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76–839—PDF 2011

S. HRG. 112–630 

CEO PERSPECTIVES ON HOW THE TAX CODE 

AFFECTS HIRING, BUSINESSES, AND 

ECONOMIC GROWTH 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 27, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Duke, Michael T., president and chief executive officer, WalMart Stores, 

Inc., Bentonville, AR ............................................................................................ 5 

Falk, Thomas J., chairman and chief executive officer, Kimberly-Clark Corporation, Irving, TX ............................................................................................. 6 

Lang, Gregory S., president and chief executive officer, PMC-Sierra, Inc., 

Sunnyvale, CA ...................................................................................................... 8 

Merlo, Larry J., president and chief executive officer, CVS Caremark Corporation, Woonsocket, RI ............................................................................................ 10 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 33 

Duke, Michael T.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 35 

Falk, Thomas J.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 43 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 51 

Lang, Gregory S.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 53 

Merlo, Larry J.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 62 

Responses to questions from committee members ......................................... 67 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 73 

R&D Credit Coalition .............................................................................................. 79 

Retail Industry Leaders Association (RILA) ......................................................... 83 

(III) 

(1) 

CEO PERSPECTIVES ON HOW THE TAX CODE 

AFFECTS HIRING, BUSINESSES, AND 

ECONOMIC GROWTH 

WEDNESDAY, JULY 27, 2011 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:09 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Conrad, Bingaman, Wyden, Stabenow, Nelson, 

Menendez, Cardin, Hatch, Snowe, Enzi, Cornyn, Thune, and Burr. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; 

Blaise Cote, Tax Research Assistant; David Hughes, Tax Advisor; 

and Jeff VanderWolk, International Tax Counsel. Republican Staff: 

Tony Coughlan, Tax Counsel; Maureen McLaughlin, Detailee; and 

Christopher Hanna, Senior Tax Policy Advisor. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Benjamin Franklin wrote, ‘‘When men are employed, they are 

best contented.’’ 

Today, too many men and women are unemployed. These are 

Americans who have worked, want to work, and will work again. 

Our economy rests on the foundation of businesses, big and 

small, providing the goods and services that the market demands. 

And many Americans’ livelihoods rest on businesses providing jobs, 

which are currently in short supply. 

The unemployment rate is hovering around 9 percent. Poverty 

has increased—14 percent of Americans now live in poverty, including more than one-fifth of all U.S. children. 

Many who are unemployed have been searching for work for 

more than a year. These Americans need a job and the certainty 

that comes with going to work every day. 

In this environment, the business community has an opportunity 

and an obligation to help get Americans back to work. Businesses 

need to step up to the plate by preserving good-paying jobs and creating new ones. This means not just waiting for demand to fully 

recover, but giving Americans a chance, including the long-term 

unemployed. 

We want to make sure our tax code supports efforts to create 

jobs. Our ultimate goal is not simply economic growth for growth’s 

2 

sake or profitability for business owners alone. But job creation 

cannot occur without this growth. 

We know that American businesses face obstacles achieving 

growth. Our economy is slowly recovering from the most significant 

recession since the Great Depression. Consumers are saving more 

and spending less. Banks are more cautious in their lending practices. 

At the same time, competition is getting tougher in an increasingly globalized economy, and major new players are emerging in 

developing countries. 

In 1960, exports accounted for 3.6 percent of America’s GDP. 

Today, they account for nearly 12.5 percent. And sales are growing 

faster in markets outside the U.S. than they are here at home in 

most industries. 

In today’s global economy, we simply cannot afford for the tax 

code to hamper businesses’ ability to compete and create jobs here 

at home. We need corporate tax rules that encourage job creation 

and widespread economic growth. 

Last year we began a comprehensive review of America’s tax system to understand how our tax code became so complex. More recently, we have held hearings addressing the need for tax reform. 

These hearings have looked at the goals we want our tax system 

to accomplish and whether it effectively meets those objectives. Of 

course, the tax code should raise the revenue necessary to finance 

the operations of the Federal Government, but we also want our 

tax system to spur long-term economic growth which can benefit 

more folks in Montana and across the country, and we want it to 

promote fairness and certainty. 

Americans need a tax code that helps them get back to work. Today’s witnesses can help us understand the effect our current code 

has on U.S. businesses and their hiring practices. They represent 

some of the largest employers in our country. 

I am grateful that they are here today with us to discuss whether the tax code imposes undue burdens on businesses and what 

ideas they may have to help improve investment, foreign investment in the U.S., as well as domestic investment here in the U.S. 

We are looking forward to hearing what factors drive their decisions about whether to hire new employees. We need to identify the 

policies that are the most effective in helping these business leaders create more jobs. 

Do we need to support innovation more effectively? Do we need 

to develop a more highly educated workforce? How can we level the 

playing field for U.S. companies competing overseas? How do we 

reduce incentives to locate new jobs abroad rather than here at 

home? 

I ask each of our witnesses to take off your hat as an advocate 

of your company. I ask you instead to tell us what your experience 

as a CEO has taught you about what is best for our country. 

So let us focus on how the code can help our businesses create 

good-paying jobs today, and let us work together to improve the tax 

system to ensure widespread prosperity for all Americans. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. I would now like to turn to Senator Hatch. 

3 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. 

I would like to thank Chairman Baucus for calling this hearing 

today, and I would like to welcome each of you CEOs here, who 

have come here to participate in the committee’s continuing dialogue about tax reform. 

With so many of our fellow Americans out of work and struggling 

to find a job, it is refreshing to see that your companies, collectively, employ over 1.6 million people—1.6 million Americans. That 

is pretty good with you four folks. 

Today, we are here to learn how the corporate tax affects your 

businesses. The corporate tax is the third-largest source of Federal 

revenues behind the individual income tax and payroll taxes. 

Corporate income tax revenues as a percentage of total Federal 

revenues have steadily declined since the 1940s and 1950s. During 

much of the 1990s, corporate tax revenues averaged about 11 percent of Federal revenues. Last year, corporate tax revenues were 

less than 9 percent of our total Federal revenues. 

The corporate tax is generally considered to be the most inefficient of all taxes, and tax scholars have debated for years as to who 

really bears the burden of the corporate tax. 

We know that, although corporations cut the checks to the IRS, 

corporations do not ultimately pay taxes, people do. But which people? Is it the shareholders of the corporation or maybe the employees of the corporation or the consumers? The most recent research 

in this area seems to indicate that a substantial percentage of the 

burden of the corporate taxes is borne by employees in the form of 

lower wages. 

In addition to inquiries about where the burden of the corporate 

income tax truly falls, I think it is important for this committee to 

focus on how the corporate tax system encourages the use of debt 

rather than equity. If the corporation is in need of additional funds, 

our current tax system encourages the corporation to borrow money 

rather than raising money by issuing stock. 

Now, how is that? By making any interest payments on the borrowing deductible, whereas any dividends paid are not deductible. 

From a business standpoint, the increased use of debt by corporations makes a corporation more vulnerable to the risks of bankruptcy and other downturns in the economy. 

Dividends not being deductible means that corporate profits are 

taxed twice, once at the corporation level and again at the shareholder level. 

As a result of this tax treatment, we have seen a decline in the 

use of traditional corporations. In 1980, 75 percent of all business 

income was earned by traditional corporations. In 2007, that figure 

was only 36 percent. From 75 percent to 36 percent. 

Equalizing the corporate tax treatment of debt and equity would 

reduce or eliminate distortions in at least four ways: number one, 

the incentive to invest in non-corporate businesses rather than corporate businesses; two, the incentive to finance corporations with 

debt rather than equity; three, the incentive to either retain or distribute earnings, depending on the relationship among the corporation, the shareholder, and the capital gains tax rates; and four, the 

4 

incentive to distribute earnings in a manner to avoid or reduce a 

second level of tax. 

We also need to consider once again the issue of repatriation. 

Many U.S. multinational corporations earn money overseas and 

will typically want to bring that money back home to the United 

States. However, our corporate tax system discourages or penalizes 

U.S. multinational corporations, including Utah multinational corporations, from repatriating foreign earnings by imposing a 35- 

percent residual U.S. tax at the time of repatriation. 

As a result, several high-profile U.S. multinational corporations 

are sitting on large piles of cash earned from foreign operations; 

yet, these same corporations are borrowing money. 

One of the reasons is that their cash is trapped offshore, and 

these corporations will be subject to a 35-percent U.S. tax on repatriating their cash back to the United States. As a result, because 

of our corporate tax system, these corporations keep their cash offshore and borrow money here in the United States. 

One way of alleviating the problem of cash that is trapped offshore is for the U.S. to reform its corporate tax and international 

tax rules by, for example, adopting a territorial tax system. 

Finally, no discussion of corporate tax reform can conclude without consideration of the corporate tax rates. Our corporate tax system has a top rate of 35 percent. When coupled with a State corporate tax, the tax rate is usually about 39 percent. As a result, 

the U.S. has one of the highest corporate tax rates in the world. 

Our corporate tax system is in need of reform, and the high corporate tax rate needs to be a major part of this discussion. 

Now, I am very interested to hear what our witnesses have to 

say today with regard to our corporate tax system and how it affects hiring, businesses, and economic growth. 

Again, Chairman Baucus, thank you very much for scheduling 

this important hearing, and I am certainly one of those really most 

interested. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. Thank you, Senator, very much. 

I would now like to introduce our witnesses. First is Mr. Michael 

Duke. He is the president and CEO of WalMart Stores, the world’s 

largest retailer, employer of about 2.1 million people. 

Second, Mr. Thomas Falk, chairman and CEO of Kimberly-Clark. 

Kimberly-Clark is the world’s top maker of personal paper products. 

The next witness is Mr. Gregory Lang, the president and CEO 

of PMC-Sierra Semiconductor Manufacturing Company. 

And, finally, Mr. Larry Merlo, president and CEO of CVS Caremark Corporation, the leading drugstore chain and pharmacy care 

provider. 

