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80–844 2013

TAX REFORM AND THE U.S. 

MANUFACTURING SECTOR 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 19, 2012

Serial No. 112–28 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan,Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER M. SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Counsel 


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C O N T E N T S 

Page 

Advisory of July 19, 2012 announcing the hearing ............................................... 2 

WITNESSES 

Ms. Diane Dossin, Chief Tax Officer, Ford Motor Company, Testimony ............ 7 

Mr. Henry W. Gjersdal, Jr., Vice President of Tax and Real Estate, 3M, 

Testimony ............................................................................................................. 13 

Ms. Susan L. Ford, Vice President of Tax, Corning Inc., Testimony .................. 20 

Mr. Ralph E. Hardt, President, Jagemann Stamping Company, Testimony ...... 26 

Mr. Kim Beck, President and CEO, Automatic Feed Company, on behalf 

of the Association for Manufacturing Technology, Testimony ......................... 37 

Mr. Hugh Spinks, Vice President of Tax, Air Liquide USA, Inc., Testimony ..... 44 

Ms. Heather Boushey, Ph.D., Senior Economist, Center for American 

Progress, Testimony ............................................................................................. 48 

SUBMISSIONS FOR THE RECORD 

3M ............................................................................................................................. 103 

American Council for Capital Formation ............................................................... 107 

Advanced Medical Technology Association ............................................................ 119 

American Fuel & Petrochemical Manufacturers ................................................... 131 

American Chemistry Council .................................................................................. 134 

Biotechnology Industry Organization .................................................................... 140 

Center for Fiscal Equity .......................................................................................... 144 

Ernest Christian ...................................................................................................... 150 

Hanes Brands Inc .................................................................................................... 158 

LIFO Coalition ......................................................................................................... 160 

National Association of Manufacturers .................................................................. 209 

R & D Credit Coalition ............................................................................................ 214 

Scott Bucknell .......................................................................................................... 220 

Semiconductor Industry Association ...................................................................... 223 

Society of Chemical Manufacturers & Affiliates ................................................... 233 

Stephen Entin IRET 1 ............................................................................................. 234 

Stephen Entin IRET 2 ............................................................................................. 239 

Stephen Entin IRET 3 ............................................................................................. 240 

U.S. Chamber of Commerce .................................................................................... 243 

U.S Steel Corporation .............................................................................................. 251 

William Lee .............................................................................................................. 259 


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TAX REFORM AND THE 

U.S. MANUFACTURING SECTOR 

THURSDAY, JULY 19, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The committee met, pursuant to call, at 9:43 a.m., in room 1100, 

Longworth House Office Building, the Honorable Dave Camp 

[Chairman of the Committee] presiding. 


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HEARING ADVISORY 

Camp Announces Hearing on Tax Reform and the 

U.S. Manufacturing Sector 

Thursday, July 19, 2012 

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

Means, today announced that the Committee will hold a hearing on business tax 

issues currently facing U.S. manufacturing companies, and will examine how comprehensive tax reform could improve the ability of manufacturers to contribute to 

job creation and economic growth, including U.S.-based public and closely held companies as well as foreign-owned U.S. manufacturers. The hearing will take place 

on Thursday, July 19, 2012, in Room 1100 of the Longworth House Office 

Building, beginning at 9:30 A.M. 

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

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

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

list of invited witnesses will follow. 

BACKGROUND: 

The United States has the highest corporate income tax rate in the developed 

world at 39.2 percent (federal and state combined)—compared to the OECD average 

of approximately 25 percent—and recent economic research indicates that much of 

the corporate tax is borne by workers in the form of lower wages and fewer jobs. 

In addition, U.S. manufacturers that operate internationally are subject to tax on 

their worldwide earnings, while their competitors in foreign markets often are based 

in countries with a territorial system that does not tax foreign earnings, putting 

U.S. manufacturers at a competitive disadvantage. 

Furthermore, a substantial portion of manufacturing activity by U.S. companies 

is conducted through pass-through entities, and income earned by these entities is 

taxed at the individual income tax rates. Consequently, uncertainty surrounding the 

individual rate structure after 2012 poses significant challenges to business planning and job creation in the manufacturing sector, especially for smaller manufacturers further down the supply chain. 

In announcing this hearing, Chairman Camp said, ‘‘U.S. manufacturing has 

long been a cornerstone of our economy, and it continues to provide highpaying jobs for American workers while supplying global consumers with 

high-quality products. As with the rest of our economy, however, the 

strength of U.S. manufacturing is being undermined by our current tax system, which is too complex, too costly, and too time-consuming to comply 

with. As we examine the implications of comprehensive tax reform for specific industries, I will be interested in hearing from U.S. manufacturers 

about how tax reform can make the United States a more attractive place 

for the industry to hire and invest.’’ 

FOCUS OF THE HEARING: 

This hearing will examine how the current tax system affects U.S. manufacturers, 

including U.S.-based public and closely held companies as well as foreign-owned 

U.S. manufacturers, and how comprehensive tax reform might affect their ability to 

expand and create jobs. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearVerDate Mar 15 2010 04:56 May 29, 2013 Jkt 080844 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\80844.XXX GPO1 PsN: 80844

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

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Thursday, August 2, 2012. Finally, please note that due to the 

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

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

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

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

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

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

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

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

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

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

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

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

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

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

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

by the Committee. 

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

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

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

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

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

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

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

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

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

f 

/. 

Chairman CAMP. Good morning, thank you for joining us for another in a series of hearings examining how comprehensive tax reform can help stir economic growth. Today’s hearing is an opportunity to look more closely at the manufacturing industry. Specifically, we will examine how the current tax system affects U.S. 

manufacturers, including U.S.-based public companies, small and 

closely-held manufacturers, and foreign-owned U.S. manufacturers. 

We will also explore how comprehensive tax reform might affect 

manufacturers’ ability to expand and create jobs. 

The importance of the manufacturing sector to the U.S. economy 

has been well-established. In 2011, manufacturing accounted for 

12.2 percent of the country’s gross domestic product, and approximately $1.27 trillion in exported goods according to the Commerce 

Department’s of Bureau of Economic Research. With a long and 

treasured history in America, manufacturing touches every aspect 

of our lives. From the food we eat, to the cars we drive, to the 

clothes we wear, the impact of manufacturing is felt each and every 

day. 


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Supporting about one in six private sector jobs, the manufacturing industry is a cornerstone of our economy that provides highpaying and high-quality jobs to approximately 12 million people according to June’s Labor Department data. Manufacturing is closely 

connected with research and innovation which improves our lives 

and our standard of living. 

Whether small, medium, or large, whether publicly traded or 

closely held, manufacturing companies contribute to the American 

economy every day. Nowhere is that more evident than in my home 

State of Michigan, the heart of the auto industry and the engine 

of the industrial Midwest. Manufacturers have been hit particularly hard in this country. 

Since the President took office, we have lost over one-half million 

American manufacturing jobs. According to the Department of 

Labor, the precise number is 590,000. So as we examine the effect 

of our current Tax Code as well as the implications of comprehensive tax reform, the importance of understanding how tax reform 

can make America a more attractive place for the industry to hire 

and invest can’t be overstated. 

A recent op ed offered by the National Association of Manufacturers sums up the challenges posed by today’s Tax Code, stating 

manufacturers have added 13 percent of the net new jobs gained 

since the end of 2009. And we have made larger than normal contributions to gross domestic product. But there is a black cloud 

looming with much uncertainty ahead. The op ed goes on to describe the impact that those looming tax increases will have on 

manufacturers, both for individual and corporate taxpayers. Citing 

a recent survey, 64 percent of manufacturers describe the tax and 

regulatory environment as their top concern. 

The concern expressed by the manufacturing community is well 

founded, and it is a concern shared by many on this committee and 

in the Congress. We are all familiar with the statistics. The United 

States has the highest corporate tax rate in the world at 39.2 percent if you combine Federal and State. The high corporate rate in 

our outdated worldwide system of taxation do little to attract the 

investment and hiring we need to help get America back to work. 

Similarly, as the NAM-authored op ed reminds us, businesses 

paying at the individual rate are also affected by today’s broken 

Tax Code; not to mention its December 31st expiration date. 

If the tax relief originally enacted in 2001 and 2003 expires, then 

2/3s of manufacturers that operate as pass-through entities and 

pay taxes at the individual rate, will face even higher tax bills. The 

bottom line is that today’s Tax Code isn’t working. It is not working for the manufacturers that are organized as pass-through entities because it is too complex, too costly, and too expensive to comply with. It isn’t working for manufacturers who operate internationally because it is outdated, and leaves America uncompetitive in the global marketplace. 

Most of all, it is not working because it is not helping families 

struggling in a weak economy get back to work. It is time America’s Tax Code puts the America economy first. We know that what 

doesn’t work and now it is time for a comprehensive tax reform 

plan that will work. Since this Congress convened in January of 

2011, the Ways and Means Committee has had more than 20 hearVerDate Mar 15 2010 04:56 May 29, 2013 Jkt 080844 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80844.XXX GPO1 PsN: 80844

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ings focused on the steps Congress might take to transform our 

broken Tax Code into a pro-growth Code that will provide employers the certainty, the flexibility and freedom they need to invest 

and hire. At the request of the Ways and Means Committee, the 

last two House-passed budgets have outlined a framework for comprehensive tax reform that lowers rates for individuals and corporate taxpayers, repeals the AMT for 31 million households and 

transitions America to a more competitive territorial system of taxation, which even the Obama administration pointed to as a ‘‘hopeful area of consensus.’’ 

The framework is a good start, but more must be done. Today 

we will hear directly from stakeholders in the manufacturing community as they share their ideas for what Congress can do to help 

and what we ought to avoid that might hurt. 

Your voices are critical to this discussion and after all, it is not 

enough simply to write a plan that reads well in Washington. It 

has to be a plan that works in the real world, the world where you 

run your businesses. Thank you for taking the time to be here 

today and I look forward to your testimony. I will now yield to 

Ranking Member Levin for his opening statement. 

Mr. LEVIN. Thank you, and welcome to each and every one of 

you. Thank you for coming. 

During the 2000s, we experienced a crisis in manufacturing employment. During the 8 years of the Bush administration, we lost 

4.5 million manufacturing jobs. Now, since the recovery has taken 

hold, the manufacturing sector has added about a half a million 

jobs. We have seen that gain in manufacturing employment over 

the last 2 years. And now we hear talk about a resurgence of 

American manufacturing in part because of the policies of this 

President. 

The President took the difficult but vital step of providing assistance to the domestic auto industry. If he hadn’t done that, it would 

have devastated the manufacturing sector well beyond the Big 

Three, and even beyond their suppliers. 

The Recovery Act Included key provisions like the 48C credit to 

encourage investment in advanced energy manufacturing. The tax 

agreement at the end of 2010 included 100 percent bonus depreciation for capital investments. But more needs to be done, clearly. We 

are still below where we were at the end of the Clinton administration by about 5 million manufacturing jobs. Ways and Means 

Democrats, we here have introduced a no-excuses agenda of items 

like bonus depreciation, the Wind Credit, R&D, 48C, Build America 

Jobs, and a provision to reduce the incentive to ship jobs overseas 

that this committee should act on immediately to promote job creation, especially in the manufacturing sector. 

This committee should act on these provisions as soon as possible. Today we are considering how manufacturing fits into tax reform. Tax reform must fit into support for manufacturing. Eliminating every corporate tax expenditure including the domestic 

manufacturing deduction, R&D, and accelerated depreciation, 

would not pay for reducing the corporate rate to 25 percent, and 

could work against further support for manufacturing. 

The President and Democrats in Congress view, in terms of tax 

reform, the larger goal as one of economic growth and job creation. 


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Just setting a rate and not saying how you will get there doesn’t 

really tell you whether you are achieving those goals or not. 

We think manufacturing should be at the heart of our goals for 

tax reform. Manufacturing still provides millions of middle-class 

jobs, conduct more than 2/3 of private R&D, accounts for 60 percent 

of exports, and has vital positive spillover effects in the broader 

economy. 

Secretary Geithner said this very well before this committee in 

February. He said, and I quote, ‘‘I would say we would look at any 

proposal through that simple test which is relative to what you face 

today, are we making it more likely that the next factory by a U.S. 

company or a foreign company will be built here?’’ 

Republicans often say that they don’t want to pick winners and 

losers. It is not picking winners or losers, it is picking what side 

you are on. Being on the side of those who want to build things 

in America is not picking winners and losers, but winners for the 

American public. 

That is why we think tax reform needs to mean a great deal for 

manufacturing sector. That is a major purpose of the hearing 

today, and we look forward to hearing our witnesses’ thoughts on 

how we achieve that goal. Thank you. 

Chairman CAMP. Thank you, Mr. Levin. 

And we are pleased to welcome our excellent panel of experts 

who have extensive experience running both large and small manufacturers. I believe that their experience and insight will be helpful 

as we focus on tax reform as it relates to their industry. First, I 

would like to welcome and introduce Ms. Diane Dossin. Ms. Dossin 

is the chief tax officer and a long-time employee of Ford Motor 

Company. Ms. Dossin, thank you for being here today. 

To introduce our second witness I yield to the gentleman from 

Minnesota, Mr. Paulsen. 

Mr. PAULSEN. Thank you, Mr. Chairman, it is my privilege to 

welcome also Mr. Skip Gjersdal, from 3M who is the vice president 

of Tax and Real Estate who we will hear from in just a little bit. 

Skip has worked in the tax department actually at 3M for over 12 

years. He has a strong background in tax, and also has worked previously at Cargill, which is also based in Minnesota. He brings a 

strong wealth of knowledge from a manufacturing perspective on 

tax policy, and the impacts that U.S. companies have in competing 

in the global marketplace. He was born and raised in my district 

in the third district in Minnesota, and I am proud to welcome him 

here. He has been a good advisor to me from a corporate tax standpoint as well, Mr. Chairman. 

Chairman CAMP. Well, thank you very much, Mr. Paulsen. And 

now to introduce our witness from New York, I will yield to Mr. 

Reed. 

Mr. REED. Thank you, Mr. Chairman. It is my pleasure, and I 

am pleased to introduce Susan Ford, the vice president of Tax at 

Corning Incorporated. As you know, Corning Incorporated is 

headquartered my district in Corning, New York. This company 

has been around for 161 years. It is the world’s leading manufacturer of high technology glass, and glass ceramic components. It 

was founded by Amory Houghton the great-great grandfather of 

former Congressman Amo Houghton who, as you know, was a 


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member of the committee for many years and a good friend to 

many of us here on this panel. 

Corning is proud to have invented a number of technologies with 

significant impact on the world, including optical fiber, ceramic 

substrates for catalytic converters, and is the world’s largest 

produce of glass for LCD–TVs and a lot of our phones and other 

materials have that material on them. 

So I am proud to be here. I am proud to introduce Ms. Ford, and 

I look forward to her testimony, and I welcome her and yield back 

the balance of my time. 

Chairman CAMP. Well, thank you, Mr. Reed. Our fourth witness, Ralph Hardt, the President of Jagemann Stamping Company 

in Manitowoc, Wisconsin. Aside from his work at Jagemann, Mr. 

Hardt brings a wealth of experience from managing several other 

small manufacturing businesses. 

And fifth, we will hear from in Kim Beck, the President and CEO 

of Automatic Feed Company in Toledo, Ohio. Mr. Beck had so 

much good information to share with us that last night after his 

flight from Toledo to Washington was canceled, he hopped in his 

car and made what I imagine must have been close to an 8-hour 

drive to Washington, D.C. So Mr. Beck, thank you for your commitment and fortitude in making the effort to be with us here today. 

Our sixth witness will be Mr. Hugh Spinks. Mr. Spinks is the 

vice president of Tax for Air Liquide USA, located in Houston, 

Texas. Additionally, Mr. Spinks is on the tax committee of the 

American Chemistry Council and serves on the board of directors 

to the Organization for International Investment. 

And finally, we will hear from Miss Heather Boushey. Ms. 

Boushey is a senior economist at the Center for American Progress 

here in Washington, D.C. 

Thank you all again for your time today. The committee has received each of your written statements. They will be made part of 

the formal hearing record. Each of you will being recognized for 5 

minutes for your oral remarks and Ms. Dossin, we will begin with 

you. You are recognized for 5 minutes. Thank you. 

STATEMENT OF DIANE DOSSIN, CHIEF TAX OFFICER, FORD 

MOTOR COMPANY 

Ms. DOSSIN. Thank you. Good morning, Chairman Camp, Ranking Member Levin, and Members of the Committee. I am the Chief 

Tax Officer of Ford Motor Company, a manufacturer of cars and 

trucks, headquartered in Dearborn, Michigan. We employ over 

66,000 at 25 manufacturing facilities and other office buildings. 

And we thank you for holding this hearing on tax reform in the 

manufacturing sector, which you all understand is the most important sector in the American economy. 

Ford has manufactured cars and trucks for over 100 years, but 

not that long ago, we were fighting for survival. And we stood up 

in that moment and developed a plan to aggressively restructure 

the company. We rationalized our brands. We leveraged our global 

strengths to build high-quality products more efficiently. We revised labor contracts. We funded post-retirement healthcare. We 

funded pensions. We restructured the dealer network. And to fund 

all of that, we took out what everyone described as the largest 


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home-improvement loan that was secured by all of the assets of 

Ford, including the trademark blue oval. And over the last couple 

of years, we have repaid over $20 billion of that debt, and the blue 

oval belongs to us again. 

And we did all of that against the backdrop of the severe economic conditions at the time, and we did it outside of bankruptcy. 

In short, we have restructured every element of the business that 

we could, and we have returned to profitability in the U.S., but our 

tax expense does remain internationally uncompetitive. We are 

grateful that Republicans and Democrats have recognized that the 

U.S. corporate tax rate is simply too high. Chairman Camp’s discussion draft and the President’s framework for business tax reform both suggest much lower rates. 

We are very hopeful that the time for reforming America’s uncompetitive corporate Tax Code has arrived, and we believe that 

lowering the corporate tax rate is the single most important and 

efficient and simple way to relieve the burden on U.S. companies. 

Ford understands that in the current fiscal climate, it is likely 

impossible to achieve a lower rate without broadening the base. We 

also understand that base-broadening comes with costs that must 

be weighed against the value of the lower rate. As an American 

manufacturer, Ford is interested in several tax provisions of broad 

applicability that do encourage important U.S. investment. First, 

the research credit. Many other countries have both a low rate, and 

incentives for research. The U.S. should not put itself at a competitive disadvantage by heading too far in the opposite direction. 

Second, depreciation, reasonable cost recovery periods at least 

consistent with expected economic wear or obsolescence are critical 

to support continued U.S. capital investment, and third, the domestic manufacturing deduction, which recognize the special advantages manufacturing activity provides to the U.S. economy. 

We are hopeful that a lower rate and a reformed U.S. corporate 

Tax Code will be a net positive for American manufacturers to permit us to continue strong U.S. investment. 

Ford does operate globally, and builds vehicles where its customers live. We earn a large part of our income in the U.S. Abroad, 

Ford generally operates in relatively high tax countries, and we do 

not have substantial foreign earnings that have been taxed at very 

low foreign rates, and that only come back to the U.S. at a very 

high U.S. tax cost. 

And for that reason, Ford does not have a particular position on 

how the U.S. taxes foreign earnings. Whatever the method, Ford 

believes it is appropriate for corporate tax reform to provide some 

minimum level of U.S. tax when corporations shift income to taxsavings countries. 

We see value in all three anti-base erosion options included in 

Chairman Camp’s proposal, and that lawmakers need not necessarily choose a single approach to combat tax-base erosion. The 

transition to a reformed code is also important to Ford. In particular, we are interested in how transition rules will apply to foreign earnings and profits deficits, to foreign tax credit carryovers, 

to foreign taxes that have been paid but not yet claimed on tax returns, and to overall domestic losses. 


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In summary, for over a century, the United States has been 

Ford’s home, and its most important market. Ford wants to remain 

profitable in the U.S., and to pay income tax at a reasonable rate, 

similar to the rates now levied by other countries. The stakes for 

corporate tax reform are high, and the consequences of failure are 

serious. We know it won’t be easy, and appreciate all the more your 

willingness to tackle this important task. We at Ford stand ready 

to help you in any way we can. On behalf of Ford, thank you for 

the opportunity to testify, and I look forward to answering your 

questions. 

Chairman CAMP. Thank you very much, Ms. Dossin. 

[The prepared statement of Ms. Dossin follows:] 


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We leveraged our global assets, innovation, technology, and scale to deliver world-class products 

efficiently for every market, 

Working with our UAW partners, we revised labor contracts, funded retiree health care, and made 

discretionary contributions to pension plans to help close the competitive gap. As a result, Ford is now 

making small cars profitably in the United States. 

Working with our dealer partners, we restructured the dealer network to enhance the sales and service 

experience for our customers. 

We funded our transformational plan by taking on an immense loan secured by all of our assets, 

including the trademark Blue Oval. We continued to strengthen our balance sheet, and between the 

end of 2009 and 2011, we repaid more than $20 billion of that debt. Today we are back to an 

investment grade credit rating and have full rights to all of our collateral. 

