 400,000 members and supporters, we urge you to formulate 

a tax reform package that will benefit average Americans and Main Street businesses, not the 

wealthy elite and multinational corporations. The voting public understands that the tax code is 

currently rigged to benefit the richest of the rich and allows some hugely profitable corporations to 

pay zero taxes while the rest of us taxpayers pick up the tab. It's far past time to change that so that 

corporations, millionaires and bill ionaires pay their fair share. 

Right now, our nation is suffering under a false auster·ity. While vital social services like Meals on 

Wheels and Medicaid are slated to be drastically cut under recent proposed budgets and are 

expected to see similar cuts in FY2018 proposals as well, America is leaving billions in potential tax 

revenues on the table by allowing corporations and the rich to game the system. 

Trickle-down economics didn't work before and it won't work now. Instead of giving tax cuts to the 

top classes, we should be increasing the progrcssivity of our tax system so that those who can pay 

more-corporations and the rich-do so, rather than the middle class and small businesses. 

In 2014, corporations paid taxes equal to less than two percent of the Gross Domestic Product 

(GOP). but in 1950s the average corporate share was double that, at more than 4 percent share of 

the GO P•. However. in 2014, individuals' tax payments equaled more than 8 percent of the GOP. 

four times the corporate share.> Though our statutory rate is 35 percent, effective rates for 

corporations are much less. with many profitable companies like General Electric, PG&E and 

Priceline.com paying no taxes at all in recent years.3 Corporations utilize public services like our 

roads, our courts, a nd ou r· educated workforce, so it is only reasonable to have them cover their 

portion of the tax responsibility for paying for these essential services. 

1 Hl'storlcol Source of Revtmue as Percent of COP. Re:cefpts by Source as Peruntage of Cross Domestic Product~ 1934·2020, TAX POUCY 

CENTER. (Updated feb. 4, 20 15). !rufJt~IINtwq_l!, 

lid. 

, MATTHEWCARD.'"ER. ROBERTS. r.tCINTV'Jfl, AMD RICUAJlO Pf!IUIPS, TI~ E 35 P£RO:N1'C0RPORATII TAX MYnt,INS11TUTEfOR TAXATION AND ECONOMIC 

Pol.ltv t~r(h 2017). hnp:/fbtl.ly/2m1MmltY. 
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2 

One of the most obvious loopholes in need of closure that keeps corporate effective tax rates so low 

is so·called "deferral," which a llows multinationa l compa nies to indefinitely avoid paying taxes on 

the profits that they book offshore, until the point that they are "repatriated" to the U.S. and 

reinvested or paid out as dividends to shareholders. Right now, there is a n estimated $2.6 trillion in 

profits booked offshore by American corporations, meaning corporations are avoiding a n estimated 

$767 billion in taxes.

4 Deferral provides a hefty incentive for corporations to offshore investments, 

as that provides the vehicle for profit shifting and other accounting maneuvers to move profits to 

the books of foreign subsidiaries, a nd be allowed to defer paying taxes on those profits. True tax 

reform to benefit the American economy would end deferral and force corporations to pay taxes 

a nnually instead of allowing them to use foreign subsidiaries to avoid taxation. 

Moreover, allowing a repatriation "holiday" for those hoarded profits would do nothing but further 

incentivize offshoring since corporations would just bide their time, knowing another tax break 

would be coming their way, and would continue to defer taxation on their foreign-booked profits. 

Whereas the huge pot of money sitting (at least on the books] offshore is tempting source of 

fund ing for important public investments like infrastructure, to tax those deferred profits at 

a nything less than the full statutory rate would incentivize the type of profit shifting that will 

continue to erode our tax base for years to come. 

The American public is deeply offended by unpatriotic "inverting" corporations that merge with a 

foreign corporation and reincorporate in another country. The public backlash over inversions 

stopped several such mergers in their tracks, and Treasury rules to limit seria l inverters and profit 

shifting will do much to stem the tide of inversions. However, comprehensive tax reform would also 

include measures to stop inversions, such as requiring companies with a majority owne rship of U.S. 

shareholders and ma nagement a nd control of the corporation based in the U.S. to be considered 

domestic corporations for tax purposes. And, inverting companies should have to pay a n exit tax on 

their foreign-booked deferred profits. 

As bad as inversions are, though, if tax reform were to move the U.S. to a territorial system rather 

than the hybrid global system we are currently under, multinational corporations would not even 

need to go through the ka buki theater of reincorporating in a foreign country. They would simply 

move even more profits to the books of foreign corporations, defer paying taxes, and eat away our 

remaining tax base, leaving the rest of us taxpayers to pick up the pieces. 

Nor should the mega wealthy avoid paying their fair share. We should strengthen the estate tax by 

lowering the exclusion levels and institute other reforms. And, we must keep in place the 

Alternative Minimum tax, so that every person will contribute a reasonable amount towa rd the 

upkeep of our government. 

The disastrous economic crash and Great Recession were fueled in part by tax policies that 

incentivized risk-taking by financial industry professionals. As part of the Take on Wall Street 

campaign to strengthen financial reforms to protect our nation's economy, we seek to close several 

loopholes such as disallowing corporate tax deductions for executives earning more than $1 million 

per year. And, to create greater fa irness in the tax code, investment fund managers' income should 

not be allowed to be taxed as capital gains instead of as wages. And, corporations should not be 

a llowed to deduct from their taxes the cost of settlements for misdeeds. 

4 ]NSTITUTE ON T AXATION AND ECONOMIC POLICY, FORTUNE 500 COMPANIES H OLD A RECORD $2.6 T RILLION OFFSHORE (Ma r c h 2 0 17), 

http: //bitly / 2 pUZEN 5. 
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3 

In addition to closing loopholes, Public Citizen and our allies in the Take on Wall Street campaign 

are also seeking to enact new, progressive taxes that w ill require the financial industry to pay their 

fair sha re of taxes. For example, though America ns pay sales tax on our purchases like ca rs, shoes, 

tools, and eve rything else, Wall Street traders are not taxed on financial tra nsactions like stock, 

bond, and derivative trades. To enact a fraction of a percent tax on Wall Street trades would 

strengthen our economy by calming our markets that are currently prone to fla sh crashes, 

exacerbated by high-frequency trading algorithms.

5 In 1914 through 1965, the U.S. had a modest 

Wall Street tax, also known as a financial tra nsaction tax - ra nging from 0.02 to 0.06 percent - in 

place. n fact, the economy grew at 5 percent annually from 1959 until19 65, the period in which the 

legacy Wall Street tax most closely resembled modest current day policy proposals. lncentivizing 

long-term investments over high-speed trading w ill put capital investments in Main Street America, 

growing jobs and providing economic security for small businesses. Other taxes like a bank 

leverage fee or taxing derivatives mark-to-market are also critical improvements that will grow 

significant revenue while ma king our markets safer a nd our economy more stable. 

In addition to addressing fa irness in our tax code a nd creating revenue for investing in our 

economy, comprehensive tax reform should look at other ways that the tax code is used-for 

example sta ndardizing the defini tion of electioneering activity in the Internal Revenue Code so that 

electioneering fron t groups can be easily distinguished from genuine 501(c] nonprofit 

organizations and be required to register as political committees. Rules must also be in place to 

ensure that non profits ca n fully pa rticipate in our democracy while ensuring that they play by the 

rules when it comes to influencing our elections. And, tax reform must absolutely not do more to 

dilute the voice of the America n public by increasing the a bility of special interests to influence our 

elections. For example, that means preserving the johnson Amendment that prohibits 501(c)3 taxexempt organizations from funding, endorsing or opposing political ca ndidates. If we were to allow 

partisan politics into religious and cha ritable life would threaten the public's co nfidence that their 

contributions would be used for universally valued purposes rather than mere partisa n politics a nd 

would open those institutions to pa rtisan exploitation by donors and leaders with political agendas. 

American corporations are reporting record profits. They are dodging taxes at outrageous levels. 

There is zero ra tiona le for cutting corporate taxes a nd zero reason to think that lower taxes will 

genera te more investment. We urge you to keep the interests of the American people and Main 

Street businesses at heart so that wealthy and the financia l elite do their civic duties like the rest of 

us a nd pay their fair share of taxes. That's the real recipe for a strong a nd prosperous economy. 

Sincerely, 

L1~ 

Lisa Gilbert 

Vice Pre sident of Legislative Affa irs 

Public Citizen's Congress Watch 

rz~ 

Susa n Ha rley 

Deputy Director 

Public Citizen's Congress Watch 

5 T AYLOR LINCOLN, PUBLIC CITIZEN, TH E FINANCIAL T RANSACTION T AX, A N OLD SOLUTION TOA N EW PROBLEM {Oct. 8 . 2015), http: //bit.ly/2pUZi8U. 
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TesUmony to the House \Vays and I\1eans Committe-e 

America's Corpor at e Tax Rate is Killing Our Economy 

'Otank you, Chainnan Hrady and Ranking Member Neal, for receiving this testimony from the 

RATE (Refonning America's Taxes Eqnitably) Coalition, which is comprised of nearly threedozen co1porations and associatious, rcprcsculi.ng some 30 million workers in all of America's 

states and Lcrritories. 

As the \Vays and Means Committee begins to take action to refonn our broken and outdated tax 

code for the sake of spurriJtg growth, the RATE Coalition urges a prime focus on reform of the 

corporate income tax, whic.h is routinely described as the single most detrimental aspect of our 

em-rent ta.x system. Corporate tax refonu is desperately needed for the sake of spnrring growth 

and ettSwing that aU corporations are treated equally. 

In particular, we wish to point out that for many years now. the United States has had the highest 

corporate tax rate among tbe leading economies oftbe world - a combined 39.1 percent. Here 

we are speaking of the 35 member-cotutrries of the Organ.ization for Economic Cooperation and 

Development (OECO). Surely, for the U.S .. in • world characterized by ever more intense 

economic competition. this is a dubious. even dismal, distinction! 

Still, many people do not sec t11e com1CC-tion between America •s higll corporate tax rate and her 

slow economic growth. One of the ulost frcqueu1 responses to th.is fact is, '"Yes. but nobody pays 

that high rate bec-ause there are so many loopholes. •• 

TI1ere arc 1wo big problems wilh tluu response. 

First. many COlporations - indeed, the vast majority, nationwide - actually do pay at or near 

the high rate, bect1use they are primarily based in the U.S. In fact, the RATE Coalition's member 

companies pay an average effective federal tax rate of 32 percent. And so, the t.ax-ntte 

differential puts them tlt a severe disadvantage in the intemational arena. 

\Vc can <1uickly see chat if om competitors cau enjoy greater rerunlS on capital due to their lower 

tax mte, then they have a sig fic~1nr competitive advantage relative to American firms. AJld that 

significant advantage for them trnnslares into a significant disadvantage for our companjes and. 

www.RATEcoalitjon.com 
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therefore, our workers. 

Second, some companies -so far, only a few, but more and more companies are consideting the 

option -are exercising the ultimate tax avoidance sh·ategy and moving their headquarters to 

other cmmt:Iies where the corporate tax rate is lower. The spate of "inversions" in recent years is 

testament to the fact that the high corporate tax rate in and of Uselfis driving businesses and jobs 

away fi:om America. 

Thus we can see: This anti-competitive U.S. corporate tax rate has handicapped us against our 

intemational competitors. The cunent code has made it more difficult to invest in our Ame1ican 

employees and operations, while limiting the value that our member companies have been able 

to create for our shareholders and stakeholders. 

This basic inequity in the tax code can be easily fixed by lowering the corporate tax rate so that it 

is more competitive with the average of our major n·ading partners -the OECD countries -

which is around 24 percent. (At the same time, RATE believes that other aspects of the code, 

too, might need adjusting, with an eye toward fairness and sirnplicity.) 

Meanwhile, so long as our rate remains the highest, Ametican employees, shareholders, and 

suppliers will all be suffering the consequences of our crippling corporate tax rate. Unfortunately, 

the results will also cripple job creation, dampen economic secmity, and overall reduce 

irwestment ir1 the United States. 

For years now, both Democrats and Republicans have supported lowerir1g the corporate tax rate. 

Indeed, the RATE Coalition, and its allies, have long regarded the 1986 Tax Refonn Act as a 

model of bipartisan problem-solvir1g. 

More than 30 years ago, House Democrats joined with Senate Republicans to produce a 

landmark piece of legislation that was enthusiastically signed into law by a Republican President, 

Ronald Reagan. 

To this day, the Tax Reform Act stands as a testament to the good that can come when the two 

patties work together for the common good. That is, clean up the tax code by lowering the rate 

and broadening the tax base. It was good public policy then, and we believe that it's good public 

policy now. 

Adrnittedly, much has changed over the last three decades, and yet interestingly, the same 

positive spitit of bipartisan cooperation has continued, albeit often below the radar. We know 

that Republicans and Democrats have long agreed -sometimes publicly, sometimes ptivatelythat rate-lowering corporate tax refonn is a good idea. 

Today, the RATE Coalition joins with many others in the hope that 2017 will be the year that the 

legislative and executive branches can come together to create meanirtgful tax reform -for the 

www.RATEcoalition.com 
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sake of growth, jobs, and, yes, hope. 

The Washington Times 

Cutting the drag of heayy corporate taxes 

By Elaine C. Kamarck and James P. Pinkerton 

May 16, 2017 

On Thmsday, the House Ways and Means Committee will have a heating examining how tax 

refonn will grow om economy and create jobs. 

It's an impmiant issue, perhaps one of the most impmiant topics to be decided by Congress this 

year. 

There is ample evidence that if Congress would reduce the corporate tax rate, it would grow the 

economy. America leads the world when it comes to taxing its business sector and that leading 

position is stifling om economy. 

We can't promise that slashing the corporate tax rate to make it more competitive with the rest of 

the world will lead to 4 percent growth, but there are plenty examples to point to where such a 

policy was implemented and did successfully yield such a result. 

In Ireland, the growth rate was 7.2 percent. Their corporate tax rate is set at 15 percent and is 

scheduled to be cut to 10 percent. In the United Kingdom, the cmporate tax rate is 19 percent 

while the economy grew at about double that of the United States. 

Japan had a corporate tax rate similar to the United States and last year had anemic growth 

similar to oms. The Japanese government decided to join with the Irish and the English and slash 

their cmporate tax rate to levels more competitive with their competitors. 

Unless we get om own version of corporate tax refonn, we will be left behind, in the dust. 

For many years now, Ametica has had the highest corporate tax rate in the world- 35 percent. 

And yet, many people don't see the connection between the high cmporate tax rate and 

Ametica's slow economic growth. One of the most frequent responses to this fact is, "Yes, but 

nobody pays that high rate because there are so many loopholes." 

www.RATEcoalition.com 
527 

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That's wrong. Most cmporations- indeed, the vast majmity, nationwide- actually do pay the 

high rate, and tills puts them at a severe disadvantage in the international arena: If om 

competitors can enjoy greater rehuns on investment thanks to their lower rate, then they have a 

significant advantage. And that significant advantage for them translates into a significant 

disadvantage for om companies, and om workers. 