Gentlemen, you probably know the rules or at least the custom 

and practice here. Your statements will automatically be included 

in the record, and I would encourage you to summarize your statements for about 5 or 6 minutes. I also encourage you to be candid, 

say what is on your mind. You know, life is short. Let us make the 

most of this. [Laughter.] 

All right. Mr. Duke, why don’t you begin? 

5 

STATEMENT OF MICHAEL T. DUKE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, WALMART STORES, INC., BENTONVILLE, 

AR 

Mr. DUKE. Chairman Baucus, Ranking Member Hatch, members 

of the committee, I appreciate the opportunity to testify today. 

We urgently need to modernize our tax code, and I thank you for 

taking on this issue. The ultimate outcome must be a strong, vibrant, job-creating U.S. economy. 

I hope all of you know your local WalMart store back in your 

home State. But let me start with a few words about the company 

that we run out of Bentonville, AR. 

Every week we serve 106 million unique customers, about onethird of the U.S. population. The business model that has earned 

our customers’ trust is simple. We give them everyday low prices 

by passing on savings from our everyday low-cost operations. 

Last year, WalMart paid $4.7 billion in corporate taxes in the 

United States, which was 3 percent of all corporate income taxes 

collected by the U.S. Treasury. Our effective corporate tax rate was 

32.2 percent. Many companies who will testify before you theoretically face similar tax rates, but we actually pay them. 

But we are not here to ask for sympathy. The question is not 

whether WalMart can get by as a company under the current tax 

structure. The real question is: is this structure the best approach 

for our country? We believe that it is not. 

As we begin this discussion, it is important to understand how 

WalMart’s operations at home and around the world contribute to 

the U.S. economy. In the U.S., we operate over 4,400 stores and 

clubs, and we employ almost 1.4 million associates in the United 

States. I am happy to say that the domestic business is still growing. 

Every store that we build means new jobs, construction jobs, an 

expanded local tax base, and more opportunities for U.S. suppliers. 

WalMart is also growing around the world, which is good for the 

U.S. economy as well. Our international growth allows WalMart to 

source more goods from U.S. companies to sell in our stores around 

the world. Seventy percent of our top international suppliers are 

U.S. companies, which creates and sustains American jobs. 

We are also one of the largest purchasers of American agricultural products. Last year, we directly exported nearly $40 million 

worth of Washington apples, California asparagus, Florida grapefruits, and other crops. Likewise, we look for opportunities to use 

American products as we build stores, like the LED parking lot 

lights, which are mostly manufactured in North Carolina. 

The best way that I can say it is that, when WalMart goes overseas, we bring American companies with us. When we grow, they 

grow. 

So how do we reform the tax code to drive growth here at home 

and encourage America’s competitiveness abroad? My advice is 

straightforward. Lower the corporate rate as much as you can, 

make the tax base as broad as you can, and move to a territorial 

system as quickly as you can. Without any of these three components, it will be impossible to achieve a fiscally responsible, simplified, and competitive tax system. 

6 

And we need comprehensive solutions, not piecemeal attempts to 

repeal this or that incentive. We will give up the existing incentives that benefit us if it means getting rid of them in a reformed 

system. Taking these steps will help American companies compete 

abroad, and I believe WalMart is more likely to export Washington 

apples or California asparagus than our foreign competitors. 

Yet, these foreign competitors have an advantage because they 

pay less in corporate income tax. For example, we compete in 

China against Tesco from the U.K. With the U.K. territorial system 

of taxation, Tesco pays 25 percent to China on their business profits there and no additional tax when they bring money back to the 

U.K. In our case, we pay 25 percent to China, plus an additional 

10 percent to cover the differential between the U.S. statutory rate 

and the Chinese rate when we bring that money home. 

The result is that we are often outbid for retail sites because 

companies with lower overall tax rates have a lower cost of capital. 

When we do win, we pay more overall. 

The keys to reform are to lower the corporate rate, get rid of existing incentives that benefit some industries over others, and level 

the international playing field with a territorial system. 

If we take these steps, we will drive the virtuous cycle that I 

have described with more U.S. exports, more investment, and more 

job creation at home. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Duke appears in the appendix.] 

The CHAIRMAN. Thank you very much, Mr. Duke. 

Mr. Falk, you are next. 

STATEMENT OF THOMAS J. FALK, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, KIMBERLY-CLARK CORPORATION, IRVING, TX 

Mr. FALK. Good morning, Chairman Baucus, Ranking Member 

Hatch, and distinguished members of the committee. Thank you for 

this opportunity to share my views on the need for changes in our 

tax system. 

First, I would like to provide a brief overview of Kimberly-Clark 

and our global businesses, and then I will address the three reasons we believe the current U.S. tax system hinders growth and 

puts American companies and workers at a competitive disadvantage. 

Kimberly-Clark will be 140 years old in 2012. So we have been 

around through lots of different tax systems and grown our company through the years. And, through the years, we have been providing consumers with the essentials for a better life, with brands 

like Kleenex, Scott, Huggies, Pull-Ups, Kotex, Poise, and Depend. 

We estimate that one out of every four people around the world 

uses our products every day, and they buy lots of them at WalMart 

and CVS as well. 

In fact, I would expect that everyone in this room has used a 

Kleenex or changed a diaper at some point in time in their lives. 

We will not ask for a show of hands here. 

But you may not know that we are also a leading provider of 

safety products that help protect both workers and the environments in which they work. Also, if you have been a patient in a 

7 

hospital, you would find that medical professionals count on 

Kimberly-Clark for products essential to the health and hygiene of 

their patients and staff, including surgical drapes and gowns, face 

masks, exam gloves, and infection control and pain management 

products. 

So our company touches people’s lives in many parts of the economy. Our consumers live in more than 150 countries. So we have 

to have a global presence to serve them. And because many of the 

products we sell are lightweight, bulky, and costly to ship, we have 

to manufacture our products close to where our consumers live and 

work. 

Now, the U.S. market is our largest market, but the categories 

there in which we compete are mature, often growing at the rate 

of population growth. Like many companies, the developing and 

emerging markets represent our biggest growth opportunities. 

For example, moms in the U.S. use about five diapers a day to 

care for their babies. In developing and emerging markets, moms 

may only use five diapers a week. This opportunity will represent 

a huge growth opportunity for us as these economies grow. 

To be successful in any market, businesses need fertile ground on 

which to grow. That fertile ground includes access to skilled employees, reliable availability of energy, and other essential resources, and a competitive, stable, and predictable tax and regulatory environment. 

So I would like to now address the three key ways we believe our 

tax system could improve the fertile ground in the United States 

and lead to more investment, job creation, and economic growth in 

our country. 

First, we need to have a more competitive tax rate. The combined 

Federal and State tax rate in the U.S. averages approximately 39 

percent, which significantly exceeds the rates in most other countries. The average combined tax rate among the member countries 

of the OECD is now 25 percent and is expected to decline further. 

In the competitive global market, U.S. companies are at a significant disadvantage versus non-U.S. companies who benefit from 

lower tax rates in their home countries—39 percent here, 25 percent elsewhere. When a U.S. company seeks to grow outside our 

home country, we are way behind before we even get started. 

Second is taxation of worldwide earnings. In addition to its high 

tax rate, the U.S. taxes worldwide earnings of U.S.-based companies. Most developed countries do not tax their local companies in 

a similar manner. 

Under the current U.S. system, all repatriated income is subject 

to U.S. tax, which creates an incentive for companies to leave their 

cash outside of the U.S. If we were able to freely bring our foreign 

income back home to the U.S., we would have the freedom to invest 

those earnings in product development, new capital spending, or 

return them to our shareholders, who, in turn, could invest in the 

U.S. economy. Cash trapped outside the U.S. is more likely to be 

invested overseas, creating foreign instead of American jobs. 

The current tax system causes many U.S.-based multinationals 

to delay bringing their foreign earnings back home. Rather than restrict the free flow of capital, we need a territorial tax system that 

8 

encourages companies to deploy capital in a manner that supports 

the needs of the businesses and creates jobs. 

And, third, we need to simplify our tax rules. It is no secret that 

our U.S. international tax system is highly complex. You may not 

know that I was a CPA once, and I actually completed corporate 

income tax returns early in my career. 

The complexity of our current tax code is now understood by only 

a handful of international tax experts. This complexity requires 

U.S. companies to devote significant resources just to try to comply 

with the rules. Time and money spent on these activities takes 

away resources that could be spent on product innovation and market growth. 

We need a system of international taxation that reduces the cost 

of administration, reduces the risk of error, and is easier to monitor. Now, I do not know if we will ever come up with a system that 

is so simple that even I could fill out Kimberly-Clark’s tax return, 

again someday in the future, but that is a worthy goal. 

American companies have a terrific base of talent, an unrivaled 

track record of innovation, and some of the greatest products and 

brands in the world. Unfortunately, we are disadvantaged against 

other global competitors as a result of the U.S. tax system. 

So, to continue to prosper and deliver the essentials for a better 

life to consumers for another 140 years, Kimberly-Clark must grow 

both at home and around the world. We are committed to creating 

jobs, to developing new innovation, and to reinvesting for future 

growth everywhere we do business. 

To do this, we need a tax system that is competitive with our 

global competitors. We need a tax system that is less complex and 

easier to administer, and we need a tax system that does not penalize us for earning money outside the U.S., but encourages us to 

redeploy it freely for future growth. 

Mr. Chairman, this is an important debate. Many businesses 

today face critical decisions about future investment and growth. 

You and your colleagues have the opportunity to create a level 

playing field for U.S. businesses to compete and win on a global 

basis. 

Thank you for giving me the opportunity to share my views on 

creating a tax system that supports the growth of American companies and that enables the growth of the American economy. 

I would be pleased to take any questions you may have. 

[The prepared statement of Mr. Falk appears in the appendix.] 

The CHAIRMAN. Thank you, Mr. Falk, very, very much. 