We did all of this against the backdrop of the severe economic conditions of late 2008 and 2009 and 

outside of bankruptcy, 

Ford is now profitable, especially in the United States. Our 2011 operating earnings were more than 

$8.5 billion. We are now recording tax expense on our earnings at a rate near the U.S. statutory rate of 

35%, From a cash standpoint, for the next few years, Ford will continue to offset its U.S. taxable income 

with losses sustained and tax credits earned in the last decade. However, the day is fast approaching 

when Ford will make substantial cash payments to meet its corporate income tax obligations in the 

United States~at the world's highest statutory rate. This tax burden will directly reduce the cash that is 

available to support investment in new product and job creation in the U.S. and to compete with 

foreign-based manufacturers who conduct key functions in their home countries (with the benefit of 

lower tax rates). 

In short, we have restructured every element of the business that we can, but our tax expense remains 

internationally uncompetitive. To continue to compete on the world stage, we need a lower corporate 

tax rate at home that is much closer to those of other developed nations, And to achieve that, we need 

your help. 

Corporate Income Tax Rate Reduction 

It is well chronicled that the U.S. now has the highest corporate income tax rate in the developed world. 

We are grateful that Republican and Democratic leadership~both here in Congress and in the 

Administration-have recognized that the U.S. corporate tax rate is too high. We are especially pleased 

at the level of engagement of both Chairman Camp and Ranking Member levin, as well as many other 

members of the Committee. Chairman Camp's Discussion Draft and The President's Framework for 

Business Tax Reform have suggested tax rates of 25% and 28%, respectively. We are hopeful that the 

time for reducing and reforming America's uncompetitive corporate tax code has arrived. 

In pursuit of that objective, Ford has joined the RATE Coalition, a group of 28 companies and 

organizations supporting 30 million American jobs and dedicated to advancing the cause of a lower 

corporate tax rate. lowering the corporate tax rate is the most efficient and simplest way to relieve the 

outsized tax burden on U.S. companies ~ and particularly on manufacturing companies with hard assets 
11 


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and operations in this country. A lower rate wil! also decrease the incentive to move U.S. jobs and 

investment abroad and will increase the incentive to move foreign investment and jobs into the U.S. 

Corporate Tax Base Broadening Considerations 

Ford understands that, In the current fiscal climate, achieving a lower corporate income tax rate IS 

probably only possible ifthe tax base is broadened. We also understand that base broadening does not 

come without attendant costs-costs that must be weighed against the relative value of a lower rate. In 

considering base broadening alternatives, Ford urges consideration of the full impact of the ultimate tax 

reform package on the U.S. economy. The final product should have a net positive effect on the goals of 

increased competitiveness, economic growth, and job creation in manufacturing here at home. 

The automotive industry is a key component of the overall U.S. manufacturing sector. It is supported by 

a large and lengthy supply chain and is a large consumer of goods and services from many other 

economic sectors including raw materials, construction, machinery, computers, and health care. In an 

April 2010 study, the Center for Automotive Research estimated that each auto maker job supports nine 

other jobs in the supply chain, automobile dealer network, and broader economy and that the U.S. auto 

industry collectively supports nearly 8 million U.S. jobs. Automakers alone pay $200 billion of annual 

wages for jobs that are among the best in their communities. 

Therefore, it is not surprising that Ford, as an American manufacturer, employer, and innovator, 

benefits from several provisions in today's tax code that were enacted in support of this sector of the 

U.S. economy: 

Research Credit. The four pillars of Ford's brand strategy are Quality, Green, Safe, and Smartfour vehicle characteristics that are highly valued by today's customers and supportive of 

national policies around fuel economy, sustainability, and safety. To advance in these core 

areas, Ford continually innovates, at a cost of more than $3 billion per year in the U.S. The U.S. 

tax credit for research and experimentation supports locating technologically innovative 

activities in this country. Many other countries have incentives for research and 

experimentation activities in addition to their lower statutory rates. The U.S. should not put 

itself at a competitive disadvantage in this critical area by heading too far in the opposite 

direction. 

Depreciation. Investment recovery provisions are important to Ford because of the continuous 

need to invest in plant machinery, equipment, and tooling. Ford expects to add over $6 billion 

in capital investment in the U.S. through 20IS-investment that will have considerable spillover 

benefits. Reasonable cost recovery periods, at least consistent with expected economic wear or 

obsolescence, are critical to support these investments. 

Domestic Manufacturing Deduction. Congress recognized the special advantages 

manufacturing provides to the U.S. economy when in 2004 it enacted the Internal Revenue 

Code §199 domestic production activities deduction. In the years since 2004, the relative 

importance of manufacturing to the U.S. economy has only increased. Because of cumulative 

losses, Ford has benefitted minimally from §199 to date, but our forward-looking business plans 

assume that our U.S. operations will receive substantial benefits going forward. 
12 


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We are hopeful that a lower rate in a reformed U.S. corporate tax code could be a net positive for an 

American manufacturer like Ford to permit continued strong investment in this country. 

Prevention of Tax Base Erosion 

Ford operates globally and builds vehicles where its customers live. The U.S. is Ford's most important 

market and, in recent years, Ford has earned a large part of its income in the u.s. Outside the U.S., Ford 

generally operates in relatively high tax countries, Ford does not have substantial foreign earnings and 

cash that have been taxed at very low foreign tax rates and that, therefore, could only be repatriated to 

the U.S. at a high U.S. tax cost. 

We know there has been a lot of debate about the best way to tax foreign earnings so that the U.S. 

remains competitive in the global economy. Ford does not have a particular position on the exact 

design and believes that any of several variations of worldwide, territorial or formulary apportionment 

systems could be workable. We see most countries' systems as hybrids. Systems generally understood 

to be worldwide often have territorial elements, like deferral mechanisms, while many of those 

considered to be territorial have worldwide elements, like subpart F-type provisions. We note that the 

reforms being discussed in Washington today are effectively hybrids. 

Ford believes it is appropriate for corporate tax reform to provide for some minimum leve! of U.S. tax 

when corporations shift income to tax haven countries. This would be particularly true if the U.S. were 

to adopt a more territorial system. Option B of Chairman Camp's Discussion Draft would seem to 

provide a workable model for a minimum level of U.S. tax, under which the U.S. would currently tax 

income earned by a controlled foreign corporation if such income is subject to an effective foreign tax 

rate of less than 10% - although using a threshold rate as low as 10 percent could be unnecessarily 

generous. We note that Option B may be more fair and effective if it included a sliding scale for U.S. 

indus ion similar to that employed in Option A of the Chairman's Discussion Draft. Global 

competitiveness concerns that could arise because only U.S.-based multinational corporations would be 

subject to Option B might be alleviated by a lower U,S. statutory rate and by the likelihood that other 

nations would follow the U.S. lead and enact similar provisions of their own. 

Option C would seem to provide an effective incentive to develop and own intangible assets in the U.S. 

Accordingly, Option C could help address global competitiveness concerns regarding U.S. research and 

development. Lawmakers need not necessarily choose a single approach to combat tax base erosion, 

Provisions could be used in various combinations to achieve desired goals. 

Transition Considerations 

The issue of how we transition to a reformed tax code is important to Ford. In particular, we are 

interested in how the transition rules will apply to foreign earnings and profits deficits, foreign tax credit 

carryovers, foreign taxes paid but not yet claimed on U.S. tax returns, and overall domestic losses. 

Conclusion 

Ford was born in America. For over a century, the United States has been Ford's home and its most 

important market. Ford wants to remain very profitable in the U.S. and to pay income tax at a fair and 

reasonable tax rate similar to the rates now levied by many other developed nations. 

4 
13 

f 

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

STATEMENT OF HENRY W. GJERSDAL, JR., VICE PRESIDENT 

OF TAX AND REAL ESTATE, 3M 

Mr. GJERSDAL. Good morning, Chairman Camp, Ranking Member Levin and Members of the Committee. 

Chairman CAMP. You need to push the button on the microphone. 

Mr. GJERSDAL. Good morning, Chairman Camp, Ranking Member Levin, and Members of the Committee. My name is Skip 


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Gjersdal and I am the vice president of Tax and Real Estate at 3M 

Company. I thank the committee today for the opportunity to address the important issue of tax reform. As you know, the U.S. corporate tax rate is the highest tax rate of any country in the world. 

In some cases, the high U.S. tax rate is mitigated by tax credits 

and deductions. These credits and deductions, however, often fail 

to adequately encourage the behavior they are intended to 

incentivize, and create competitive imbalances between U.S. companies. In addition, the Internal Revenue Code has not kept up 

with the rapidly changing international business environment. 

Virtually, every developed country has responded to these 

changes by adopting tax systems that provide their domestic corporations the tools to compete in the global marketplace. Also, part 

of this new global reality is that nearly 50 percent of the world’s 

public companies, and frankly many of our competitors, are now 

based outside the U.S. in Western Europe. They start with the 

competitive advantage in the marketplace because of the lower tax 

rates they enjoy. 

3M submits that the U.S. could take a few key steps to address 

these competitive imbalances while simultaneously creating greater 

simplicity and predictability for its domestic corporations. First and 

foremost, we recommend that the corporate tax rate be reduced. 

We support the chairman’s proposal to reduce the rate to 25 percent, a rate which is more in line with other developed countries 

that view a lower corporate tax rate as a competitive advantage. 

We recognize that a large reduction of the corporate tax rate 

would require substantial offsets from existing deductions and 

credits. For example, 3M utilizes the Section 199 manufacturer’s 

deduction, accelerated and bonus depreciation, and the R&D credit. 

The manufacturer’s deduction, provides a significant benefit to 

our company, since 3M has half of its manufacturing base in the 

United States. However, lowering the rate to 25 percent would offset the benefit of this deduction, and would also eliminate the complex and time-consuming record requirements required by the Section 199. 

3M would also support the repeal of accelerated and bonus depreciation to partially pay for a significantly lower tax rate. While 

depreciation provisions provide a significant benefit to the company, these rules merely change the timing deductions and result 

in an upfront cash flow benefit. Importantly, they do not impact 

the tax rate reported by the company in its financial statements. 

Finally, 3M would also forego the current R&D credit for a significantly lower rate. As one of the most innovating companies in 

the world, 3M believes that intellectual property development must 

remain a cornerstone of American business. 3M spends over $1.6 

billion a year on R&D. However, today’s R&D credit provides insufficient incentives to encourage R&D investment in the U.S. because 

it is based on incremental spending on a limited portion of R&D 

expenditures. And of course, its temporary nature limits its effectiveness. If Congress wishes to continue to encourage R&D here in 

the United States, there are numerous ways to substantially improve the incentives for research development and the ownership 

of intellectual property. 


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15 

For example, a so-called patent box could provide a low rate of 

tax on income generated from intellectual property developed and 

owned in the United States. This would not only encourage investment in IP, but it would also encourage its retention in the U.S. 

Lastly, 3M applauds the chairman’s inclusion of a territoriality 

system in his proposal. We agree with the 95 percent exemption 

system rather than the alternative systems that would create unnecessary complexity. The territorial system would bring the U.S. 

in line with most developed countries, including the U.K., Canada, 

Germany and Japan. In addition, such a change would facilitate a 

partial or full repeal of many international tax rules, which are 

amongst the most complex and controversial rules in the Code. Replacing those rules with the territorial system would greatly enhance simplification and transparency. 

Again, we thank the committee for inviting 3M to speak today. 

We support its efforts to achieve comprehensive reform with a substantially lower rate and territoriality, field a simpler and more 

transparent Code, and to help American companies compete in a 

global economy. 

Chairman CAMP. Well, thank you, Mr. Gjersdal. 

[The prepared statement of Gjersdal follows:] 


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Committee Oli Way, ami Mea"s 

Ht'"aJ-ing on ~~l'ax Reform and the l:.S. 1\1anufat~turing St'ctor~' 

July 19.2012 

Writt<'l' Statn"eut of Henry W. Gj'·l'sd.i 

Vice President of T a, 

3M Company ("3M") appreciates the opportunity to testify before the Committee on 

Ways and Means on "Tax Retorm and the U.S. Manul,jetul'ing Sector." 

3M is a large U.S.-based employer and manufacturer established over a century ago in 

Minnesota. Today) 3M is one of the largest and most diversified manufacturing companies in 

the world. We are a global company conducting the majority of our manufacturing and research 

activities in the United States. 3M thanks the Committee for its leadership on the critical issue of 

tax refonn and for considering our perspective in this imp011ant debate. 

Our comments are written to share the practical impact of corporate lax rerOm1 on 3M. 

3M respectfully urges thc Committee to continue making the global competitiveness of 

American businesses and \vorker~ a key objective ofrefonll. From 3M's perspective, this means 

a significant reduction to the corporate tax rate and the adoption ofa territorial system. 3M 

generally supports the approach outlined in the Ways and Means October 20 II discussion draft 

on a Participation Exemption (Territorial) System. We reCOb'1lize that to relonn the system in 

this way, all cunent incentives. credits and deductions must be reviewed. 

3!\1looks [llf\.vard to working with the Committee on achieving meaningful and 

comprehensive tax reform. 

Background on 3M 

3M, formerly known as Minnesota Mining and Manofacturing. is an American company 

currently hcadquat1Cred in St Paul, Minnesota. The company, created in 1902 by a small group 

of entrepreneurs, initially began as a small sandpaper product manufacturer. Today, 3M is onc 

of the largest and most diversified manufacturing companies in the world. 3M is home to such 

well-knO\\'n brands as Scotch, Scotch-Brite, Post-it@>, Nexcare@, Filtrete®, CommandtE, and 

Thinsulate@ and is composed of six business sectors: Consumer and Office; Display and 

Gmphics: Electro and Communications: Health Carc: Industrial and Transportation: and Safety, 

Security and Prokctioll Services. 

Ahead of their peers, 3M's founders insisted on a robust investment in R&D. Looking 

back, it is this early and consistent commitment to R&D that has been th0 main component of 

3M's success. Today, 3M maintains 40 different technology platforms. These diverse platforms 

allow 3M scientisls to share and combine technologies from one bllsin~ss to another, creating 

unique, innovative solutions Cor its customers. The financial commitmcnll0 R&D eqllated to 

S1.6 billion of R&D spending in 2011 and over $7 billion during the past live years. and 

produced high quality jobs for 3900 researchers in the United States (and 7000 total worldwide). 
17 


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2 

The results are equally impressive with 571 U,S, patents awarded il12011 alone, and over 40,000 

global patents and patent applications. Over 32% of2011 sales came from products developed 

in the la~t 5 years. 

3M's worldwide sales in 2011 were nearly $3D billion, 3M is one of the 3D companies on 

the Dow Jones Average and is a component of the Standard & Poor's 500 Index, Owned by 

millions of shareholders directly and jndir~ct1y through mutual funds, 3M has consistently 

delivered positive results to its owners. Ii has paid dividends to its shareholders e\'ery quarter 

since 1916, 3M paid dividends of$1.6 billion in 2011 and a total of$8,2 billion over the past 

five years. Most remarkably, for the la~t 50 consecutive years, annual dividends have 

consistently increased. 

fhis Sllccess is attributable to the people of 3M. Generations of imaginative and 

industrious employees in all of its business sectors throughout the world have built 3M into a 

sllccessful global eompany. 

3M: Competing in A Highly Competitive Global Economy 

3M is a U.S. company that manuiacturcs and sells its products throughout the world. 

Headquartered in St. Paul, Minn~sota, 3M has operations in 28 U.S. states, ... "here approximately 

half of 3M's worldvv'idc manufacturing opcrations arc locatcd. Internationally. 3 M has 

historically had a large manufacturing presence in vVestcrn Europe, Canada and Japan. 3M 

employs approximately 33,000 in the United States. In addition, 3M conducts over 60% of its 

worldwide R&D acti\'ities in the United States, The U,S, market currently accounts for 

approximately one-third of 3M's global business. 

While its U.S. presence is strong, 3M is increasingly a global company, 3M operates in 

more than 70 countries and sells products into more than 200 cOlmtrics. In 2011, approximately 

two-thirds of 3M's sales \Ven.~ outside the United States, a percentage that is projected to rise in 

future years. In the current global economy, \vhere international markets are growing faster than 

U,S, markets, being able to compete successfully in the global marketplace is critical to 3M, 

Global market competition ha~ made "localization" critically impOl1ant [or the 

company's future success. If 3M is going to successfully compete against its foreign 

competitors~ it must invest in new facilities in those foreign markets to be closer to its non-U,S. 

customers. 3M mllst hire intemational employees with an in-depth lmderstanding of their 

markets. 3M's sllccess has depended on our ability to tap into the talent of a richly diverse 

global employ~e base to share ideas and innovate. Local knowledge and execution, supported by 

3M t~chnologies. products, and brands, is an overarching strength and competitive advantage. It 

enables 3M to provide international customers with leading-edge products, strong marketing 

support and responsive service, thereby achieving borderless customer ~uccess. 

This business-driven need fix further localization, as well as the need to simplify 3M's 

historically complex supply chains, has led 3M to adopt a regional sourcing initiative. 3M 

pursuc~ morc customer-focused supply chains with an increased localization target,,~ meaning 

that more of our products sold in a region will be produced in the same region as that of the 

customer. This shift to greater localization is not tax-driven, but rather results ii'om competitive 

pressures to better serve the needs of our global customers. 
18 


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Reforming the Current U.S. Business Tax System 

Tax refonn is essential to ensure long-tenn competitiveness of American businesses and 

workers. As the Committee knows. thc US corporate tax rate is the highe::..t tax rate or any major 

country. In some cases. the high US tax rate is mitigated by tax credits and deductions. These 

credits and deductions, however, often fail to adequately encourage the behavior they were 

designed to incentivize and uften L:reate competitive imbalances between US companies. 

In addition. the Internal Revenue Code has not kept up with the rapidly changing 

international business environment. Virtually every developed country has responded to these 

changes by adopting tax systems that provide their domestic corporations the tools to compete in 

the global marketplace. Also, part of this new global reality is that nearly 50% of the world's 

largest public companies - and many of our competitors - are now based outside of U.S. and 

Western Europe. They can start with a competitive advantage in the marketplace because oftbe 

lower tax rates they enjoy. 

3M submits that the U.S. could take a few key steps to address these competitive 

imbalances while simultaneously creating greater simplicity and predictability for its domestic 

corporations. 

Significantly Lower the Corporate Income Tax Rate. First and foremost. \ve 

recommend the corporate tax rate be reduced. We support the Chairman' s proposal to reduce the 

rate to 25%; a rate which i~ more in line with other developed countries that view a lower 

corporate tax rate as a competitive advantage. From 3M's perspective, the current high corporate 

tax ratc has two adverse effects on domestic investment: it reduces the after-tax return on 

domestic imestments and creaks signitlcant inefficiencies in the deployment of the Company's 

capital and the management of its balance sheet. 

Since 3M maintains the majority of its manufacturing and R&D acthities in the United 

States, our effective ta.."X rate is one of the highest among our competitors. For 2012, 3M is 

anticipating a world'wide effective tax rate of29.5%. In 2011, 3M's \vorld\vidc tal( expense was 

over $1.6 billion. Tn all increasingly global marketplace. 3M's high effective tax rate is a 

competitive disadvantage. 

In addition. the high U.S. tax rate imposes an undue cost batTier to repatriating foreign 

earnings under the current international t<.LX system. American businesses should be encouraged 

to successfully cumpete in forei!::,'11 markets and repatriate foreign earnings back to the United 

States. A significantly reduced corporate ta>. rate would eliminate significant inefficiencies in 

the deployment of the Company's capital and the management of its balance sheet. Vie recognize 

that a large reduction in the corporate tax rate would require substantial offsets from existing 

dedl.lctions a.nd credits, For example. 3M utilizes the Section 199 manufacturer's deduction. 

accelerated and bonus depreciation, and the R&D tax credit. 

The manufacturer's deduction provides a signiJicant benefit to om company since 31\'1 has 

a majority of its manufacturing base in the US. However, lo\',,:ering the tax rate to 25% would 

offset the bendit of this deduction and \vould also eliminate the complex ~md time consuming 

record keeping requirements. 

3M would also support the repeal of accelerated and bonus depreciation to partially pay 

ror a significantly lower tax rate, While the depreciation provisions provide a significant benefit 

to the company, these rules merely change the timing of deductions and result in an upfront cash 
19 

f 

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


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t10w benefi!. Importantly, they do not impact the tax rate reported by the Company in its 

financial statements. Timing benefits like accelerated and bonus depreciation do not impact 

earnings per share. 

In addition, 3M would also forego the current R&D credit for a significantly lower rate. 

4 

As one of the most ilUlovative companies in the world, 3M believes that intellectual property 

development must remain a cornerstone of American business for their success. 3M spends over 

$1.6 billion a year on R&D. However, today's R&D credit provides insutlicient incentives to 

encourage R&D inyestl11~nt becaus~ it is based on incremental spending on a limited portion of 

R&D expenditures. And, its temporary nature limits its effectiveness. 