Now some companies - especially the larger ones, with more internal flexibility- do exercise 

the ultimate tax avoidance strategy and move their headquarters to other count:Iies where the tax 

rate is lower. The spate of "inversions" in recent years is testament to the fact that the high 

cmporate tax rate in and of itself is driving businesses and jobs away fi:om America. 

Thus, businesses that create jobs in America often find themselves taxed at higher rates than 

those that don't. The RATE Coalition's member companies employ one-tlllrd of America 's 

private-sector workers, and contrary to the conventional wisdom, om membership pays an 

average effective federal tax rate of 32 percent. 

This anti-competitive U.S. cmporate tax rate has handicapped us against om international 

competitors for too long. It has made it more difficult to invest in om American employees and 

operations, while limiting the value we're able to create for om shareholders. 

So long as om rate remains the highest, American employees, shareholders and suppliers will all 

be bearing the consequences of om high cmporate tax rate - and the result is anemic job 

creation, dampened economic secmity, and overall reduced investment in the United States. 

For years now, both Democrats and Republicans have supported lowering the cmporate tax rate. 

President Obama spoke about it in most of his State of the Union Addresses. And in their first 

debate back in 2012, Mr. Obama and Republican candidate Mitt Romney agreed on the need to 

lower the rate. 

Fonner President Bill Clinton is on the record suppmiing a lower rate. And, of comse, President 

Tnunp has made it a centetpiece of Ills tax plan. 

Lowering the rate is a simple and fair way to address the fact that Ametica 's jobs are 

disappeating. In this polarized era, it is one important step we can take to get the Ametican 

economy growing in America again. America 's workers need a win. Real tax refonn starts with 

the rate. 

Elaine C. Komarek and James P Pinkerton are co-chairs of the RATE Coahtion 

www.RATEcoalition.com 
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Dear House Ways and Means Committee, 

Subject: End Citizenship-Based Taxation and Implement Resident-Based Taxation For All 

Americans Abroad 

I would like to thank you for the opportunity to provide your committee my inputs for the current 

debate on tax reform. This debate could not have come soon enough. 

I am an American overseas living under the tourniquet known as citizenship-based taxation 

(CBT). As you may know, Americans, wherever we live, we must report our global income to 

the IRS, annually. You may also know, this law had its roots in the Civil War, a war fought over 

the right to hold slaves, and has stayed on the books since but has become more refined and 

more virulent over the many decades. 

For starters, Congressional representation does not extend to Americans abroad. I've written to 

both senators and congressperson over the years about the problems associated with the tax 

laws for overseas residents and have not gotten as much as a reply. Congress does not mind 

imposing ever more harsher tax laws as long as some other constituency pays it. The bottomline is since I don't have representation I am highly vulnerable to CBT abuse. 

What is clear is many Congresspersons don't understand the implications of global taxation 

laws. Members seem to be in a perpetual state of denial - not wanting to know -as to the 

penalizing effects of CBT. 

To make matters more difficult Congress is not interested spending a cent on studying the 

implications of CBT, either. Americans abroad are not included in government surveys or 

census reporting. As a general rule, we optimize what we measure. Since there are no bonafide government sponsored statistics I am an 'incognito' -except for taxation. This is grossly 

unfair. 

Americans abroad, like myself, drive, eat, attend school , pay taxes, work, etc. , do everything 

locally. When I need police help, I call the local police. When my house is on fire, I call the 

local fire department. This is the crux of the problem with CBT. The American government will 

not intervene to support me in any way when I am overseas. What I see as local Congress 

sees it as -foreign, overseas, abroad -and therefore dangerous. 

What are some of the problems I experience with my American citizenship while living 

overseas? There are several. My local (overseas) bank closed my savings account and 

brokerage accounts once the Foreign Account Tax Compliance Act (FATCA) was put into gear. 

They informed me due to the complexity of U.S. tax reporting they could no longer keep my 

interest bearing accounts open. When I moved to another country I could not open a single 

bank account. Bank staff said they did not want to retain American account holders because 

they were petrified of the potential of a 30% withholding penalty for failing to report American 

account holders. 
529 


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I tried to open a checking account at a local bank to get a mortgage. They advised me because 

I am an American , they could not open an account. 

I once tried to mail a check to the IRS to pay my taxes from China. Because China is under 

tight capital controls, the postal clerk refused to forward my letter. I had to seek other channels 

to pay the IRS. 

I had to avoid any partnership deals. Being in a partnership would open the whole organization 

to IRS reporting. Regrettably, I had to sideline several potentially lucrative deals. 

Being extra careful as an American overseas cannot be overdone. When I was at several 

employers I had to be sure not to gain signature authority over any financial accounts. Due to 

the evils of CBT my employability was and is severely hampered. Employers across the world 

are gaining knowledge not to hire qualified Americans. With FATCA, Congress has made 

overseas employability near impossible. 

Opening a joint account with a foreign born spouse is problematic. Your spouse suddenly loses 

his/her privacy. Their income I assets are reportable to the IRS. 

Local pensions are double-taxed so Americans abroad must carefully weigh how this loss in 

income will impact their future. Many are tossing their citizenship to save for the future. Keep in 

mind Americans back in Wisconsin , for example, will not have their pensions double taxed. 

When I provided my stateside bank my overseas address they restricted my mutual fund 

holdings and froze other financial instruments. I had to move the proceeds to a non-interest 

bearing account. If that was not bad enough my stateside brokerage company is rumored to be 

closing accounts for Americans with overseas addresses. Luckily, I have not received such a 

letter yet but it could happen any day. They cited the reasons for closing the accounts was due 

to FATCA. 

Constitutional protections should apply to all U.S. citizens regardless of their residence, and all 

the constitutional protections afforded U.S. citizens should be respected, whether residing 

abroad or in the U.S. The right of privacy, as well as other constitutional rights, are also 

encompassed in the IRS's Taxpayer Bill of Rights, which is also applicable to all U.S. taxpayers. 1 

Since I live overseas, Congress does not think I am entitled to Constitutional protections. While 

someone from Nebraska, for example, has only to report to the IRS the interest or capital gains 

they gained with their financial accounts, I am obligated to report not only interest and capital 

gains, but I also have to report total account values. Unfortunately, my privacy rights were not a 

1 The Bopp Law, PC, 

https://www.dropbox.com/s/qc8610icfoxdf47/POST%20FATCA%20HEARING%20RESPONSE%20BOPP 

%20T0%20MEADOWS%20150517.pdf?di-O May 15, 2017 
530 


33393.459

concern to FATCA and CBT authors. For what it's worth , to get the Nebraska account holders 

bank balance a warrant is required. His I her privacy is protected. Not mine. 

My Constitutional protections fall apart on another level. Let's say I 'forgot' to report my 'local' 

account(s) to the IRS. Everyone makes mistakes and should not expect armageddon, right? 

Not so under the Internal Revenue Code (IRC) as it relates to 'offshore.' Congress weaponized 

the IRS so that it can get oversized fines for minor tax filing infractions. Civil rights, as 

expressed in the Constitution, were not considered when penalty assessments were authored 

into the IRC for overseas account holders. Maximum pain was the overriding factor. 

When I complete my filing I almost never need to pay additional taxes to the IRS. However, the 

big winner is my tax accountant. He gets the lion's share and not the U.S. Treasury because 

the tax code is loaded with so many land mines only competent tax preparers can help me 

navigate through the maze of arcane laws. 

I've had to provide all of my personally identifiable information to my tax accountant whom I 

have entrusted to keep secure. Congress made no effort to provide a more secure environment 

for tax filing. If my tax info gets into the wrong hands it is up to me, not my tax accountant nor 

the IRS, nor my bank to to stymie any potential wrongdoing. 

Congress has aided and abetted a distorted view about Americans abroad. They have 

described us 'rich ' and 'tax cheats' who are trying to avoid paying our 'fair share' in taxes. This 

is so wrong. We pay taxes where live, where we get public service. 

But Congress' continued red baiting me as a tax scofflaw when nothing could be further from 

the truth is helping to sustain tax-exempt NGOs, generally Washington based , in poisoning the 

debate on tax fairness. They've used their tax-exempt status to distort the truth about CBT and 

FA TCA and therefore help confuse the public. They are not about providing evidence based 

research, but thrive on groupthink and Washington based ideology. There is nothing objective 

with these organizations as it relates to discussing issues on overseas taxation. 

Congress should refrain from using 'tax cheat' or 'tax evasion' unless there is a court finding that 

is recorded for such crimes. This will help stop the nonsense spewing from the opinionated 

Washington based tax-exempt industry which advocates others to pay taxes. Living overseas 

should not be considered a crime. 

Dismiss any suggestion of a same country exemption (SCE) as some sort of bipartisan fix to 

FATCA. There is nothing bipartisan about it. SCE is a response to a big problem without 

careful analysis. As I mentioned above, I've had to keep my banking in another country 

because the one I live in banks regularly refuse Americans. SCE is unAmerican. 

In sum , CBT and FATCA were implemented without considering my Constitutional rights. 

have no Congressional representation to push back against their abusiveness. Tax filing is a 

very precarious event that can cause me severe financial penalties for even minor mistakes, 
531 

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which fellow Americans stateside don't have to worry about. The tax code has hindered my 

ability to hold overseas and stateside financial accounts. In addition, advancing into meaningful 

employment is fraught with dangers because of the IRC obsessiveness on wanting to know 

everything about overseas financial accounts. Congress has provided fuel to a relentless taxexempt NGOs apparatus that is ill equipped to understand the overseas taxation. Their opinions 

should always be taken with a degree of skepticism. SCE should be rejected as some sort of 

fix. The financial burden for many Americans overseas will be kept intact as a result. 

I can state categorically CBT is not in the American public interest. Even when all tax reporting 

requirements are satisfied, the financial hit continues unabated for anyone living overseas. 

Please end citizenship-based taxation and move to a more responsible residency-based 

taxation system for Americans abroad as soon as possible. I can then better compete for jobs 

and have a better outlook to the future as opposed to being worried if I made a mistake(s) on 

my U.S. tax filing and then being confronted with severe penalties. 

Again, I wish to thank the Committee for allowing me to submit my case for the record. 

Thank you. 

Reg Callaway 

31-646-10-1700 

Amersfoort, Netherlands 

3825RL 
532 


33393.461

RILA 

R(T-IliNOUSTftVI.lAD~RSASSOCIATION 

Educate.Collabor• te.Advocate. 1700 North Moore Street, Suite 2250, Arlington, VA 22209 

Statement for the Record 

U.S. House Ways and Means Committee 

Hearing on 

" How Tax Reform Will Grow Our Economy and Create Jobs" 

May 18,2017 

Jennifer Safavian 

Executive Vice President, Government Affairs 

Retail Industry Leaders Association 

The Retail Industly Leaders Association (RILA} applauds the Committee for holding this heating on job 

creation and economic growth through tax refonn, and welcomes this opporttmity to express our strong 

support for the enactment of comprehensive tax refonn. Rll.A is the trade association of the world's 

largest, most itmovative and recognizable retail companies and brands. Our membership includes more 

than 200 retailers, product manufachrrers, and service suppliers, which together accotmt for more than 

$1.5 trillion in annual sales, millions of Ameticanjobs and more than 100,000 stores, manufachrring 

facilities and distiibution centers domestically and abroad. 

There is no industly that wants tax refonn more than retail. Rll.A is a strong supp011er of enacting 

comprehensive tax refonn that reduces the c01porate rate, broadens the tax base, and natTows the 

discrepancies in effective tax rates (the rates that businesses actually pay) among industry sectors. 

RILA supp01ts comprehensive tax refonn that includes the following ptinciples: 

• Substantially lowers the rate for all business taxpayers; 

• Eliminates special preferences that give some advantage over others; 

• Addresses the tax rules applicable to all business types, as well as individual consmners; 

• Simplifies and stabilizes the tax code; and 

• Restores America's global competitiveness by instituting a tenitorial tax system. 

RILA 's member companies make a significant impact on the daily lives of all Americans- from their 

customers to their employees and families to the c01mmmities they setve. We agree that to drive our 

nation's economy to grow and foster job creation, Congress and the President must work together to 

enact tax refonn. The retail indust:Iy supp01ts enacting tax refonn as the foremost domestic job creator, 

the chiver of the U.S. economy, the leading investor in Ametican c01mnunities, and among the highest 

rate payers tmder the ctment code. 

Creator a[ American Jobs 

More than 42 million jobs in the U.S. are either a retail job or a job that relies on retail. Jobs in the retail 

industly span from designers and IT professionals to transportation and logistics service providers to 

customer setvice representatives. Outside ofbtick and mortar stores, millions of jobs in manufacturing, 

finance, insurance, real estate, transp01tation and warehousing, and setv ices industiies are supported by 
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RILA 

R(T-I iNOUSTIIVI.lAD~RS SOCI ATION 

Educate.Collaborate.Advocate. 1700 North Moore Street, Suite 2250, Arlington, VA 22209 

retailers. For millions of Americans, including Members of Congress and their staff, their first job was 

in retail. For many executives in Rll.A's member companies, their entire careers are spent in the retail 

industly - beginning at a cash resister, stocking shelves, or working in a distribution center, then 

becoming store managers before moving up through the company ranks. Retailers offer flexible 

schedules that enable individuals to spend more time with their families or complete a degree, and 

provide employees with extensive training at all job levels and skill sets that lay a core foundation for 

fimdamental career development. Millions of high-tech and high-paying jobs are created by retailers as 

consumer demand and industly innovation continually advance and change. 

Driver ofthe U.S. Economy 

With more than $553 billion in labor income and more than $3.8 tiillion in sales, retail is one of 

America's most powerfi.1l economic engines. In fact, consmner spending represents two-thirds of U.S. 

gross domestic product (GDP). There are few industries that have a greater impact on the U.S. economy 

than retail. We employ millions of Americans throughout the supply chain and provide Ametican 

consumers with the products they want to buy at the price they want to pay. Retailers pay billions of 

dollars in federal, state, and local business and real estate taxes each year, and collect and remit billions 

more in sales taxes to state and local govemments, providing a significant tax base for these 

conummities. The depth and breadth of the domestic retail supply chain is far reaching throughout this 

countly and the world. 

Steward of Communities 

Retailers often setve a central role as stewards of communities beyond that as places to purchase goods 

and setvices. Brick and mo11ar retailers, large and small, provide a significant tax base for core local and 

state setv ices such as police, fire and rescue, and schools. Beyond investing resources in store operations 

and job creation, brick and mmtar retailers: provide billions of dollars annually to tens of thousands of 

local and national charities; hire Ametican veterans; sponsor local sports and recreation teams; provide 

tangible goods donations to schools and homeless shelters; suppmt cmmmmity workforce development 

and training programs; and often provide shelter during stonns and are the first on the grotmd after 

disasters strike to provide families with relief and help cmmmmities rebuild. Additionally, even the 

largest retailers rely on small business vendors in cmmnunities, such as plumbers and electiicians, to 

keep stores open and operating. 