Mr. Lang, you are next. 

STATEMENT OF GREGORY S. LANG, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, PMC-SIERRA, INC., SUNNYVALE, CA 

Mr. LANG. Chairman Baucus, Ranking Member Hatch, and members of the committee, my name is Greg Lang, and I am the president and CEO of PMC-Sierra. 

We generated about $635 million in revenue in 2010 and are a 

leading semiconductor innovator, transforming networks that connect, move, and store digital content. 

I am also a member of the Semiconductor Industry Association 

Board of Directors and the chair of the SIA’s Tax Reform Working 

9 

Group, so I can offer a perspective on the semiconductor industry, 

as well as a mid-sized technology company. 

I would like to thank the committee for the opportunity to 

present our views on how the U.S. tax code can promote job creation and sustained economic growth for our country. Before summarizing my recommendations for tax reform, I want to emphasize 

the importance of this industry to our Nation, and the reasons why 

corporate tax reform is essential to the continued growth and leadership in this critical industry. 

First, semiconductors are essential for innovations in every aspect of our modern economy and national security. Semiconductors 

are the enabling technology for advanced communications, manufacturing, health care, information technology, as well as national 

defense and homeland security. We are a fundamental building block of the broader $1.1-trillion 

technology industry which supports 6 million jobs. Studies show 

that semiconductors and the information technologies they enable 

represent 3 percent of the economy, but drive 25 percent of economic growth. 

Third, semiconductors are a global industry, with capable competitors around the world. Today, the U.S. industry holds approximately a 50-percent share of a $300-billion worldwide market and 

represents America’s largest export industry. In fact, the semiconductor industry, as a whole in the U.S., earns approximately 80 

percent of our revenue today as export revenue. 

Finally, the semiconductor industry is a key driver of U.S. innovation. The industry invests 17 percent of revenue in research and 

development, an amount higher than virtually any other sector. 

Chip companies account for seven of the top 15 patent recipients 

in the U.S. In short, maintaining U.S. leadership in semiconductors 

is in our national interest and should be made a top priority of the 

Congress. 

Tax reform is one part of an agenda to ensure that the U.S. remains a leader in innovation and economic growth. Given the strategic nature of the chip industry, other countries are actively targeting our sector with generous credits, grants, and reduced tax 

rates. In fact, China has specifically included our industry in their 

latest 5-year plan, with a number of incentives focused on drawing 

more investment into China. 

To maintain U.S. leadership, our country must have a more competitive global tax structure. For example, it costs approximately 

$1 billion more to build and operate a semiconductor manufacturing facility in the U.S. compared with other countries. Now, despite the perception that that may be due to labor differences between a high and a low labor rate country, in fact, the main cost 

differences are in tax benefits and other incentives. 

To achieve a more competitive tax environment for the U.S., fundamental reform is necessary and must focus on three key elements. First, the U.S. should adopt a globally competitive tax rate. 

The OECD average rate is approximately 25 percent. For PMC, our 

emerging competition is in China, where the rate is approximately 

15 percent for new technology businesses. In contrast, the combined Federal and State corporate tax rate is approximately 39 percent. 

10 

Many countries offer substantial tax holiday incentives for new 

high-technology investments, which effectively lower the rate to 

zero or single digits. While the U.S. need not match these incentives, tax reform must be competitive with rates of competing countries. 

Second, our worldwide tax system creates an additional disincentive for U.S. companies. Meaningful tax reform should include a 

move to a territorial approach. A territorial system would enable 

companies to repatriate their profits to invest and create jobs in 

the U.S. 

The U.S. is the only major OECD country with a global tax system. Combined with the highest tax rates, this is an enormous penalty for U.S. companies competing on a global scale. 

Finally, comprehensive tax reform should provide strong and permanent incentives to encourage research and development in the 

U.S. R&D is the lifeblood of the semiconductor industry, but the 

R&D tax credit in the U.S. is weak compared to our global competition, and has lapsed 13 times in the last 3 decades. 

The current R&D credit is complex and unreliable. Given the 

competition for investment and jobs around the world, it is insufficient to encourage R&D job growth here at home. 

The semiconductor industry was invented here, and the U.S. can 

remain the leader. But industry leadership is not an entitlement. 

It is not guaranteed. At PMC, we must compete, day in and day 

out, and we have proven that we can compete and win on a level 

playing field. 

Just as government’s policy supported this critical industry in 

the 1980s when the U.S. semiconductor market was specifically 

targeted through harsh trade practices by foreign governments, 

corporate tax reform and other policies can help maintain the future and pace of American enterprise and innovation. 

I would be happy to answer any questions. 

[The prepared statement of Mr. Lang appears in the appendix.] 

The CHAIRMAN. Thank you, Mr. Lang. 

Finally, Mr. Merlo? 

STATEMENT OF LARRY J. MERLO, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CVS CAREMARK CORPORATION, WOONSOCKET, RI 

Mr. MERLO. Good morning, Chairman Baucus, Ranking Member 

Hatch, and members of the committee, and thank you for holding 

this important hearing today and for allowing CVS Caremark the 

opportunity to share our views on tax reform. 

CVS Caremark Corporation is the leading pharmacy care provider in the U.S., headquartered in Rhode Island, and we are dedicated to helping Americans achieve their best health outcomes at 

lower costs. 

We employ over 200,000 people in the U.S., including more pharmacists and nurse practitioners than anyone else in the Nation, 

and we have a high effective tax rate of 39 percent. 

Now, some think of us as the Nation’s leading drugstore chain 

because we operate more than 7,200 CVS Pharmacy stores in 44 

States, here in the District, and Puerto Rico. In fact, 75 percent of 

11 

all Americans in our markets live within 3 miles of one of our 

stores. 

Others see us as a leading pharmacy benefits manager, or PBM. 

And I think, as you know, PBMs assist health plans, unions, and 

governments to design prescription drug benefit options that best 

meet their members’ needs, and help drive down costs. 

That being said, we think that CVS Caremark is more than just 

a PBM and a drugstore chain. We consider ourselves a part of the 

fabric of American society, working to improve the lives and health 

of our customers, and to provide those services at the lowest possible cost. 

Because of that thinking, we have made significant investments 

in our people, and in our infrastructure here in the U.S. We believe 

that is our obligation as part of the American business community. 

Now, as a measure of our commitment, over the past 5 years, 

CVS Caremark has reinvested more than $10 billion of our earnings in our domestic operations and our employees, but we do believe that we can do more. Our company is committed to making 

significant future investments in our service offerings, our technology, our people, and other improvements to our infrastructure 

and operations. 

Tax reform is important to CVS Caremark because it will lower 

our cost of capital and enable us to make even greater investments 

in our business. 

For CVS Caremark, the key component of any tax reform is a reduction in the maximum corporate tax rate. Such reform would 

specifically allow us to accelerate our investments in jobs, and in 

our infrastructure. And the return on those investments will benefit us all in the form of lower overall health care costs and better 

health outcomes for consumers. 

CVS Caremark’s Federal effective income tax rate is approximately 35 percent, and our combined Federal and State effective 

income tax rate is approximately 39 percent. Together, with our 

more than 200,000 employees, we generate Federal payroll and corporate income tax revenues of approximately $3.7 billion annually, 

and more than $4.3 billion when similar State, local, payroll, and 

income taxes are considered. 

Now, we have a high effective tax rate for two principal reasons, 

the first being that many of the tax policies that help industry have 

limited application to CVS Caremark; and secondly, we have consistently chosen to reinvest our earnings and create jobs here in 

the U.S. 

In order to continue to be successful in an increasingly global 

marketplace, CVS Caremark must control costs, we must raise capital, and we must efficiently reinvest our earnings. And, although 

we have worked hard managing our operations and controlling 

costs to provide both capital for our business and returns for our 

shareholders, our high effective tax rate not only limits the amount 

of earnings available for reinvestment, but it also makes CVS 

Caremark less attractive to global investors. 

Reducing the maximum rate to create a more competitive tax 

structure for U.S. corporations so we can effectively compete is both 

a thoughtful and responsible policy move. 

12 

As I stated earlier, CVS Caremark is dedicated to improving care 

and lowering costs for millions of Americas. Lowering the corporate 

tax rate will accelerate our investment in U.S. jobs and infrastructure, all of which will ultimately help us lower overall health care 

costs and grow our economy. 

So, I would like to thank the distinguished members of the committee for your attention today, and I would be happy to answer 

any questions you might have. 

[The prepared statement of Mr. Merlo appears in the appendix.] 

The CHAIRMAN. Thank you very much, Mr. Merlo. 

I think there is a general feeling here in the Congress that we 

clearly need to reform the corporate tax code, and the individual 

as well, probably, because there are so many pass-throughs now 

compared with not too many years ago. And the reform generally 

we are talking about today is to lower the rate, broaden the base, 

move to a territorial tax regime, and so forth. 

That is sort of, in the abstract, what needs to be done. 

The next level of questions, though, is, if that is all pursued, to 

what degree will that encourage more job growth in the U.S. rather 

than more job growth overseas? If the corporate rate is lower, the 

base is broadened, and a lot of tax expenditures are eliminated, 

presumably, profits are higher and you get more flexibility as to 

where you locate your plants and your operations, et cetera. 

But I think a lot of Americans are going to be thinking, particularly with unemployment rates so high, ‘‘Gee, all that sounds nice, 

but what assurance do we have, we Americans, that as a consequence of this change, more jobs will be in the U.S. rather than 

more jobs overseas?’’ 

So let me start with you, Mr. Duke. I would like each of the four 

of you to just briefly touch on that. 

Mr. DUKE. Thanks, Mr. Chairman. First, I would say that, in the 

growth overseas, when WalMart grows overseas, we bring American companies with us, and I would welcome any members of the 

committee, in travels to other markets, to let us show you a WalMart store and the products that are in a WalMart store in countries outside the United States. 