If Congress is unable to secure a significant rate reduction or wishes to continue to 

incentivize R&D here in the U.S. in a reform package, there are numerous ways to substantially 

improve the incentives for research, development and ownership of intellectual property, For 

example, a so-called "patent box" could provide a low tax rate on income generated from 

intellectual property developed and owned in the US. This would not only encourage investment 

in research and development, but it would also encourage its retention in the U,S, and address 

concerns regarding the migration of IP offshore. Other countries, such as the Netherlands, Spain 

and Belgium. have adopted provisions that permit a deduction or exclusion for a portion of 

royalties received for the use of IP created by the licensor. 

Territorial System. The worldwide base orthe current intenlational tax system 

adversely impacts the competitiveness of American businesses which operate overseas for 

business reasons. like 3M, rdative 10 competitors that arc based in jurisdictions that exempt 

foreign income. It is important for 3M to he able to manage debt and reinves.t capital on a 

regional basis. A territorial system would allow the movement of capital across country borders 

\vithont triggering a US tax consequence, giving American companies the ahllity to deploy 

capital errlciently in competing for growth opportunities abroad. 

3M applauds the Chairman's inclusion ofa territoriality system in his proposal. We 

agree with a 95% exemption system rather than altemative systems that \volild create 

unnecessary comp!cxity. This approach accomplishes the policy objectives of exempting foreign 

eamings and limiting deductibility of related U.S. based expenses in a far less complicated 

manner than other proposals. A territorial system would bring the US into line with most 

developed countries, including the UK, Canada, Germany and Japan. In addition. such a change 

would fully or partially repeal of many intemational tax rules, which are among the most 

complex and controversial rules in the Code. Replacing those rules with a territorial system 

would greatly enhance simplification and transparency. 

We agree with the Committee that anti- abuse rules arc necessary to prevent the erosion 

of the u.s. tax base. Regarding transition rules for pre-enactment foreib111 eanlings, 3M, like 

many companies, has substantial foreign earnings pennanentiy reinvested in active businesses 

outside of the u.s. The up-front tax impact on accumulated earnings that can nevel' be 

repatriated to the U.S. need to be considered, along with the complexity involved in determining 

the accwnulated undistributed carnings for companies that datc back over 50 years. In addition, 

3M suggests this tax should not be imposed on accumulated earnings that are invested in assets 

used in active businesses since theses earnings will never be repatriated 

Summary of3lVl Tax Reform Recommendations 

We thank the Committee for the opportunity to share our perspective as an American 

employer interested in preserving and enhancing the global competitiveness of American 

businesses and workers. 

As a U.S. based multinational company that is contending with many foreign-based 

competitors every day around the globe. it is critical to reduce the U.S. corporate tax rate and 

adopt a tcrritorial system to help make us morc compctitive. 

We sincerely appreciate the significant work you and the Committee have and are doing 

to crall a U.S. tax code that levels the playing lield lor U.S. based companies and encourages 

morc investment, manufacturing and johs in the U.S. 

3M stands prepared to work with you in any way we can to support you on this critical 

public policy matter. 
20 

STATEMENT OF SUSAN L. FORD, VICE PRESIDENT OF TAX, 

CORNING INC. 

Ms. FORD. Good morning, Chairman Camp, Ranking Member 

Levin and Members of the Committee. My name is Susan Ford and 

I am the vice president of Tax for Corning Incorporated. We are a 

glass technology and research company located in Upstate New 

York. Mr. Reed gave a great background for Corning, so I won’t 

cover most of that, but I do want to hit a couple of points to give 

us context for our discussion. 

Corning does have approximately $7.8 billion in sales as of 2011, 

and we have 29,000 employees worldwide, of which more than half 

of that payroll is located in the United States. Corning takes a tremendous amount of pride in its heritage as one of America’s oldest 

and most innovative companies, the company that has been said to 

recreate itself. Corning spends about 10 percent of our global revenues in R&D, about 98 percent of which is conducted within the 

United States, and mostly in Upstate New York. We have manufacturing in 11 of the 26 States in which we operate in this country. 

Corning is also a global company, however, approximately 79 

percent of our sales are to foreign customers. Corning operates in 

many industries where the customers and competitors are predominantly or entirely located outside of the United States. To survive 

and prosper, Corning must operate there as well. I will give you 

an example in our display business. Display is our largest segment 

at Corning and it is segment that makes the LCD glass in the televisions. The glass that we actually make is formed in sheets that 

are about the size of a king-size bed and about the width of four 

times the human hair. So you can imagine that shipping that kind 

of glass, nothing good happens when you ship it thousands of 

miles. 

For that reason, we often located our manufacturing facilities in 

the same, obviously on the same—frequently, excuse me, on the 

same piece of land as our customers. Because foreign markets are 

a larger proportion of the global consumer demand, we must be 

able to grow both not just domestically, but internationally. This is 

true for Corning and many other U.S. manufacturers working to 

compete in an intense global market. We need tax policy that is 

competitive while continuing to incentivize innovation and job creation in the United States. The current Tax Codes, manufacturing 

and R&D incentives, tax rates, and worldwide system taxation are 

complex and simply no longer globally competitive in our view. 

I will give you a brief example for Corning. Our U.S. effective tax 

rate in 2011 was approximately 36, 37 percent. And our foreign 

rate was approximately 17 percent. This was principally due to the 

fact that some of the foreign jurisdictions in which we operate provided significant incentives for capital investment. Again, these are 

business decisions that were made to be close to our customers because our product is difficult to ship, but additionally, it receives 

some incentives that allowed us to earn income at some lower foreign rates, particularly in Asia. It is very common in Asia. For this 

reason we are very heartened by the growing consensus among 

U.S. policymakers in general for the need to reform the U.S. Tax 

Code. 


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21 

Some of the points, I will make are a bit repetitive to the prior 

two witnesses, but I think they are important enough to have another mention. Two principal points. I think the lower rate is very 

key. The lower rate will allow for a couple of things. One is its universal applicability, right. It will help domestic manufacturers. It 

will help companies that export from the U.S. It will help companies who are competing with foreign importers, for example. And 

secondarily, I think that the lower the rate can go, the less likely 

companies are incented to move income offshore. 

The second part of Mr. Camp’s proposal that I think is a principle that improves competitiveness is the territorial system. This 

is particularly important to multinationals like Corning who are 

based in the U.S., have significant employment in the U.S., but 

must compete with foreign companies abroad in their home countries. 

We believe the territorial system—the nonterritorial system currently is a disadvantage to U.S. companies because it costs more 

for us to repatriate trade income, versus our competitors. 

We do acknowledge that moving to a territorial system presents 

some transition challenges and we acknowledge Mr. Camp’s proposal of a foreign earnings inclusion as an appropriate response to 

that. We appreciate the reduced rate on those earnings because 

companies like Corning often have earnings abroad that are in capital and in buildings and infrastructure that can’t be returned. This 

presents a particular hardship for companies like Corning when 

tax is on all of the income but the cash cannot be returned to pay 

those taxes. 

I think as a final point, it is important to note that base erosion 

principles, I agree with Ford in the sense there are three of them 

there and a balance can be used. We do believe that option C encourages companies to keep their innovation here in the United 

States, and their IP here in the United States because it does tax 

that income at a lower rate. It allows us to be more competitive 

with other companies, again, who have these intangibles offshore, 

and pay lower rates on their royalty income. 

As patent laws around the world become more sophisticated and 

the enforceability improves, historic benefits of having U.S. technology ownership just no longer serve as sufficient compensation 

for a higher U.S. tax burden on the related income. 

In summary, we do believe tax reform is a necessary action for 

the competitiveness and economic health of the United States and 

the manufacturers in it. For U.S. headquartered companies competing at home or abroad, the current system is cumbersome and 

inefficient. Many developed nations have modified their policies to 

facilitate competition and encourage domestic investment. The 

United States should not allow its trading partners to gain an advantage through tax policy modernization. Moving to a competitive 

territorial system with a competitive tax rate will result in benefits 

both to the United States and its manufacturers. Thank you, very 

much for the opportunity to participate today. 

Chairman CAMP. Thank you, Ms. Ford. 

[The prepared statement of Ms. Ford follows:] 


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nl"" I. S ...... t'''''' MId I lO, ,he Vice Pmidenl ofl· ... for C"",IOl!.lno:<KpORied, • g\o» 

loohnology Mod ""'n"r""'~l . """".,.1 1oo.'1",d in (lie "1"I' "'c II ..... ofC' .. ,mlnll. Now \'<>:1<. 

ThotII: )'bU 10. Ibo of'PO"uni(y ... 'f'I'ok "' yw ood.y, I .. n ~_ '0 ",ovid< Caminj!" .iew. 

"" "'" r<r",m, 

C"",i,. Inootpu<llCd i • • J~l )"'0' l~ con'l1"ny .. ilh i", ,.'o/Id 1I<arl.j"aril"" in Comi,,¥- N<'w 

Yon:.. Tho «lnI!'''''Y ..... fuloOOeO by AlllOt)' Ilou lhl"' ~ IIIe gta!-JU<O(III.llIlralhof orb""" 

C.....,,,,,",,,,,. "'>PO Ilou!h"",. w,..,,.... on...,\><! of'~fs "",,,mi,, .. for many )'H'''' CotnIna'. 

>kJ<k ;, II"blioly lnodcd Of] III< N<w Yuri: SL<o<k ""chln¥< lnd II< ...... ~,1 ,'.p" 'l'I""""imol<ly 

II g Dlm"n. S .... ln 2011 "" .. "IlP""i"""ly S1,1 flilli"" ood we hal'< 01»"1 2~.OOO 

"",plo~ I>mtdwlde wilh 0."". half of .. ", pl)'l'Oti ln I"" Un il«l SI.1tO. eo. ... !\!: " k .. . 

1,0000eMoo' ~I"(""l\ ofpri<IC II< III botilO\g'e " """ or A", ... I ... ', ol<ks! ..... nKl&l irrno .... II,'. 

"""'PI"I<:o. (.''''.'.8 If""' ...... "",,"I 1000f 0Itf globol ... enoeo on R&D, orrd it:! princil"'l R"-Il 

.,.,,1<' ", i" "1"'"1< Now Y<rfI<. Continght&"",,,, ... kl·, ,,,.,.. 0.1 .. ",,«1 optlcol rot .... 

"""'uf6cturiO~ pi""" in Wllonl"ll''''' ' O'II! Ccnoo<d. N~ C.roli ... 0 'f<'clOIIY al ... 

"' ..... f""luri"~ fll<illly in II.,ood"",,<&. K.",oci.y, ond ~ ,1lIIt "r(he *' .'.on""'>" .nil di .. ", 

",niMiIm. """"t,1 """"0101 "",nltr.o"oi,'Ii focil1ltc. In 0 ' .'011 lowo in I"""" New Y",k, 

""iglrbo{iull our hoadq' '''I= in C""'i"1- Cooni"1J. <rp<n< .. in lS ",10 ... ""I.., ,,,,,I,,,liog ~ 

_<q>n:~wJ by WI~ !IJ'Id MearuM",,,"o,,· c.JilUmi •• K.r"""k ~. M.....cl" ... 'Ji.. ~w 

....... y. r",,,...yl,,,nia, Ten""""",,,. 'ocI T ..... h ... oll""r"",,,,lnll in II oflIoo26 .... ""lo 

..tUclr ,,,, Ira ..... i>JU<n"". 

0.., ,he I,,, 161 ),<ors Co'n l,'J hood.<li,'=d i""" .. 1ion lhal ha.';grrif"","l1~ '"",",,!Nlho WIly 

the world """"''''''''''I.,.. .",tduo!. "oedic.l r=atelt. ,",,1001' 'Iro eo.i"""".,,I, ~"-.. II> (<xod. 

0IId i. "' I\ ~".d, /;<>mlna n'-<le lire aJ ... ."><1"",,, Ii>< 1_ F..cII<OD·. hg/>t ""lb!! ... ""II .. 

niilro.:l l..,,,,,,, ,.hleh (:.(oUjd "" Il",."d IUlo,... tnl .. ><1 ""W. In U .. 19so.. C",,,iog do"lop<d 

C""'iltKW ..... "" 1'yI"". ",hiell """,0£)"00 """",l>Iy,,1I\ """,, io )'lIO, . I(,Irtno. l:omlng .... 

lb. III< --":I', 1o:><Ilog , •• nur""" ..... or ,'Olhod" "'11tI<vl<lo" wl>es rOt~. In III< 1'J7OJ. 

l'omin~ invwle>1 G()IkoI fllx-r """ =.",1" iInn<),,,,",,,b",b$l""" OIIIbIing !lit tallilylit: 

"",,,..,1\<1. Todor. Coming "Ol" i ...... '" m"""r ... ,Ute ~ ",n QI'liCOlI Oboto-. <>~It Oftd Irord"",,,, 

."" .... ,ipl"out fur II .. 1<1""'~"'" mi<a""'" i,olullry, . , "'<II •• i!Io "".,Dio ... b>lr>le, (!)o 

"UlOm(>biI"""" b.,,,y duty dlem .... Iy"< ","V<l ..... Atldill"""Uy "" .. ~ ""..,",Iy lho- wortJ·. "",,", iq ,Ile pnrdu01;"" Qf liquid cryl",1 olispl.y ,,-....... , ... LCD ldov&'on . .. '" «on",,, ... 

:1<.,...,"", You, "otrb<ic ph""," 1'''ly r<3!""'" I dan ... , "" .. ,..,1 Comln'S di5rloy u.1_ ",UN 
23 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 12 here 80844.012

Oorill. UIa<>. "'" Cmn,11j,\ ho, ",n".i"l r.,,,ily orlife ",ien<e1 ","'uci' u><'<l in 

plwlllOOOftlli .. 1 ",>01 bi<>lo<ioo..,1osl' mooan:h. Coo"ing """ ~ rell"note 10 m><).e 'no 

rmhlon" . Mc.Io.l <>fT .. tn..,~~ row li,""-," III"'''"' . 1t "fthcll: lothookotJ .. wered ... lop«I 

II'ld """"in Dwn«I by Comi"llln""""",led in ,be: Vni'ed SI.IOJ, 

Ccmi"1I io 01", • 810 .... 1 O<llnIW'Y. "PI'fO'iffilll<ly 19% of out 061 .. OK ro forci", < ... ~ 

("Mni"", QP<I'OI<' in iodu!lne. whew ClI$Iom= """ """'pell, ....... ",odto,ni, .. "Uy Ioooled 

"""ide <If ... Uni'ed SIIoI ... 'To "",vi"" ood PfWP-T. omin~ "''''' O!"' .. ~ tI""" .. ... 11. II, ItO 

... "'pl •• Chi .. ,. """""Ily !t .. , 1''1''III''''''lh co"n'll' in tho "o>rld. 1 .... 1 .... Illo ""'"""'"_ 

"", ... 1 fibot '-n>=l ln ,be: ...."rId. tho "","ber ", .. ,."10 I""~" in ohe WOII~, .. oJ b<wo,illlllbe: 

.......!d •• "''G''o( "".."m," ofLClJ 10'",101"" •. 

"o:l<"I<I' IcuI; at .... fli ..... ,. , ... " ,><>IOW" "'W".nt ~~Ihe In'~ oreon.in~·J 

~Ioba l •• oo poM"I.,lyo .... 11.;..,.1"'''''''''' Inlbe: "",",ofC ...... ing·, j)isp!&y buol..,.., WoO .. 1I 

"'" .p<"<i.naJ I.cD it,... .oMw'es 10 monUfoc:lUiWI of "'i""·",,,,,,i, leI) 1"'0<10. 111<",.", 

"" pond ,nol«,,, 1o<~1<:11 i" II .. Uni,c,J Slot ... Thoy ttl< "","loci in Til"",". J.p'o. Ko' ... U>l 

_ rtI:01Ily. Chi ... Ow l.CD gl ..... r", .. ,ed in I.~ oM'I ............. IOftlot" ,han ...... 1 oni .... 1 

'-'>"'" • ~In~';'" b.:d 01 I Ihi.:kn.,. or.wrox1n .. ,oIy r.,o,,[rnn .!Io, ~f. hum .. h. i •. VU" 0311 

(,"", ... 1Il0l Hille good '"" hoppo" !<> !hi> glo'" it il ;, .hipt)«l U>o~. of RIlle!. In n ... ~ 

U~ <HlI mc:llirIt; pIonl •• ", 100.",<1 pl .. ~~ 10 "'" OilS1OO1<B 10 •• bld 'hi>, In Ih. 

imlon«.< ........, "" ",1l$I .~Ip Ihi.< gta.< inlOmlll'OII:IU" lbe: ..... kl\ll;ng P"""''' is il..,lf !"Ilo,led. 

Il<eau .. fUl'Cign ",.rII." "'" ,be Il\Ig<'l propor<"", om .. global COO>\I.OlU demond, ,," """" l>c 

hI.,~ VI'" '""J"st don>ts"Cl>II" bulinl<");l'ifllmliy, "[hi, i" NO f.,. Comi~"'" ,,,,..,,. uU>er 

US. n,., .. ",<" lVOIIti"8I" oornpel<1n .. In' ..... gl<lbol ......... W. noed W( pol", ~ 1n.1 i. 

'"""",I,Ii"" while .",, ln~inlilo lI>ct>ui.i"" i"""".,i"" ondjob ..... Iion ill lho l!n;l«:I S, ..... 

'n", """,",' no_ <Ode', manor"''''';''t. .. ><:1 R.ln ill«ll'i"",. In ,,"to,. tmrI """Uw'.tlo . ,... .. n of 

I""O\i"" "'" """"lex .. >J no k,"!.'iM>olly""",~ili,' .. 

III"""can OUIIi\Iu..u.,..". "'" at • di>lir.ct dilndvon"io 10 CO!n~jl"" 1-'q"",I ..... l" "'~ 

00IIII11 .... Sp«ifiC!lUy, fomgl'l n\lll\U(JelW'<Ofl' Ul\i!'urmly foe •• Iow<, ""'pont" I"" ~.Ihon 

U.S. ""'"ur..,'" ...... IUId ~i u .. lly.1I """,_1< 0 .... ' 1 •• itori,1 JIJ wIoi<h """'Hm'", 

i",·_ ,1 boIh abr'nM and "toome. In 1idJ11K>n.. ...... y furcill" ,"""uf""""" .... joy m ..... etobuot 

It&U i""<nli""" ~"'" do Ammo." """'lW'i ... """. 8,.,,,i,,, num"", enjoy ",hot innoval;"', 

i''''''''I;~ Ii ~",,".nl """eo," TOII"'h< •• I ....... foctOl'>""" IIi"" r=i~n 'n..,~f",w .... . 

• i"i~<o " O<lll" 0"'" Il><i. AllICI'kan OO\IlIICrpoot1 •. llti. ,it"li"" i, "," nc:w, bul hOI bowrnc: 

~I.d in =1 tOl" '" f_tWO go .. mnItnlJ .... VI: illC!""'\gty I"mod '61", IowIO hclp 

llIe" """POO'''' "''''''''''' i,,,moal.,u.lly, 

II, on ~~'" ;n 20 II. Cornin;', .~. elfetl;"" I .. """ ("H'llt'"). ;,,,,1,,,1i01l-'1O'" 1 ...... .... 

• """",;,,,,,,o]y ) 1;% and our , .,."". f",.lj!II [;'l'R "' .... 17%.' In 2012. wttH. both "'I .... t 

' TIoio ...... --...'Il"'Iot_ .... """""" .. "' ...... -...1'IIIIoIoI, _ .... lIIIok • .-u,$. t;i""p __ . ... _or""'Oy -...( ....... ........ oI .......... ..... ... <IOo·'.-oIOI>II .. _1o .... 1l~GIo'" _ on" ... I<01 "_ "P"''''_ .. _""'<ok._f .. \J .s O"~,_~ 
24 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 13 here 80844.013

inanainll- II", di""';l~ II<, ....... U <lilt U.s ...... ("",!sn ""., 8JfIWII ~ oru", <xpi""i"" or 

til< u.s. R&D ot«Iil .1Id ,II< 1ooIo: ·1""'"Kh ""OjIIion 10 Subpo,n f, C"""ng·' ox",nple.t>ow. ~w ~;rr~ in ' .. 1o_...J i....,.'i_ ... """" 0' .......... ""in .. 1<111>0 Unil«l S .. ", am 

,.,..11 in U.S. "","pani .. 1Ia"'"~ t"tw.:r .Au-\U. dol .... I" ow«' lhan ..... ibn:il!" """lp,O!h~. 

w. 1110,01"","1"<. V<:I)I .... n ..... d by Ol1"l';'1,i; """."."." "nlO"S \/.s. ",,'i<~IIUI~us un ........ 