Leveling the Playing Field Through Tax Reform 

The retail industry's treatment under the cunent tax code belies its prominent place in the economy and 

stifles job creation, investment, and consumer savings. At 36.4 percent, the retail industly's effective tax 

rate (the rate that businesses actually pay) is the fomth highest domestic effective tax rate -nearly 10 

percentage points higher than the average- of all the 18 major U.S. industrial sectors. The government 

should not use the tax code to pick winners and losers. Today, it does just that. Thousands of changes to 

the tax code over nearly three decades have created myriad rules, credits, and deductions that give some 

indus hies and individuals advantages over others. 
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RILA 

R(T-I iNOUSTftVI.lAD~RSASSOCIATION 

Educate.Collabor• te.Advocate. 1700 North Moore Street, Suite 2250, Arlingt on, VA 22209 

Under current law, domestic effective tax rates va1y widely. This combination of high effective tax rates, 

burdensome requirements, and constantly expiting provisions depresses investment and growth, makes 

compliance tmbearably difficult and costly, and long-tenn planning nearly impossible. 

The increased complexity and inefficiency of the federal tax code trickles down through to the state and 

local level, creating heavy collection and compliance burdens on top of federal obligations. For 

example, state and localities continually place taxes and fees on retailers for the sale of items such as air 

conditioners, refrigerators, soda, motor oil, and even playing cards. State and localities have also 

implemented regulat01y and recycling disposal fees on retailers for goods such as computers and 

televisions, plastic bags, mattresses, and consumable and personal products. 

Additionally, the disprop011ionate tax rate placed on the retail industly largely tmdennines U.S. 

competitiveness. A growing number of U.S. retailers are expanding into the global marketplace through 

the establishment of both retail operations in other countries as well as subsidiaties that strengthen the 

supply chain of goods and setvices they provide to their customers in this cotmtiy. The United States' 

ctUTent system of taxing worldwide income and proposals to increase the tax burden on U.S. 

multinationals not only consti·ain a retailer's ability to grow intemationally but also cost the U.S. the 

well-paying jobs that a company typically must add to oversee such global operations. 

A more simple and stable tax code with substantially lower rates has the potential to produce savings 

that could be reinvested to increase employment, increase wages and salaties, and lower retail ptices. If 

we are serious about giving U.S. businesses the ability to compete effectively in the global marketplace, 

a substantial reduction in the c01porate income tax rate is essential. 

Rather than enacting proposals like the border adjustment tax that petpehmtes the advantages the ctm·ent 

tax code provides for cettain sectors of the economy, Rll.A urges Congress to broaden the base and 

introduce comprehensive refonn that promotes a balanced tax system that fosters overall econ01nic 

growth and job creation. The border adjustable tax would significantly lnut retail customers by raising 

prices on evetyday consumer staples, and litniting the availability of goods including life-saving drugs 

and agticultural products that have no domestically manufactured or produced equivalents. The border 

adjustable tax would also significantly increase the tax liability of retail businesses, resulting in job 

losses and cutbacks in investment in such businesses and, in some cases, threaten the viability of the 

business. Because the border adjustable tax will have such a significant negative impact on consumer 

prices and retail spending, its inclusion in a tax refonn package would undennine the package 's ability 

to strengthen the economy and create jobs. 

For tax refonn to have its greatest effect, it must address the tax code for all taxpayers and all types of 

businesses. Businesses that are not taxed separately as c01porations are subject to taxation under the 

individual tax rules. These businesses, including many retail establishments, would be left at a fmther 

disadvantage if the individual tax rules are not addressed. Additionally, individual taxpayers face the 

same dizzying patchwork of rules, credits, and deductions as do business taxpayers. If we agree that the 

corporate tax system desperately needs to be refonned, then we must also agree that the individual tax 

rules demand the same overhaul. Like businesses, consumers desetve a tax code that is equitable, 

coherent, and adJ.ninistrable. 
535 

f 


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RILA 

lltnll_,.....~M~ 

~t• e.Col•bot.U.Ad~ f700 North Moc:~re Strft\. Suite tlSO, Mlngton. VA 22209 

f'urther, as an additional step to secure American competitiveness abroad. the retail industry favors a 

ten·itorial tax system like those widely adopted around the world. This would focus U.S. taxation oo the 

domcslic camings of U.S. businesses and prcvcn11hc double 1axa1ion of their foreign operations abroad. 

which cun·emly puts then) at a cornpetitive. disadvamage to foreign competitors. 

Conclusion 

Given the enonnous employment footprint of the retail indus'll)'. comprehensive tax refomt could 

stimulate job growth in the retail sector and the industries supported by retail. Retailers compete every 

day for consumers· loyalty and spending. The nation's tax mles. d01nestic and international. should 

foster theU: success - not erect competitive barriers- especially as U.S.-bascd retailers continue to 

expand in rhe global marketplace. Comprehensive tax refom1 that meets these standards wi ll fi·ee 

retailers, as well as the broader business eouummity, to luvcst, grow, and most i.mp011'antly, create new 

jobs. Tite status quo is unacce1>table. 

RILA and its member companies are eager ro work with all Me1nbers _ of Congress and the 

Administ:nuiou 10 enact pro-growd1 tax rcfonn that reduces the eorponue rate and broadens the tax base. 

Refonn thar substantia lly lowers rhe rates tltat retailers ulti.mate ly pay will gene-rate job growrh and 

benefit American families in <:Ow1tless ways. 
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PUBLIC SUBMISSION, not a witness. But call me :o) 

Rick Hohensee presidentbyamendment.com 

rick_ hohensee@email.com 

PROPOSED 

A BILL 

of proposed law of the United States of America, 

edited most recently Feb. 201 7: complete re-work 

Sent to "Joint Taxation" by Rep. Stivers, sent to Legislative Counsel by Rep. Luhan-Grisham. 

Some interest expressed by Rep. Mike Bishop. 

Be it enacted by the Senate and House of Representatives of the 

United States of America in Congress assembled, 

SECTION I. SHORT TITLE 

Bedtime For Deficits Act, The BFD, 

SECTION II. WE FIND THAT 

EVERYBODY wants tax reform, and for good reason. 

SECTION Ill. WE THEREFOR ACT AS FOLLOWS, 

All of the Title 26 United States Code Subtitles A and B, income taxes, gift taxes, and estate 

taxes are hereby replaced, thus voiding several thousand pages of existing prior Acts, as follows1. Non-Taxable (Govemment) Income 

Payments directly from the USA, a State, or US municipality are not taxed by the USA. 

This includes wages and salaries of direct government employees, the military, payments 

on government contracts, government pensions, entitlements, Unemployment Insurance, 

Social Security, and interest payments on government bonds. This does not include, for 
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example, wages of government contractors. This clause conditions all following clauses 

without repetition herein. This also pertains to illiquid or non-money donations from a 

government to any person, which do not bear the tax described for gifts below. 

Although not directly taxable, government income is counted as income when calculating 

the Standard Credit. In other words, government income does count as income vis-a-vis 

possible positive tax payments due to an individual from the US Treasury. 

2. Taxable Individuals and Businesses 

There are two basic taxable entities, Taxable Individuals and Businesses, and their 

respective modes, the Individual Tax, and the low percentage rate Sales/Gross 

Receipts/Revenue Tax. The Sales/Gross Revenues rate is basically the same for business 

receipts and personal sales by Taxable Individuals. In other words, a taxable party may be 

just a business, or a private individual, possibly with personal and/or business income. 

A.Business taxes: All Businesses Pay the Sales/Gross 

Revenue Tax on all Revenue 

1. Any type of business, which is all non-government group economic entities 

licensed to conduct business as a single entity, including private schools, 

churches, advocacy groups, charities, political campaigns, fraternal 

organizations, and commercial businesses, pay the Sales/Gross Revenue 

Rate, 2.5%, on their gross revenue. Gross revenue is all receipts of money 

and non-money, payments or gifts (in the case of businesses). The 

Sales/Gross Revenue tax is applicable to all entities receiving payment for 

goods or services delivered in the USA. 

2. Revenues from foreign sales by US-owned companies are not taxed. All 

sales for all goods and services delivered in the USA are taxed. 

3. Expenditures predominantly for the personal benefit or personal 

dispensation of an owner or associate of a group economic entity shall be 

from a salary or other payment to the individual from the group entity, 

which payment shall bear the Personal Income Tax, which see below. 

4. A business entity owning another business entity is liable for the 2.5% rate 

on it's own revenue, 2.5% on the owned company's revenue, and 1% 

additional on the subsidiary's revenue, regardless of whether paid by the 

parent or the subsidiary. 

5. This concludes income taxes on businesses and non-government economic 

groups of all types. 

B.Individual Income Taxes 
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The income tax for individuals is based on a single base rate, a credit for dependents 

which may result in payments to the private tax party, and a surcharge on higher 

incomes tied to national indebtedness. A Taxable Individual is one taxpayer and up 

to three additional economically dependent persons, for a total of one to four 

dependents per Taxable Individual. Dependants shall be live human beings, each 

assigned to only one Taxable Individual. Filers claiming dependents shall be 

actually aiding said dependents for more material value than the Standard Credit 

Amount, which for example room and board is deemed to be. 

1. Gifts and Inheritances 

All gifts of money and other liquid assets such as securities to an individual 

are Wages Income, and all non-money (illiquid) gifts and bequeaths to a 

Private Taxable Party are to be valuated at market rates and the value subject 

to the Sales/Gross Revenues Rate, 2.5%. 

2. Credit for Dependents 

The Standard Single Credit for one dependent is $3,000--. This is a credit 

against taxes due, not a deduction from income. Potential taxes on all 

incomes are combined in a simplified way to determine if a payment is due 

to the Taxable Individual. 

The sum of a Taxable Individual's dependents, i.e. the number of persons 

comprising the Taxable Individual (up to 4 including the filer) times the 

Standard Credit Amount, is the Taxable Individual's Gross Standard Credit. 

The Gross standard Credit is a credit directly against the Taxable 

Individual's total tax otherwise due, rather than an offset of taxable income, 

and may result in a payment due to the Taxable Individual at low incomes 

if the Gross Standard Credit is greater than the Taxable Individual's taxable 

(non-governmental) income. For example, a Taxable Individual with zero 

income and one dependent, themself, is due a payment of their entire Gross 

Standard Credit, which equals the Standard Credit Amount ($3,000), from 

the US Treasury, per year. 

3. Taxable Income, Liquid and Illiquid 

The liquid/illiquid distinction is crucial to this tax system vis-a-vis Taxable 

Individuals. "Liquid" is in terms of ease of exchange, i.e. almost as 

transferable as cash. Liquid assets including US legal tender, foreign legal 

tender, and transferable securities such as bearer bonds or equities may be 

considered money for tax purposes, when used as payment or gift. Specie 

metals traded by weight at per weight market rates and collector coins and 
539 


33393.468

paper money traded as nonfungible unique items are illiquid. Current small 

facial-deoominated legal tender coin is money. 

Trade of illiquid good for illiquid good is baner, and not taxed. 

4. Individual Sales Tax 

Individuals receiving payments for the sale or sales of real propeny, goods, 

equities, or transferable loans such as bearer bonds, or rents, or interest on 

personal loans, shall pay the Sales/Gross Revenues Tax Rate, 2.5%, on the 

sale, rent, or interest. Sales of securities bear the Sales/Gross Revenues Tax. 

ll1is is in effect a "transaction tax". Dividends and private (nongovernment) bond interest are taxable as wages, which see below. 

Taxable Sales Income has aS 1,000-· deductible. Taxable Sales Income is 

Sales Income minus S I ,000-- if Sales Income was more than $1 ,000. 

Otherwise Taxable Sales Income is zero. ll1is deductible docs not apply 

when calculating a payment due to a Taxable IndividuaL 

5. Wages Taxes 

'lbere are two tax rates on private wages income, the Basic Wages Tax Rate, 

BPTR, and the Inescapable Pay-Go Rate, lPGR, which might be the same 

as the Basic Wages Tax Rate if the USA ever retires it's debt.. The 

lnescapcablc Pay-Go is a conditional surtax, a tax-or-not so to speak, based 

on the indebtedness of the nation. 

Wages, liquid gifts, corporate stock dividends, non-govemment bearer bond 

interest shall bear the wage tax rate. 

a. Basic Wage Rate 

ll1e Basic Wages Tax Rate is 113, 33.33 ... %. This rate applies to all 

non-sales incomes. 

b. lnescaJleablc Pay-Go Conditional Tax-Or-Not 

ll1c Incscapeable Pay-Go Rate has a maximum of 3/4, 75%. It is a 

conditional surtax on all non-sales income over the lnescapeable 

Pay-Go Threshold, $100,000--. The Basic Wages Tax Rate is in 

effect on incomes up to the lnescapcable Pay-Go Threshold 

(S 100,000-- of wages income), and the lncscapcablc Pay-Go rate 

applies on wages income over that threshold. 

ll1e lncscaJ>eable Pay-Go rate is to be computed and pub I ished each 

year by the hllemal Revenue Service, with consultation from the 
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Government Accountability Office, based on the prior year's federal 

budget. The calculation of the Inescapeable Pay-Go Rate shall be : 

Phase 

The Inescapeable Pay-Go Rate is 75% until $2T has been repaid to 

Social Security. 

Phase II 

Divide the prior year's budget deficit by the revenue of the federal 

government for that year. This value is Debt Proportion. 

Multiply Debt Proportion by two. That is Value V. 

Add Value V, expressed as a percentage, to the Basic Wages Tax 

rate. This value is the Inescapeable Pay-Go Test Value. 

If Inescapeable Pay-Go Test Value is greater than 75, the 

Inescapeable Pay-Go Rate for the year is 75%, otherwise the 

Inescapeable Pay-go Rate is the Inescapeable Pay-Go Test Value. 

If Social Security is paid back, and the national debt is retired, the Inescapable Pay-Go Rate 

becomes the Basic Wages Rate, i.e. the surtax is 0% and the marginal rate becomes the Basic Wage 

Rate, 1/3 (33.33 ... %). 

6. Individual Tax Elements Combined 

Taxable Individuals may be paid a positive tax payment, if their taxable 

income is below their Break Even Point. Government income and 

entitlements and sales income are included in income for this purpose. 

Similar proposals have in the past been refered to as negative income taxes. 

This bill is written from the people's viewpoint that regular taxes are 

negative. 

To calculate if a payment is due to the Taxable Individual, add their entire 

gross income from all sources together, including government payments, 

sales income without asserting the deductible, and illiquid payments and 

gifts received valuated at market rates. Apply the Basic Wages Tax Rate 

(1/3) to this gross income total (i.e. divide by 3). Now subtract the Taxable 

Individual's Gross Standard Credit from their Gross Income Total. If it is 

negative, i.e. if the Standard Credit is larger, the difference is due to the 

Taxable Individual. 

a. PAYMENT DUE TO THE INDIVIDUAL 

Daily Electronic Disbursement of Positive Taxes 

Positive taxes payable to a Taxable Individual due to credits against 

taxes due shall be accrued daily, preferably dispensed in daily 
541 


33393.470

electronic transfers, with the standard daily payment being l/400th 

of the total due for a year, and a balloon payment of35/400 of the 

annual total on December I st. The IRS shall promulgate a system 

for distributing said positive taxes due to be paid to TAxable 

Individuals on a daily basis, via banks and/or similar institutions. 

Use of existing card systems for entitlements is advised. 