Whether it is the agricultural products that would come from the 

U.S. or U.S. beef that we export to markets around the world, 

those products that are on the shelves that are produced by American companies would be an example. 

The other would be, even here in the United States and the 

growth and opportunity here in the U.S., since we operate and 

build retail stores, our employment is at store level. We are not 

manufacturing the product, but we deliver directly to the consumer. And, in that relationship with the consumer, we certainly 

have more opportunity for growth to more consumers here in the 

U.S. 

One of the interesting—— 

The CHAIRMAN. So, essentially, you are saying there would be 

more jobs created in the U.S. than created overseas. 

Mr. DUKE. Absolutely. 

The CHAIRMAN. With these changes. 

Mr. DUKE. We would do both. There would be—— 

13 

The CHAIRMAN. But more in the U.S., though. That is my question. 

Mr. DUKE. Now, for a store that is open overseas, clearly, it 

would be some of both, and I am not able to quantify one compared 

to the other, because we open small stores and large stores. But it 

will create jobs in the United States to support stores that are 

opened outside the United States. 

The CHAIRMAN. My time is pretty limited. 

Mr. Falk, could you take a shot at that, please? 

Mr. FALK. I will build on where Mike took off. Ultimately, you 

want U.S. business to be competitive in a global market. So you 

could take the opposite approach and say, ‘‘Well, what happens if 

we do nothing and the rate continues to rise, while OECD rates 

continue to go down?’’ 

That is just going to mean American business is less competitive, 

and we are going to see job loss over time. So getting us back to 

a level playing field is critically important. 

From Kimberly-Clark’s perspective, we do virtually all of our research and development in the U.S. And so we have—as we grow 

overseas, we do more R&D here. We bring back roughly $350 million a year in royalties on our intellectual property that is owned 

in the U.S. 

So, as our business grows, we are going to do more R&D and 

have more staff support for that, here in the U.S. 

The CHAIRMAN. Mr. Lang? 

Mr. LANG. Yes. Just to build on the R&D perspective. In 1990, 

the U.S. had the number-one R&D tax credit in the world. It was 

a model for many around the world. Today, it is effectively the 

number 24 R&D tax credit around the world. 

And this is an area where having the incentives to actually develop in the U.S. has a real impact on decision-making, and I will 

give you one small company example, which is my own. 

We, in the last year, 2010, added about 20 percent to our employee base; so about 20 percent hiring, which is very good given 

the economic climate. 

That is the good news. The bad news is only about 15 percent 

of those were in the U.S. And a lot of folks might immediately conclude that those jobs were actually sent overseas to India, to China; 

but, in fact, a third of those jobs actually went to Canada, where 

they have one of the most aggressive R&D tax credits in the world. 

So I think our brothers up north have maybe something that we 

can learn from here. It is not the only decision made in terms of 

where to hire, but they have done a very effective job at neutralizing some of the differences between geographies and making it an 

incentive to invest in their local market. 

The CHAIRMAN. Mr. Merlo? 

Mr. MERLO. Well, Mr. Chairman, since we are a domestic company, I will only talk about the U.S., and I will cite two examples. 

In my remarks, when I talked about accelerating investments in 

our infrastructure and creating jobs, when you look across the 

health care space, we have a problem with our health care system. 

There is about $300 billion that is spent annually on unnecessary 

medical costs as a result of poor compliance and adherence of prescription drugs. 

14 

We believe we can accelerate our investments in terms of bringing products and services that are solutions to that problem that 

will improve the health of those we serve and, at the same time, 

lower the overall cost of health care across the country. 

A second example I would cite: I think many of you know that 

we operate the largest number of in-store retail clinics. Today we 

have about 600 of them. We have plans to double the number of 

clinics over the next 5 years. 

We believe that that provides an important source of primary 

care, acknowledging that there is a shortage of primary care physicians across the country, and that is expected to get worse over 

time. 

So we believe—again, another example—we can accelerate our 

investments in the growth of retail clinics and, again, provide a 

service to Americans across the country. 

The CHAIRMAN. Thank you. My time has expired. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

This question is for the entire panel. Ideally, tax policy should 

not distort business decisions, but, unfortunately, the current U.S. 

tax code does exactly that. It is highly distortive. It is characterized 

by a high statutory rate, lopsided incentives that encourage the use 

of debt instead of equity, as I said in my opening remarks, and, actually, it discourages or penalizes U.S. multinationals from repatriating foreign earnings back to the United States, where they can 

be invested and create U.S. jobs. 

My question for the entire panel is: Is it not true that lower corporate taxes would create more investment opportunity in the 

United States? It would seem to me that a lower U.S. corporate tax 

rate makes it more likely that proposals for investment in the U.S. 

will meet your targeted rate of return, and that makes it more likely that investment will be made here, which, in turn, would support the growth of U.S. jobs. 

Am I wrong about all this? 

Let’s start with you, Mr. Duke. 

Mr. DUKE. Senator Hatch, you are absolutely correct. Comprehensive tax reform and a lower overall rate would create more 

incentive and more desire to invest, and I think that is what we 

are about: the creation of jobs and opportunity and competitiveness 

for U.S. companies. We agree. 

Mr. FALK. Yes. I would build on Mr. Duke’s comments. A lower 

tax rate lowers our cost of capital, and that makes more projects 

attractive. And so, as we go through and look at how to allocate 

our capital resources, lowering the rate in the U.S. would make 

more projects attractive to us in the U.S. 

Mr. LANG. And, for a global business, I think lowering the effective tax rate allows us to invest in the U.S. without being penalized, and I think today it is a penalty. 

Mr. MERLO. And, Senator, from the CVS Caremark perspective, 

again, acknowledging that we are a domestic company, yes, this 

would help us accelerate our investments, as I acknowledged earlier, in terms of bringing products and services to market faster 

and in a more robust fashion. 

15 

Senator HATCH. Well, thank you all. Just a quick follow-up question. 

Mr. Falk, you note in your testimony that there have been proposals recently to ‘‘move the U.S. tax system further away from 

competitive global norms’’ by ending deferral of tax on a U.S. company’s foreign earnings. 

That has been a suggestion by some in this administration. Now, 

this would actually burden U.S. companies with an even higher tax 

rate. Now, it seems to me that we cannot create the type of jobs 

that we desperately need if the tax code punishes companies that 

are headquartered here. 

Would you comment further on the effect this would have on 

your company, and on the U.S. economy? 

Also, if there were an accompanying tax rate reduction that were 

significant enough, would that make the repeal of deferral acceptable? 

Mr. FALK. Well, Senator, you are certainly right that ending deferral would add further complexity to the tax code and drive up 

the cost for multinational companies, and it would be viewed as 

anti-business by the large multinationals. 

So I think the challenge would be to say, how do we get a competitive global tax system with a competitive rate applied to a competitive base, which would be more of a territorial system and that 

would set American companies up to compete on an even keel with 

other multinationals around the world? 

Senator HATCH. Thank you. Let me just ask one other question 

then. This could be a question for the entire panel. 

The grand deal I hear being proposed by all of you gentlemen is 

that you are willing to have a broader tax base, meaning getting 

rid of a lot of tax expenditures, deductions, credits, et cetera, in return for a significantly lower corporate tax rate. 

Now, that is a grand deal that interests me a great deal. I would 

like to help you with that. However, I do have a concern that I 

wanted to probe to see if you had any similar concerns. 

What if you agree to get rid of a lot of tax expenditures, and you 

get the corporate rates down, say, to 25 percent or even lower for 

the first year of tax reform. But what if Congress, over the course 

of the next few years, increases the corporate tax rate right back 

up again to 30 percent or even all the way back to 35, but without 

the various tax expenditures? 

Does that concern you? Are you concerned that a good part of the 

deal might only be temporary, but the bad part could be permanent? How do you get past that concern? 

Mr. Duke? 

Mr. DUKE. Sir, we are not competitive today. American companies are at a disadvantage today, and we do believe we need to 

move ahead with the comprehensive tax reform. 

Clearly, I believe that it would be important to remain competitive, and it would be very, very important to measure, over time, 

the competitiveness, and ensure that American companies stay 

competitive. 

It would clearly not be in the interest of American jobs to then 

increase the tax rate, and we would clearly not want to see that. 

Senator HATCH. Mr. Falk? 

16 

Mr. FALK. I would just build on Mr. Duke’s answer. One of the 

challenges in running a business today is the level of uncertainty 

that is out there. And so, uncertainty on tax policy does not help. 

So it would help that comprehensive corporate tax reform would 

be coupled with a policy decision that we are going to make American businesses competitive in the global marketplace, and keep it 

that way for a long, long time. 

Senator HATCH. Mr. Lang? 

Mr. LANG. I think that certainty is similar to the example that 

I gave earlier on the R&D tax credit expiring 13 times over the last 

3 decades. It is very hard to plan your business around the uncertainty involved with having to go through that question mark every 

few years. 

Senator HATCH. I empathize with you there. 

Mr. Merlo? 

Mr. MERLO. I would just emphasize the point, Senator, that having a certainty and predictability in terms of being able to make 

our business decisions, I think, is one of the key elements of overall 

tax reform, and I would certainly encourage that. 

Senator HATCH. Mr. Chairman, I am out of time. 

The CHAIRMAN. Thank you very much. 

Next, Senator Stabenow. 

Senator STABENOW. Well, thank you, Mr. Chairman, very much. 

And welcome to each of you. 

I want to follow-on—Mr. Lang, I am going to start with you—as 

it relates to the R&D tax credit. I could not agree more. It should 

be permanent. We have worked on that, a number of us, trying to 

make that happen. 

But when we talk about the three prongs that each of you are 

talking about in terms of tax reform, one of those is eliminating tax 

expenditures or spending in the tax code. 

And so I guess my question would be, as we look at this, how 

do we—how would you recommend that we evaluate tax expenditures? The R&D tax credit is a tax expenditure, and it is a very 

important one, I believe, and certainly I would not want to eliminate it. 