10 ,.r",," ,'''' l'A~. 1>< 0Qd.>. K.,. M<mbet. oflhc lIu""" .. .:I S<'n"~". "dl .. ,,,,,Obo,,", 

AIl.,in;"ta!k>n. ""V<: .n ""bli<l~ ."'~ 1"" in"",""""" of tax ... r""" In Ihc lin""""" ="'''''Y o"d "","politi"",,,,,,. S,..u"~ .... , year. til<' W.~. an<! M.,... onJ Sc,,'~ Fi~ ConunillOci 

hit ... hold ..... inl1" <xpI<>ri"lllbl, !Opk.IId",~ "O"li IIi,,~ !O 010 ... , .. ",id<n<'<d by "'" ,r.ee1ing 

t<>:b~. In o.:1Ob<r 201 I, Cl'Iainnan c.",V ~eaood hi. ~ .......... , dran "" ,,.,,.,.,... lOll ,dom', 

whkh ..... bo:li<'l. ""um.-d Ib.·con.Of •• "" " fofworll tlconIati<Ally. Lao, mon.h, Chain"" lJauo"" 

p'uvidcd .. , ""'i". ufloi, """,&1111 in • mtIjo< ,p«<h on tax .donn, o<JI"'8Iba' od, ... """",""" 

III ... " "''''''mI ""!'»<>tN. ra'" rnd !iIlil!.:d 1" ld'I'iLorial '1"""" in ....-do, '" bo<Qo"" "'''''' 

COI"I'.:!I';v<:. """ the 01>0'"" Ad,nin;'l",ti..,.100 ha> Jt<:UtIIilCd ,1"10" out co""'" I ... 'Y".nt i. 

"_"",i,ive, di",,,u busi ..... dt:ci>i"" n .. li "~.nIl .Iows """""'''''' VO",h. lIoving .uth bn"", triroolll"" 0fVt<"""1 "" ~ .... u,"""" ,,(til<' f...-.!atll<tlloll'f">!'em ;" in , ... ,to sisnil1C<U\l 

~!, aod ""' . .. ,1>< .. 1000 VCr)' opI'.,i>Iio on ,he 1X»iI'«''' fur meoni'll!f.lln ,,·form. 

Boat_ CIioi""",, C4n,p', 2011 d~ dtttl I, Ih. """' doIailed !egi.>lOIi"" ~I "" ,II< 

'obit, _drlly.o"" ... n .. If'"'''''''' wilh it in "'n<!, Cho'""""c.."~', poQ~_1d 

p"',ido • "'" 00<pUr01C ntc of2.5%, • 95% dedueli<Ht f<l< the fb .. cll!I\-OOUItt pot,".t o{ di.!dmJ. 

~ {rom conIroliN fOrtiS" <»I"J"'<IOliont ("CFCo"): no addi,ionaI al l"""i"" "fU.S. 

;"".oml"JX'n>elI _h o. int ....... ' poMi> 10 f.,m&n .. ""'pI .. mu.p; • ~""l~ r", 95," of 

",In on d~liolt of $I«~ in """lin ..";,,, CFCI (with nR dedu<lion f ... I ....... on ouch 

,,4!IIacti .... ); impooilion or. 5.25% I"" ~ •• IUbj ... 10 ... elw"", '" 11""<0<1 ,Itt t~ 0_ os i<>nII ., oiKM)'eIIr1O. OI' pn:-.rr .. ,i .. dOlO rorcil!'1 .. ,"i.lP; aoJ j.VO,;,,;oru-lOr 'ho I""vtftll ... of"... 

..... i .... 

w. b<1~ a..im ... Comp', di",""'" .no """,";n. "' ....... 1 ~i.""' .. Ihtt oould I~ 

U.s. "'""l"'li'i ............ 1\ ........ '"iaJ rod"",i",, I. ,110 .... .to<)' "x ... ", i. eri,;""I, 1\ .. ~tuI"'Y "'"' 

rar' .. the "onq;" .. ,. of <lUf n!Oj'" 'I1I<IinS 1*1""" w""W omI:< .igotir ... nl PI"""' 'o\01U"d 

le ... li" ~ lite """'pet;'i .... Io"d,"""" m.I ",-",Id be """" .If .. 'i .... , ..... many currtnl intaolh ... in 

_I;IIK ,hal putpIIO<". Tit< "" ... Qbviouo opJICOl "fo tilflir..,..\1 ,t>< nIIt rn{"",,,,,, u II ... It 

,,"wid help 011 u.s.<:OIItpO>Ilcs _ U,S·booed ",ol'i .. ,:"",I .. U.S. export"'" and U.s. «>t npni .. 

' .... 'd, operal. slrk11y """'-I< ... dly. J I""""",. the tho ... ,.,. 11M '" m.~t ... , .. ""' .. "I.k .. , 

'N"",I"" ",,"pkd wi," • bnoo>Ii<nm~ oflhe 10);. 1>0"; would 110"" limit«! roW,i'" .A41 ..... """Id 

1Ot'<lIIlIl hUH U's. """"",iii ......... " .. ""r ..... ' "'!~ ""I """"",panicl b~ " .....,.'" of ex.iSlinS, 

<H\"" i""fficl""" , .. _filS I. !. _r, 

Mr. Corup', p<Qp<IOOIl £<or • lonil<lriall •• '~.Iem «rolJ do .. ~'lI<h ... rA'o «:<1,",,100 10 fu!Ier 

l'.S. <0,"1>'1,(; ........ Mom of,be _Id', '0< <)'Ilcm. on: lerritorial, OlCdudin8 rru., lU u .. 

~",i'y uflbei .. 'l><PO)'<f·' r_ign ......... ;"""" .. 1ncl""i" ~ 1'0",;", di.;o.,m Tho """"", 

U,S. ')">IOIn or ...,.W,v!6e l ..... iQn i, "jI<!I<i~ '" ",mini ..... , di"""","" "",I,i.OI.,. .. 1 <",,,,pat,i .. 

f,,"" h<od'lI"fl<r1ng;II lbe U.S., ,e,d .;"""''''goo U.S. """pon'" r""" '<p"trialing foreiil' 

..... ;O~L Movina III • """'l"' ilh'~ 'OIri!Oriol ')'11'''' will odd,e" on of lhe><. i_. <:«111"1 
25 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 14 here 80844.014

.~od I" lhe C.,np propUOal' , Ii<ll fI".liM ,'[r,,,,, 1"''''''''' uff ... igo eamu.g. in p ...... of"" , 1Iot_ •• po' .... dis;>jlowa"" •. Thi, .".,.,..,h ;. ~"'i .. lo in tcrnl(ooi.1 .1"' ...... 00 

rrO'lO\o> oi,nJ'lK:i'y, 0. .. fwll>erin¥ P"ti11 wi ~ 1I1<>boi 'Y''"''' ond ~O>ci!l$!/It Coo! oflll>l",,)'., 

«><uP/11IIIO< and ~"""'''''''I.nr~_n'''L 

/>1<>\""1 '" • l"";lorio' .y!ll"" m.... ~ " .... ;llDo ehaH'"i<''' _h .. how j"""" ... 1Imtd 

abloo\d ... "" '" ,hc odojIIlM oflbc ICrrilMioi ')'O'e .. ohwtd be " .. ,ed . ftt< odop!iooI, So",. 

"",riC)' maw od""""t< '"briDQina e'm)'thing ""1'(>.0" by ... ,,,, .11 ....... """"'''''' r"",ill" ,,,,,,,inl" 

im,>K\Ii."'ly. w. 1><1;.".11111 Mr. Camp"l""I_11<> .. 6_,,,,, .. ,.,,,, .1Id, ''<k .. ",ed" 

l<"fIIIII'io,,,,,, vi •• " etgllly-r.", """"'''' di.idonoh ,wcivtd doJuo,lon b<~;". '0 Old ....... tho 

pO",nliol bard.nip ,hat ,""ld ...... 11 /'tom On j'n",edi". and r«",nl.lly ,.,!!" U.S. ' lWIbto 

;""Iu.ion I"", m,&lI l r""'C<II~~I;'" li~.Cm>irIi _ 01 ... ",on"!J.:uo ... ~. tlO .... ' .. '.11><-

1<tId«JIf fot the"""" ""e .. II .. , . 11 !O<cill" • ..,unp """'d be dffined ~ed Withoot • 

rI.'Odu.,ion for 1-.. In _Ie OII'i'''' or [Of •• mi"" d"" ... 001 "'II'''''''''''' by oasIl (i .• - 'hooo in ........... obrwd i. hord __ an.! III<",C"", .:aM01 bt ~.te<I~ Thi ••• ., be. <:om' .. ".I ...... I~ 

h.nh =ulllOn """,,,,I inl .... i.., """, ,,,'I~ li~~ Comin, Ih:tI mll<l pt. I .. mIIIIUrO<luriul 

fllcili,i .. in ,he "'""" W"" 'IY II il. c."""",". ~u~l>.~ u"dy "",y he ........ nlod 10 """"dtr ill< 

opproprille .... "rro"",,, tu.a. I ... , ,t.,I"","' of, .. f'I)<d .. minlio'o lhe ... p/'\J.s, nel 0f!<'I1'\"" 

I.,...,. on<! ft>reign "'" ctNi, corry""" ....... 11ho ,.,,' .. ror (lIIy,ne", or II., .... ul''nlI .... 

Chlio ... " Camp', PftIPC"OI olio incluloo po>.>ibl<- "biloe croti<t/t" ptol..,lion •. A •• ~on;',. po;"'. it i. iMp<>rt."1 '" _nltt ,I"" ,ne gon ... \be ted""IWtt in Ihe U.s, '-""JI<I'1Ll< I" ,.!C. IhO 

I .... ,,"'"pon;', "ill h< «>mpellod 10 m,,,"-I. i"""me prodlltitlf, ",,;.ily <If ... ell. We . """,oi" .. 

ho>~, III< ne<d 'Q "" ... fully o"""i<l,,, lilt po.sib;lib' II~ ""Y new I),<Ieo' CO\II~ he.lruotd.nd 

\Od~ p<>!.'I>1. prn!«liOltS ""iMl ' I>usi ....... i<m "fIIleU.S.IU bIo.e, Oflh/! lillee 

1''''''''l\Ii", mo:u..-et propo>oed by Mr. Clunr. Option C oWW' '0 bo>I iIlI •• io,. "'" OOOtpo1iti .. 

~.1lIII! ""'''rob nuny U.S. 1"","ooIoIlY<""'I*'''''' t~ """ .. , n:ooatch DOthlo,i .. m:I 

,,,,oIkc''''I't'Qpeny oll<llon: ..... )leI"~ lows ttOunci ,I>< ""'IiJ boo<>"" more ~i""lod IitId 

,hoi, ""I'on;eobilily ;n,l"'I-' II>< h/lIori< _fils o[U.S, I«IInoIojy ........ "hlp 00 ""'.b"'" .. ,v< :os .. rr,o.t.", rompons&Tioo r", • higher U.S. I"~ bot<iool 0" ,he ,el .. od """"' .. , M,. C'mp', 

Op,i"" C. whic~ it.i •• • foftml pet«"'''' "" f"""'I' i_ ~\alolOd I>l' U.5 . ..(I"·""" 

'ntao\libl .. , wili bolp U.s .... np .... ;.,; wilh U.~ .... """.d .... owned i'''''lIoc'""IIIf<l\JC'fI~ 10 

""""pt1~ will> ,I\0<I0 ,hoi ""'""0 on<! ",on ...,., properly ._. I~ '~i ...... 100, '''Y ""'-I..,i"g 

o(Urelo box .., ... ",~yitlf,. I .. ",te ",J .... ..", on r"...;~" w!)lli/ income from ;"'011001 .. 1 

P"'r<tly "'"" be ,_ot«l tOr !<>IOI elf..", We.n> aware of""""""", ",i«<! by ",n"""" mok"" 

lnd .. 1Ier:o ~t<ling tho p'''''"''iol ''''&oIi'' iMpool OpTio" C "",IJ ....... "" ,I"", Itu.i""", fl'IQdel •. 

Comlrl/lloo»:l f._.rJ 10 _kin, .. ~ oil inl<''''lLod pori'" 10 "'" ... U"" ~ .... h 1>"'",.10. 

ll>VPO<U ,h. "",npolilive"'" of 01, U.S.-\JuOd CUlO"",';"' .. 

",,1Ol1Ier .. peel of'lI): Jcl"arnt tho, m ... 1 be ""nli<ltr«l ",I."" ,~ rrovi,i,"," intm;l<d 10 jn=r,i"'" 

,ho OratiM of 1«"nololO' in Tt.: UI,i"," Slot ... We 11<\.,.,.. _h ""'VWn"" ..... 1<I be ""*"'""" .,1\1 mode-uIII'" om"i .. , in or<Ior ,. mol< IhI:rn ".,... .Il«:ll .. In in'l"n,ins ,II< OOfUpoIiti.,..".,.. 

,"u.s. ~ IIDd " .. ,,"fOC1,~ing C<l! ,,~, 

II ;" banl,,, J~~ "';Ih i"""""i~Wng the wnd"" of ... rncn.:on ...... n:h on<! ~ ..... iopmcn'. buI . 

"","porilUTl of ,he U.S. Jt&:D cn:di' 10 lho .. 11 .. 1 .~I.\ In ""''I<'0I11e< «tIIIt1rks <I .. "" ,.'" ,II< 

, 
26 

f 

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

STATEMENT OF RALPH E. HARDT, PRESIDENT, JAGEMANN 

STAMPING COMPANY 

Mr. HARDT. Good morning, Chairman Camp, Ranking Member 

Levin, and all committee members. Thank you for the opportunity 

to testify before you today on an issue that impacts manufacturers 

of all sizes, especially small businesses like ours. 

I am Ralph Hardt, President of Jagemann Stamping based in 

Manitowoc, Wisconsin. Chairman Camp got it pretty close in your 

introduction, thank you. 


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27 

Chairman CAMP. All right. 

Mr. HARDT. It is a family-owned business, with 300 employees, 

where we manufacture precision metal parts and export 22 percent 

of our products over 15 different countries. We have a subsidiary 

in Nashville, Tennessee with 33 personnel as well. I am also chairman and owner of another small manufacturing company in South 

Carolina, with 31 employees in precision grinding and finishing. 

My involvement with these three small businesses located in very 

different parts of the country, gives me an excellent understanding 

of how to compete globally and grow investments in our equipment 

and our employees. We are also members of the Precision Metal 

Forming Association, and National Tooling Machines Association, 

which together have about 3,000 companies averaging 50 employees per business. Most are family owned and about 2/3s of these 

companies are structured as Subchapter S corps with some more 

pass-throughs. How our businesses are organized and the way we 

pay taxes has the single greatest impact on our companies, and 

how much we can reinvest in our businesses. 

For example, one of our members, a New England based manufacturer with roughly 200 employees will see a 6 percent effective 

tax rate increase this year compared to 2011, assuming no congressional action will take place, and could jump as much as 15 percent. 

With so much uncertainty over upcoming tax increases and 

changes, small companies and small manufacturers like us are becoming very conservative right now, are frozen in place and possibly not making significant investment in our business. This is a 

very important point. The uncertainty in a Tax Code and what the 

future holds keeps many manufacturers from investing as much as 

they should or could to grow their business, purchase new equipment, and hire new employees. 

In fact, even the Federal Reserve chairman when testifying recently before Congress, said, ‘‘The global and other uncertainties 

are slowing the demand for capital investment.’’ This is simply the 

wrong thing needed for our country right now. 

In order for manufacturing to succeed in this country, we need 

stability and transparency in our Tax Code. In our industry, we 

often have to investment millions of dollars annually into new 

equipment, research and training for our employees to remain globally competitive. We therefore fully support expanded bonus depreciation, Section 179, domestic production activity deductions as 

tools manufacturers use to create jobs and compete globally. 

For example, our precision grinding company in South Carolina 

with barely 30 employees just bought a new machine for $270,000, 

that require three additional new employees to operate; a 10 percent increase in our workforce. 

What many policymakers in Washington do not understand, is 

unlike larger corporations, small manufacturers like us are required to provide a personal guarantee for most loans when purchasing capital equipment, or expanding our facilities. I just recently signed a personal guarantee for the new $270,000 grinder I 

just mentioned. This means as a small business owner, I have to 

put even my family’s home on the line and take significant risk if 

I want to grow my business and compete globally. 


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In Wisconsin, our investment over the years come up to 147,000 

per employee and we spent over half a million in research and development. There is a lot of noise in Washington right now about 

only raising taxes on wealthy to pay for government programs and 

hopefully balance our federal budget. However, small businesses, 

we may report 250,000 or more in profit, but few manufacturers actually take those profits home. They will overwhelmingly reinvest 

it in the business and our employees manufacturing in America. 

Based upon an industry survey, most small manufacturing business owners pay a combined tax rate of 36 percent, distribute 18 

percent; however, reinvestment between 46 and 50 percent back 

into the business. 

Tax increases also result in reduced cash flow potential, further 

limiting access to capital which is already difficult enough for small 

business lenders to secure. Lenders and other investors in a new 

business look at the tax implications as closely as we do whether 

deciding, or not, to funding manufacturing investments. 

We, again, need a reformed tax structure in this country, which 

encouraging Americans to start, and I emphasize this is important, 

to be compelled to start or expand any manufacturing businesses 

here and hire new employees here in the U.S. Comprehensive tax 

reform to us means fixing the problem for both traditional C corps 

and S corp pass-throughs at the same time; the vast majority 

which are family-owned. 

With over 70 percent of all U.S. manufacturers structured as 

pass-throughs, companies like ours contributing the overwhelming 

economic activity in the sector which accounts for a substantial 

portion of our GDP. 

However, small manufacturers are ready to step up to the plate 

on tax reform, and will forego some tax credits and deductions if 

it means a lower effective rate for all manufacturers in solving our 

Nation’s budget crisis. However, we cannot afford to fix the problems on the backs of family-owned businesses and only address 

larger corporations or multinationals without remembering that 

again, 70 percent of us in manufacturing are structured this way. 

I strongly urge politicians to move beyond labels, rich versus 

poor, employer versus employee. No manufacturing company can 

succeed without strongly investing in their employees and equipment. Tax reform needs to happen for everyone. 

On behalf of Jagemann Stamping, Jagemann Precision Plastics, 

Labtech Industries, and all of our employee associates, I thank you 

very much for the opportunity to testify before you today, and I 

look forward to answering any questions you may have. 

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

[The prepared statement of Mr. Hardt follows:] 


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Written Testimony of 

Ralph Hardt 

President 

Jagemann Stamping Company 

Manitowoc, \vr 

Before the 

House Committee on Ways and Means 

[Iearing on 

Tax Reform and the U.S. Manufacturing Sector 

July 19,2012 

Chairman Camp, Ranking Member Levin, members oUhe Committee, thank you for the 

opportunity 10 testi fy before you today on this imponant issue that impacts manufacturers of all 

sizes, especially small businesses like ours. My name is Ralph Hardt. I am the President of 

Jagemanll Stumping Comp(lllY based in Manitowoc, Wisconsin, a fuurth generation familyowned business with three hundred employees where \-ve lmmufacture precision metal pans fur 

defense, solar energy. industria! machinery, and automotive customers and export 22 percent of 

our products to over 15 difTerent countries around the world. We also have a subsidiary in 

Nashville with 33 employees where v,:e do precision insert molding. I am also Chairman of 

another small manufacturing company in South Carolina with 31 employees where we do 

precision grinding and finishing for indu~trjal, medical and other industries. In all of these 

operations .... ve provide rull health care and other benefits to our employees, whom we consider as 

members of our extended family. My involvement with these three small businesses, located in 

very dill'erent pUliS of the country manufacturing highly technical parts, gives me an excellent 

understanding of how to compete globally and grow our investment::. in equipment and our 

employt!es. 

! am also a member of the Precision Metalforming Association and National Tooling and 

Machining Association, which togeth~r have ahout 3,000 memhef companies averaging about 50 

employees per business, most of\.-vlllch afe family-owned or closely held like ours. About lwothird::. of these companies are ~tructured a~ Suhchapter S corps or similar passthroughs. Hov. ow 

businesses are organi7ed and the way we pay taxes has the single greateM impact on our 

companies and how much we reinvest in the business. 

For the record, I have attached the formal comments these two associations submitted to the 

Ways and Means Subcommittee on Select Revenue regarding their June 8, 2012 Tax Extenders 

hearing. In addition, for the record, to furthcr demonstrate the impact of tax reform on small 

manufacturing businesses, J haH~ attached as Exhibit 1 a tax template created by accounting firm 

Plante & Moran in partnership with the two associations. The sample template was completed by a 

Ne\\ England ba::.cd manufacturing bu~iness with roughly 200 employees and demonstrate~ lhe 

impact on that panicular numuflicturer should Conb'Tess eliminate certam tax Jedueliolls anJ credit:, 

Of increase certain rates. In thi~ New England manufacturer example and based on their current 

claim" and deductions. this lOO-employee company wit! sec a 6% Etlcctive Tax Ratc Increase in 
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The manufacturing businesses I manage in V,iiSCOTIsin and Tennes:.ee are both struclured as S~ 

Corporations where the individual owners pay the taxes, whether at a 35 

in the future up to 39.6 I lowever, the :'l1laIJ manufacturing business in South Carolina 

still structured as a (:-Corporation, subjcct to double tax.ation. While the company v.a<; 

initially incorporated when we bought il- we fully planned on changing ib structure 

to an S~Corporation. uncertainty over upcoming: tax incrcases and potential 

changes, \ve are frolen in place. 