The means for applying for such payments shall be filing a tax 

return, and may be filed at any time. (unsolved problem: timing and 

lag) 

b. TAXES POSSIBLY DUE 

TREASURY 

TO THE 

The following calculations apply if a Taxable Individual's gross 

income, times the Basic Wage Tax Rate, is greater than their Gross 

Standard Credit. Type of income now becomes a factor. A Taxable 

Individual may have a mix of sales and wages income. It is 

permitted, and advantageous to the Individual, to consider as much 

of their wages income as possible to have been offset by their 

Standard Credit. It also simplifies calculations. 

Was your wages income greater than the Break-even Point By itself, 

without sales income? 

NO, WAGES< BREAK EVEN POINT 

Individual must have significant Sales Income, some of 

which is considered to have defrayed credits due. All of 

Taxable Individuals Wages Income is deemed to have been 

offset by Standard Credits, so no wages Taxes are due. Some 

Sales/Gross Revenue Taxes are due. 

Subtract your Wages Income from your Break-Even Point. 

Subtract that value from your Taxable Sales Income, 

computed earlier by subtracting $1,000-- from Sales Income. 

The remaining Sales Income bears the Sales/Gross Revenue 

Tax ( 2.5%). That value is your total taxes for the year. 

YES, WAGES > BREAK-EVEN POINT 

If so, was the Individual's wages income over the 

Inescapable Pay-Go Threshold ($100,000)? 

WAGES> $100,000--
542 

f 


33393.471

last edited-- Feb 2017 

if so, subtract your Break Even Point from the IPGT 

($100,000--). That is your flat tax wages. That 

amount bears the Basic Wage Tax (33 .33 ... %). Your 

wages income minus the IPGT ($100,000--) bears 

the Inescapable Pay-Go Rate (likely 75% at the time 

of enactment ofthis proposed law) and your Taxable 

Sales Income, computed as described above, bears 

the Sales/Gross Revenues Rate (2.5%). The sum of 

those three values is your taxes due for the year. 

WAGES< $100,000--

if your Wages Income was less than the Inescapable 

Pay-Go Threshold 

subtract your Break Even Point from your income. 

That is your taxable Wages Income . That amount 

bears the Basic Wage Tax (33 .33 ... %). Taxable Sales 

Income (Sales Income minus $1,000--) bears the 

S/GRT Rate (2.5%). The sum of those two values is 

the Taxable Individual's taxes due for the year. 
543 


33393.472

• S I A I 

SEMICONDUCTOR 

INDUSTRY 

ASSOCIATION 

Submission of the Semiconductor Industry Association 

U.S. House Committee on Ways and Means 

Hearing on "How Tax Reform Will Grow Our Economy and 

Create Jobs Across America" 

May 18,2017 

Introduction 

The Semiconductor Industry Association ("SIA") appreciates the 

opportunity to provide to the House Committee on Ways and Means our 

priorities for comprehensive tax reform. SIA is the voice of the U.S. 

semiconductor industry. We commend the chairman, members of the 

committee, and staff for this hearing and continuing efforts to improve 

our tax system. SIA supports efforts to lower the U.S. corporate rate , 

move to a territorial international system with appropriate transition 

rules, and enhance U.S. incentives for research and development. 

SIA supports the Better Way corporate tax reform blueprint as an 

appropriate starting point for reform. We believe the Better Way 

corporate tax reform blueprint would make America's corporate tax 

system more competitive and allow U.S. semiconductor companies to 

grow, innovate, and create more jobs in the United States. While there 

are many details of significance to our industry that need to be 

understood and addressed, we support the proposal as a framework for 

moving forward with tax reform. 

Background on the U.S. Semiconductor Industry 

America's semiconductor industry is critical to U.S. economic 

growth and national security. Semiconductors are the fundamental 

enabling technology for the modern economy and an essential 

component of our nation's defense and homeland security, information 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
544 


33393.473

• SIAI SEMOCDNDUCTDR 

INDUSTRY 

ASSOCIATION 

technology, global finance , transportation, and health care. The U.S. 

semiconductor industry is one of the world's most advanced 

manufacturing sectors, and the U.S. semiconductor industry is 

America's number one contributor to labor productivity growth by 

making virtually all sectors of the U.S. economy more efficient. 

The U.S. semiconductor industry leads the world, accounting for 

roughly half of global market share through sales of $164 billion in 

2016. Nearly half of U.S. semiconductor companies' manufacturing base 

is located in the United States, and 21 states are home to semiconductor 

manufacturing facilities. Over 80% of industry sales are outside the 

United States, making semiconductors America's fourth-largest export. 

Our industry directly employs nearly 250,000 people in the United 

States and indirectly supports more than 1 million additional American 

jobs. In 2016, the U.S. semiconductor industry invested approximately 

20 percent ofrevenue into research and development (R&D). This was 

the second-highest share of any industry. 

Global Competition for U.S. Semiconductor Companies 

SIA would like to draw the Committee's attention to the fact that 

the tax policies of other countries present two tiers of competition for the 

U.S. semiconductor industry. The first tier is the competitive pressure 

we face along with other U.S. industries because many foreign countries 

have more attractive tax systems. The U.S. currently has the highest 

corporate tax rate in the Organization for Economic Cooperation and 

Development (OECD). In addition to lower rates, most other OECD 

countries have a territorial tax system. When their companies invest in 

subsidiary operations in another country, the tax imposed by that other 

country on the earnings from the investment will generally be the final 

tax imposed- home country tax generally does not apply when the 

earnings are repatriated. Finally, the U.S. research tax credit has fallen 

far behind the incentives for research offered by other countries. These 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
545 


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• SIAI SEMOCDNDUCTDR 

INDUSTRY 

ASSOCIATION 

features of other tax systems - lower rates, a territorial system and 

strong research incentives- are imbedded in the tax laws of other 

countries and are available to any taxpayer with transactions that qualify. 

Additionally, a second tier of competitive pressures for our 

industry come from special incentives that are given selectively by 

governments to taxpayers that bring to the country strategic investments. 

In our case , governments offer incentives for locating wafer fabrication , 

assembly/test or R&D. These incentives include full or partial "tax 

holidays" and other benefits such as loans and reduced utility costs. 

Countries target the semiconductor industry because they understand 

that semiconductor manufacturing and R&D operations have a 

significant positive "spillover" effect on their economies in the form of 

employment in high tech jobs and the development of an engineering 

and technology infrastructure. Over time , a package of these incentives 

usually results in a substantial cost advantage for an operation, compared 

to a similar operation without such incentives. 

These competitive advantages create an after-tax income 

differential that results in our competitors having more funds for 

investment, more funds for R&D , and more of a profit cushion so they 

can drop prices when competing against U.S. semiconductor 

manufacturers. Importantly, if cash flow from our overseas operations is 

more valuable in their hands than in ours simply because of tax 

differences, it is likely that, over time , they will seek to acquire our 

operations, or more U.S. economic activity will migrate offshore- the 

after-tax return on offshore investment is simply too compelling. With 

higher after-tax profit margins, cost of capital is reduced creating 

financing , offshore hiring, and capital investment advantages. Corporate 

tax reform must level the multinational competitive landscape for U.S. 

companies and reinstate the U.S. as an attractive investment location. 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
546 


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• S I A I 

SEMICONDUCTOR 

INDUSTRY 

ASSOCIATION 

Lower, Globally Competitive Tax Rate 

The United States currently has the highest corporate tax rate in the 

OECD. In order for the U.S. to maintain its global leadership in hightech manufacturing , we must move to an internationally competitive 

corporate rate of20 percent or less; at 15 percent, the return to U.S. 

productive capital investment would reach a tipping point. 

While a focus on the OECD average tax rate is useful, it's 

important to note that U.S. semiconductor companies also compete with 

companies headquartered in countries outside of the OECD, and their 

average tax rate is significantly lower. This creates strong competitive 

advantages for foreign semiconductor companies and we urge 

policymakers to address these critical areas. 

SIA strongly supports the 20 percent rate proposed in the Better 

Way blueprint, as well as the 15 percent rate proposed by the Trump 

Administration. These significant reductions in the corporate rate would 

substantially enhance the competitiveness of semiconductor design and 

manufacturing in the United States. 

Territorial International Tax System 

The current U.S. international tax system has been widely 

criticized. By taxing revenues of foreign subsidiaries of U.S. companies 

(controlled foreign corporations, or CFCs) at the statutory rate of 35 

percent, current law reduces the competitiveness of U.S. companies 

operating in foreign markets and discourages U.S. companies from 

repatriating overseas income to the United States and investing it here. 

Most OECD nations employ a territorial system. In order for the U.S. to 

maintain its global leadership in high-tech manufacturing, it must move 

toward a more competitive, territorial international tax system. 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
547 


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• SIAI SEM>CDNDUCTO<> 

INDUSTRY 

ASSOCIATION 

Rules for a transition to a territorial system, including a tax on 

historical CFC earnings that have not been repatriated to the U.S. parent, 

are a critical issue for the U.S. semiconductor industry. SIA maintains 

that any mandatory or deemed repatriation should only be considered as 

a transition to a territorial system in the context of tax reform. SIA also 

recommends that any transition tax impose a lower rate on earnings that 

have been invested into plant and equipment than the rate imposed on 

cash and cash equivalents. This is of particular concern because 

semiconductor manufacturing is a capital-intensive industry where 

companies may have reinvested a significant portion of those earnings in 

high-cost capital equipment. 

Companies that have invested in capital assets outside the United 

States to address the needs of a global marketplace and the cost of 

capital advantages associated with offshore investment could face a 

significant tax liability without any corresponding increased cash flow to 

pay the tax. Any transition tax would impose additional costs and 

financial statement liability on U.S companies while their competitors 

would face no comparable burden during the same period. This may lead 

to foreign acquisitions of U.S. companies and mergers of U.S. and 

foreign companies resulting in more offshore headquarters. To 

ameliorate this concern, companies must be allowed to pay this tax 

liability over several years. Furthermore, companies must be permitted 

to elect to offset the tax liability of a deemed repatriation with net 

operating losses (NOLs)I 

In recent years, the semiconductor industry has experienced a wave 

of consolidation as companies have acquired and merged with others to 

reach greater economies of scale and more effectively compete with 

foreign rivals. As long-term business planning is intrinsic to growth and 

l tf NOLs at 35 percent value are used 1-to-1 against a repatriated amount taxed at a rate 

significantly lower than that, it would result in a significant loss of value of the NOL. The NOL 

used must be computed as: NOL utilized * deemed repatriation tax rate I 35%. See Section 

378 of Singapore tax law (Adjustment of capital allowances and losses between income subject 

to tax at concessionary and normal rates of tax) as an example of a provision to allow previous 

NOLs to maintain their tax value when carried forward to lower tax years. 

1101 K Street NW, Suite 450Washington, DC 20005 

p: 202.-44&.1700 www.semiconductors.org 
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• SIAI SEMOCDNDUCTDR 

INDUSTRY 

ASSOCIATION 

investment strategies, it is important that these business practices are not 

penalized and that the repatriation rules do not excessively tax foreign 

cash that is already committed to an acquisition. SIA supports a 

provision that would treat foreign earnings committed to the acquisition 

of a foreign company as amounts that have been reinvested to ensure 

that cash committed to an acquisition is not unduly taxed. 

SIA supports the deemed repatriation provisions contained in the 

Better Way blueprint. The bifurcated rates- an 8.75 percent rate for 

cash and cash equivalents, along with a 3.5 percent rate for historical 

CFC earnings that have been invested into plant and equipmentproperly address the issues raised above. The 8-year period during which 

companies would be allowed to pay the liability will minimize the shortterm costs and disruptions in this transition. 

Incentives for U.S. Research and Development (R&D) 

Robust incentives for research and innovation that are competitive 

with incentives in other countries are another SIA priority. In 2016, the 

semiconductor industry invested into R&D 20 percent of total revenue -

the second-highest share ofrevenue of any U.S. industry. Retaining the 

R&D credit and increasing the amount of the Alternative Simplified 

Credit (ASC) to 20 percent would support semiconductor research and 

design in the U.S. and American jobs in these fields. The U.S. R&D tax 

credit is primarily a jobs credit; 70 percent of credit dollars are used to 

pay salaries of U.S .-based researchers. 

Other proposals regarding research tax incentives would harm the 

U.S. semiconductor industry and deter future research investment in the 

United States. Computer software is a key element in semiconductor 

design and manufacturing, and SIA opposes proposals to remove 

computer software from credit eligibility. No other country specifically 

denies credit eligibility for all software costs. Similarly, disallowing the 

credit for the cost of supplies would also reduce the positive effect of the 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
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• SIAI SEMOCDNDUCTDR 

INDUSTRY 

ASSOCIATION 

credit for U.S. semiconductor manufacturers since equipment, raw 

materials, and other instruments are used in semiconductor 

manufacturing research. Finally, proposals to limit the ability of 

companies to deduct the costs of U.S .-based research activities will act 

as a disincentive to research investment, and companies should not be 

required to capitalize these costs. 

SIA strongly supports maintaining the R&D credit, as envisioned 

in the Better Way blueprint. SIA also urges Congress and the 

Administration to enhance the credit by increasing the rate of the ASC to 

20 percent. In the 114'h Congress, SIA supported H.R. 5187 , the 

Research and Experimentation Advances Competitiveness at Home Act 

of 2016, the REACH Act of 2016, introduced by Rep. Tiberi, with 22 

cosponsors, which increased the ASC rate to 20 percent. 

Other Key Provisions 

There are several other tax provisions that are significant to the 

U.S. semiconductor industry. As noted earlier, the semiconductor 

industry has in recent years experienced a wave of consolidation as 

semiconductor companies have acquired and merged with others to 

reach greater economies of scale and more effectively compete with 

foreign rivals. While some acquisitions will be funded by the use of 

unremitted foreign earnings, others have been financed through debt 

instruments. SIA does not oppose the elimination of the deduction for 

corporate interest contained in the Better Way blueprint, however we 

strongly recommend any legislation to eliminate this deduction contain a 

multi-year transition rule to ensure that companies are not unduly 

penalized for relying on this deduction in past transactions. 

Semiconductor manufacturing is a capital-intensive industry, with 

the cost of a new, leading-edge semiconductor fabrication facility 

exceeding $5 billion. The Better Way blueprint's proposal to allow 

immediate expensing of capital equipment is therefore a potentially 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
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• SIAI SEMOCDNDUCTDR 

INDUSTRY 

ASSOCIATION 

significant change to make U.S. semiconductor manufacturing more 

competitive. Finally, the semiconductor industry has historically 

suffered from large cyclical shifts in demand and production from year 

to year. Preservation of NOL carryforward rules are an appropriate tool 

to account for such cyclical shifts and help smooth the transition 

between up and down years. 

Conclusion 

SIA strongly supports efforts to reform, modernize , and make 

more competitive the U.S. tax code. Policymakers must seize this 

opportunity to eliminate the current disadvantages the U.S. tax code 

imposes on semiconductor research, design and manufacturing in 

America. Reducing the corporate rate to 20 percent or less, enacting a 

territorial system for CFC income with appropriate transition rules, and 

preserving and enhancing R&D tax incentives are policies SIA strongly 

supports, and which would make U.S. semiconductor companies and 

operations much more globally competitive. SIA looks forward to 

working with Congress and the Administration to enact these policies 

into law. 