But when we evaluate all of this, to me, it is very much about 

focusing on incentivizing innovation, research and development. I 

also think incentivizing manufacturing in this country is important, coming from a State that makes things. 

And in the Recovery Act, I have championed the advanced manufacturing tax credit to incentivize a 30-percent tax cut for equipment, buildings, for making things here, for clean energy. 

So I wonder if you might just speak, as we are reforming tax expenditures and looking at all of this, about how we should decide 

which ones to keep and which ones to eliminate, because I am assuming you would not want to eliminate all of them. 

Mr. LANG. Thank you for your support in recognizing the importance of this part of our tax code. 

But I believe that the challenge on the tax code, in general, is 

a multifaceted challenge, as you are well-aware. And our basis and 

our interest is getting to a point where the package, the overall 

system, is something that allows us to compete globally. 

17 

And so, when we are talking about R&D incentives, as well as 

the corporate rate, as well as a territorial system, we should be 

looking at how do we, as a country, enable our companies to compete most effectively. 

That can be in the form of many different dimensions. But I 

think, very clearly, R&D incentives are being targeted very aggressively by certain countries who would love to have our R&D jobs 

relocated to their country. 

So I think it is imperative for us to not stand by and let that 

happen, but actually to put a competitive system in place that allows us to invest at home and not be penalized for it. 

The CHAIRMAN. So how do you do that? 

Senator STABENOW. Right. Yes. 

The CHAIRMAN. How do you do that? 

Senator STABENOW. That was going to be—Mr. Chairman, you 

and I are thinking on the same wavelength, because how do we do 

that? On the one hand, we are talking about lowering the rate, 

eliminating tax expenditures or tax incentives, and yet we have a 

very big one called the R&D tax credit that is incredibly important. 

I would also argue for looking at other countries right now, 

where we are competing with places like Germany, which is actually high-wage, high-cost, but has major manufacturing incentives, 

and they are taking our new clean energy manufacturing because 

they have manufacturing tax incentives. 

And I would welcome anyone else who would want to respond, 

as well. But how do we do that while legitimately dealing with the 

other issues you raise, but, at the same time, knowing that we are 

competing because there are tax incentives in other countries? 

Mr. FALK. I guess I will speak next. I guess my advice, too—this 

is not an easy challenge that you are facing—is to focus on getting 

the rate as low as you can and to get competitive with global economies around the world, because the marginal rate is where a lot 

of investment decisions get made. 

So having a low marginal rate is much more important than incentive packages. And I would say, when it comes to making a 

choice between the marginal rate and an additional incentive package, I would choose the lower rate and get rid of the incentives. 

Senator STABENOW. But, Mr. Lang, would you agree with that, 

if that meant the R&D tax credit? 

Mr. LANG. I think having a competitive rate is important. I also 

believe that R&D incentives, as well as research funding in this 

country, have been a foundation for the IT industry that has really 

propelled growth for this country over the last couple of decades. 

So I think it is a combination of factors. We need to be competitive as a country or we stand to lose something that was invented 

here. 

Senator STABENOW. Not to be argumentative, but that is our dilemma, to be looking at competitive rates globally, but at the same 

time at the incentives that are also being given around the world, 

and we are losing because there are incentives being given in other 

countries. 

Again, Mr. Chairman, on the manufacturing front, which I know 

you know I care deeply about, we are facing dilemmas because of 

18 

both financing mechanisms and tax incentives around manufacturing. 

And I want to make sure that once we are done, Mr. Lang, with 

your R&D, that you are making everything here as well. And so 

that is my question as to how do we do that. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Nelson, you are next. 

Senator NELSON. Mr. Lang, thank you for recalling that the 

semiconductor industry is so important. And you remember about 

20 years ago when all of that business was about to go offshore and 

the United States decided that it was going to stop that trend, it 

put together a consortium called SEMATECH. And the proof is in 

the pudding, what you just told us. So congratulations. 

I wanted to ask, Mr. Duke, in your testimony, you said, ‘‘In our 

view, the Bowles-Simpson Deficit Commission’s corporate tax proposal represented a very good start because it endorsed these three 

components of reform.’’ 

There is a version of that that is circulating right now, which is 

the Gang of 6, and it basically gives huge deficit reduction back to 

the committees of jurisdiction. The biggest deficit reduction would 

come back to this committee, tax reform, what you have all testified to, health reform, et cetera. 

Now, a big part of that tax reform is taking all of these tax preferences, otherwise known as tax expenditures, and getting rid of a 

lot of them, and instead taking that revenue that you gain from 

that and then allowing the tax system to be reformed, and to do 

just exactly what all four of you have testified, which is bring down 

the rates for everybody and simplify the tax code. 

As a matter of fact, one proposal is to simplify it into three 

brackets for the individuals, and lower, of course, all the rates considerably, as well as the corporate rate. 

Now, my question to you all is, boy, you are going to be stepping 

on some sensitive toes when you get rid of all those special tax 

breaks, otherwise known as tax expenditures. 

So I would like your comment on it. 

Mr. DUKE. Senator Nelson, first, I have to say I am not familiar 

with the specific discussions that you referred to that are taking 

place at the moment. So the details of the current dialogue I could 

not speak to. 

What I can speak to, though, is this broad topic that you are 

really asking about, and we do believe that comprehensive reform 

does mean that willingness to put everything on the table, including all of those tax incentives that you are referring to. 

And we think for the overall rate to be lowered—it needs to be 

in that mid-20 range to be competitive with other countries that we 

are competing with—it will require some difficult decisions around 

those incentives. And we do think comprehensive reform involves 

reviewing all of those in a very thoughtful way. 

Mr. FALK. Yes, Senator Nelson. I guess I would build on that and 

say our Nation is facing a crisis, and, in a crisis, you can get amazing things done. Every one of us, as a CEO, has faced that in our 

businesses at some point, and you can drive a lot of change in a 

19 

short period of time and get things done that once were thought 

to be impossible. 

And so I would urge you to be bold and come up with a tax system that makes American companies more competitive, and get 

some things done that could not be done in ordinary times. 

Senator NELSON. It is kind of like the package becomes the—the 

whole becomes greater than the sum of its parts. But the sum of 

its parts is a lot of special tax preferences for individual interests 

that are not going to want to give them up, including preferences 

that inure to the benefit of your four companies. 

Mr. FALK. To be specific, Senator, we do most of our R&D in the 

U.S. I take advantage of the R&D credit. We do a lot of manufacturing in the U.S. I take advantage of the manufacturing credit. I 

would trade both of those off for a competitive global statutory rate. 

Senator NELSON. Mr. Merlo, you have a separate area. If this all 

came to pass and it came back here to the Finance Committee and 

we had to start doing some serious looking at where you take 

things out of the health care system, particularly, Medicare and 

Medicaid, do you want to make some suggestions? 

Mr. MERLO. Well, I think that, similar to the discussion that we 

just had with the previous question in terms of, there are going to 

be puts and takes, I think that that is also true with our health 

care system, and, specifically, Medicare and Medicaid. 

I acknowledge one of the challenges that we have, and I think 

that we have many opportunities to address the costs of Medicare 

and Medicaid and, at the same time, address some of the unnecessary costs and wasteful spending that we are seeing. 

The example that I gave earlier was, $300 billion is spent annually on unnecessary medical costs as a result of poor prescription 

drug compliance and adherence. 

So I would encourage us to look at both of those as potential solutions to that challenge, recognizing that there are things that we 

can do to take costs out of the system, and, at the same time, keep 

Americans healthier. 

Senator NELSON. Thank you. 

The CHAIRMAN. Thank you. 

Senator WYDEN. Thank you, Mr. Chairman. This has been a very 

helpful hearing. 

I also want to note before we start, Mr. Falk, that, as the parent 

of 3-year-old twins, I am still stocking up on those diapers. 

Mr. FALK. Well, thank you for the business, Mr. Wyden. We hope 

we have 100-percent market share in your household. [Laughter.] 

Senator WYDEN. I am sure you are doing well. 

The CHAIRMAN. And you are going to check next time. 

Senator WYDEN. I am. I am. [Laughter.] 

Mr. Chairman, I think you put your hand on the key question 

that people are talking about, and that is, how is this going to affect jobs? I think people in this country, that is what everybody is 

focused on, around the kitchen table, anywhere you go. And I want 

to ask a very specific jobs question. 

If you all, as part of tax reform, were to give up tax deferral— 

that is the break, of course, that you get when you are doing business overseas; you defer paying tax until you bring the money 

home—and all of that money was brought back to our country and 

20 

used to slash rates dramatically when you are doing business in 

the United States so that we would be able to say you are then 

competitive with everybody around the world, would that not be a 

significant boost for job creation in the United States? 

Let us start with you, Mr. Duke. 

Mr. DUKE. So I think our position has been that each of these 

steps would be important, but it is important to look at the whole 

picture. And that is why we have continued to focus on comprehensive reform, operating on a global basis. 

So we are growing in the United States already, and we want to 

continue that growth. I would say that competitiveness here is 

very, very important also. One of the retailers, our competitors, 

that has been growing in the United States recently is Tesco, which 

I mentioned earlier, a U.K.-based retailer, that does have an overall lower rate. 

So growth in the United States and around the world is important, and we believe all of it should be looked at together. 

Senator WYDEN. The reason I ask the question is, the Finance 

Committee said that your effective tax rate for 2010 was around 32 

percent. If you abolish deferral and use those dollars for creating 

what I call red, white, and blue jobs, jobs in this country, your effective rate would go down considerably. You would be certainly in 

the mid- to low-20s. 

That is why I am asking the question. Let us just go down the 

row. 

Mr. FALK. Yes. In my particular situation—if you look at different markets around the world, our categories are growing at different rates. We talked about the young moms in emerging markets who today use five diapers a week who, within 5 years, will 

be using five diapers a day. 