This is an important point the unce11alTIty in the tax code and \\ hat the future holds keeps many 

!lnl11ur'lclurers from il1\csting a:. much a:. they ~hollJd or could to grov. their businc:.s, purchase 

TICV. equipment and hire more employees. [n order for manufacturing to :.uccced in this country 

\\c need two things - ::.t<lbility and tran:.parency in our tax code. Particulurly ITI an industry like 

ours, we often have to invest millions ofdoHars into new equipment and training f(Jr OUI 

cmployees to remain globally competitive. \1-ic fully support expanded bonus dcprcci<ltlOn, 

Section 179 expensing, and the 'lection 199 Domestic Production Aet!vity Deduction as tools 

manufacturers use to create jobs and compete globally. For example, our precision grinding 

company in South Carolina with barely 30 employees just bought a new machine tor sno,ooo that will require 3 additional new cmployees to operate. As any business owner \o..no\\s, you 

typically purchase large capital equipment in one of two ways - out of your protib or through 

borrowing - \vhich is increasingly lTIore diflicult for a small manufacturer like us to secure. 

What many policymakers in Washington do not understand is unlike larger corporatIOns, small 

manufacturers like llS arc required to provide a personal guarantee for most loans when 

purchasing capital equipment or expandHlg Ollr facilitie'i. 1 ju:.t recently signed a personal 

for thc new sno,ooo grinder I jU'i! mentioned, 'f his mean:-. as a small bu:.ine<;s o\\-ner, 

my family's home on the line, and take significant risks ifl \van! to grow my 

business and compete globally. For example, \\c have made significant progress 

manufacturing critical high precision metal around thc \\-orld 

llowc\-cr, that took mi!lions of dollars in in 

inyestment in 

our Wisconsin pcr employee. In addition, this year 

we plan on spending <lpproximately 5500,000 in Research and Development. \1-ic found out carly 

on th<lt we cannot compete globall) or e\-en sur\-ive domestically if we do not contmuously 

invest in equipment and our people. This is why tax relixlTI is so important to Illullufacturing 

companies across the country -to ti'ee up capital for investing in people and equipment and to 

bopefully provide more certainty to aid in our decisions. 

More than 70 percent of manufacturers are structured as S-Corporations or other passthroughs 

paying tax.es al the individual rate_ which is poised to jump to 39.6 percent. There is a lot of noise 

in \Vashington right no\v ahout only raising taxes on the "wealthy" to pay for social programs 

and hopefully balance our iCderal hudget. 1I00vever, as a ~mall business, we may report S2S0,000 

or more in profit hut few manufaeturer:'.lake those profilS home - they are overwhelmingly 

reinvested in the business and our employees manuEl(;turing in America. This means that the less 
31 


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resources we have due to paying more taxes tics our hands and docs not allow us to buy ne\v 

million dollar machines that need ne\v employees to run. 

The majority of manufacturers !ike us leav\! 1110St of the 1110ney in the business, directly 

reinve~ting in our employees, faellitie~ and equipment. Due to Ollr current U.S. tax code, we arc 

tax\!d on income v.e do not take out of the company but leave in the business to reinvest. This 

means \\e have fewer resources to put to\vards hiring, trainmg and buying new machines. Based 

on an industry survey among sma!lmanut:1cturers. most small manufacturing bu~illess owners 

pay 36 pereenlm taxes, di~tribLlte ! 8 percent to owners and reinve~t 46 percent in the bu~iness. 

And that is conservative. In sum, ~hen more 1110ney goes towards federal. state and local taxes, 

less is reinvested in our employees, equipment and manufacturing pl<lnt~. 

If statutory mte~ increase by nearly 5 percent as scheduled, busines~ oVrllers have to take it out of 

the pie somewhere, either from the owners' famIlies, or from the reinvestment in the employees 

and company, usually both. Ta .... increases result in reduced cash 1100v in the bu~ine~s. causing a 

major unintended ripple effect, limiting access to capital which is already difficult enough for a 

small bl!sines~ to ~ecure. 

Anothcr unintended con~equenee of our currcnt taA code is the way il di~eourages manul~lCturers 

from starting their own bu~iness. When an entrcpreneur sits down \\ ith their lender or venture 

capitalist they must factor in whether a temporary ta .... incentive will still be there for them in six 

months or whether they w1l1 have enough capitali?ation in the ~tartup to cOver upcoming tax 

increases. Lenders. venture capitalists and other investors in a new business look at the ta .... 

implication~ as closely as \"e do when deciding \\-bether or not to fund a ne\v manufacturing 

plant in the U.S. We need a reformed tax structure in IhlS country \\hieh encourage~ Americans 

to start their own manufacturing bu~iness and hire ne,", employees. 

Banking and other lending requirements have toughened. forcing most owner~ to leave rl!tained 

earnings in the business for the sole purpose of meeting collateral requirements. Profits left in the 

business arc still suhject to taxation c\-en beforc dIstribution to the owner creating a current 

which penalizes and taxes business o\\ners who leave money in the business for 

resulting in reduccd ability to secure loans. Therdixe, increased tax liability means 

less 1110ney in the business, which "·ill restrict the ability of a small business to access timely and 

sunieient credit to purchase machines, expand thcir tacilities and hire new employees. 

Since J became President ofJagernann Stampmg in Wisconsin, we have grovvll our exports by 

ovcr 30 percent - this mcans we facc global competition not only here in the U.S. but whcn 

markcting ovcrseas. This is wherc tax dedllction~ and credits come in as the only tool we havc to 

reduce our effective tax ratc unless Washington can finally act on comprehensive tax reform. 

Comprehensive tax reform means fix ing thc problem for both traditional C-Corporations and SCorporation pas~throughs at thc same time, thc vast majority of which are family-owned. With 

over 70 percent orall manu1acturers structured as passthroughs, companies likc ours in 

Wiscon~in and Tenncssee contribute the ovcnvhclming ~harc of economic activity in this sector 

\VhlCh accounts for l~ pcrecnt orour nation's GDP. Wo:: simply cannot afford to sacririco:: 70 
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percent of our nation's manufacturers in the name of tax reform - we need a comprehensive 

solution that incorporates all businesses, especially small manutacturers like ours. 

Small manutacturers are ready to step up to the plate on tax reform and possibly forego some tax 

credits and deductions if it means a lower etIective tax rate for all manutacturers and solving our 

nation's budget crisis. However, we cannot afford to fix our nation's problems on the backs of 

family-owned small businesses and only address larger corporatious or multinationals that are 

prcdominatcly C-Corporations. 

I remember working my way through school at Arby's and at a local lumber yard, experiences 

that shaped my perspective as an employer. Most ofthe business owners today I know got their 

start whcn they were just a tecnager, sweeping the shop !loor of their parent's manutacturing 

plant. Now, they are the owners and hope to someday pass along their family business to their 

children. This is part of the main reason so many manufacturers are structured as passthroughsthey want their children to inherit the family business and grow. When asked by policymakers in 

Washington why S-Corporations simply do not convert to becoming a traditional C-Corporation 

the answer is clear - when an owner passes a company down to the next generation there is a 

much greater tax liability in a C-Corporation and the costs associated with the conversion are 

astronomical, especially for a small business. 

I strongly urge politicians to move beyond labels - rich vs. poor or employer vs. employee. No 

manufacturing company can succeed without investing in their employees and equipment and we 

cannol do that without sufficient capital in the business and a solid ability to borrow. Tax reform 

needs to happen for everyone. whether a C-Corporation, an S-Corporation, or an individual 

regardless of income. Small manufacturers like ours have to compete not only globally but also 

against much larger manufacturers. This is why we reinvest every cent we can back into the 

business. But every penny we pay to the government in taxes is less that we have available to 

purchase a million dollar machine or hire the five employees we need to make our new parts and 

jumpstart the American economy. 

Thank you for the opportunity to testify before you today and I look forward to answering any 

questions you have. 
33 


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June 22, 2012 

rhe Honorable Pat Tlbcn 

Chllinnlll1 

I louse Subcommittee on Seb:t Revenue Measures 

1101 Rui!ding 

Dear Chairman Tiberi' 

Jaw. 
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Overall limitation on itemi..:cd deductions and the personal exemption phasc-out 

Reduced ratc on dividends and capital gains 

AMTn:licf 

Energy efficient appliance credit 

Deduction of State and local salc~ ta.\(;\ 

Section 179 Increased E"peming 

Interest Charge D()]l1e~tic international Sale~ Corporation (ll"-DlSl") 

Estate "I a>,. 

R&lJ Tar Credit (R&D) 

ollset i~ an important 1001 for manutacturcrs 
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requires hiring more I.':mrloyl.':c~. 

La5f-il/~FinH)/i( (UFO) 

EMote Tux 
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level and rates eUITently in place in 2012 (i.e. $5 million exemption indexed to inllation, 35% tax 

rate, v.ith spousal tnlnslcr and stepped-up basi~). 

Regardless of the outcome of comprehensive tax refonn, manufacturers need stability and 

transparency illthe tax code. A business cannot ctkctivcly plan for the future \\-hen it is unclear 

\\hether Congress will extend a provision before it expires, or gumble thut the R&D will be made 

retroactive. Business 0\\ ners make decisions tt)r th<: next year beginning the previous summer and in 

many cases earlier. Tax credits and deductions can only succeed if manufacturers can trust they \\ ill 

still exist six months fTOm nov\'. The prime e"amp1e is Bonus Depreciation. A small manufacturer 

cannot make a decisIOn on whether to pllfchase a S 1 million machine \vithout knowing if they can 

depreciate the cost of the equipment. A tax credit or deduction, such as [JonllS Depreciation in this 

example, can mean the difference betwcen investing in that equipment and hiring \vork~rs or not 

taking on the ne\\ business. 

To further demon:;trate the impact or tax reform on small manufacturing businesses, \\c have 

attached as Exhihit 1 a tax template created by accounting firm Plante & Moran in partnershIp \\itll 

One Voice. The sample template was completed by u New England based manufacturing business 

with roughly 200 employees and demonstraks the impact on that pm1icular manufacturer should 

Congress eliminate certain tax deductions and credits or increase certain rates. In this New England 

fl1i'1nufacturcr exmnple and based on their current claims and deductions, this 200-employee company 

will see a 6% Effective Tax Rate lncrea:;e in 2013 compi'lred to 2011 lavv' a~suming no Congres:;ional 

action and will jump J 5% LInder a \vorst case 39.6°;.) scenario \.l,.'ith no dcductions pennitted. Some 

smaller companies have shown a 15% increasc in 2013, and a 7% increase under 39.6% with no 

deduction:;. 

To strengthen the compclitivene:;s nfsmall and mcdium-si/.cd manufacturers, we need to simpl!!} 

and stabilize the tax code and implement policies that eneolll"age investment and eliminate tax 

disadvantages. The eurrcnt tax structure is a myriad ofhigh rates. temporary credits, loopholes, and 

outdated policies that slow gro\"th and competitiveness. In order to compete globally under the 

current U.S. tax structure, domestic manufacturers must usc as many tax incentives as possible to 

lower their burden, expand their businesses and hire more employees . 

. \1anufacturing businesses employ nearly 12 million Americans, repre~ent more than 10 percent of 

our entire economy, and are a vital part of America's future economic and national securit). 

Comprehensive tax refonn is the singic most important stimulus W'ushingtol1 could provide 

bLlsine~ses manulllcturing in America 

Thank you fiJI' your consideration and your leadership on behalf of the metal\\orking industry. 

William E. Gaskin 

PMA Presicknt 

Sincerely, 

NTMA President 
37 

f 

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

STATEMENT OF KIM BECK, PRESIDENT AND CEO, AUTOMATIC 

FEED COMPANY, ON BEHALF OF THE ASSOCIATION FOR 

MANUFACTURING TECHNOLOGY 

Mr. BECK. Thank you, Chairman Camp, and Mr. Levin, and 

Members of the Committee for holding this hearing today and giving me an opportunity to participate. I am here representing small 

manufacturers, even smaller than Mr. Hardt’s here, on behalf of 

AMT, The Association For Manufacturing Technology, a trade association made up of 600 manufacturers across the United States, 

most of them with sales of less than $10 million. 

I am here to convey to you the toll the great recession has had 

on this Nation’s small business, particularly small manufacturers 

like Automatic Feed Company, and I want to tell you that small 

business owners have great concerns about the words and actions 

coming out of the Federal Government. This year marks 63 years 

of continuous operation of Automatic Feed Company in Napoleon, 

Ohio. We were devastated by the recession. We almost didn’t survive. In just 12 months, our revenues dropped by 90 percent. Our 

sales went from $30 million down to $4 million. Prior to the recesVerDate Mar 15 2010 04:56 May 29, 2013 Jkt 080844 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80844.XXX GPO1 PsN: 80844

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38 

sion, we had 110 employees. They were highly-skilled engineers, 

welders, machinists, and machine assemblers. 48 of them were 

skilled union employees. Over the next 2 years, our workforce 

dwindled to 25. Wages were cut an average of 40% while the top 

management took 60 percent pay cuts that still haven’t been restored. 

I have spent the last 4 years trying to save our company. We survived only because we made the necessary sacrifices, and we had 

very little debt. The banks were under such scrutiny that they 

were not lending, especially to small manufacturers tied to the 

automobile industry. 

Today, small manufacturers are angry that after they made such 

great sacrifices, they are now being asked once again to finance a 

government that is too large, too inefficient and fiscally irresponsible. The rhetoric out of Washington against small businesses is 

getting louder every day. Why would the government punish small 

manufacturers with higher taxes and other imposed cost burdens 

when we are the ones creating jobs? It is illogical and unfair. Often 

it seems as though the largest impediment to our growth is our 

U.S. Government. Higher taxes, more regulations, increased health 

care, and energy costs, outdated policies, and a complicated broken 

Tax Code all contribute to a significant competitive disadvantage 

American manufacturers face when compared to foreign counterparts. 

In 1975 when I came into this business as a young man out of 

college, U.S. manufacturing and machine tools were number one in 

the world. Today, we are number seven behind China, Japan, Germany, Italy, Korea, and Taiwan. Automatic Feed Company has no 

U.S. competition. Our competition comes from companies that are 

100 times larger than we are. They are German, Korean, Japanese, 

Spanish, and Chinese. For us to consistently outpace our competition, we need to have a lower cost structure. Part of that lower cost 

structure has to be lower regulations, lower taxes, and support that 

helps us compete worldwide. 

One of the biggest obstacles is our own Tax Code. Today, the 

United States now has the highest corporate tax rate in the industrialized world. It significantly contributes to an unlevel playing 

field for American manufacturers. Bad tax policy is not only anticompetitive, but it also leads to less tax receipts collected by the 

Federal Government. Bad tax policy outsources jobs. 

The President proposed letting the Bush tax cuts expire for those 

making over $250,000 a year. When are our elected leaders going 

to realize that a tax increase on those who report higher incomes 

is a direct tax increase on manufacturers like me. Partnerships, 

LLCs, sole proprietorships, and Subchapter S corporations are a 

significant share of those that are considered ‘‘wealthy’’ under this 

tax law, because we file individual income taxes. When in actuality, 

none of us bring $1 million into our own homes each year. We take 

that money that we make and we reinvest it into salaries for our 

people, for R&D, and for modernizing our plants and facilities. 

The 3 or 4 percent tax increase means a lot to small manufacturers that were starved of profits during the last recession. Today, we 

could use that money for reinvestment and help rebuild this economy. 


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39 

One hundred percent bonus depreciation, increased Section 179, 

expensing levels, and the R&D tax credit should be extended now. 

The R&D tax credit has helped us in developing a new product line 

that we have been working on for 5 years. We haven’t made a cent 

on it yet. It hasn’t hit the market, but without the credit, we would 

not even have tried. In the long term, we need to tackle tax reform 

across the board. We need to increase the cash flow to our companies through investment, and also free up more days of operation 

for covering our processes. 

And also, we need to keep our current estate tax rates. I want 

to thank you for this opportunity and I urge you to take the action 

necessary to help strengthen small businesses and small manufacturers. 

Chairman CAMP. Thank you, Mr. Beck. 

[The prepared statement of Mr. Beck follows:] 


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TESTIMONY OF 

KIM W. BECK, PRESJJ)ENT & CEO 

AUTOMATIC FEED COMPANY 

ON BEHALF OF 

AMT - TIl E ASSOCIA TION FOR MANUFACTURING TECHNOl.OGY 

Before the 

INTRODUCTION 

U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS & MEANS 

JULY 19,2012 

"Tax Js,~ues Facing U.S. Manufacturers" 

Mr. Chairman and members orthe Committee, thank you for holding this hearing today and for 

giving me the opportunity to participate. 

My name is Kim Beck, President and CEO of Automatic Feed Co. in Napoleon, Ohio. J am also a 

member and former Chairman of AMT-Thc Association For Manufacturing Technology -- a trade 

association representing nearly 600 U,S.-based companies that produce and sell machine tools and 

other techno logics essential to the manufacturing process. While AMT's membership includes large 

companies such as ExxonMobil, 70 percent have less than $30 million in revenue and half have 

revenue orunder S! 5 million. 

I am here today becausc I \ .... ant Congress to understand the significant impact th~sc tax policy 

discussions have on small manufacturing companies Iik..: mine. Business owners have grelll 

apprehension about thc actions coming out of the tederal gO\crnment. Even though business is 

much better, the best industry analysts predict a slowdmvn in manufacturing tecbnology order 

acti .... ity in the last part o1'1his year due in large part to uncertainty about what's happening in 

Washington. Our sales people are already concemed, seeing 4uote activity beginning to drop otT. 

The prospect of tax increases and the outlook for real long-term tax reform figure prominently in 

the anx icty. 

COMPAl'iY OVF:RVIE\\ 

This year marks 63 years of continuolls operation of Automatic Feed in Napoleon. In 1952, when 

our building on Canal Stred was pmchased, it measured just ovcr 2,000 sq. fl. Today, \ve boast a 

15(},000 sq. [1., state-of-the-art fllcility. Since our humble bcginnings, \\'C have been designing and 

manut~lcturing col! pressing equipment for the auto industry. Over the y~ars, we have received 

various awards and honors from automobile companies like Honda, Toyota, Nissan, Chrysler and 

Gencral Motors. 

Thc Great Recession hit us hard. In just 12 months. we went [rom a $30 million company to a $4 

million company, and by 2009. our facility was mostly dark with no orders. We had to consolidate 

to a small ponion ofthc plant to sav~ on utility bills. Over the years, we otTered stable employment 

for, at times, up to 175 people. In 2007, just prior to the recession, we employed 110 workers, 

almost all of which werc highly skilled engineers, welders, machinists and machine asscmblers 

including 48 skilled union employees. Two years later, our workforce was down to just twenty-five. 

Today. we llre clmving back to about where we were before the recession, because \'ve made 

difficult sacritices to remain viable .- something our govcrnmcnt could learn from us. During the 

financial meltdown, the average wages of the 25 remllining employees were reduced by 40%, 'with 
41 


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top management taking 60% pay cuts that today still have not been fully restored. It is a horrible 

situation when you go to bed every night and pray that those most loyal employees don't lose their 

homes to foreclosure because of pay cuts. 

To survive, \ve increased our efforts to diversify away from autos. Now, we are developing new 

products for other industries, but it is increasingly difficult trying to remake a 60+-year·old 

company \'\o'ith the federal govemment seemingly working against us in e\ery way. Each night on 

the news we hear ofrumb!ings in this to\",n that \vill negatively impact our business. Uncertainty 

abounds. Businesses fear another recession is just arollnd the corner. Every time a new law or 

resolution is approved, it affects business decision-making. 

STATUS OF TilE MANUFACTURING TECHNOLOGY INDUSTRY 

Although the U.S. manufacturing technology industry is relatively small in terms of numbers, what 

it contributes has an enormous impact on America's ability to manufacture - and to manufacture 

competitively. Our companies provide the means by which all products arc manufactured. We 

provide the innovative solutions that ensure those products are \vortd-class. Without our 

manufacturing technology companies, no other American manufacturing would be possible in the 

United States. This country would be left to rely on foreign manufacturing technology to make parts 

and finished products be they cars, "vind turbines, medical devices or even defense systems. 

In 1975 when I came into this business as a young man out of college, America was the \vorld 

leader in building machine tools the foundation of almost every manufactured product and critical 

to our defense industrial base. In2012, we stand a distant 7th behind China. Japan, Germany, Italy, 

Korea, and Taiwan. 

Even so, the outlook for manufacturing technology is positive considering the lackluster recovery 

and persistent unemployment. AMT reports that May orders \vere up 14.5% from April and lip 

19.0% from May 2011. Overall, 2012 is up 12.1% compared with 2011. This latest data indicates 

sound health. While the latest Purchasing Managers Index saw a slight contraction, overall 

indications are that manufacturing wm continue to lead the general economic recovery. 

Our market is expected to realize a 10-15% growth in orders for 2012 over 2011. This is 

phenomenal when taken in perspective. In 2010, the industry realized a 91% gain in 2010 over 

2009 and another 66% gain last year over 2010 _. finally overtaking 2007Ieve]s, our last peak year 

before the recession. We've made up a lot of lost ground in two years. but it will be difficult to 

slIstain that upward trajectory without some decisive action out of Washington. 

TAX CODE ADVERSELY AFFECTS SMALL MANlJFACTlJRERS 

It seems as though the largest obstacles to continued growth are created by the U.S. government. 