1101 K Street NW, Suite 450 Washington, DC 20005 

p: 202-446- 1700 www.semiconductors.org 
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Smull 

~~J}c~ Business & Entrepreneurship Council 

How Tax Reform Will Grow Our Economy and Create Jobs 

Statement for the Record 

By 

Karen Kerriga n 

President & CEO 

Small Business & Entrepreneurship Council 

Ways a nd Means Committee 

U.S. House of Representa tives 

The Honorable Kevin Brady, Chairman 

The Honorable Peter Roskam, Chairman, Subcommittee on Tax Policy 

Statement submitted on: 

May25,2017 

Chairmen Brady and Roskam, thank you for your leadership, commitment to 

tax reform, and your consistent support for entrepreneurs and small 

businesses. 

On behalf of the Small Business & Entrepreneurship Council (SBE Council) and 

our nationwide membership and network of just over 100,000 members, I am 

pleased to submit this statement for the record in support of reforming our 

nation's tax system. Indeed, pro-growth tax reform will grow our economy 

and create jobs. Reforms that keep the needs of small businesses and 

entrepreneurs at the center will accomplish these important goals, and much 

more. 
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SBE Council is a nonpartisan, nonprofit advocacy, research and education 

organization dedicated to protecting small business and promoting 

entrepreneurship. For nearly 25 years SBE Council has worked to advance a 

range of policy and private sector initiatives to strengthen the ecosystem for 

startups and small business growth. 

Tax reform is vital to the growth of U.S. small businesses and 

entrepreneurship. The focus of this effort must be on reforms that produce a 

simple, fair, and productive tax code- one that encourages investment, risktaking, capital formation, and small business growth. Indeed, our small 

businesses have experienced a challenging operating environment for more 

than a decade. The financial crises, the Great Recession, followed by a weak 

economic recovery plus policy headwinds from Washington, have increased 

their business costs and sustained tremendous uncertainty. But things have 

changed. Small businesses and entrepreneurs are pleased that we are 

currently in a period where Washington has the opportunity to enact policies 

that create a better U.S. business environment and make our nation more 

competitive. 

The U.S. tax code must encourage our existing businesses to grow and invest, 

but it must also foster higher levels of entrepreneurship. The dearth in new 

business creation is a crises that must be addressed on several levels, but 

sound policies- including tax policy- play a key role. SBE Council's most 

recent "Gan Analysis" renort on entrepreneurshiP finds a massive shortfall 

of businesses, some 3.4 million, compared to where we should be based on 

historical trends and key data related to incorporated and unincorporated 

self-employed, and employer firms as shares of the relevant population. SBE 

Council believes a pro-growth tax system is a critical part of the policy 

ecosystem that will enable greater levels of entrepreneurship. 

Based in part on what the GOP House leadership and the Trump 

administration have put forward, the foundation for substantive, productive 

tax reform has been established. The key now is to move forward with 

measures that unify the business community and entrepreneurs, such as 

greatly reducing tax rates, allowing expensing of capital expenditures for all 
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businesses, simplifying the tax system, eliminating the AMT and death taxes, 

eliminating special-purpose "loopholes," among other measures. 

Lower Tax Rates Critical to Entrepreneurs 

SBE Council supports reducing both the corporate income tax rate, and the tax 

rate of pass-through entities. This is vital for U.S. business competitiveness 

and economic growth. 

As you well know, the U.S. imposes one of the highest corporate tax rates on 

the planet. But reducing and reforming the corporate income tax rate is not 

just a "big business" issue. It's very much about small business. According to 

the latest Census Bureau data, 86 percent of corporations have less than 20 

employees, and 96.7 percent less than 100 workers. Many of these small 

businesses are in high-growth sectors, and they- as well as their employees 

and our economy- would benefit tremendously from reducing the corporate 

rate. 

At the same time, it must be recognized that 95 percent of businesses as non-C 

corporations pay the personal rather than the corporate income tax, which 

speaks to the need to reduce individual income tax rates as well. just as the 

U.S. corporate income tax rate ranks poorly, our individual rates are not 

globally competitive either. 

As for top personal income tax rates, the 39.6 percent tax rate ranks 106th 

among 144 nations this year. The news gets worse when factoring in the 

average state income tax rate (excluding local income tax rates but accounting 

for the deductibility of state income taxes on federal returns). This adds at 

least three percentage points to the U.S. rate, taking it up to at least 42.6 

percent. That, in turns, pushes the U.S. tax rate global ranking down further to 

115th out of 144 nations. 

Small business optimism increased markedly following the 2016 elections and 

it remains strong in the second quarter of 2017. But entrepreneurs and 

small business owners are counting on substantive tax reform - featuring 

relief from high tax rates and burdens on investment, onerous regulations, 

and ridiculous complexity- to help bring them to higher levels of growth and 
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confidence. In turn, this will lead to more investment, job creation, innovation, 

and business expansion. With higher levels of growth (and more opportunity), 

the U.S. will also experience enhanced business startups which means more 

dynamism, innovation and quality job creation for our economy. 

SBE Council's hope is that the House quickly act on a tax reform package, so 

that small business owners and entrepreneurs can plan for a better tax system 

in 2018. Again, lowering rates for all, vastly simplifying the system, making 

the system fair and productive to encourage growth is vital to U.S. 

competitiveness and leadership in the global economy. With this in mind, we 

are hopeful your committee will continue to keep entrepreneurs and small 

businesses at the center of your reform efforts. SBE Council and our members 

pledge to work with you every step of the way to ensure the U.S. has a 

modern, pro-growth tax system that does not stand in the way of opportunity 

and entrepreneurship in America. 

Thank you for considering the views of SBE Council and our members. 

Respectfully submitted, 

Karen Kerrigan, President & CEO 

301 Maple Avenue West, Suite 100 ·Vienna, VA 22180 · 703-242-5840 

www.sbecouncil.org @SBECouncil 

Protecting Small Business, Promoting Entrepreneurship 
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STUDENT DEBT 

REDUCTION 

COALITION 

Submission for the Record for U.S. House of Representatives Committee on Ways and 

Means Hearing "How Tax Reform Will Grow Our Economy and Create Jobs 

The Student Debt Reduction Coalition ("SDR Coalition") would like to thank the U.S. House of 

Representatives Committee on Ways and Means for holding this hearing entitled "How Tax 

Reform Will Grow Our Economy and Create Jobs." The Coalition appreciates the opportunity to 

reiterate its support for the committee's tax reform efforts as this is an opportunity to address the 

student debt crisis, which has severe negative economic implications. As the committee 

considers reforms dealing with employer benefits and higher education, the SDR Coalition 

strongly recommends tax code changes that would encourage student loan borrowers to repay 

their loans faster. 

Borne out of the 2016 ASPEN Future of Work Initiative's Toward a New Capitalism report, a 

bipartisan effort to identifY concrete policies to update the tax code to reflect a 21" Century 

economy, the SDR Coalition represents a group of companies that believe student loan debt is a 

serious problem that affects an individual's financial wellness and the economy as a whole. The 

SDR Coalition has two major public policy goals: (I) help Americans repay student loans fa ster; 

and (2) empower Americans with student loans to increase retirement savings. In order to 

achieve these critical public policy objectives, the SDR Coalition has developed a series of 

recommendations and solutions to address the problem-- several of which could be implemented 

through Congress' tax reform efforts. 

The Impact of Student Debt on the Economy and the Taxpayer 

High levels of student debt undercut the opportunities that higher education is intended to 

provide for young Americans. Over 43 million Americans have more than $1.3 trillion in student 

loan debt, a 170 percent increase since 2006. 1 Additionally, 70 percent of graduates leave college 

every year with student debt. The average student loan balance for borrowers in the class of 20 16 

was $37,172, up 6 percent from 2015 and 70 percent from 2006, according to debt.org. 

According to the Federal Reserve Bank of New York ("New York Fed"), aggregate student debt 

is increasing since more students are taking out loans for larger amounts due to the rising costs of 

tuition. Additionally, repayment rates have slowed down. 

1 New York Fed Consumer Credit PaneVEquifax: 

https ://www .newyorkfed.org/medialibrary/media/press/PressBtiefing-Household-Student -Debt -April320 1 7. pdf. 
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According to the U.S. Department of Education ("ED"), national default rates for federal student 

loans eclipsed 11.3 percent in 2016. This translates to over 593 ,000 new Americans that 

defaulted on their student loans in 2016. The highest default rates are attributable to low-income 

earners. According to recent Internal Revenue Service data, 59 percent ofloan defaults are from 

individuals earning less than $60,000 annually. However, those with higher student debt are now 

much more likely to default than in the past, contributing to higher collections. 

According to the latest quarterly collection statistics for federal student loans, there are currently 

$81 billion in collections. During the final quarter of2016 (10/1/2016 to 12/31/2016), more than 

$16.2 billion was added to collections and only $2.6 billion was actually recovered by 

collections2 As the student loan default level continues to hover above 10 percent annually, the 

impact is significant for the taxpayer because many of these loans are not repaid to the U.S. 

Treasury. 

Recently, the U.S. General Accountability Office ("GAO") reported that all federally issued 

Direct Loans made in fiscal years 1995 to 2017 in Income-Driven Repayment (!DR) plans will 

have government costs of$74 billion. This cost is attributable to the fact that only $281 billion 

of the $355 billion in federal Direct Loans that have entered !DR plans will ultimately be repaid 

by borrowers. Therefore, there is a 21 percent subsidy rate, reflecting an average cost to the 

government of $21 per every $100 in loans disbursed. 3 The costs to the taxpayer are expected to 

rise as !DR plan costs have doubled from $25 to $53 billion for loans issued from fiscal years 

2009 through 2016, largely due to the growing number of loans expected to be repaid in !DR 

plans. While the !DR plans greatly help ease the student debt burden on borrowers, these costs 

add up to the taxpayer. 

Due to the high default rate of federal student loans and to the hefty costs of subsidizing federal 

!DR programs, the SDR Coalition believes that new federal solutions should be offered to reduce 

the expected cost to the taxpayer. Tax writers have an opportunity to reduce student loan default 

rates and the cost of unpaid student loan debt by providing new tax reform solutions to repay 

student loans. 

Impact on Homeownership 

Research indicates that student debt significantly affects other economic factors such as 

homeownership and retirement savings. While those attending a four-year college see markedly 

higher rates ofhomeownership, regardless of debt, homeownership rates are less for student loan 

borrowers according to a study by the New York Fed. For example, the New York Fed study 

indicates that for Americans between the ages of23 and 33 , the homeownership rate is about 7 

percent lower for people with student debt. Additionally, Americans with more than $25,000 in 

student debt are less likely to own a home than those with less than $25,000 in student debt 4 The 

homeownership gap between students with and without debt also increases over time. As a 

2 U.S. Department of Education: https://studentaid.ed.gov/sa/about/data-center/student/default. 3 U.S. Govenunent Accmmtability Office: https://www.gao.gov/products/GA0-17-22. 4 Federal Reserve Bank of New York: http://libet!yst:reeteconomics.newyorkfed.org/2017/04/diplomas-to-doorstepseducation-student-debt-and-homeownership.html. 

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result, instead of a college education acting as an equalizer, for those who graduate with student 

debt, it actually widens the economic gap. 

Saving for retirement and homeownership are core drivers of the American economy, and 

without the right solutions, student debt can hamper our economic growth. We believe that tax 

writers have an opportunity to reduce student debt through the tax code and this will also 

promote savings and purchasing power for millions of Americans. 

Impact on Retirement Savings 

Student debt also impacts the ability of Americans to save for retirement. According to a survey 

released by A on Hewitt, over 51 percent of workers with student loans are contributing 5 percent 

or less of their pay to retirement plans. 5 Sixty-three percent of people with student loan debt have 

saved less than $50,000 for retirement. Overall, 49 percent of people with debt contribute less to 

their plans than the recommended amount based on age and income. 

A recent study conducted by the Boston College also found that the average student loan balance 

causes retirement insecurity to rise by more than 5 percent. This level of retirement insecurity is 

similar in magnitude to an across-the-board cut of nearly 20 percent to future Social Security 

benefits. According to a recent analysis by GoodCall, having $28,950 in student loans, less than 

the national average, amounts to nearly half a million dollars in lost retirement savings for 

college graduates, compared to a debt-free graduate over a ten-year period, assuming savings of 

6 percent of total income and an employer 40 1 (K) match of 3 percent. 

Student loan debt also has particularly negative consequences for older Americans. According to 

an American Student Assistance study, approximately 867,000 households are headed by 

someone 65 or older who carries student debt. In fact, according to a December 2016 study by 

the U.S. GA06

, the number of older borrowers with student debt has increased over the last 

decade- since 2005, the number of older borrowers with student debt has gone up 385 percent 

for those over the age of 65 and 119 percent for those between the ages of 50 to 64. The debt 

balance for these loan holders has also tripled for the 50 to 64 population from $43 billion to 

$183 billion in outstanding debt. 

According to the American Student Assistance, as a result of higher student debt balances, nearly 

62 percent of respondents indicated that they have postponed saving for retirement or other 

investments as a direct result of the need to pay down their student loan debt. In a similar survey 

conducted by Fidelity Investments, 80 percent of those surveyed indicated that student loans 

have limited their ability to save for retirement. 

5 AON Hewitt Student Loans Hurting Workers' Abdity to Save for ReNrement, http:llir.aon.comlabout-aon/investorrelationslinvestor-newslnews-release-details/20 16/Student-Loans-Hurting- Workers-A hi hty-to-Save-forReNrementlde(ault.aspx 6 U .S. Govenunent Accmmtability Office, "Social Secmity Offsets: Improvements to Program Design Could Better 

Assist Older Sh1dent Loan Borrowers with Obtaining Pennitted Relief," http://www.gao.gov/products/GA0-17-45. 
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As a result of the negative impact of student loans on an individual's financial security, it is more 

important than ever to encourage retirement savings. Saving at a higher rate (1 0 percent of 

income, for example) will help significantly narrow the gap in retirement savings between 

graduates with student debt and those who are debt-free. As a result, it is imperative that 

Congress use tax reform as an opportunity to incentivize retirement savings and help repay 

student loan debt for millions of Americans, thereby allowing them to work towards financial 

security. 

Impact on Job Performance and Entrepreneurship 

Student debt follows Americans long after graduation, affecting their job and career 

opportunities. According to a PWC study, 50 percent of workers with student loans spend time at 

work dealing with financial issues, versus 23 percent without student loan debt. Thirty-two 

percent also indicated that their productivity at work has been impacted by issues dealing with 

financial distress. 

Offering student debt repayment assistance programs allows employers to reduce their 

employee's financial stress, thereby improving their productivity. These repayment assistance 

programs also serve as useful recruitment and retention tools for employers, given that over 80 

percent of employees would like to work for a company that offers this benefit. In order to avoid 

the high costs of turnover, employers are increasingly exploring offering this type of program. 