So our business in China today, we do about $300 million. Within 5 years, we will be doing $1 billion in China just to meet the 

demand of those consumers. And so for me, it is more about creating a system where we have free trade, free flow of capital, 

economies that generally thrive and prosper. And having a level 

corporate tax rate I think would be an underpinning of that. 

Senator WYDEN. Mr. Lang, we touched on this yesterday. 

Mr. LANG. Yes, we did. I need to start by saying that, certainly, 

having a system that allowed companies to bring the dollars back 

to the U.S. and put them to work in the U.S. can only be positive. 

Having those dollars overseas looking for overseas investment does 

nothing for us. 

So bringing them home, I think, is something that I would 

strongly agree would be a positive for U.S. jobs. 

The key question, though, comes down to, what is that rate, and 

is something in the low-20s really going to make it competitive 

with the other markets where we compete? 

I think we all probably have some different countries, different 

places we compete, and different rates. In our business, most of the 

places we compete with are in the 15- to 17-percent statutory rate, 

and, as we know, with other special incentives, those rates can be 

substantially lower. 

21 

So my view of that and my concern about that would be finding 

that rate that would make it competitive, or make it neutral, and 

I think it would be below that low 20-percent range. 

But I think that the general concept would be very positive, because it would simplify life and bring the dollars, and put them 

back to work here in the U.S. 

Senator WYDEN. Mr. Merlo? 

Mr. MERLO. Again, acknowledging that we are a domestic company, some of your question really does not specifically apply to 

CVS—— 

Senator WYDEN. You had a 38.9-percent effective tax rate, according to the Finance Committee’s figures. So under this, for job 

creation in the United States, you would be one to see a very, very 

substantial rate reduction. 

Mr. MERLO. And I think that that supports our goal of doing 

more in terms of products and services and accelerating our investments in our infrastructure, which will create jobs. 

I think the question to my other panelists—I certainly concur 

with them, and I think that overall tax reform that does benefit 

multinationals in terms of bringing those dollars back to stimulate 

economic growth, accompanied by a meaningful corporate rate reduction, makes all the sense in the world. 

Senator WYDEN. My time is up, Mr. Chairman. 

I just wanted to say I am very interested in working with you, 

Mr. Chairman, and Senator Hatch on that point Senator Hatch 

made with respect to, when we have a Baucus-Hatch tax reform 

bill, that we have some way to try to keep in place that good work, 

and we do not unravel it so as to create uncertainty again. 

I thought Senator Hatch’s point was a very good one, and I am 

interested in working with you and Senator Hatch on it. 

The CHAIRMAN. Thank you. 

Senator Menendez? 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Gentlemen, thank you for coming. I, with interest, have read 

your testimony. Let me start with Mr. Duke. 

Mr. Duke, you have my former chief of staff working for you now, 

and I have come to be proselytized, because, if I read one more email that says ‘‘Save Money, Live Better,’’ I—— [Laughter.] 

Talk about branding, I will tell you. It is engrained. But he does 

a great job for you and did a great job for me. 

Let me pick up on a point. We had a hearing yesterday, and it 

was a deficit hearing, and my colleague, Senator Conrad, made 

what I thought was a very good point. He pointed out that interest 

rates matter, and he said a sustained 1-point increase in interest 

rates would cost the Federal Government over $1 trillion over the 

next decade. That is from the governmental side. 

And I noticed that you were one of those CEOs who signed the 

Chamber of Commerce letter warning of the danger of default. 

And, in part, that letter says, ‘‘Treasury securities influence the 

cost of financing not just for companies but, more importantly, for 

mortgages, auto loans, credit cards, and student debt. A default 

would risk both disarray in those markets and a host of unintended 

consequences.’’ 

22 

So my question is, beyond what it will cost the government, what 

would be the impact of a default on interest rates for your customers? And, if they are increased by this self-inflicted wound of 

a default—which we still hope and pray we can prevent—what do 

you think that would do to their purchasing power and to sales at 

companies like yours? 

Mr. DUKE. Senator Menendez, thank you again for your comments about our colleague, and I appreciate the training that you 

provided and that worked very well. [Laughter.] 

Related to this, I would have to, first, represent our consumers, 

our customers who are shopping in the store as, across America, 

they are watching the events take place here in Washington. 

And there is both the real and the perceived, and I think both 

reality and perception have to be considered. Higher interest rates 

clearly would have an effect on consumption. And so the ability of 

the consumer to regain confidence, to start then reinvesting themselves as families across America, is important. 

A default and the ripple effect, I think, would be impactful, and, 

representing our consumers, we think that that would be very, very 

difficult for the American economy to withstand at this point in 

time in our history. 

The other factor is consumer confidence. I am out every week 

talking to customers in our stores, and, when I am talking to the 

customers who are shopping in our stores, I am not getting a sense 

of confidence. 

So I measure my own consumer confidence when I am out talking to our consumers. And with the situation in the economy, with 

the job situation and other factors facing consumers, I think a default at this time would be devastating in both that reality and 

perception of consumers. 

Senator MENENDEZ. I appreciate that. 

Mr. Merlo, I want to follow on what my colleague, I think, is referring to in terms of repatriation of foreign profits, and I understand that CVS Caremark is not necessarily in that category. 

But you do say in your testimony that you are paying almost an 

effective 35-percent rate, and, in essence, by paying a high effective 

rate, it seems to me that your company, and others similarly situated, is basically paying for the burden of loopholes and avoidance 

behaviors of other companies. 

So, do you believe that aggressive use of avoidance methods by 

competitors or the ability of companies to be able to take their 

overseas earnings and convert them into tax benefits here at home 

that ultimately provide them with a much lower effective rate 

while you are still paying a higher effective rate, is a fair set of 

competitive standards? 

Mr. MERLO. Well, I think it certainly does create some competitive challenges for us, acknowledging that we compete with domestic companies, as well as foreign nationals that have the opportunity to have a lower tax rate. 

And I think it goes back to the theme of this hearing in terms 

of, we support an overall corporate tax reform review that would 

reduce our overall rate. 

I would like to go back and just tag onto something that Mr. 

Duke mentioned about consumer confidence and bring us back to 

23 

the health care space, because we do see evidence of consumers 

today making decisions about when to get their maintenance prescription for a chronic condition filled, and we see evidence that 

they are getting it filled later, which means they are not taking 

their medications as prescribed and, in many cases, dropping off 

those therapies. 

So we would be very concerned with any additional declines in 

consumer confidence and the impact that that would have on the 

health of Americans. 

Senator MENENDEZ. I appreciate that. 

I would like to work, Mr. Chairman, in our effort to repatriate 

foreign assets and do it in a way that would induce companies to 

do so. But when I hear that the choice is 5 percent as the rate to 

return that money on, it is very hard to tell a New Jerseyan who 

is paying 25 percent or higher in a tax bracket that we are going 

to do a 5-percent rate for repatriation of foreign corporate assets. 

And, unless there is some connection with job creation that is 

tangible—because the last time we did this on a holiday basis, we 

did not really get the jobs—I think it is problematic. 

So I am one of those—sign me up in the column that wants to find a way in which we can have nearly $1 trillion of private sector 

investment in our country, repatriate it, but do it in a way that actually creates the jobs at the end of the day. 

I thank you, gentlemen, for your testimony. 

The CHAIRMAN. Thank you, Senator Menendez. 

Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman, for holding the hearing today, and Senator Hatch. 

I appreciate our witnesses being willing to offer their expertise 

and insights. I think it is interesting that all four of the witnesses 

today agree on both the urgent need for tax reform as well as the 

direction in which we need to move, and that is a lower corporate 

rate and a territorial tax system that does not impose a second 

layer of taxation on the foreign earnings of our U.S. companies, 

and also in pointing out that the United States really is an outlier 

when you look at that. 

We have the second-highest corporate tax rate in the world, and, 

of the G–8 nations, we are the only one now that has a worldwide 

tax system. 

So I think a combination of those two factors makes it very difficult for U.S. companies to compete. And, as we begin to look at 

shaping a tax reform bill, Mr. Chairman, I would hope that we 

would take into consideration the testimony that was provided by 

our witnesses today and look at lowering rates, broadening the 

base, and putting American companies in a position where they can 

compete better globally. 

Just a question. This is maybe a tough question for you to answer, and I would throw it out there to anybody. 

But I would be interested in knowing, from each of you, if there 

is any targeted tax benefit that you would be willing to give up, 

if it were necessary to do so, in order to lower our corporate tax 

rate to a level that is commensurate with our major competitors 

and to move toward a territorial tax system, because that is the 

whole debate right now: what do we do with tax expenditures or 

24 

tax preferences? And, if we close some of those loopholes, or in 

order to be able to lower rates, we may have the necessity of closing some of those loopholes or doing away with some of those targeted tax benefits. 

I am interested if any of you has any observations about things 

that you would be willing to give up. 

Mr. DUKE. Senator Thune, we are willing to look at every benefit 

and believe that they all should be on the table for discussion. 

And we do, as a multinational company, receive some benefit, 

though we are not into heavy R&D investment as a retail company. 

But there are benefits that we receive today that we think should 

be looked at as a part of an overall comprehensive plan. 

Mr. FALK. Yes, Senator. I guess I would add that, I believe it is 

possible to have revenue-neutral corporate tax reform. We know 

that fiscal crisis is not easy, and this should not add to it. But I 

think everything should be on the table and, again, I would err in 

favor of lowering the rate. 

And, if we can get the combined Federal and State rate in the 

U.S. down to 25 percent, which would imply a Federal rate of 22 

or 23 percent, then I think a lot of these incentives become much 

less important. 

Senator THUNE. One of the hallmarks of the increasingly global 

nature of the U.S. economy is the fact that a larger and larger percentage of the revenue, of course, of our U.S. businesses is earned 

outside the United States. 

Now, there are those who view this as a negative and an indication that U.S. companies are moving operations abroad, and there 

are others, I think, who believe that it is a necessity in a world 

where 95 percent of the consumers and 75 percent of global purchasing power are outside our borders. 