High taxes, burdensome regulations, increasing health care and energy costs, outdated policies and 

complicated, broken processes all contribute to the significant competitive disadvantage American 

manufacturers face when compared to our foreign counterparts. 

Your first reaction might be to ask "What law can \ve enact? What program can we create? \Vhat 

tax incentive can we pass to reverse this trend'?" I am here to tell you little will make any difference 

unless we take action to make the United States a better place to do business. The cost ofnmning a 

company in this country is becoming prohibitive. 

My com pan) 's competition is foreign-based. Every competitor is at least 100 times bigger than us. 

They arc German. Korean, Japanese, Spanish and Chinese. For Automatic Feed to be competitive. 

we must have a cost structure similar to our competitors. For us to consistently outpace our 

competition, we need to havc a lower cost structure. U.S, manufacturers cannot be successful 

against foreign competitors that have little or no regulatory costs, lower taxes, and export subsidies 

without appropriate action from our government to level the playing field. 
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A major obstacle is our own tax system. It significantly adds to our competitive disadvantage in the 

global marketplace. The United States now has the highest corporate tax rate in the industrialized 

world. In addition, unlike most industrialized nations, it has a worldwide system of taxation. These 

factors make it less attractive for companies (foreign and domestic) to invest and manufacture in the 

United States and more attractive for companies to invest and manufacture overseas. 

Bad tax policy is not only anticompctitive; it also leads to less ta"'\. receipts collected by the federal 

government. For example, in 2007, my employees paid $1 million in payroll taxes. Automatic 

Feed paid another S I million in income taxes. Two years later, with only 25 employees and 

drastically reduced revenue, tax receipts from my company decreased substantially. Those 

remaining 2S employees, in an attempt to save the company, accepted pay reductions that not only 

represented a significant decline in income, but in tax revenue as well. Obviollsly, our laid off 

workers didn't pay taxes either. 

SHORT-TERM- EXTEND ALL BUSH TAX CUTS 

Now that business is stronger, small manufacturers need to reinvest their income into developing 

new products and conquering new markets. New products mean innovation and job creation. Tax 

increases simply leave less for investment and jobs. The last thing Congress should do right now is 

raise taxes on small manufacturers just as we are rebowlding after a devastating recession, 

especially to finance more government spending. President Obama and some in Congress propose 

to do exactly that by calling for the expiration of the Bush tax cuts 011 incomes over $250,000 a 

year. The federal government must recognize that a tax increase on those who repoI1 income in the 

top brackets is a direct tax increase on manufacturers l1ke me. Partnerships, LLC's, Sole 

Proprietorships and Subchapter S corporations are a significant share of those who are considered 

'''vealthy'' wlder current tax la\v, because they file individual income taxes. 

Economists estimate that Jetting the cuts expire for upper earners would generate $850 billion over 

10 years. That's $85 billion a year in revenue, a sizeable sum by. 1110st metrics; but it amounts to less 

than seven percent of our projected 2012 deficit of$I.17 trillion. A 3-4% tax increase, on thc other 

hand, means a lot to the small manufacturers that have been starved of profits during the recession. 

They are eager to reinvest their income directly back into their businesses and continue to drive the 

economy forward. Successful small businesses that are investing and creating jobs -- essentially 

leading the recovery - would bear the brunt of the burden. 

EXTEND 100% BONliS DEPREC[ATlON/l:'<iCREASED SEC. [79 EXPENS[NG 

American manufacturers are never going to compete successfully with low-cost foreign producers 

on the hasis of low wage rates or lower worker henefits. V.fe can only compete on the basis of our 

higher productivity and quality - making things faster, cheaper, and hetter. That's where newer and 

more productive equipment comes in. Companies emerging from the recession are eager for the 

latest manufacturing technology, and they come from all sectors of the economy - healthcare, 

automotive, defense, energy and aerospace. Ifmanufacturing is to continue to strengthen U.S. 

economic growth and competitiveness, these companies must be able to expand their investments in 

state-of-the-art machinery and manufacturing processes. 

Tn today's emerging markets, rapid innovation is what determines who gains market share. 

However, the anemIC recovery and naggmg uncertamty about the future have made many 

companies cautious about investing and hiring. Bonus depreciation and increased Section 179 

expensing can be deciding factors for businesses considering equipment upgrades or company 

expansions. These two incentives 1110st assuredly contributed to the impressive growth in 

manuC1cturing technology orders in 201 I. Reducing these incentives for 2012 and beyond 

etTectively increased the cost of job-producing capital investment at the worst time - just as the 

economy is showing signs ofli[e. This is the wrong time to thwart the investment and 

modernization that is directly related to innovation and job creation in the United States. Now is 

when 100% bonus depreciation and enhanced Sec. 179 small business expensing can have a 

significant impact on 2012 investment decisions. 
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EXTEND THE RESEARCH & DEVELOPMENT (R&D) TAX CREDIT 

Since the R&D tax credit was first enacted in 1981, it has been extended more than a dozen times, 

sometimes retroactively. This obviously negates its effectiveness as an incentive 10 \!xpand research. 

Most recently. the credit \vas allowed to expire just as companies were in a better position to take 

advantage of it. There's no question R&D leads to new technologies and innovation .," key drivers of 

productivity, economic growth and job creation - and that the R&D tax credit spurs greater R&D. 

We used the credit during the recession to keep our company going, developing a new product at a 

critical time. Without the credit, we may not have made the investment. 

LONG-TERM TAX REFORM IS CRITICAL 

Fear of the unknown is a considerable impediment to growth, especially in a lackluster economy. 

Until Congress takes significant action to fix the tax code and rein in spending, businesses will 

continue to play it safe with investment and hiring decisions. Piecemeal fixes and temporary 

extensions of incentives important to American businesses only add to our competitive 

di~advalltage. 

Congress must find the political courage and determination to tackle real tax reform to give 

businesses the confidence they need to invest and hire. It mllst be simple and balanced. I commend 

Chairman Camp's leadership in offering a tax draft for consideration which lowers corporate rates 

and moves the U.S. to a territorial system of taxation. I urge this Committee to remain mindful of 

the small manufacturers that don't file under the corporate code. Both individual and corporate rates 

must come dO\vn to a level \\'hich allows us to compete with other nations. Otherwise, 

manufacturing goes overseas and with it goes innovation and jobs. Simplification and balance arc 

key to bringing down compliance and riling costs, 

It is impOliaLlt that attention he given to the small manufacturers in my industry that are cash-based 

businesses, which depend on working capital for orders that can take many 1110nths or longer to 

complete. Uncertainty surrounding the timeliness of paid receivables and a need for a steady cash 

flow tOT day-to-day operations and investments creates challenges for these critical supply chain 

manufacturers. Often. we an: squeezed between our customers that require tenns that don't pay in 

full until after delivery (or, in many times, aftcr the equipment produccs its first palis) and our 

lenders who are increasingly hesitant 10 fund \Vork-in-Process, making it impossible 10 take orders, 

So the orders go to our foreign competitors. Some companies have turned to self-financing to avoid 

banks altogether, but this takes resources a\vay from R&D, business development and job creation. 

Tax preferences, such as 100% expensing, net operating loss caryover and a permanent R&D tax 

credit, are essential to helping alleviate the negative impact of uneven cash flow on day-to-day 

operatiolls. 

For our customers, a permanent R&D tax credit and 100% expensing mean increased investment in 

research and state-of-the-art facilities and processes. Current depreciation schedules are sorcly out 

of sync 'with the rapid pace of manufacturing technology. Al!owing companies to recover the cost of 

their capital investments sooner will encourage modernization of plants and processes. 

Our tax code must do more to slipport small business growth rather than hinder it. According to the 

Small Blisille~s Alhnilli~lration. ~mal1 busillesse~ represclll more thaII 99% percent uf all empluyer 

firms, employ hair or all private sector employees and generated 65 percent of net new jobs over the 

past 17 years. Yet they get little support [rom the federal govel11ment and repeatedly bear the brunt 

of tax provisions targeted for other groups. The estate tax is a prime example. 

My most valuable investment is the company itself. Automatic Feed has been in my family for 63 

years, Many of our nation's best companies are small, family-owned businesses that want the 

opportunity to keep the business in the family from generation to generation and to continue to 

provide good. high-paying manufacturing jobs in the community. However, families are often 
44 

f 

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

STATEMENT OF HUGH SPINKS, VICE PRESIDENT OF TAX, AIR 

LIQUIDE USA, INC. 

Mr. SPINKS. Mr. Chairman, and Members of the Committee, I 

appreciate the opportunity to testify today on the issue of corporate 

tax reform to produce a more simple, predictable, and competitive 

tax environment in the U.S. 

My name is Hugh Spinks and I appear today on behalf of Air 

Liquide USA, one of the Nation’s leading industrial and medical 

gas companies. Air Liquide is the world leader in industrial medical gases. We operate in 80 countries around the world, employing 

over 46,000 world citizens. Headquartered in Houston, Texas, Air 

Liquide USA, has over 5,000 American employees, in more than 

200 locations throughout the country, and actually a physical presence in all 50 States. For decades, Air Liquide has offered industrial and medical gases and related services to the Nation’s largest 

industries, including manufacturing, electronic, and health care. 

Air Liquide is focused on technological innovation to help make our 

Nation’s manufacturing and industrial sectors more efficient, environmentally friendly, and productive. 


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The industrial gases business is an essential and thriving cornerstone of American manufacturing and technology, reaching into 

every conceivable sector of the economy. Air Liquide, is committed 

to significant growth and domestic expansion, and in fact, has doubled its investment in the United States during the last 5 years. 

This investment has created new jobs, and access to critical products and technologies in communities throughout the Nation; from 

Texas to North Dakota, from California, to Delaware. 

We see the future for U.S. manufacturing as bright, and rich 

with opportunities, but we are also pragmatists in the distribution 

of our resources. In deciding where Air Liquide will make its investments, we examine all of the potential costs, including taxes. 

With such a large and capital-intensive operation, we oftentimes 

have more potential projects than capital on a worldwide basis, 

forcing difficult decisions about where to allocate scarce resources. 

Corporate tax reform should be designed in a manner that encourages global companies like Air Liquide to make increased capital 

investment in the United States. 

This requires, among other things, a level-playing field, one that 

is not punitive or discriminatory based upon where a company is 

headquartered. 

Over the last couple of decades, many countries have significantly lowered their corporate tax rates to attract new business investment and create jobs. For example, U.S. competitors in such diverse geographies as Canada, the United Kingdom, and recently 

Japan, have significantly lowered corporate tax rates and passed 

legislation to simplify their taxation of business. 

With Japan’s 2012 corporate rate cut, the Federal plus State income tax rate of about 39 percent in the U.S. is the highest in the 

OECD. This puts the U.S. in a position of trying to compete for 

new investment projects with countries whose corporate tax rates 

are often 7 to 10 percentage points lower. 

In spite of the many advantages that the U.S. offers as a premier 

location to do business, trying to achieve an equivalent after-tax return on investment under these circumstances is challenging. With 

a lower corporate tax rate of 25 percent as suggested by Chairman 

Camp, the U.S. would be better able to compete for new projects. 

As an internationally headquartered company, Air Liquide is 

part of the dynamic business community of global companies that 

play a critical role in the health of the U.S. economy, particularly 

in the manufacturing sector. The U.S. subsidiaries of global companies employ over 5 million American workers directly nationwide, 

including 2 million in the manufacturing industry. These companies produce 21 percent of total U.S. exports, conduct 14 percent 

of domestic research and development spending, and account for 17 

percent of U.S. corporate income tax payments. 

I applaud the committee’s recognition of the important link between tax reform and inbound business investment. To conclude, 

we support comprehensive tax reform, and we understand there 

will be trade-offs in the pursuit of a lower rate as well as greater 

certainty and simplicity in the Tax Code. I thank the committee for 

inviting me to testify, and I will be pleased to answer any questions that you have. 

Chairman CAMP. Well, thank you, Mr. Spinks. 


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[The prepared statement of Mr. Spinks follows:] 


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Statement of Hugh Spinks 

Vice President, Tax 

Air Liquide USA LLC 

On the Issue of Corporate Tax Reform in the United States 

U.S. House Ways & Means Committee 

U.S. House 

July 19, 2012 

Mr. Chairman and Members of the Committee, I appreciate the oPPOltunity to testify today on 

the issue of corporate tax reform here in the United States. My name is Hugh Spinks and I 

appear today on behalf of Air Liquide, one of the Nation's loading industrial and medical gas 

companies. Headquartered in Houston, Texas, Air Liquide has over 5.000 U.S. employees in 

more than 200 locations throughout the country. For decades, Air Liquide has offered industrial 

and medical gases and related services to the Nation's largest industries including 

manufacturing, elecuTmics and hcalthcare. Air Liquide is focused on technological innovation to 

help make our Nation's manufacturing and industrial sectors more efficient, environmentally 

!riendly and productive. ln 2007, Air Liquide established its Delaware Research and 

Technology Center \vhich houses more than 100 scientists and engineers specifically devoted to 

developing innovative applications for gas products in sectors such as electronics, hcalthcare, 

energy and food. 

The industrial gases business is an essential and thriving cornerstone of American manufacturing 

and technology, reaching il1to every conceivable secior of the economy. Air Liquide is 

committed to significant growth and domestic expansion, and in fact has doubled its investment 

in the United States during the last five years. This investment has created ne'v jobs and access 

to critical products and technologies in communities throughout the nation fi'om Texas to North 

Dakota and California to Delaware. Air Liquide is the world leader in industrial and medical 

gases and ,ve operate in over 80 countries. employing over 46,000 world citizens. 
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'We see the future fur U.S. manufacturing <IS bright and rich with opportunities, but \ve arc u1so 

pragmatists in our distribution of resources. In deciding where Air Liquide will make its 

investments, we examine all of the potential costs, including taxes. With such a large. capital 

intensive operation, v,,'e oftentimes have more potential projects than capital on a worldwide 

basis, forcing objective decisions about where the best return on investment exists. Air Liquide 

evaluates these competing potential projects in different geographies on an after-tax basis, as do 

many companies. 

Over the last couple of decades, many developed and developing economy countries have 

significantly lowered their statutory corporate tax rates to attract new business investment and 

create jobs. U.S. competitors in such diverse geographies as Canada, the United Kingdom and 

recently Japan have recently enacted significantly lmver corporate tax rates and legislation to 

~implify their taxation of business. With .lapan's 2012 corporate rate cut. the federal + stale 

income tax rate of about 39% in the U.S. is the highest in the OECD. This puts the U.S. in a 

position of trying to compete tor ne\.-\' investment projects with countries whose corporate tax 

rates are often 7 to 10 percentage points lower, or even Jess in many developing economy 

countries. In spite of the many advantages the U.S. offers as a premier location to do business, 

trying to achieve an cquivalent after-tax return on investment is challenging with a corporate ratc 

far in excess of competing countries. With a lower corporate tax rate of 25%, as suggested by 

Chairman Camp, the U.S. would be better ahle to compete for new projects. 

As an internationally headquartered company, Air Liquidc is part of the dynamic business 

community of global companics that playa critical role in the health of the U.S. economyparticularly in the manufacturing sector. The U.S. subsidiaries of global companies employ over 

five million American workers nationwide, including 1\\0 million in the manut~!cturillg industry. 

These companies produce 21 percent of total U.S. exports. conduct 14 percent of domestic 

research and development spending, and account for 17 percent of U.S. corporate income tax 

payments. I applaud the Commitlec's recognition of the important link between tax rcrom1 and 

inbound business investment. 

-2-
48 

f 

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

STATEMENT OF HEATHER BOUSHEY, PH.D., SENIOR 

ECONOMIST, CENTER FOR AMERICAN PROGRESS 

Ms. BOUSHEY. Thank you, Chairman Camp, and Ranking 

Member Levin and Members of the Committee for inviting me here 

to testify on the effects of tax policy on the U.S. manufacturing sector. My name is Heather Boushey, I am a Senior Economist at the 

Center for American Progress Action Fund. 


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I want to make two points in my remarks this morning, which 

I expand upon in my written testimony, which I have submitted for 

the record. First, manufacturing is not only a key part of our economy, but moving forward, it will remain critical to our Nation’s economic vitality. Economic research is increasingly showing that 

manufacturing is critical to our future. A strong manufacturing industry supports solid middle-class jobs, it enables our Nation to be 

a leader in technology and innovation, and can help us address our 

trade deficit. 

Second, there are a variety of ways that policymakers can support manufacturing, of which reforming the corporate Tax Code, is 

one piece of the puzzle. The research is clear, that any set of policies aimed at supporting U.S. manufacturing should include investments in education and training, infrastructure, basic and applied 

research and development, and improvements to basic data collection. In terms of tax policy to support manufacturing, I recommend 

that this Congress focus on a few key items. 

First, pass comprehensive business tax reform that both eliminates loopholes and inefficient business tax expenditures without 

disadvantaging domestic manufacturing. Currently, loopholes allow 

companies to avoid paying U.S. taxes by artificially shifting their 

profits offshore. Closing these loopholes, by adopting strong provisions to prevent base erosion that will promote job growth in the 

United States and ensure businesses are both competitive and fairly taxed. 

Along these lines, we need to introduce a minimum tax on foreign earnings to prevent production from going to tax savings overseas, as the President has proposed. This would also ease the Tax 

Code’s current bias towards foreign as opposed to domestic investment, and to level the playing field among competing businesses. 

We also need to find a fiscally responsible way to make the research and experimentation tax credit permanent in other to boost 

and attract domestic private investment in R&D. Studies have 

shown that the R&D tax credit stimulates as much research and 

development investment as a direct subsidy, and that the social returns on R&D are greater than returns for private investors who 

finance R&D. 

I want to stress that the level of taxation is only one piece of the 

puzzle and the statutory corporate rate is only one aspect of the 

corporate Tax Code and how it affects businesses as we have heard 

already this morning. 

But I also urge you to keep in mind the reason that we tax. Tax 

revenues fund public goods that U.S. manufacturing and global corporations that manufacture in the United States benefit from and 

which otherwise would not exist. 

For that reason, when considering levels of taxation, it is equally 

important to weigh the benefits of the public goods and services 

made possible with taxpayer dollars. When it comes to creating 

good manufacturing jobs in the United States, government spending plays a critical role in setting the stage for economic growth. 

To promote manufacturing and innovation in the United States, or 

at least to not disadvantage it relative to other industries, we recommend improving infrastructure so that U.S. goods can be more 

easily transported and marketed at home and abroad. This should 


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50 

include addressing our aging and overwhelmed electrical grid as we 

have all learned about here in the District of Columbia over the 

past few weeks; implementing the Obama administration’s proposal to start an $8 billion community-college-to-career fund to encourage collaboration and partnerships between community colleges and businesses in training our future workforce. 

Two million workers would learn skills vital to working in burgeoning industries like advanced manufacturing and health care. A 

highly skilled workforce would also give the U.S. and its regional 

economies further advantages over its global competitors. 

In addition, we should increase government investment in advanced manufacturing and establish a national network for manufacturing innovation. Having a strong manufacturing industry in 

the United States should be at the top of our national economic 

agenda. We will not be a global leader for long without a vibrant 

and innovative manufacturing base. 

The industrial commons matters for innovation and the extent to 

which we allow manufacturing processes to continue to go overseas, 

we only make it that much harder to regain our place as a global 

leader. 

Moreover, as more of our energy future will rely on high-tech 

manufacturing, our economic competitiveness, and in fact, our future trade deficits will be even more closely aligned with our ability 

to be an innovator and producer of manufacturing goods, especially 

in the energy sector. 

I want to thank you for inviting me here to testify and I would 

be happy to take any questions. 

[The prepared statement of Ms. Boushey follows:] 


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Action Fund 

Testimony before the U.S. House of Representati\'es Committee on Ways and Means 

on Tax Refonn and the U.S. Manufacturing Sector 

!leather Boushey, 

Senior Economist, Center for American Progress Action Fund 

July 19,2012 

Thank you Chairman Camp and Ranking Member Levin for inviting me here today to testify on 

the effects of tax policy on the U.S. manufacturing sector. My name is Heather Boushey and 1'm 

a Senior EconOlnist at the Center for American Progress Action Fund. 

The U.S. manufacturing sector is and will remain vital to oW' nation's economic prosperity. The 

rise of American industry made the United States the wealthiest and strongest nation on earth, 

provided the foundation for a strong middle class, and fueled critical breakthroughs in innovation 

and technology that transformed our lives and produced previously unimaginable achievements, 

from the invention of Henry Ford's assembly line to the landing of a man on the moon. 

I want to make a two key points in my testimony today: 

First, manufacturing is not only a key part of our economy, but moving forward it will 

remain critical to our nation's economic vitality. A strong manufacturing industry supports 

solid, middle-class jobs; enables our nation to be a leader in technology and innovation; and can 

help us address our trade delici!. Economic research is showing that manufacturing is critical to 

our economic future. J 

Second, there are a variety of ways that policymakers can support manufacturing, of which 

reforming the corporate tax code is one piece of the puzzle. Manufacturers make their 

investment decisions based on a varlety of factors, not only the level of taxation. The research is 

clear that any set of policies aimed at supporting U.S. manufacturing should include investments 

in education and training, intrastructurc, basic and applied research and development, and 

improvements to basic data collection. 