According to 20 1 7 data from the Center for American Progress, employee turnover costs a 

company up to 213 percent of the total annual salary for highly educated executive positions. For 

example, the cost to replace a $lOOk CEO is $213,000. For mid-range positions (those earning 

$30,000 to $50,000 a year), the cost to replace an employee is approximately 20 percent of 

annual salary. For positions where employees earn under $30,000, it generally costs 16 percent 

of annual salary to replace the employee. Beyond these tangible costs, there are many intangible, 

and often untracked, costs associated with employee turnover that makes it preferable for 

employers to offer benefits that help them retain good workers. 

Given this data, by 2018, 26 percent of employers are expected to offer a student loan repayment 

program, according to the Society of Human Resource Management. 

In addition to affecting employee turnover and job performance, student debt also stops 

Americans from starting their own businesses and undertaking other entrepreneurial ventures. 

According to Arnobio Morelix, a senior research analyst with the Kaufmann Foundation, the rise 

in student debt has coincided with a decline in start-ups. This is in part because entrepreneurs 

need capital to start new businesses, and people with student debt lag far behind on accumulating 

net worth. 

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According to a study by the Pew Research Center,

7 households headed by a young, collegeeducated adult without any student debt obligations have about seven times the typical net worth 

($64,700) of households headed by a young, college-educated adult with student debt ($8,700). 

The wealth gap is also large for households headed by young adults without a bachelor's degree 

-those with no student debt have accumulated roughly nine times as much wealth as debtor 

households ($10,900 vs. $1,200). 

Employer Benefits and Higher Education Tax Reform 

The current U.S. tax code provides for various ways for Americans to increase their educational 

opportunities and achieve financial goals through their employer. For example, the retirement 

system has been enhanced through tax-advantaged employer contributions to retirement 

accounts. Additionally, many education credits and tuition reimbursement incentives have 

enabled Americans to pay for college, including the Section 127 employer educational assistance 

exclusion and 529 Savings Accounts. As the Ways and Means Committee considers changing 

the tax code, the SDR Coalition recommends expanding existing programs to help Americans 

repay their student loans faster. 

Most companies already help Americans save for retirement, pay for healthcare costs, and 

reimburse tuition. Tax writers should consider encouraging companies to offer student loan 

repayment assistance benefit programs. Several private sector companies already provide 

student loan repayment assistance. However, employer student loan repayment contributions are 

taxed as compensation by the Internal Revenue Service, often making it cost-prohibitive to offer 

the benefit. Reducing this tax on employer student loan repayment contributions will encourage 

many more employers to start offering these types of plans. 

Student Loan Tax Reform Policy Recommendations 

The SDR Coalition believes student debt reduction can be achieved through fundamental tax 

reform, allowing employers the option to provide student loan repayment contributions as an 

employer benefit. As Americans enter the workforce, they have many financial concerns, 

including saving for retirement, paying for healthcare costs, saving for education, and paying off 

their student loans. The tax code should reflect the current demographics of the modern 

workforce by creating a benefit system that allows Americans at every stage of their life to 

choose from a suite of benefits that help them improve their financial future. Americans should 

have several tools at their disposal and be allowed to choose what is best for their financial 

future. 

One of the ways this can be achieved is allowing employees to use a certain percentage of their 

unused 40l(K) exclusion to pay down their student debt. For example, employers should be 

encouraged to use a percentage of their "employer match" to help pay down the employee's 

7 Young Adults, Student Debt and Economic Well-Being, http://www.pewsocialh·ends.org/2014/05/ 14/ymmg-adultsstudent-debt-and-economic-well-being/_ 

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student loans. The remainder of the employer match would go towards the employee's 401 (K) 

account. The SDR Coalition recommends requiring employees to make a minimum contribution 

to a retirement savings account, before taking advantage of the loan repayment matching 

contribution. Additionally, employers would choose where they invest their employer matchthey would not be required to contribute a percentage to repaying student loan debt. 

Studies show that employees who are able to participate in this type of student repayment plan 

are able to pay off student debt faster. According to early user data from Student Loan Genius, 

each $100 monthly employer student loan contribution ($1 ,200 annually) can reduce repayment 

time by an estimated average of 7 years for a $5,000 loan carrying a $50 minimum payment. 

Consequently, calculations show that a $100 employer contribution to student loans reduces 

repayment time on a $3 7, 123 loan by 13 years and 7 months. These estimates are based on an 

interest rate of 4.45%. 

Members of Congress already recognize that student debt repayment has enormous 

consequences on Americans' financial future. In the past few years, members have championed 

various proposals that address this issue. For example, several bipartisan bills have been 

introduced this Congress to expand the Section 127 exclusion for employer educational 

assistance programs in the U.S. tax code and allow this money to be used to repay existing 

student loan debt. Legislation includes including H.R. 795, the Employer Participation in 

Student Loan Assistance Act, and H.R. 1656, the HELP for Students and Parents Act. 

Given that only 30 percent of young workers save for retirement through 40l(k) programs,' the 

loan repayment benefits would help increase participation, especially among millennials. By 

connecting retirement savings and student loan repayment in the minds of young workers, this 

policy will have a beneficial long-term impact on their saving habits. A similar proposal was 

featured in the bipartisan Aspen Institute 's January 2017 report "Toward a New Capitalism9 " 

Congress has a unique opportunity to tackle one of the most challenging financial issues for 

today' s generation of young workers - empowering them to repay their loans faster. As a result, 

these policy options would help reduce student loan default rates, help Americans save for 

retirement faster, and begin to purchase a home faster than they would if they continued to hold 

student debt, amongst other positive consequences. 

The SDR Coalition looks forward to working with the House Ways and Means Committee to 

improve the financial situation of millions of Americans. We stand ready to work with you on 

these proposals in a way that grows the economy and reduces the cost on the taxpayer. 

8 Bloomberg: M;!lenn;a/s Are Frealdng Over ReNrement----and Not Do;ng Much About It, 

https:/ /www .bloomberg.com/news/articles/20 16-08-16/millennials-are-fi:eaking-over-retirement-and-not-doingmuch-about-it 

9 ASPEN Instih1te Fuhu·e of Work Initiative : Toward a New Cap;ta/ism, 

https://assets.aspeninstitute.org/contenUuploads/2017/01/New Capitalism Policy Agenda.pdf 

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About The Student Debt Reduction Coalition: 

Formed in 201 7, the mission of the Student Debt Reduction Coalition is to champion public 

policy solutions that improve the student debt crisis in America. The Coalition supports federal 

and state legislative initiatives that would reduce the employer and employee tax on student loan 

assistance plans and would improve financial counseling for student debt borrowers. The 

Coalition believes the reduction of student loan debt would contribute to increased retirement 

savings, along with a host of other economic benefits. To learn more, visit 

www.studentdebtcoalition.com. 

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TECH NET 

THE VOICE OF THE INNOVATION ECONOMY 

May 18, 2017 

U.S. Representative Kevin Brady 

Chairman 

House Ways and Means Committee 

1102 Long worth House Office Building 

Washington, D.C. 20515 

805 15th Street, NW, Suite 708, Washington, D.C. 20005 

Te lephone 202.650.5100 I Fax 202.650.5118 

www.technet.org I @TechNetUpdate 

U.S. Representative Richard Neal 

Ranking Member 

House Ways and Means Committee 

1102 Long worth House Office Building 

Washington, D.C. 20515 

Dear Chairman Brady and Ranking Member Neal: 

On behalf of Tech Net and our members, we appreciate your commitment to 

reforming America's broken, burdensome, and complicated tax code in a manner 

that unleashes strong job creation and higher paychecks throughout America's 

economy. As the House Ways and Means Committee holds a hearing today 

examining " How Tax Reform Will Grow Our Econom y and Create Jobs," we renew 

our commitment to helping you, the committee's members, and the entire U.S. 

House of Representatives enact meaningful and impactful tax reform during the 

115th Congress. 

At Tech Net, we represent a diverse group of more than 70 technology companies. 

Our members range in size from small or medium, to large and multinational; 

operate across various sectors of the innovation economy; and include young 

startups as wel l as more established and iconic American tech innovators. 

It has been 3 1 years since Congress last passed fundamental tax reform legislation. 

Back in 1986, many of our member companies had not been founded. In fact, 

some of our companies' founders had not yet even been born. These t wo facts 

alone underscore just how outdated our tax code is and how in need it is of a 

dramatic overhaul. 

As Congress continues its work on a job-creating economic agenda, we recognize 

the American economy cannot grow at its full potential without a thriving 

technolog y sector, just as the technolog y sector cannot succeed without the right 

federal policies in place. From the perspective of America's technology sector, 

there is no single federal policy being considered by Congress and the 

administration that holds as much potential to unleash a wave of dynamic and 

robust job creation as tax reform. 

Washington, D.C. • Silicon Valley • San Francisco • Sacramento • Austin • Boston • Seattle • Alba ny • Tallahassee 
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TECH NET THE VOICE OF THE INNOVATION ECONOMY 

Specifically, we believe the following measures are essential components of tax 

reform that will maximize job creation, boost workers' paychecks, and increase 

investment for sustainable long-term growth: 

Lowering the corporate tax rate so that American businesses are able to 

compete globally on a more level playing field. 

Adopting a competitive, market-based territorial tax system with balanced 

safeguards against base erosion and profit shifting that does not discriminate 

against any particular income, including income from intangible property. 

Enabling U.S. companies to bring home approximately $3 trillion in overseas 

earnings and invest it here at home. 

Defending the legal right of U.S. corporations to structure global business 

operations consistent with relevant legal requirements. 

Preserving and enhancing the research and development (R&D) tax credit. 

Encouraging intellectual property to be created and commercialized in the 

U.S. 

The continued prohibition of federal internet access taxes. 

Simplified tax requirements for mobile workers. 

Accelerated and full business expensing. 

The renewal of Section 48 of the Investment Tax Credit (lTC), which enables 

projects with long development cycles, including both large fuel cell power 

generation systems and distributed generation systems, to effectively access 

the credits. 

The coming months represent the best opportunity in a generation to achieve 

fundamental tax reform that modernizes our tax code for the future. We encourage 

you and your colleagues throughout the federal government to seize it, and we 

stand ready to support you in getting this done for the American people. 

Sincerely, 

Linda Moore 

President & CEO 
564 

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~~~LSI NELLI 1401 Eye Street NW, Suite 800. Washington. DC 20005 (202) 783-3300 

The Honorable Kevin Brady 

Chairman 

Committee on Ways & Means 

U.S. House of Representatives 

Washington, DC 20515 

The Honorable Richard Neal 

Ranking Member 

Committee on Ways & Means 

U.S. House of Representatives 

Washington, DC 20515 

June 1, 201 7 

Dear Chairman Brady and Ranking Member Neal: 

Thank you for the opportunity to submit a statement on tax reform to the Committee on 

Ways and Means. As the Executive Director of The Advertising Coalition, I am pleased to 

submit with this letter a statement regarding the history and principles related to the 

Section 162 deduction for the cost of business advertising. 

polslnelli.QOm 

Atlanta Bos1on Chicago Dallas Denver Houston Kansas City l os Angetes Nashville New Yo~ Phoenix 

St. Louis San Franci$CO Washington, D.C. Wilmington 
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The ADvertising Coalition 

Comments Regarding Hearing on 

How Tax Reform Will Grow Our Economy and Create Jobs 

To The Committee on Ways and Means 

U.S. House of Representatives 

May 30,2017 

Executive Summary 

We appreciate the opportunity to submit these comments on behalf of The Advertising Coalition 

(TAC) in response to the Committee's request for comments on tax reform and the economy. TAC 

includes national trade associations whose members are advertisers, advertising agencies, broadcast 

companies, cable operators and program networks, and newspaper, magazine and online publishers. 

Our coalition represents perhaps the single broadest constituency of advertisers, advertising 

agencies, and media-related businesses in this country engaged in protecting the free flow of 

advertising content and volume. As a direct correlation to that objective, TAC members are vitally 

interested in assuring that any reform of the Tax Code preserves the current ability of businesses to 

deduct the cost of advertising as an ordinary and necessary business expense. 

While we agree with the general goal of lowering the statutory corporate tax rate, we believe that it 

would be counterproductive and in direct conflict with 104 years of established tax policy to impose 

limits on the deduction for advertising in an effort to "pay-for" such changes. The stated goals of tax 

reform are to make the U.S. more competitive, stimulate growth and simplify the tax code, but 

burdening advertising with additional tax liabilities would not further any of these important 

initiatives. Our concerns are not merely hypothetical as former Ways and Means Chairman Dave 

Camp included a $169 billion tax on advertising in his 2014 comprehensive reform proposal (the Tax 

Reform Act of 2014). 

Historically, Congress has reviewed the operation of the Tax Code and proposed revenue raising 

measures that involved limiting or eliminating nonproductive, revenue losing provisions such as tax 

expenditures identified by the Joint Committee on Taxation or the Office of Management and 

Budget. The deduction for the cost of advertising, however, has been an accepted business expense 

since the adoption of the corporate Tax Code, along with the deduction of other business operating 

expenses such as rent, salaries and office supplies. This deduction has never been characterized as a 

tax expenditure or in any way inconsistent with sound tax policy. However, it has become the focus 

of tax reform for the same reason that Willie Sutton once explained why he robbed banks. "I rob 

banks because that's where the money is." 

One of the unintended consequences of the proposed tax on advertising is that it would result in less 

information being available to consumers through internet publishers, newspapers, magazines, radio 

and television stations and networks, and cable networks and operators. Advertising is essential to 
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-2-

the operation and even the survival of our national independent providers of news and information, 

particularly in rural and smaller communities. Reducing the advertising revenue received by these 

media outlets would reduce their ability to make information available and would weaken a core 

underpinning of our democracy- an informed electorate. 

A tax on advertising such as what was proposed in the Camp legislation would not only damage the 

advertising and media industries, but also would negatively affect the jobs and sales generated by 

advertising's ripple effect throughout the economy. A 2015 study conducted by the world-renowned 

economics and data analysis firm IHS Economics and Country Risk ("IHS") determined that every $1 

spent on advertising generates nearly $19 in economic activity (sales), and that every million dollars 

in advertising supports 67 American jobs. In 2012, advertising drove $5.8 trillion of the $36.7 trillion in 

U.S. economic output and supported 20 million of the 142 million jobs in the United States.' These 

figures demonstrate that every form of advertising - ranging from newspapers, magazines, and 

television to the Internet - strengthens business and triggers a cascade of economic activity that 

stimulates job creation and retention throughout the U.S. economy. 

The nation's businesses that advertise would annually feel the brunt of a Camp-like proposal, leaving 

them with fewer resources to commit to advertising spending year after year. The resulting decrease 

in advertising purchases would, as described above, cause a chain reaction throughout the economy 

and sharply affect media companies that depend on advertising as a critical source of revenue for 

daily operations. Given the complex role of advertising in the economy, this type of tax policy would 

work counter to the key objectives of tax reform of making the Tax Code simpler and more efficient, 

and fostering a pro-growth environment. 

A tax on advertising is neither supported by sound economic policy nor informed tax policy. Two 

leading experts on the role of advertising, Nobel laureates in Economics Dr. Kenneth Arrow and Dr. 