But could each of you describe briefly or discuss what this greater reliance on foreign revenue means for U.S. jobs, and do you view 

that to be a positive or a negative thing? 

Mr. LANG. I will start. In the semiconductor industry, we are already about 80 percent overseas. So we kind of live and breathe 

this type of international footprint every day. 

And I do not view it as a necessity. I think it is an opportunity. 

It is an opportunity for us to take things that we invent here, or 

that we grow here, and offer those products and services around 

the world and benefit from that, and leverage U.S. jobs and U.S. 

efforts to realize those gains. 

So this is certainly not evil, and it is not a necessity. It is a wonderful opportunity, because the growth potential outside of the U.S. 

far exceeds what is available inside the U.S., and we should be pursuing all of that. 

Senator THUNE. Does anybody else care to comment on that, foreign investment, good thing, bad thing, positive, negative? 

Mr. FALK. I think it is a good thing. I think if we want the U.S. 

to be a competitive place to invest, we want U.S. companies to be 

competitive players in the global economy. And so, as economies 

outside the U.S. are growing faster, we want U.S. companies to be 

winners in those markets as well. That has to be good for jobs in 

the U.S. long-term. 

25 

Senator THUNE. This is for, I guess, Mr. Duke or Mr. Merlo, because your companies are in the retail business. You both have 

high effective tax rates. What does it mean when you compete 

abroad against companies that are not U.S.-based? And I guess it 

comes back more specifically to the question of, who are your major 

competitors, I guess I would ask, and where are they headquartered? 

What challenges does the tax system present for you as you seek 

to expand in new markets around the world? 

Mr. DUKE. Senator, I could quickly name three large multinational retailers that we compete against around the world— 

Tesco from the U.K., Carrefour from France, and Metro from Germany. 

And it is interesting because, we are often competing for specific 

real estate sites to build new stores in markets around the world, 

and that means that there is an advantage in the calculation of return on investment. Their return would be at a higher rate. 

As an example, Tesco in China, we would compete against frequently, and the 25-percent rate of tax in China would be all that 

Tesco would pay. We would pay the 25 percent, and then the additional 10 percent as far as the U.S. rate. 

We also—and it comes into play related to even acquiring a business, and then, as I mentioned, Tesco is now building stores and 

growing in the United States. So we actually are opening the door 

for foreign retailers to have an easier entry to compete in the 

United States against U.S.-based retailers. 

Senator THUNE. Mr. Merlo? 

Mr. MERLO. And, Senator, I think Mr. Duke is spot-on. The only 

thing I would add is that we have other companies out there, like 

Ahold that operates food-drug combos here in the U.S., where the 

same principles that Mr. Duke mentioned apply and create some 

competitive challenges. 

Senator THUNE. Great. Thank you. My time has expired. Thank 

you, Mr. Chairman. Thank you all. 

The CHAIRMAN. Thank you, Senator. 

Senator Conrad? 

Senator CONRAD. Thank you, Mr. Chairman, and thank you very 

much for holding this hearing. I think it is so important. 

I was part of the Fiscal Commission, as was the chairman of the 

committee. I have been part of the Group of 6. Both of them concluded that you have to have fundamental tax reform to broaden 

the base, to lower rates, and to help us be more competitive while, 

at the same time, raising some additional revenue to couple with 

entitlement reform and to couple with domestic spending reductions, in order to get our debt down. 

That is the fundamental framework of both the Fiscal Commission and the Group of 6. 

I would just like quickly to ask each of you, does that fundamental framework make sense to you? 

Mr. Duke? 

Mr. DUKE. Senator, the fundamental framework of debt reduction and fiscal responsibility certainly makes sense. And the comprehensive corporate tax reform we think is important. We do believe that all of this should be looked at on a long-term perspective. 

26 

I think earlier, other members of the discussion today mentioned 

the uncertainty. That is why our interest is in a long-term, comprehensive tax reform plan that we think would be able to lay out 

what the future would look like for American companies. 

Senator CONRAD. Very important. And let me just say, fundamental tax reform, I do believe, cannot be done in 6 weeks or 6 

months. I believe fundamental tax reform is such a complicated undertaking, it will take us well into next year. And Joint Tax just 

told us they could not score fundamental tax reform within the 

next 6 months, because they do not have a model that would allow 

them to do that. 

Mr. Falk, in terms of the basic structure of a strategy to get at 

our deficits and debt, do you favor what the Commission and the 

Group of 6 have proposed? 

Mr. FALK. Yes. It makes sense to me. I would echo Mr. Duke’s 

comments. And once again, it has taken us more than a generation 

to get to this point in time. And so there are a going to be a lot 

of things that have to be dealt with to correct our problems and get 

our fiscal house in order, moving forward. 

Senator CONRAD. Mr. Lang? 

Mr. LANG. Yes. I would agree with the comments made here at 

a high level. Those sound like the fiscally responsible approach to 

addressing some of the major issues we have today. 

Senator CONRAD. Mr. Merlo? 

Mr. MERLO. I agree with the panelists. There is no question that 

comprehensive reform is going to have to be thoughtful, it is going 

to have a lot of elements to consider, and, just to emphasize the 

point about predictability and certainty, I think it is a key byproduct of the decision-making process. 

Senator CONRAD. Well, I appreciate that. Let me go to a question 

on repatriation, because I have asked my staff to look into what 

happened in the last repatriation, and here is what they report to 

me. 

A number of empirical analyses have been undertaken to assess 

the use of repatriated earnings and their impact on investment in 

U.S. growth and jobs. These studies found no evidence that firms 

used repatriated earnings to significantly increase domestic capital 

investment, employment, or research and development. Rather, 

earnings were largely used to benefit company shareholders 

through stock repurchase programs, even though this was explicitly 

prohibited by the measure. 

The memo goes on to say researchers also found, specifically, 

with regard to employment, that a number of firms repatriating 

funds actually reduced employment in their domestic operations in 

the period after they repatriated funds. 

For instance, tax economist Martin Sullivan found that three of 

the top five firms, in terms of the dollar amount of repatriation, reduced U.S. employment in 2005 and 2006. 

I will not name the companies, but we have it all laid out here. 

I would just say to you that, clearly, fundamental tax reform needs 

to include how we are dealing with worldwide income. 

In the Reagan administration, I served on a commission on taxing international corporate earnings. It was one of the most interVerDate Nov 24 2008 20:16 Dec 03, 2012 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\76839.000 TIMD
27 

esting negotiations I was ever part of. It made this negotiation on 

the debt ceiling look relatively easy. 

But let me just say that the argument that had been made by 

some in repatriation, that it is going to create jobs here, we did it, 

and it did not produce jobs here. That is the overwhelming evidence. 

That does not mean we should not do fundamental tax reform, 

because, if we are going to be competitive, we have to get in the 

game. And our tax code was designed at a time when we did not 

have to worry about the competitive position of the United States. 

We were fully dominant when this tax code was developed. 

I do not think anybody, if they were going to sit down and devise 

a tax code for the United States in 2011 or 2012, would come up 

with one that looked anything like this one. 

My time has expired. I thank the panel for their testimony. 

The CHAIRMAN. Thank you, Senator, very much for your work on 

the Commission and the Gang of 6, and, also, I do not think there 

is anybody that disagrees with your last statement, too. It is clearly 

time to overhaul an antiquated tax code. That is clear. 

But it is not going to be easy. One thing I have learned around 

here, abstractions are easy, but sometimes abstractions are cruelty, 

because it is the specifics that really count. 

For example, there is a lot of talk about lowering the rate and 

broadening the base. The current corporate rate, 35 percent Federal, by how much could the rate be lowered? If all tax expenditures were eliminated, you do not get very far. Let us just stick 

with the territorial system, if it is territorial. 

You do not get very far. Maybe you get down to 29 percent, approximately. Then the next question is, what about interest expense? Do you want to eliminate interest expense? If you eliminate 

interest expense, then we start to make a little headway at getting 

the rate down quite significantly. 

I suspect in all these other countries, it is the other tax systems 

which allow those countries to raise revenue, because revenue as 

a percent of GDP is generally higher in those countries, including 

probably business revenue, compared to the United States. 

I do not know, I have to research this, but it could well be that 

it is a combination of income taxes in those countries and valueadded taxes and so forth. 

So it is not easy to get the rate down to levels that people talk 

about, say, a 25-percent corporate rate or lower. It is not easy at 

all. 

It gets to the next set of questions of, which potential expenditures, if you will, are you willing to give up? Theoretically, it is everybody gives up everything. But there are some specifics. 

For example, I know, Mr. Duke, at WalMart, the work opportunity tax credit is pretty important to your company. 

And, Mr. Falk, I suspect section 199 is important to your company. 

And for Mr. Lang, clearly, the R&D tax credit is pretty important. 

So I am asking each of you. Are you willing to give up each of 

those for your companies? So long as everything is given up, then 

we get to questions that I think Senator Stabenow touched on, 

28 

namely, if Canada is giving such a great incentive to R&D, and, 

if we give up our R&D tax credit, will a lower rate make the 

United States semiconductor companies sufficiently competitive so 

they could deal with, or offset, that Canadian incentive? 

I would just like you all to tell me the degree to which you are 

willing to give up some of the provisions that you currently use 

very significantly. 

Mr. Duke? 

Mr. DUKE. Mr. Chairman, with, first, the overall lower corporate 

tax rate that would be competitive in the global marketplace, such 

as in the mid-20s, for example, we would be willing to look at every 

aspect of those incentives that we participate in, and we believe 

that all should be on the table for discussion. 

The CHAIRMAN. So you are basically saying you are willing to 

give it all up as long as your rate, your headline rate, the corporate 

rate is, say, mid-20s or something like that? 

Mr. DUKE. Yes, sir, if we are competitive against other markets 

that we are competing against. 

The CHAIRMAN. Mr. Falk? 