To suppOli manufacturing, 1 recommend that this Congress focus on a few key items: 

Pass comprehensive business tax refonn that both eliminates loopholes and inefticicnt 

business tax expenditures without disadvantaging domestic manufacturing.' Currently, 

loopholes allow companies to avoid paying U.S. taxes by artificially shifting their prot;ts 

offshore. Closing these loopholes by adopting strong provisions to prevent base erosion 

and will promote job growth in the United States and insure businesses are both 

competitive and fairly taxed. 
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Find a fiscally responsible way to make the research and experimentation, or R&E, tax 

credit permanent in order to boost and attract domestic investment in research and 

development, or R&D, fi'om the private sector. Studies have ,hown that the R&E tax 

credit stimulates as much research and development investment as a direct subsidy and 

that the social retwlls on R&D arc greater than returns for private investors who finance 

R&D,3 The Obal1la tax proposal finances the credit exclusively through business tax 

reform.-1 

lntroduce a minimum tax on foreign earnings to prevent production from going to tax 

havens overseas,s This would also ease the tax code's current bias towards foreign. as 

opposed to domestic, investment and level the playing field among competing businesses. 

I want to stress, however, lhat the level of taxation is only one piece of the puzzle and the 

statutory corporate tax rate is only one aspect of the corporate tax code and how it aHects 

businesses. Supporting manufacturing requires a deeper policy commitment and while I 'will 

focus my time in my remarks specitically on tax policy. given thc jurisdiction of this committee, 

there are also a variety of other ways that we can promote manufacturing and innovation in the 

United States~or least not disadvantage it relative to other industries~incILlding: 

fmprove infrastructure so that U.S. goods can be more easily transported and marketed at 

home and abroad. This will also make the U.S. more appealing to business.es and globally 

competitive.6 

Implement the Obama administration's proposal to start an $8 billion "Community 

College to Career Fund" to t:m:ourage collaboration and partnerships between community 

colleges and businesses in training om future workforce. T\'vo million workers would 

learn skills vital to \vorking in burgeoning industries like advanced manufacturing and 

heath care. A highly skilled \vorkforce \vould also give the U.S. and its regional 

economies further advantages over its global competitors.7 

Increase government investment in advanced manufacturing by 19 percent, to $2.2 billion 

in fiscal year 2013, as outlined by the current administration. 8 Manufacturing workers 

receive better pay and benefits, \vhile the manufacturing sector is the driving force behind 

innovation in our economy. Additional investments in this area \vill benefit workers. 

improve our standard of living, and strengtben our economy.9 

Follow through on President Obama's plan to establish a National Net\vork for 

Manufacturing Innovation. This net\vork, comprised o[up to 15 new manufacturing 

institutes, \vould facilitate 8nd promote collaboration between companies and research 

universities, all with the aim of increasing and scaling up manufacturing production. H) 

Having a strong manufacturing industry in the United States should be at the top of our national 

economic agenda. Without a vibrant and innovative manufacturing base, we \viII not be a global 

leader for long. Moreover, as more of our energy future \vill rely on high-tech manufacturing, 

our economic competitiveness will be even more closely aligned \vith our ability to be an 

innovator and producer of manufactured goods. 
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Further, this is an urgent national issue and one of those cases where success hegets success. 

Economists have begun to study and shmv that the "industrial commons" matters for innovation 

and the extent to \vhich we allov.,'manufaeturing processes to continue to go overseas, we only 

make it that much harder to regain our place as a glohal leader. ll As my colleagues Michael 

Ettlinger and Kate Gordon have put 1t, "the cross-fcttilization and engagement of a community 

of experts in industry, academia, and government is vital to our nation's economic 

compelitiveness.,,12 '-' 

Manufacturing is not only a key part of on)" economy, but moving forward it will remain 

cl"itical to our nation's economic vitalit)' 

The U.S. manufacturing sector is still a force internationally and an impOltant pat1 afour 

economy, despite employment losses and the relative rise in manufacturing in other countries 

over the past fe\\-' decades. 13 Last year, manufacturing contributed over $1.8 trillion to U.S. gross 

domestic product, or about 12 percent of the economy. 14 Two years ago, manufacturing 

accounted for 60 percent of all U.S. exports. l

; In 2008, the United States ranked tlrst in the world 

in manufacturing value added, and it \vas the third largest exporter of manufactured goods to the 

\"orld, hchind only China and Germany and ahead of Japan and France. 16 Bet\ve~n 1979 and 

2010 manufacturing output per hour of labor in the United States increased hy an average of4 

percent annually, and the United States has one of the world's most productive workforces. 17 

Moreover, in 2009 thcre were 11.8 million direct jobs in manufacturing and 6.8 million 

additional jobs in related sectors. 1tl Put another way, one in six U.S. private-sector jobs is directly 

linked to manufacturing. l9 

Yet the industry suffered declines in the 2000s. The U.S. share ofworldw·ide manufacturing 

\alue added dropped from 26 percent in 1998 to less than 20 percent in 2007. and we have gone 

from being a net exporter of manufactured goods in the 19608 to a net imp01ter.2H Manufacturing 

as a share of U.S. GDP has declined Ij'om more than 15 percent in 1998 to 11 percent in 2009.'1 

Andjobs in U.S. manufacturing declined from 17.6 million in January 1998 to 11.5 million in 

January 20 I 0?2 And although the manufacturing sector has gained jobs in every month since 

then, for a total of 504,000 jobs as of June 2012, its share of total employmenl is down [rom 16.8 

percent in 1998 to 10.8 percent today." 

These trends matter because thc United States needs a strong manufactl1ring scctor. 

Manufacturing provides good, middle-class jobs; propels U.S. leadership in technology and 

innovation. which is critical to our economic growth and vitality; and is impOliant 10 balancing 

the trade deficit, as well as important for our nation's long-term national security. 

Thc manufacturing sector has historically been a source of solid, middle-class job~ and it 

continues to he so today. The average manufacturing \vorker cams a weekly wage that is 8.4 

perccnt higher than non-manufacturing workers, taking into account worker and job 

charactcristics that influence \-vages, including unionization.2~ Economist Susan Hclpcr and hcr 

collcagues conclude that the economic evidence points to the fact that "the main reason why 

manufacturing wages and benefits are higher than those outside of manufacturing is that 
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manufacturer~ need to pay higher wages to ensure that their workers are appropriately skilled and 

motivated.,,2) 

U.S.-based manufacturing underpins a broad range of jobs in other industries, including higherskill service jobs such as accountants. bankers, and lawyers, as \vell as a broad range of other 

jobs such as basic research and technology development. product and process engineering and 

design, operations and maintenance, transportation, testing, and lab work.26 Compared to jobs in 

other economic sectors, manufacturing jobs have the highest '''multiplier effect," that is, the 

largest effect on the overall economy for each job created, relative tajobs in other industries. To 

put this in perspective, each job in motor vehicle manufacturing creates 8.6 indirect jobs, each 

job in computer manufacturing creates 5.6 indirect jobs, and each job in steel product 

manufacturing creates 10.3 indirectjobs. 27 

Manufacturing is also imp0l1ant because it fuels the United States' leadership in technology and 

innovation. whkh are criticu] to maintain for our future economic competitiveness?; 

Manufacturing f'inns are more likely to innovate than f'irms in other industries: Research from the 

~ational Science Foundation finds that 22 percent of maI~lIfacturing ~on;~ani~s are acti\~e 

I11novators compared 10 only g percent of nonmanufacturmg compa11les.~ ThiS number IS even 

higher for specific sectors within manufacturing. For example, in computer and dectronic 

products manufacturing, 45 percent of companies are product innm'ators and 33 percent are 

process innovators. 30 Manufacturing fil111S also perform the vast majority of private research and 

development: Despite comprisingjust 12 percent of the nation's GDP in 2007, manufacturing 

companies contributed 70 pcrc~nt ofprivate research and development spending. 3

! 

In addition to what manufacturers spend on innovation, there is increasingly strong empirical 

evidence showing a tight link between innovation and manufacturing production. Economic 

research now shows that the United States will not likely be able to keep the highly skilled 

technical jobs if the production jobs go overseas. Harvard Business School professors Gary 

Pisano and Willy Shih have written about th(: decline of the ""industrial commons" in the United 

States: the collective R&D. engineering, and manufacturing l..'apabiliti0s that mutually reinforce 

each other to sustain innovation.31 For many types of manufacturing, geographic proximity is 

key to having a strong "'commons," and they point to evidence sho\ving that there arc fe\v hightech industries where the feedback loop from the manufacturing process is not a factor in 

developing new products.:;3 As they put it, "product and process innovation are intertvI.:ined:' 

Pisano and Shih point to the example of rechargeable batteries as a product where innovation 

followed manufacturing. Rechargeable ballery manufacturing left the United States many years 

ago, leading to the migration of the batteries commons to Asia. Nmv new technology (batteries 

[or hybrid and electric vehicles) are being designed in Asia where the commons are located. I'd 

draw your attention to a January New forA Times article on China's increasing investment in 

research and development, which asked, '''Our global competitiveness is based on being the 

origin of the ne\vest, best ideas. How will we fare if those ideas originate somewhere else?,,3--1 

Finally, manufacturing matters because it is an important part of our trade deficit, which in turn 

has implications for our macroeconomy. The United States has had a trade deficit in almost 

every year since 1971 and the size of those deficits has grown over time. The trade deticit was at 

4 
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5727 billion in 2011, having never topped $300 billion prior to 20003 < Running a trade delicit 

over many years can have the effect of slowing economic gro\\'th, increasing unemployment, and 

risking economic instability. And, eventually, the U.S. will need to grow to pay back the debt we 

have incurred. The U.S. trade balance in high tech began to decline in 2000 and became 

negative in 2002. 36 

The trade deficit can come down in a variety OfV\iSyS, hut it is hard to see significant progress 

without manufacturing playing an important role. Brookings Institution economists Susan Helper 

and Howard \Vial \yith researcher Timothy Krueger calculated that the United States could 

eliminate its trade detlcit by 2019 through service exports alone only if service exports grew at 

an annual rate of 13.5 percent, compared to their annual growth rate fi-om 2001 to 20 I () of 7.9 

pcrcent. 37 According to their analysis, it would be easier to balance the trade deficit by with 

manufacturing exporls alone, 8S manufacturing exports would need to grow at an annLlal rate of 

9.3 percent, compared to their 2001-2010 annual gro\\1h rate of 6 perccnt.J~ 

There are a Y8riety of ways that policymakers can support manufacturing, of which 

reforming the corporate tax code is one piece of the puzzle 

The goal of this Congress should bc to support U.S. manufacturing in ways that generatcs U.S. 

jobs and helps to locate the United States as an innovation leader. While taxation may be part of 

lhis agenda, it is far [rom the only part. For too long we have allowed this one aspect o[hmv to 

grO\v our economy and SliPpOli U.S. manufacturing to overshadow all others. Yet, the research is 

clear that any sel of pohcies <-limed at supporting U.S. manufacturing should include investments 

in education and training, infrastructure, basic and ap'plied research and development, and 

improvements to basic data collection. further, as economist Susan Helper and her colleagues 

have noted, the focus should include encouraging workers, employers, and unions, and 

govcmIncnt to share the responsibility for improving the manutacturing base. 39 

I want to stress that the level of taxation is only one piece ofthe puzzle and the statutory 

corporate tax rate is only one aspect of the corporate tax code and how it affects businesses. 

urge you to keep in mind the reason we tax. Tax revenues fund public goods that U.S. 

corporations and global corpor<-ltions that do business in the United Statl:S benefit from and 

which otherwise would not exist. For that reason, when considering levels of taxation, it h 

equally important to weigh the benefits ofthe public goods and services made possible with 

taxpayer dollars. When it comes to creating good manufacturing jobs in the United States, I will 

argue that government spending plays a critical role in set1ing the stage for economic growth. 

First. investments in education and worker training are critical to ensuring that manufacturers can 

find skilled workers to make their products. In a recent survey conducted by Accenture, 61 

percent of companies indicated that they are considering more closely matching supply location 

with demand location, which means products for the U.S. market arc increasingly hkely to be 

made in the United States. 40 However, these same companies also expressed that they are 

concerned about the availability ora skilled workforce in the United Statcs.41 Another survcy by 

Deloitte documents a growing skills gap in manufacturing,-+2 Of companies surveyed. 67 percent 

reported a moderate to severe shortage in qualified workers overall and 83 percent reported a 

moderate to serious shortage of skilled production v.,rorkers; the majority expect this gap to 
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worsen over time.4< While companies can and should do more to train workers. it also makes 

sense [or the country to boost investments in workforce training and education . ..J4 Instead, the 

House approved a budget that would actually cut investments in education and training by 48 

percent per capita over 2010 levels,4J 

Second, there is broad bipartisan consensus that a strong national infrastmcture network is 

crucial to tbe success of the manufacturing sector and oventll economic grov.1h. Without an 

adequate infrastructure system, manufacturers face longer delivery times, more money wasted on 

gasoline as delivery trucks get stuck in traffic, rising energy costs, and more frequent power 

outages. But U.S. infrastmcture has been woefully underfunded in recent years, to the great 

detriment of our manufacturing eompetiveness. The Center for American Progress has written 

extensively about the need to repair OlIr aging roads, bridges, \\later, and other key public 

as~els.46 About one-in-four bridgt:s in the country is structurally dcficknt or functionally 

obsolete. 47 Inadequate freight rail means that our highways arc clogged \vith both trucks and 

passenger vehicles. making transporting goods inefficient and costly.4s Our strained electrical 

grid contributes to an increasing frequency of debilitating blackouts.4

<J The reperclissions of this 

failing infrastructure system to U.S. competitiveness are severe: according to the World 

Economic Forum's G/ohal Competitiveness Report, the United States now ranks 24th on key 

global indicators for infrastructun: quality among 142 nations, down from 8th in 2006. 50 

In order to revitalizc our infrastructure and enhance our global manufacturing competitiveness, 

the Center for American Progress has recommended a set of critical reforms, statiing with 

increasing the nation '5 infTastTucture investment by $] 29 billion a year over the next 10 YC<lrs.51 

Doing so will bring our crumbling infrastructure system up io par, belping to improve 

manufacturing productivity and ensure that manufacturers have the transportation network to 

efTicienlly bring their goods to market. 51 Instead, this HOllse has opted to pass (I budget that 

would cut transportation int1-astructure investments per capita by 28 percent over 20 1 0 levels. 

Third, funding adequate investments in research and development is necessary to promote U.S. 

manufacturing jobs.:'3 The relationship between basic research and de\ dopment. 

commercialization, and the manufacturing sector is critical: the microwave, the photovollaic cell, 

and the Internet, just three of a host of inventions. all came Ollt of Department of Defense 

investments in basic research and development, without which they may have taken years or 

dec<ldes longer to be invented and commercialized.54 Yet federal research budgets have 

diminished in recent decades relative to GOP gro"'rth. 55 Investments in science and technology 

research provide a critical basis for manufacturing innovation, but the House has instead voted 

for a budget that would reduce research and development spending per capita by 24 percent over 

20 J 0 levels. 56 

Finally, improving federal data collection and competitiveness coordination is important to 

supporting U.S. manufacturing,57 One ofthe biggest balTiers to the United States developing a 

more robust set of policies to support manufacturing is that policymakers do not have a clear idea 

of what this country already produces and there is little coordination between the many 

govemment agencies and programs that focus on basic competiti\'eness.5N For example, under 

the eurrent s),s.tems (If measurement, "it is not now possible to know how many jobs in the 

Detroit region arc actually tied to the manufacturing industry.',.'9 We should re form our 
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insufficient statistical system to assess the competitiveness of key traded industries,fio to 

adequately measure intermediate outcomes that influence competitiveness,61 to improve the 

analysis of factors that influence competitivencss,62 and to improv~ e\ altmtion of 

competitiveness programs.63 Congress should also grant President Barack Obama the authority to 

reorganize the government to streamline federal competitiveness efforts by consolidating the 

following six agencies into one depmtment: U,S. Department of Commerce's core business and 

trade functions, lhe Small Business Administration, the Oflice ofthe U.S. Trade Representative, 

the Export-Imporl Bank, the Over~eas Private Investment Corporation, and the U.S. Trade and 

Development Agency.6-1- Taking these steps is an inexpensive way to ensure that we are guided 

by the best, 1110St accurate infom1alion when making manufacturing policies. 

Creating a climate for the United States to be globally competitive requires that we make 

investments tmvard this goal. It is through this lens that we need lo evaluate tax policy. As we 

think through hov,/ to construct a tax system that encourages manufacturing and other economic 

activity, we must balance the need for revenues to fund public goods that otherwise would not 

exist, alongside the distortions that taxes create. If our tax code cannot be reformed to raise 

additional revenue, the resulting deficits will drive debt-to-GDP ratios to unsustainable levels 

under any reslistic spending scenario, \\'ith negative repercussions for the U.S. economy over the 

long krm. 

The facl is thai we need to increase ollr revenues. Our current tax code is inadequate to fund our 

national needs without accumulating more debt and the problem is not one of accelerated 

spending, but rather of declining revenues. 1n ihe 1950s corporate taxes contTibuted about 30 

percent of federal revenues, but have steadily declined and now average only about 10 percent of 

federal revenues. 65 With the diminishing corporate tax the United States has relied more heayily 

on other taxes, in particular payroll taxes on \vages, which have risen from about 12 percent of 

federal revenueS during the t 950s to about 40 percent of revenues today. M The increasing share 

of business activity being conducted via "pass-through" entities, including S corponltions and 

LLCs is partly responsible for the decline in corporate tax revenues. But also responsible is the 

fact that corporations are paying lower cff~ctjve tax rates on their profits than they did in th\? 

recent past. 

The good news is that there is room for revenue~positive tax reform, including revenue-positive 

ref 01111 of the corporate tax code. The corporate tax is 1he third largest federal revenue source, 

behind individual income and payroJ! taxes. While the statutOlY corporate tax ratc is 35 percent, 

the second highest in the OECD, the better measure of the actual tax paid by corporations is their 

eilcctive rates.67 Recent studie~ have found that the effective rates of large U.S. corporations are 

in line whh or actually lower than their foreign counterpat1s.i}S In fact, corporate taxes represent a 

smaller portion of GDP in the United States than in other OECD economies.6

'1 

In thinking through any reform, however, \ve need to bear in mind a number of key issues 

specitic to manufacturing and whether the goal ora 26 percent rate for all industries is 

achievable. The Joint Committee on Taxation has said that eliminating nearly all major tax 

expenditures to lower the corporate rate in a revenue neutral way would allow us to get the rate 

to 28 percent. but not to 25 percent and if we are to increase revenue, this :'.hould be carefully 

targeted. 
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The mantra of "lower the rate, broaden the base in a revenue-neutTaJ way" may in fact do the 

most harm to domestic manufacturing. Repealing tax expenditures and lowering the rate would 

increase, not decrease taxes on manufacturing firms. Writing for Daily Tax Report, Gerald 

Prante. Robert Carroll, and Torn Neubig found that: 

... the biggest winners from using repeal of business tax expenditures to 100ver business 

tax rates to appr0ximately 28 percent would be the retail and wholesale trade, 

information, transportation, tinance and insurance, and services industries. Rate reduction 

v,muld more than offset the loss of benefits from their tax expenditures.7o 

Congress should consider carefully \vhethcr this kind of reduction senres our national economic 

gouis. First, it is not clear that that \ve should continue to privilege finance over other industries 

and retail and wholesale trade are, by their nature, geographically constrained. Tn a fiseal 

environment 'where we are already facing large and grovr'ing budget deficits, we need to make 

sure that our tax policy both brings in sutlicient revenue and focuses on Suppol1.ing our 

manufacturing base. 

Prante, Carroll, and Neubig go on to note that while 

... eliminating all business tax expenditures would disproportionately hit the 

manufacturing industry, especially those manufacturers with multinational operations. 

Within rnanufacturing, durable goods manufacturers, especially those \\/ith a 

multinational presence, \\(mld be the biggest losers, reqldring a far greater reduction in 

th~ corporate tax rate to break even.71 

This is consistent with analysis by economist Martin Sullivan in his analysis of lowering the rate 

in a revenue-neutral .... vay, \vhich found tbat this approach wi1l be detrimental to domestic 

manufacturing. His analysis concluded that the biggest winners would be securities (net 

reduction of 12,3 percent), insurance (-11.9 percent), credit intermcdiation (-10,2 percent), and 

retail trade and bank holding companies (-10.1 p~rccl1t each), while metal. minerals, and 

machinery manufacturing would see its net taxes rise by 7.3 percent and computers an 

ekctronics \vould see net overall taxes rise by 33.0 percent?:~ 

Second, tax reform should put an end 10 any bias tmvard foreign over domestjc investment. The 

Govenllnent Accountability Officc has found that the effective tax rate that U.S. corporations 

pay on their foreign pro1its is 16.2 percent, about two-thirds of the tax rate on their domestic 

profits, which they eslimate to be 25.2 percenL73 Tax reform must level the playing field, not 

furthcr tilt it against investment in the United States. 