George Stigler, concluded that "Proposals to change the tax treatment of advertising are not 

supported by the economic evidence," and that any policy of making advertising more expensive 

would cause a decisive decline in advertising spending. ' In addition to helping businesses 

communicate the benefits of their products and services, advertising is a critical driver of U.S. 

economic activity and should remain a fully deductible expense, just like salaries, rent, utilities, and 

office supplies. 

Advertising Consistently Has Been Defined as an Ordinary and Necessary Business Expense 

The treatment of business advertising costs as an ordinary and necessary business expense under 

Section 162 of the Tax Code has been upheld in the U.S. Tax Court3

, supported by a Revenue Ruling 

from the Internal Revenue Service, 4 as well as endorsed by Dr. Arrow and Dr. Stigler. 5 The 

commitment by leaders in Congress to improve the way the government identifies and collects tax 

revenues can bring important and productive changes to the Tax Code, including a reevaluation of 

1 11Economic Impact of Advertising in the United States." IHS Economics and Country Risk. (March 2015). 2 Arrow, Kenneth eta!. 11Economic Analysis of Proposed Changes in the Tax Treatment of Advertising 

Expenditures." Lexecon Inc. (August 1990). 

3 RJR Nabisco Inc. v. Commissioner, 76 T.C.M.71 (1998). 

4 See Rev. Rul. 92-80, 1992·39 I.R.B. 7· 5 Arrow, Kenneth et al. ''Economic Analysis of Proposed Changes in the Tax Treatment of Advertising 

Expenditures." Lexecon Inc. (August 1990). 
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what constitutes a "tax expenditure," to be more consistent with sound tax policy. However, it is 

essential to maintain a clear distinction between the definition and treatment of tax expenditures 

and the need for businesses to deduct ordinary and necessary business expenses, such as 

advertising. 

The Congressional Budget Act defines tax expenditures as "revenue losses [to the government] 

caused by provisions of the tax laws that allow a special exclusion, exemption, or deduction from 

gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax 

liability."' In other words, a tax expenditure is a form of federal spending designed to encourage 

specific behavior. However worthy the objective, a tax expenditure is an exception to sound tax 

policy. Neither the Joint Committee on Taxation nor the Office of Management and Budget has ever 

classified the deduction for advertising costs as a tax expenditure. 

The deduction for advertising costs is essential to the proper calculation of the net income tax 

liability of a business. This principle has been upheld by the U.S. Tax Court in the face of challenges 

from the Internal Revenue Service that have attempted to test this standard over a period of several 

decades.' 

Advertising Creates Millions of Jobs and Adds Trillions of Dollars to the U.S. Economy 

As the nation's leading advertisers and media companies, members of The Advertising Coalition 

understand first-hand the extent to which advertising is a powerful tool that not only may be used to 

promote goods and services, but also helps to educate consumers about the world around them. 

Advertising also is responsible for generating trillions of dollars in economic activity. IHS Economics 

and Country Risk, using an economic model developed by Dr. Lawrence R. Klein, the 1980 recipient 

of the Nobel Prize in Economics, demonstrated how advertising performs as a key driver of 

economic activity and a generator of jobs.8 This macroeconomic model has been employed by the 

Treasury Department, Commerce Department, Labor Department, and most Fortune soo companies. 

IHS concluded in 2015 that the jobs of 14 percent (19.5 million) of all U.S. employees are related to 

advertising, the sales driven by advertising, and the induced economic activity that occurs 

throughout the economy as a result of advertising.' Additionally, IHS previously established that 

advertising does not merely shift market share among competing firms, but rather stimulates new 

economic activity that otherwise would not have occurred. This, in turn, triggers a cascade of 

economic activity and stimulates job creation and retention throughout the U.S. economy.'"' 

The IHS study quantifies the levels of sales and employment that are attributable to the stimulus 

produced by advertising. It comprehensively assesses the total economic contribution of advertising 

expenditures across 16 industries, plus government, in each of the so states, Washington, D.C., and 

each of the 435 Congressional Districts in the United States. The overall economic impact of 

advertising consists of the direct impact of advertising dollars and subsequent sales, supplier sales, 

inter-industry sales, and resulting consumer spending. Each of these effects also creates and 

6 P.L. 93·344, 88 Stat. 297, enacted July 12, 1974. 7 /d. RJR Nabisco Inc. 8 11Economic Impact of Advertising in the United States." IHS Economics and Country Risk. (March 2015). 

9 11The Economic Impact of Advertising Expenditures in the United States, 2012-2017." IHS Economics and 

Country Risk, Inc. (June 2013). 10 1bid 
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maintains new jobs that are needed to support a higher level of production. The IHS analysis 

quantifies the economic impact of advertising along four dimensions:" 

• Direct Economic Impact. This category refers to the dollars and jobs dedicated to developing and 

implementing advertising in order to stimulate demand for products and services. It includes the 

work of advertising agencies and the purchase of time and space on a host of media like radio, 

television, newspapers, magazines, the Internet, and other outlets. This level of impact stimulates 

transactions such as the sale of an automobile or an insurance policy sold as a direct result of 

television advertising. 

• Supplier Economic Impact. Advertising-generated sales set off chain reactions throughout the 

economy and create sales and jobs supported by first-level suppliers. Using the example of a car 

sale, this level of impact encompasses activity by the suppliers of raw materials for upholstery, 

plastic, tires and parts, radio and GPS receivers, and other products and services that are used to 

produce the vehicle. 

• lnter·industry Economic Impact. In the automobile example, sales to first-level suppliers generate 

subsequent inter-industry economic activity that creates jobs in a host of related industries, such as 

rail and truck transportation, gasoline and oil, insurance, and after-market sales of automobile 

products. The demand for products and services, sales, and jobs at this inter-industry tier depends 

upon the initial consumer purchase of the automobile, which is facilitated by advertising. 

• Induced Consumer Spending. Every person with a direct, supplier, or inter-industry job also plays 

the role of consumer in the U.S. economy. They spend a portion of their salaries in the economy on 

items such as food, consumer goods and services, healthcare, and other needs. This spending 

initiates multiple rounds of economic activity, stimulates additional sales, and creates jobs. 

Leading Economists Have Reinforced Deduction for Advertising 

For the past quarter century following enactment of the Tax Reform Act of 1986, a wide range of 

proposals have been advanced to limit the deduction for advertising costs as a means of raising 

additional revenue for the federal government. These proposals to change the treatment of 

advertising as an ordinary and necessary business expense generally have been based on the 

theories that (1) advertising is durable and generates revenues beyond the period in which the cost is 

incurred; (2) advertising costs create intangible assets and should, therefore, be capitalized in part, 

and (3) advertising costs are incurred with a future expectation of income and also should be 

capitalized in part. 

In response to the 1987 book of revenue options drafted by the Joint Committee on Taxation that 

included limits on the deductibility of advertising," TAC worked with Drs. Arrow and Stigler to 

identify economic policies and data that would provide a counterpoint to proposals to limit this 

deduction. The American Institute of Certified Public Accountants similarly examined and rejected a 

11 1

'Economic Impact of Advertising in the United States." IHS Economics and Country Risk. (March 2015). 12 11A Description of Possible Options to Increase Revenues Prepared for the Committee on Ways and Means," 

Joint Committee on Taxation, pp. 138·139 (1987). 
569 


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-sproposal to capitalize advertising costs for book income treatment.'' The analyses of our economic 

advisers support the principle that advertising costs should continue to be treated as ordinary and 

necessary business expenses while concluding that theories advocating otherwise are not 

sustainable. 

Durability of advertising. This argument centers on the notion that the benefit of advertising extends 

beyond the year in which it is purchased, and that it is more appropriate to link advertising expenses 

and the income they generate by requiring a portion of advertising costs to be deducted in 

subsequent years. TAC asked Arrow and Stigler, and the economic consulting firm Lexecon, Inc., to 

explain the role of advertising in the economy and provide their analysis of this theory. Dr. Arrow 

was awarded the Nobel Prize for Economics in 1972 and Dr. Stigler was awarded the Nobel Prize for 

Economics in 1982 for research on consumer choice and the role of consumer information in the 

economy. Together they prepared the "Economic Analysis of Proposed Changes in the Tax 

Treatment of Advertising Expenditures." 14 

Drs. Arrow and Stigler specifically examined a number of economic studies that proposed increasing 

the cost of advertising to the advertiser. The goal of many of these studies was to demonstrate the 

longevity of the impact of advertising on sales in order to justify capitalizing all or part of advertising 

costs. The Nobel economists concluded that these studies on the durability of advertising had 

reached such different conclusions that they could not be used as a coherent basis for formulating 

tax policy. Moreover, Drs. Arrow and Stigler found that these studies suffered from technical flaws 

that rendered their conclusions meaningless. Their analysis suggests that most, if not all, advertising 

is short-lived.'' The economists cautioned against changing the tax treatment of advertising, which 

would make advertising more expensive: 

"Since the information conveyed by advertising is valuable, one must be particularly cautious 

about taxes that would raise the cost, and hence lower the quantity of advertising. Such taxes 

would reduce the overall flow of economic information available to consumers. As a result, we 

expect that prices would rise, the dispersion in prices for particular products would increase, 

and consumers would be less able to find goods that satisfy their preferences."'6 

Intangible assets. Critics of the current deduction for advertising costs have contended that it creates 

a preference for businesses that invest in advertising rather than tangible assets, and that 

advertising similarly must be depreciated over time. They also say it raises questions about whether 

the current deduction of advertising costs results in the creation of intangible assets. 

However, the economic research provided by Drs. Arrow and Stigler shows that the intangible asset 

is the firm 's product, not the advertising for the product. The results indicate that advertising only 

communicates information about the product to customers. Arrow and Stigler said that while some 

economists have attempted to measure the relationship between a firm's advertising costs and its 

intangible capital, they incorrectly ignore the fact that there are many economic factors other than 

advertising that determine a firm's market value. Indeed, the value of the firm's product - e.g., its 

13 The American Institute of Certified Public Accountants. "Statement of Position 93 7: Reporting on 

Advertising Costs." (1993). 14 K. Arrow, et. a I. 15 K. Arrow, et. al., at p. 23. 16 1bid at p. iii. 
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-6-

effectiveness or innovativeness - is the firm's true intangible asset. Advertising is only a means by 

which the firm can exploit fully the value of that asset. '

7 

Arrow and Stigler offered the innovative user interface developed by Apple Computer as an example 

of this point. "The 'Finder,' which it provides on its Apple ... personal computer ... has been 

enormously popular and Apple has exploited its value by advertising its advantages to potential 

users. As a result of the success of this product [and other Apple innovations including the iPhone 

and iPad], Apple's sales have soared, as has its market value. But Apple's advertising [Mac versus PC, 

et. al.] is not the intangible here; it is only a tool for maximizing the value of the true intangible- the 

interface."18 

Legal background. The case law supporting the current deduction of business costs had been settled 

for more than 20 years when the U.S. Supreme Court in 1992 introduced a different viewpoint in 

INDOPCO, Inc. v. Commissioner of Internal Revenue.'' Prior to INDOPCO, an expense would have been 

capitalized only if it "create[ d) or enhance[d] ... a separate and distinct additional asset."" The 

Court in INDOPCO held that legal fees and other costs incurred by Unilever United States in the 

acquisition of INDOPCO, Inc. (formerly National Starch and Chemical Corporation) should be 

capitalized and not deducted in the year in which they were incurred because the resulting legal 

structure enhanced the future value of the enterprise. 

The decision in INDOPCO focused on the tax treatment of legal fees related to a corporate acquisition 

- whether they should be deducted in the year incurred or capitalized because they contribute to 

future company income. The Court's ruling, however, prompted TAC and many other industry groups 

jointly to ask the Internal Revenue Service (IRS) whether this decision might in the future be 

extended to advertising expenditures and require any portion of advertising costs to be capitalized. 

The IRS Office of Chief Counsel responded on September 11, 1992: 

"Section 162-1(a) of the Income Tax Regulations expressly provides that 'advertising and 

other selling expenses' are among the items included in deductible business expenses under 

Section 162 of the Code. Section 1.162-2o(a)(2) of the regulations provides, in part that 

expenditures for institutional or goodwill advertising which keeps the taxpayer's name before 

the public are generally deductible as ordinary and necessary business expenses provided the 

expenditures are related to the [business] patronage the taxpayer might reasonably expect in 

the future." 2 1 

Congress in 1993 also addressed the treatment of intangible business expenses that are incurred in 

generating consumer sales. Supporters of a change in the tax treatment of intangible assets 

advocated that some of these costs should be capitalized. The Omnibus Budget Reconciliation Act of 

1993" provided that these costs generally should be amortized ratably over 15 years, but Congress 

specifically exempted any intangible "created by the taxpayer."'' The legislation also excluded from 

'

7 Ibid at p. 36. 18 11Economic Analysis of Proposed Changes in the Tax Treatment of Advertising Expenditures," Arrow, et. a!. 19 /NDOPCO, Inc. v. Commissioner of Internal Revenue, 503 U.S. 79 (1992). 2

° Commissioner v. Lincoln Savings & Loan Assn., 403 U.S. 345,354 (1971). 

" Rev. Rul. 92-80, 1992-39 I.R.B. 7, 1992-2 C.B. 57, 1992 WL 224893 (IRS RRU), September 11, 1992. 22 P.L.103-66,107 Stat. 312, enacted August 10, 1993. 

'

3 Ibid, sec. 197 (c)(2). 
571 

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-?-

amortization "any franchise, trademark, or trade name." 24 In other words, advertising that promotes 

an intangible asset- such as the brand name of a product- should not be capitalized, but rather may 

be deducted in the year the cost was incurred. 

In the period leading up to the Omnibus Budget Reconciliation Act of 1993, the accounting 

profession conducted a formal examination of the business accounting standards for the treatment 

of advertising costs. The Accounting Standards Executive Committee (AcSEC) of the American 

Institute of Certified Public Accountants (AICPA) issued a Statement of Position in 1993 that 

recommended expensing advertising costs either as incurred or at the first time the advertising takes 

place, unless the advertising meets criteria for capitalizing direct-response advertising.'' Because the 

Congress and the Committee on Ways and Means regularly look to the treatment the accounting 

profession recommends or requires for guidance in the treatment of business expenses, TAC was 

pleased that AcSEC affirmed the current deduction of advertising costs. 

Conclusion 

Decades of legal and policy justifications support the current tax treatment of advertising as an 

ordinary and necessary business expense, rather than an asset to be capitalized over time. TAC 

strongly opposes efforts that would tax the business cost of advertising. Our coalition includes 

companies and associations of all sizes that share the common goals of protecting the right of 

companies to advertise, and securing a fair, affordable business tax rate. 

Thank you for your consideration of our views. 

'' Ibid, sec. 197 (d)(1)(F). 25 American Institute of Certified Public Accountants, Accounting Standards Executive Committee, Statement 

of Position 93 7, December 29, 1993. 
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Written Statement for the Record of Ways and Means Hearing on 

"How Tax Reform Will Grow Our Economy and Create Jobs" 

Thursday, May 18,2017 

Submitted by J. Michael Keeling, President, The ESOP Association, 1200 181

h 

Street, NW, Washington, DC 20036, Suite 1125. Telephone: 202-293-2971. Email 

michael@esopassociation.org 

The ESOP Association is a tax-exempt, 501(6) trade association with over 1600 

corporate members that sponsor an employee stock ownership plan, or ESOP; also 

as secondary members are professionals providing services unique to creating and 

maintaining an ESOP, educational members who work for academic institutions, 

and corporations that are considering creating an ESOP. Total membership is over 

2900 members. 