Mr. FALK. I would give the same answer I mentioned in my comments, that we take advantage of the R&D credit, we take advantage of the manufacturing credit—we used to spend about $0.5 billion in capital in this country every year—and we take advantage 

of accelerated appreciation. 

As the rate drops from near 40 percent to 22, 23, or 25—— 

The CHAIRMAN. I am just talking about the Federal rate now. I 

cannot deal with the State and local. 

Mr. FALK [continuing]. Those incentives are a lot less valuable. 

The CHAIRMAN. Mr. Lang? 

Mr. LANG. In the Semiconductor Industry Association Working 

Group, we have had this exact conversation, and I would agree that 

everything should be on the table. We should look at it as a whole 

package and look at what the end result is. 

There were a number of things, from manufacturing incentives 

to acceleration on depreciation, et cetera, that were things that, at 

the right rates, would be worth putting aside. 

So I think that, agreeing with other folks on the panel, we should 

look at everything, and, at the end of the day, the overall system 

needs to be competitive and allow us to compete in the global marketplace. 

The CHAIRMAN. Well, we are clearly going to look at everything, 

but, after we look, we have to make some decisions. And I am kind 

of asking for guidance here, especially from your industry. 

Is 25 percent sufficient to compete with the Canadians who have 

that break, assuming you do not have that break? 

Mr. LANG. I think for our industry, the primary competitors are 

going to be in Asia, based on competition, and the effective rates 

there—excuse me—the statutory rates are 15 to 17 percent, often 

lower than that on an effective basis. 

So I am concerned that, when we look at the details and go 

through the details, a mid-20-percent rate will not be competitive 

from a semiconductor industry perspective. 

29 

The CHAIRMAN. So you are concerned that it will not be low 

enough—the mid-20s might not allow you to compete in Asia or 

worldwide? 

Mr. LANG. Yes, that is my belief. 

The CHAIRMAN. Mr. Merlo? 

Mr. MERLO. I agree with everything that has already been said. 

I think everything should be on the table. I think that is going to 

be an imperative in terms of simplifying the tax code, as well. 

The CHAIRMAN. My time has expired. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. It is nice to talk 

about everything being on the table, but there are certain things 

that make you competitive with the rest of the world, and without 

any guarantee that the corporate rates are going to stay down, we 

have to consider all of this, and consider how this works in the future as well. 

But let me just ask this question, for the entire panel. 

In considering corporate tax reform, the focus is typically on the 

corporate tax provisions in our code. But how important is it to 

focus on the impact corporate tax reform will have on a companies’ 

financial statements? 

For instance, if a corporation has a net operating loss, or NOL, 

that it carries forward from year to year, this NOL can offset taxable income in future years. Thus, the NOL can be a very valuable 

asset to your companies. 

Now, that is, the NOL can reduce taxes in future years. So, if 

a corporation has a $100 NOL, it will reduce, given our 35-percent 

tax rate, corporate taxes by $35. Thus, the corporations, under current financial accounting rules, rightly state that $100 of NOL is 

an asset the company holds worth $35. 

However, if the corporate rate were reduced to 25 percent, then 

this NOL asset would only be worth $25. Now, that is, in some real 

sense, the corporation would lose $10 by virtue of the corporate tax 

rate going down 10 percentage points. 

Now, this $10 reduction would immediately show up as a $10 reduction in the corporation’s net income and would lower the corporation’s earnings per share. 

Now, I am very supportive of a corporate tax cut, there is no 

question about that. I would hope the effort to reduce the corporate 

tax rate would not be slowed down by these financial accounting 

considerations. 

However, I can understand that those are real concerns that you 

have to be concerned with. Now, the R&D tax credit is absolutely 

critical. As you point out, 13 times, we have failed to re-up it. Both 

the chairman and I have worked very hard. I would like to make 

that permanent, because I think it would give you a competitive 

advantage in the rest of the world, because of the inventiveness 

and creativity of the American scientists and workers, especially in 

your industry. 

But I would like you to share with me your thoughts on this 

business of how you handle these accounting matters. Should corporate tax reform take into consideration the financial accounting 

impact of reform? 

30 

Mr. DUKE. Senator, first, I think in the whole discussion of lowering the overall rate, say, from 35 percent to 25, as we discussed, 

even related to the incentives and credits, we recognize that there 

have to be tradeoffs for the formula to work. 

We believe that the same would apply to your question about the 

NOL. It is worth it to have a permanent, long-term, comprehensive 

corporate tax revision that would have a competitive rate in the 

global marketplace, and that transition related to the questions 

about NOL, as well as credits, we think, would be worth the challenge. 

Mr. FALK. My comment, Senator, would be, I would say, do the 

right thing for the country, and the accountants will figure it out. 

And so I would not worry about the financial accounting implications of this. I would say far more companies have a net deferred 

tax liability from taking advantage of things like accelerated depreciation, and so, as those reflect lower tax rates, they will enjoy an 

economic benefit from this change. 

So I would not let the accounting get in the way of making the 

right economic decision for the United States of America. 

Mr. LANG. We are—PMC is one of those companies that has 

NOLs on our balance sheet, and I would agree with the statements 

here. We should do the right thing to make America competitive, 

and do the right thing for the long-term structure of the business, 

and let the accountants figure out how the financial accounting is 

impacted. 

Mr. MERLO. And, Senator, I am certainly not an accountant, and 

I agree with my colleagues in terms of, let the finance folks figure 

it out. We will have our staff get back with your staff on any further comments on that. 

Senator HATCH. That would be great. There are a lot of complexities in trying to change the tax code. But it is not too complex to 

realize that we have to be competitive with the G–8 and G–20, and 

I would like to be more competitive. And I believe if we did that, 

you folks would create more jobs, you would create more opportunities, you would create more products to sell. 

I just have seen you all these years, you are just terrific at what 

you do. And there are always a lot of tradeoffs in these types of 

issues, and we will just have to see what we can do. 

But this has been a particularly valuable panel, as far as I am 

concerned, and I want to thank you all for being here. 

The CHAIRMAN. Thank you, Senator. I thank you, too. 

Senator Wyden, the chair is yours. 

Senator WYDEN. Mr. Chairman, I just had one other question. I 

thank you. 

The CHAIRMAN. All right. Go ahead. 

Senator WYDEN. Mr. Duke, I was struck by your point with respect to your ultimate desire to have a tax rate in the mid-20s, 

and, to me, that is very much in the ballpark for tax reform. And 

I have tried to work with Chairman Baucus and colleagues on this 

for a lot of years. 

Let me walk you through how I am looking at the math, and we 

would like to work with all you folks on this. Because deferral is 

so much money, like $500 billion over 10 years, you get rid of that, 

and it is such a large amount, you use that to slash rates dramatiVerDate Nov 24 2008 20:16 Dec 03, 2012 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 R:\DOCS\76839.000 TIMD
31 

cally in the United States, and I am absolutely convinced you can 

get in the mid-20s. And you also have the benefit of less gaming, 

and a more straightforward system. 

My concern about going to a territorial system—and I have put 

myself to sleep at night trying to understand all the aspects of a 

territorial system—is that you will keep a lot of the complexity in 

the system. You will have lots of gaming and really, permanently, 

the question of transfer pricing, where somebody generates a sale 

one place, books the profit somewhere else, but especially you will 

have more business overseas rather than what Chairman Baucus 

started us off with in terms of more incentives for jobs in the 

United States. 

And I personally think it will be pretty hard to get the rate in 

the mid-20s if you go to that kind of system. I was not able to figure it out, and there are a lot of other people a lot smarter than 

I am who can’t. 

Is it fair to say, at the end of the day, that you all are willing 

to work through a lot of these concepts so that we can get to the 

point we started with with Chairman Baucus’s questions, that we 

have more American jobs and a greater level of competitiveness in 

these tough global markets, and are you all still open on the design 

of some of these components? 

Mr. DUKE. Yes, sir. We are clearly open for discussion and development of these. I would tell you, sir, that even though we talked 

some about our growth outside the United States, this year, more 

than half of our capital investment is being invested here in the 

United States. 

We will invest somewhere between $12.5 and $13.5 billion, and 

over half of it here. We have announced even recently our desire 

to build more stores and grow in urban markets in the United 

States, where jobs are needed and where product is needed. 

So we clearly want to grow here in the U.S., but we also have 

opportunity to grow and to really help American companies by 

growing outside the United States, and we would love to work with 

you and discuss this in more detail. 

Senator WYDEN. I think Chairman Baucus has to wrap up. 

The chairman has been patient this morning, and I thank you. 

The CHAIRMAN. Thank you, Senator. We do not have much time. 

The question occurs to me—what about turning this around, 

changing the code to get more foreign investment in the U.S., in 

addition to more domestic investment in the U.S.? This is basically 

the subject of this hearing. 

How do we get more foreign investment in the U.S.? A whole different subject—you do not have time. I am opening Pandora’s box 

here. 

Mr. FALK. Some of the same answers. I think you should lower 

the marginal rate for activity in the U.S., and move to a territorialbased tax system. You will make the U.S. a more attractive investment for companies all over the world. 

Mr. LANG. Simplicity, predictability, those are all keys that we 

have been talking about all morning. 

The CHAIRMAN. How much do we make ourselves less competitive because we have a system which is so complex? Someone once 

said that GE has 1,000 tax attorneys, for example, and it is my unVerDate Nov 24 2008 20:16 Dec 03, 2012 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\76839.000 TIMD
32 

derstanding that our system is more complex than the system in 

other countries. 

Does that put America at a competitive disadvantage, on the 

margin? 

Mr. FALK. Certainly, a simpler system would attract business to 

want to invest here and grow. 

The CHAIRMAN. Thank you very, very much. This has been a very 

helpful hearing. I think we will have a lot more discussions. Thank 

you very much. But the goal is to get us to a much more competitive system. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 11:49 a.m., the hearing was concluded.] 

(33) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


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COMMUNICATIONS


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Æ 


76839059.EPS