The statement follows: 

"Mr. Chairman, and distinguished members of the House Ways and Means 

Committee, my testimony focuses on jobs, and proven policy that sustains jobs of 

working Americans. 

May I make two points before providing proof of what I will say is 

supported by objective data since 2002. 

While many of the Committee did not serve with my former "boss," 

Congressman J.J. "Jake" Pickle, I will never forget that when I started work for 

him in August 1972, he said to me "Michael, when you help me understand a 

proposal, a suggested amendment, a possible project for the lO'h District of Texas, 

or Austin, Texas, the first thing you think about is 'How will this proposal, this 

law, this project impact jobs in my Congressional District?" And I always followed 

his directions. 

I know that women and men who serve in Congress today remain focused on 

the issue of jobs. My experience is that any member of Congress-whether left, 

right, in the middle, Republican, Democrat, or Independent-will pledge to work 

for policies that "create" jobs, somewhat the title of this hearing today. 

No one is against policies that "create" jobs, but what helps American 

employees most are policies to maintain jobs. 
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33393.502

Today my submission is brief: At the end of my submission is a scan from 

page 12 of a book released in late January of this year, published by the Upjohn 

Institute for Employment Research, Kalamazoo, Michigan, "How Did Employee 

Ownership Firms Weather the Last Two Recessions?" 

The authors are respected academics: Fidan Ana Kurtulas, Associate 

Professor of Economics, University of Massachusetts, Amherst, a Wertheim 

Fellow at Harvard Law School, research fellow at the Institute for the Study of 

Labor (IZA), and a research coordinator for LERA Employment Policy Research 

Network; and, Douglas L. Kruse, Distinguish Professor of Economics at Rutgers 

University School of Management and Labor Relations, a research associate of the 

National Bureau of Economic Research, a research fellow at the Institute for the 

Study of Labor (IZA), an editor of the British Journal of Industrial Relations, and 

director of the Rutgers Program for Disability Research. 

Their conclusions are based on data from: 

• The prestigious General Social Survey, conducted by the National Opinion 

Research Center, headquartered at the University of Chicago. 

• Years ofiRS Form 5500's, which are filed by sponsors of retirement savings 

plans. 

• Previous academic research on employment and employee ownership. 

While my statement includes only one chart, the book is full of charts and I 

commend it to you and your staff as you review how to have policies that are job 

maintenance policies. 

So to conclude, as the chart says what I want to convey-data from the 

GSS's 2002, 2006, 2010, and 2016 surveys evidences that companies with 

employee stock ownership laid off employees at a rate that was, on average over 

these years (which included two recessions), four to eight times less than layoff 

rates at conventionally owned companies. 

Please note, this book, this research was not paid for by The ESOP 

Association, or any other interest group. 

In sum, as you do the heavy lifting of tax reform, as it is not an easy task 

having participated in numerous tax reform efforts and the major tax bills of the 

80's, remember-you want to have policy that results in people keeping their 

jobs-consider proposals, and the existing laws that encouraging more Americans 

being owners of the companies where they work. 
574 

f 


33393.503

Thanks for permitting me to submit this statement. Above is my contact 

information if anyone wishes to speak to me about what I say today. 

Employee Stock Ownership a Proven Best Policy to 

Preserve American Jobs 

Job Security and Firm Survival. The OSS results sllow that both 

actuolloyoffs(Figure !.2) and the perc¢ivtd likelihood oflayoff(Figure 

1.3) are lower for employee-owners than for nonowoo.rs. As we t:an see 

iu Figure 1.2, in eaeh year, work¢11 wno participated in employee own· 

ersl1ip progrnnu indioat.ad a lower incidence of losing !heir jobs than 

wortters who were nen employee o\\i>ers. For exftmple, ill 2002, l.O 

percent of employee owrlers repurted being .t~id o~from lheir jobs in 

the past year compared co 9.1: p«etllt of non~mployeeowners.ln each 

----->=>::> li'lco«l.l LoyofTs•ndEI!IployNOwnenhlp 

" 

,.., lOIO 

NOl'll: Lo)'Ol!'l>lf.,.,.tion boud on tho OSS v..Ubl< loidqfl. wl>iob lodid>IOS whelhc< 

lhe employee was laid oft' from b.l$ or bcr IU.injob at aey time io the past )'Cil'. FiatR 

Ulusuates mean n".SJ)OI)Je b)' employee own.ersb lp.. 

SOURCE: l>lla Bleltonube OSS on ~lO)" "'pri- firms. • 
575 


33393.504

Testimony Submitted for the Record for Hearing on 

How Tax Reform Will Grow Our Economy and Create Jobs across America 

The Massachusetts Development Finance Agency, a quasi-public finance and 

development entity otherwise known as MassDevelopment, respectfully requests that any 

tax-reform package preserve the status of tax-exempt bonds, which play a critical role in 

the U.S. economy. 

In 2015 and 2016, MassDevelopment issued more than $8 billion in tax-exempt debt to 

fund nearly 200 projects throughout Massachusetts. These economic development, 

health care, higher education, and non-profit transactions supported the creation of more 

than 9,000 new jobs and more than 21 ,000 construction jobs. The savings in interest as a 

result of the 25-30% tax-exempt discount made the deals affordable and provided the 

necessary incentive for borrowers to engage in capital projects that ultimately served 

important public purposes. 

Under the leadership of Chairman Brady and Ranking Member Neal, the House 

Committee on Ways & Means seeks to produce tax-reform legislation that will grow our 

economy and create jobs. MassDevelopment strongly supports these objectives and 

urges the Committee to do no harm by protecting tax-exempt bonds given the great 

contributions these tools make to achieving pro-growth goals. 

Case studies from each of the nine Massachusetts House districts illustrate the vital roles 

that tax-exempt bonds play in driving the Massachusetts economy. 

Bianco & Sons, Medford 

Using proceeds from a $5.1 million MassDevelopment industrial development bond, 

Bianco & Sons Inc., a family-owned meat and sausage maker in Revere, bought and 

renovated a 29,200-square-foot building in Medford to house its manufacturing 

operations. Founded in 1960 by the late Joseph Bianco Sr., the company started as a 

small retail meat and sausage market and has expanded to incorporate many different 

products, including an increasing variety of meats, sausages, and other specialty 

items. The Medford building allowed Bianco & Sons to move from three spaces it leased 

in Revere into one facility, which accommodates the entire operation and provides a 

larger and more efficient layout for sausage production. The bond also helped the 

company buy furniture, fixtures, and production equipment. Bianco estimates the project 

will create 15 jobs and 21 construction jobs. 

Dean College, Franklin 

Founded in 1865, Dean College is a private residential college serving nearly 1,400 

students. To accommodate its growing student body, the College needed to create more 

housing. With the help of a $4.5 million MassDevelopment tax-exempt bond, Dean 

College bought a 36,000-square-foot mixed-use building with first-floor retail businesses 

underneath 21 apartments. This project, which will create 15 jobs, allowed Dean College 
576 


33393.505

to provide safe, convenient housing for 75 students. The first-floor retail activity helps 

both the College and downtown Franklin continue to grow. 

D'Youville, Lowell 

MassDevelopment issued an $8 million tax-exempt bond on behalf of Lowell's 

D'Youville Life and Wellness Community, allowing the organization to increase its 

capacity to provide assisted living and healthcare solutions to low- and moderate-income 

seniors. D'Youville used proceeds from the bond to build a 60-unit affordable assisted 

living residence in Lowell known as the Saab Residence. The residence includes a cafe, 

fitness center, wellness center, outdoor garden, and courtyard. Within the residence, 15 

units are reserved for individuals suffering from early memory loss and 15 units are 

rented at market price, while the remaining 30 units remain affordable. 

MassDevelopment had previously issued D'Youville $20.5 million in tax-exempt bonds 

in 2010 that the organization used to build a 33-bed transitional care unit in Lowell. That 

unit includes four hospice suites and provides space for short-term rehabilitation. 

Finicky Pet Food Inc., New Bedford 

Finicky Pet Food processes fish for suppliers and manufacturers in the pet food industry. 

To reduce soaring electricity costs, the company wanted to purchase and install solar 

panels on the roof of its facility. MassDevelopment issued a $5,267,500 industrial 

development bond on behalf of the project. The company's canopy system solar 

installation includes its parking lot and adjoining land. The tax-exempt bond enabled 

Finicky Pet Food to invest in renewable energy, create 20 jobs, reduce operating costs, 

and devote more resources to delivering a high-quality product to the pet food industry. 

The project created 20 construction jobs. 

Harborlight Community Partners, Beverly 

Harborlight Community Partners is an affordable housing manager and developer in 

Beverly. With proceeds from a $4 million MassDevelopment tax-exempt bond, the 

organization bought and renovated Harbor light House, an affordable senior living 

facility. The developers improved the building's energy efficiency and renovated its 

housing units to improve wheelchair accessibility. This bond also helped Harbor light 

maintain the building's 30 units as affordable for another 30 years. This project created 

14 construction jobs. 

Jarvis Surgical, Westfield 

Jarvis Surgical Inc. is a manufacturer of precision titanium and cobalt chrome medical 

parts like shoulder, knee, hip and spine implants. With proceeds from a $2.2 million 

MassDevelopment industrial development bond, the company built a 15,000-square-foot 

addition on its facility and bought new manufacturing equipment. The company also 

bought 1.9 acres ofland adjacent to its facility, which it used to expand employee 

parking. The improvements will allow Jarvis to add 24 jobs, six construction jobs, and 

help stimulate Massachusetts' vital manufacturing industry. 
577 

f 


33393.506

Madison Williams, Boston 

With a $9.5 million MassDevelopment tax-exempt bond, Madison Park Development 

Corporation, a nonprofit that promotes the redevelopment of the Roxbury neighborhood 

in Boston, is transforming the neighborhood's former Tropical Foods Supermarket into a 

vibrant mixed-use development. The building will include 7,500 square feet of ground 

floor retail space and 30 units of mixed-income housing. The redevelopment of this 

building qualifies for Historic Tax Credits and will follow National Park Service 

guidelines for historic rehabilitation. The project is creating 101 construction jobs. 

Patriot Homes, Boston 

South Boston Veterans Housing LLC used a $6.2 million MassDevelopment tax-exempt 

bond to build a low-income housing development for veterans called Patriot Homes. A 

joint venture between Braintree affordable housing nonprofit Caritas Communities and 

the South Boston Neighborhood Development Corporation, South Boston Veterans 

Housing LLC used the bond to finance the Patriot Homes development, which includes 

24 new rental apartment units for low-income veterans. The project is creating 52 

construction jobs. In its first phase, the project's sponsors acquired a former police station 

to convert into 12 studio apartments and to create office space for the South Boston 

Neighborhood Development Corporation. The second phase included construction of a 

12-unit building. All24 units of the Patriot Homes are reserved for households earning 

no more than 50 percent of area median income. 

UMass Memorial Healthcare, Worcester 

UMass Memorial consists ofUMass Memorial Medical Center with its Memorial, 

University, and Hahnemann Campuses in Worcester; UMass Memorial-Clinton Hospital 

in Clinton; UMass Memorial-HealthAlliance Hospital in Leominster and Fitchburg; and 

UMass Memorial-Marlborough Hospital in Marlborough. UMass Memorial used 

$168,750,000 in MassDevelopment bonds to purchase new equipment and complete 

construction and renovation projects at several of its hospitals. UMass Memorial used 

funds to build a 24-bed observation and admission unit, and to build and redevelop its 

dialysis center at the University campus; to connect two entrances with a new atrium and 

corridor at its Memorial campus; and to install emergency power and combined heat 

power systems at its Leominster and Fitchburg campuses to better serve patients in 

adverse conditions. The project created 264 construction jobs. 

I appreciate the opportunity to submit this testimony to the Committee and thank you for 

considering these comments. 

Marty Jones 

President and CEO 

MassDevelopment 

99 High Street 

II th Floor 

Boston, MA 02110 

617-330-2000 

617-330-2001 (fax) 
578 

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33393.507

T B £ MILITARY C OAL I TIO N 

April 26. 2017 

Tile Honorable Kevin Brady 

201 North Wa,shio:&f.OD Screet AltSUdria, \"!rpAb 12314 

(703) 833-8143 

Cbainuau. Cornminee on Ways AUd Me311s 

House of Representatives Washington. D.C. 20515 

Tile Honorable Richard £ Neal 

Ranking Member. Committee on Ways and Means 

House of Represematives 

Washington. O.C. 205 IS 

l)earChainncu J3rndy. Hatch .. lbokingMembers Neal, :;md Wyden, 

The Honorable Onin Hatch 

Chairmao, Commint-t on f inauce 

United States Senate 

Wasbingtoo. D.C. 20515 

The Hooorable on Wydc:n 

Ranking Member. Committee on Finance United States Senate 

Washington.. O.C. 20515 

11H! Military Coalition (TMC). a cousortiurn ofunifonn services aod veterans associations representing n:tore than 

5.5 million currem and fonuer seavice members aod their families and survivors. lb.a.nks you and the Committee for 

your efforts to improve the employment prospects of veterans by extending the VOW To Hire Heroes Act ta.'< 

credits and the-Work Opportunity lax Cl'(!dit (WOTC) for live years. 

Tile VOW To Hire Heroes Act. signed iu 201 I. strengthened the \VOTC by significantly increasing the fioaucial 

inct11Lives to employers for hiring veterans. in<:IU<I.iug veterans with disabililies. Depanmem of Labor (DOL) 

statistics show that 3.$.904 veterans wtre certified for WOTC dtuing the three-year period before the VOW Act Sy 

contrast, 278.61 1 veterans were ce11ified during fY 2013-15, ao increase of mort' aban 700 percent. TI1t WOTC ba$ 

been a critically imponant tool for solving the veteran uneruploymem problem. 

Ho\' ... ev~ . the constant cycle oft'xpiration and retroactive renewals of'tltese ta'< credits causes a greiH d~l of 

uncertainty among ClllJllOycrs. Sy refonniltg t_bc ttt..'< code to include a ptnuancnt WOTC. employers will build 

veteran employment into the ir dec-ision-making processes. Additionally. veterans will have cenaiury this is one ll)()re 

arrow in their quiver so they can more effectively pitch themselves to employers. 

iMC also liJlteS you 10 iududc military spouses in a pcnnanenl WO!C. Military SJ>OU$t.'S often find themselves 

penalized and disadvantaged in tbe labor marketplace because of constant relocations. Unemployment and 

underemployment are chronic problerus. in t1le military spouse conmmuity. both of which adversely affecl military 

families. You can help address these iS$ue:s by indudiug 1bcm in this 1ax credil. 

Siucerely. 

Tile Milit1:uy CoaUtion 

(Siguanu-es eo<losed)