An initial, critical step to cOlTccting this bias is to SlOp the drain of pro tits into olIsbore tax 

havens. Moving to a territorial tax system, especially without adequate safeguards. would make 

the problems worse. The discussion draft circulated by Chairman Camp admirably acknowledges 

the need for anti-tax haven rules. In seeking ways to pay [or a corporate tax rate cut, the 

committee should be wary that many tax expenditures benetit domestic investment and 

eliminating them 10 pay [or a corporate rale cut could actually make investment in the United 
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States less attractive from a tax perspective. That's v • .'hy the best way to broaden the tax base is to 

cnlck down on offshore loopholes. 

Third, tax reform should reflect our nations I economic priorities and support long-term U.S. 

competitiveness. 1n this regard \ve are long overdue for a revie\v of the growing number of 

special tax breaks. or "tax expenditures." The tax code contains permanent tax brcflks to 

subsidize oil and gas, even though \vith oil hovers above $100 per barrel, there is no clear 

economic need for subsidies, while the tax breaks for alternative cncrgy--'\vhich \vould nol only 

help our nation lead the world in addressing the warming planet, but also support U.S. 

manufacturing in cutting-edge technologie~'---are merely temporary. This should be reversed. 

There are real opportunity costs to tax expenditures and those that serve no policy purpose. like 

those for hedge funds and private equity fund managers (carried interest), should also be 

eliminated. Tax breaks that have a worthy public purpose and solid economic rationale, such as 

the domestic production deduction (section 199), should be reviewed to make sure they are well 

targeted and serving lheir purpose in a cost-dlicicnt way. The president has. proposed targeling 

that deduction more narrmvly at manufacturing and advanced manufacturing, where there arc the 

most spillover benefits. 

The research credit also has a strong policy rationale. 74 Congress should find a way to pay for a 

pennanent or at least long-term extension rather than renewing it every year, sometimes 

retroactively. 

Maintaining current revenue levels will only lead lo continued deficits and more debt, \vhile 

sacrificing the kinds of investments needed to mcd basic needs and support manlltllcturing and 

economic competitiveness more generally. If our tax code cannot be refl)fmed to mise additional 

revenue, the resulting deficits will drive debl-to-GDP ratios to unsustainable levels, with longtenn negative repercussions for the U.S. economy. As Treasury SecretalY Geithner said in a 

Bloomberg interview recently: 

One thing we can do is change our tax system so we're creating more powerful incentives 

for companies to inve~t here. because. again, \ve ,vani the stuff that the \vorld needs. stuff 

Americ~ns are uniquely good at, to bc.,prodllced in the United States by American 

compames and by foreign companies.' 

Given the important place of domestic manufacturing in our economy. this seems like the right 

goal, 

Endnotes 

I Susan IIelper, Timothy Krueger, and Howard Wia!. "Why Docs Manufacturing MaHer? Which :Vlallufaeturing 

Matters'?" (\V8shington: Brookings lnslitulion, 2012); Gary Pi~8no and Willy Shih, "Restoring Amencan 

('ompetiti\eness," Horvdl"d BlI~'iness Review (July- Augu'{t 2009) (2009): 14. 

2 Seth Hanlon, "Obama\ Corporatt: Tax Plan Poinls the \Vay for Rcf(mn," (Washlllgton, DC: Center fDr American 

Progres'>, 2(12).: "The PreSident's Framework fix Busille"~ Tax Reform," ed. The White llou"e lind the Depwiment 

of the Trcnsury (2012). 

'Laura Tyson. "The Corporate R&D Tax Credit and U.S. lnnovation and Competitiveness," cel. Grcg Linden 

(Washington. D.C.: Cenler for American ProgTe"s. 20W) 
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American Progre~~, 2(11) 

(1 Donna C(lI)peT, "Meeting the Inlra~tructLtTe 

- Stephen Stcig!cder, "Turning 

2010). 

K Remarks at "the hture of Manufacturing" Conferencc at Mit. 

') Rebecca Lehrman David Langdon, "The Beneiits of Manufacturing Jobs." ed. United States Department of 

Commerce (Washington, D.C.: Economic.~ and Statistics Admini<;tr:.Ition, 2012, Working Paper No. #01-12). 

:f, "Advanced Manufacturing: National NCH'I:ork for Manufacturing Innovation," available at: 

http://w\\\Y.manuractliring.gov/al11p/nnmi.html (last accessed July 17,2012). 

11 Pisano and Shih, "Restoring American Competitivencss". 

12 Michael Ettlinger and Kate Gordon, "The Imparlance and Pronllse of American Manufacturing" (\V8shington DC: 

Center for American Progre&s, 2011). 

U Ron Blnom and others, (Center for Amencan Progre~~, forthcoming). 

1.1 Bureau of Economic ."n!Jlysis, "Gross Domestic Product by lndu:.try: Value Added hy Industry," (Wa:.hinglon 

D(,2011). 

Ie, Lmilia lstrate ,md Nicholas "FXPOE1 Nation 2012: 1 Io\\.· U.S. Metropolitan Area~ Are Driving National 

GW\\1h" (W8shingtol1 DC: Brookings 20)2, p. J- 36). 

10 Ettlinger and Gordon. "The Importance and Pmmise or American Manuracturing". 

17 Burcau of Labor Stati1-tic1.. "Table 1. Output Pcr }Jour. Output and Hour1.." (Wa1-hington DC: Hurcau of Labor 

Statistie~, 2011 ).: Bureau of Labor Statistics, "Table 1. Output Pel' Hour in Manufacturing, 19 Countries, 1950-

lOW," (W8:.hington. DC2010). 

18 "The Facb About \1odem vlanuracluring", (\\ <l1.hington DC: The Manufacturing Institute. 2009. p. 1-55). 

19 Ibid. 

20 Ettlinger 8nd Gordon. "The Import8nec and Promise or American 1'v1811ufacturing".: Bureau of tconomie 

Analysis, "U.S. International Trade in Goods 8nd Serv'ices," (Wasbington DC: U.S. Census Bureau, 2012).; ibid. 

21 Bureau of Economic Analy.,i1., "Gmss D[)me~tic Product b) Indm,lry: Value Added by Industry as Pen;entage of 

Odp," (Wa'ihington DelOIJ ).; Rloom and others 

2~ Hun,au of Labor Statistics, "Employment, Hours, and Eaming~ from tho.: Currcnt [mploymcnt Statistit:s Suney 

(National)," cd. Departlllcnt of Labor (\\'<l"hingwn DC2012). 

n Ibid. 

M Sw .. an lIelper, "Rene\\ing U.S. Manufacturing: Pwmoting a High-Road Strategy" (Washington. DC: E.:onomic 

Policy Institutc, 200R). 

25 Susan Helper, "Renewing U.S. Manufacturing: Promoting a High-Road Strategy" (Washington. DC: Economic 

Policy Institute, 20(8). 

~: Et~linger and Gordon, "The Imponance and Pmmise of American Manufacturing". 

Ibid. 

2~ Bloom and others. 

2'.1 Mark Boroush, "NsfRdeases Nc\v Stalstics on Business Innovation," VA: t-.;8tionai Science 

FoundatlOn,2010), DOO.pdf 

.'0 Ibid. 

~l Gregory Ta:.~-::y, "Rationalc~ and Mc(.:hanisms for Revitali.ling Us Manufacturing R&D Stratcgie~" (Wa:o.hington: 

Institutes ofSt[mdards and Technology, 2009) 

and Shih, "Restoring American Competitiveness". 

Ibid. 

''; Adam Davidson, "Will China Outsm8t1 the US?," tVI!>!' York Times, JaJ1U8ry I, 2012, 2011, !Jvaibb!c at 

http://w\\\Y.nytimes.com!20 12/0 1 /0 I ll11agazine/ad8m-davidson-china-threathtml? . Fe I &pagewanted,c·all. 

3<; U.S. Bureau of the Censu:-i, "Foreign Trade- U.S. Trade with World, Seasonally Ad,iLL<;ted," 2(12). available at 

http://w\\'\\'.censlls.gov/foreign-tmde/balance/c0004.htlnl. 

'6 Pisano and Shih, "Restoring AmericaJl Competitiveness" 

~- lldpcr, KTueger, and Wial, "\Vhy Dt)e~ Manufacturing Matter? Which \1anufacturing Matters'?". 

-'X Ibid. 

]9 Ibid. 

10 
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~() Aeeenture. "Manufacturing's Secret Shift: Gaining Competiti\'e Advantage by Getting Closer to the Customer" 

(2011). 

,n Jbid 

4: Tom Morri~[)n and other::.. "Boiling Point? The Skills (jar in U.S. IV!anllfacturing" (Oe\oitte 

The Mmmtaeturitlg lnstitute, 2011). 

l' [biJ. 

44 Bloom and others. 

4'> Adam Hersh Zlnd Sarah Ayres, "New Ryan Budget Disinvests in America" (Washington: Center for American 

2012). 

Ibid. 

4~ Ibid. 

"Meeting the Inlbstructul'e lmperative·). 

«! Xu\'kr Sala-i-Martin, "The Global Competitiveness Report, 2011-12" (Gen..::va, Switzerland' World Economic 

:!Oll f.: Augusto Lorez-Claros, "Top Periormers in the Nine Pillars of the Globallndex, Fxecutive ')l1mmary 

Competitiveness Index, 2005-2006" (World Economic Forum, 2(05). 

'" Cooper, "Meeting the Infrastructurc Imperative". 

- Bloom and other" 

q Ibid. 

q Ibid. 

"5 "Federal Support for R&D." (Washington: Science Progress, 2008), available at 

http:!'; .... ww .~cienceprogre1:>s.orgl\\ p-contentiupload:-,/lOOR/06iprint_ editionifederal_ ,>urport _ datu.pdC 

<;r, Hersh and !\yrcs, "New Ryan Budget Disin ... ests in America" 

<;, Bloom and others. 

"g CAP has wntlen extensi\e!y about ways to implOve federal daUI collection and comretitlvene~s cnordinalion. See 

Andrew R(.:amer. "Economic Intelligence: Fnhancing the Federal StatistICal Syskm to Suprort U.S. 

Competiliver.ess" (Washington: Center tor American Progress. 2(12); Jonathan Sallet and Se~1n Pool. "Re\viring the 

Federal GOvernment lor Competitiveness: A New Cabinet Department for the 21 st Century" \ Washington: Center 

fi)r American Progress, 2012). 

5<) Reamer, "Economic Intelligence: Enhancing: the Federal Statistical System to Suppnrt U."). CClInpetitivene,s". p. 

18. I-Ie explains "The Blll-eau of Fcotlmnic Analysis say:-, lhat in lOOO the Detroit metropolitan area had 467,000 

manufacturing jobs, according to the STC system. and that in 200J the area had 371.000 manUfaCill1'ingjobs, 

according to '\JAICS, a decrease of97,000. In 200), the region also bad 44,000 jobs in the manal:!;ement of 

companies and enterpri~es, a category that did not exist Il1l000. Other o;;;IC manutacturingjob" shifted to NAICS 

catcgorics ~uch i.l~ transportation and \\arChollsing. In contrast, thc Bureau of Labor StatIstics ~hn\\':-, a NAICSconsistcnt change in manufacturing jobs of392,000 to 359,000 bctween 2000 and 2001, a 32,000 job decline (IH <.; 

converted Sf( data to NAteS bad to ! 990). BEA dJta include tbe self ... employed. \v'hich tends to make its numbers 

a oit higher. That BFA'..:;,illb decline number is three times that ror BLS can be attributed to the c1as~ification 

change. Under NAteS, thcn, it is no\y not rossible to know how many jobs in the Detroit region arc actually tied to 

the manufacturing industry." 

611 For example. ·'the Department of Labor should rcquest. and Congress should approve, funds fCH' BLS to create an 

input price index to more Jccurately measure manufacturing producti\,ity:' Ibid. 

01 For example, "Congre"" should provide the ('emus Bureau with fund:. surticient to conduct the::W 12 economic 

Cell~us:' Ibid. 

6~ For example, ·'thc National Cc:t1tel' for Science and fngineering Statistics should provide a current, complctc, 

d.etajled picture of R&D expenditures for the nation. states, and regions." Jbid. 

OJ For example, "the Census Bureau 'ihould create a pwgmm to use the Longitudinal Bu"ine~~ Database to a~,>ess the 

impact of program support to individual firms in terms of survival, revenues. jobs, exports, innovation, and other 

outcomes related ttl competitiveness." Ibid. 

M White J louse, "Uovemment Reorganiz.ation Fact Sheet," (WaShington: White House, 2(12). available at 

http://\\ \vw. ,\ hitehOllse .gO\ ithe"'rres,>-orf] ce!20 1210 I.' I 3/government -reOl'ganizatioll- fact-~heet. 

(,' Ibid. 

M The WhIte House, "Budget 0fthe United States Government, FISCal Year 2011, Historical T<lbles: Table 2.2. ," 

{2012}. 

(,7 Ibid. 

11 
62 

f 

Chairman CAMP. Well, thank you, Ms. Boushey. Thank you all 

for your testimony. I do have a question for Ms. Dossin, Mr. 

Gjersdal, and Ms. Ford. 

Several witnesses at the table as manufacturers have testified 

that lowering the statutory rate is so critical to America’s ability 

to compete, that it is worth giving up substantial deductions and 

credits. And some have also talked about the importance of encouraging domestic innovation, moving to a territorial system with antiabuse rules. 

Now, would a 25 percent rate, a territorial system with reasonable safeguards to prevent shifting to low tax havens and adequate 


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63 

incentives to conduct R&D, and locate intellectual property in the 

U.S. be attractive enough to you, that even as manufacturers who 

benefit from numerous deductions and credits, you would be willing 

to put all of your tax preferences on the table? And why don’t I 

start with Ms. Dossin. 

Ms. DOSSIN. Sure. I think the very fact that you have called 

this hearing means that you recognize those provisions do have 

power in the economy, and I don’t think it is time quite yet to 

choose which ones stay, and which ones go, but I am here to say 

that when that time does come, they will be all on the table, and 

we will want to be at that table helping choose what helps the U.S. 

economy go forward. 

And for Ford’s business to go forward in the U.S., I will say 

again, we think the low rate is the single-most important thing, 

and beyond that, we would look for more stability, simplicity, so 

that whatever is in there is something that I can communicate to 

management to help decision-making and hopefully that would 

support decision-making that keeps investment in this country. 

Chairman CAMP. All right, thank you. Mr. Gjersdal. 

Mr. GJERSDAL. We would certainly be willing to put every preference on the line. There is no question that a lower tax rate not 

only would be evening the playing field for all companies here in 

the U.S., the other thing it would do is, it would really simplify 

things and create transparency. Right now, the Tax Code simply is 

not believable, and that is not only to the public at large, that is 

to the executives at 3M. I find it almost impossible to explain the 

Tax Code to them these days. They don’t believe me it is so complicated. So frankly going to a lower rate—— 

Chairman CAMP. I am familiar with that problem. 

Mr. GJERSDAL. It is a very difficult proposition. But frankly, 

putting all of the preferences on the line for a lower tax rate is definitely the way to go. 

Chairman CAMP. All right. Thank you, Ms. Ford. 

Ms. FORD. I would echo the comments made. I think everything 

should be considered, particularly when you start to get towards 

the 25 percent rate. It does make us more competitive. I think the 

overriding concern, of course, is that rates can have a very easy 

tendency to creep back up. So I think it is really important that 

we think through the other provisions that we remove is they are 

incentivizing particular behaviors, and then avoid a subsequent 

kind of rate creep up over time. 

Chairman CAMP. Thank you. I have a question for Mr. Hardt 

and Mr. Beck. Earlier this week Ernst & Young released a report 

that analyzed what would happen if we would adopt the administration’s proposal to let taxes on small businesses go up at the end 

of the year. Roughly, it is the $200,000 for individuals, $250,000 for 

couples. And among other conclusions, the report finds if that were 

enacted, that it would destroy over 700,000 jobs and that wages 

would fall by 2 percent. Now, I would just ask both of our small 

manufacturers, how would this proposal affect your businesses specifically? 

Mr. HARDT. Thank you for the question. As I mentioned earlier, 

approximately 70 percent of the manufacturers in the United 

States are structured as S corps, or pass-through entities. And 


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there is only so much of the pie. You have taxes to pay out of the 

pie, reinvestment in your business, which is by far the overwhelming portion where our profits goes. I just mentioned that yesterday we were installing a $270,000 grinder, which is in excess of 

the $250,000 you just mentioned, which comes out of profits of the 

business. And of course, to repay borrowings to our banks. And 

again, they are wanting more profits in the business as well to justify borrowings these days. Borrowing money has been a little 

tougher the last couple years. 

So to me, it would directly impact investment, if you switch up 

the pie, shall we say, and it would be negative for us. The real 

issue we have today is uncertainty. I need to mention that again, 

that we are making decisions, borrowing money, personally guaranteeing loans, hiring people, and the uncertainty with that proposal 

also is very concerning to us. 

Chairman CAMP. All right. Mr. Beck. 

Mr. BECK. I agree with Mr. Hardt. When you take a look at a 

company like ours, basically my brother and I own the company. 

If the company makes $1 million, that means as a subchapter S 

company, I pay—would pay the taxes on half of that, $500,000, and 

my brother would pay the other half. The money comes from the 

company, but we are not taking that as revenue into our own pockets. That money that we make has to be reinvested in the business. 

If you take 3 or 4 percent more intakes, we have already gone 

through a great recession. We have been starved for profits. We are 

hoping to make some profits this year. We would like to hold onto 

whatever we can, and not have to give it back as taxes. We need 

to reinvest in training our people, because now we have had to hire 

back a lot of people. We haven’t put investment back in our company because we haven’t been able to. We would like to do what 

Mr. Hardt is doing and upgrade our machinery. And 3 or 4 percent 

to a small company like ours I think has a lot more impact than 

the revenue that you are going to be generating for the Federal 

Government. 

Chairman CAMP. All right. Thank you. Mr. Levin is recognized 

for 5 minutes. 

Mr. LEVIN.Well, I think if we can, we should resist using this 

hearing to have an overall discussion of the very basic disagreement as to the high income tax cuts. I am not sure of the situation 

for the two of you, but Joint Tax has told us that only 3 percent 

of small businesses have income over $250,000 a year. So the Ernst 

& Young report is deeply flawed in terms of its methodology, assuming that none of the tax cut, the end of the tax cut for high 

income would go for deficit reduction. It has other deep flaws. But 

if we spend our time today arguing over this, I think it will be a 

mistake. 

I thought the focus was the importance of manufacturing. And 

what has happened in these last years is there has been a resurgence in understanding of the importance of manufacturing in this 

country. The language became that we were in a post-industrial 

era. And it turns out, as shown by what has happened in the last 

couple of years, that manufacturing remains a very key part of our 

economy. And it has helped to lead us back from the pit, and 

helped to create jobs. And the difference of opinion about that was 


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crystallized in our reaction to whether we would let a couple of the 

domestic auto companies go under and not be able to come back. 

So I would hope we could have a focus today on the importance 

of manufacturing, and how our Tax Code relates to it, and how we 

approach tax reform, keeping in mind the importance of manufacturing. And I think this panel illustrates the challenge for us to do 

that. And to simply say let’s have a goal or a policy of reducing to 

a certain level, without taking into account what would be the impact on manufacturing, I think is misguided. 

There are differences of opinion among all of you as to what 

would be the impact of the focus only on the rate, without determining its impact on manufacturing. And I understand that difference of opinion. Your companies are in different positions. To 

say that everything should be on the table, that is, I think, okay, 

provided you keep in mind the objective of what you look at when 

everything is on the table. And I think the testimony, if I might 

say so, on manufacturing by the two of you illustrates that. And 

so Mr. Hardt, without discussing larger issues of taxation and 

upper income taxation, I think it is revealing when you say on 

page—our pages I guess aren’t numbered—but you do refer to it, 

and I think it was important. You said we fully support expanded 

bonus depreciation, Section 179 expensing, and Section 199, domestic production activity deduction as tools manufacturers use to create jobs and compete globally. 

And I think it is important to remember that, because if you 

eliminate those, you don’t get down to 25 percent eliminate everything. And the question becomes, what happens to these incentives 

for manufacturing? Should we have them? And then Mr. Beck, you 

say I think very compellingly on page three, ‘‘Bonus depreciation 

and increased 179 expensing can be deciding factors for businesses 

considering equipment upgrades or company expansions. These two 

incentives most assuredly contributed to the impressive growth in 

manufacturing technology orders in 2011.’’ 

And then you go on to say, ‘‘There is no question,’’ on page 4, 

‘‘R&D leads to new technologies and innovation.’’ And you conclude 

on page 4, ‘‘Without the credit, we may not have made the investment.’’ So I think that illustrates how we need to approach this, 

not with a simple mantra, but with a question, is manufacturing 

and the Tax Code supporting that an important criterion in terms 

of tax reform? And I think the answer clearly has to be yes, it is 

a major priority. 

Chairman CAMP. Thank you. Time has expired. Mr. Johnson is 

recognized for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Hardt, you 

know, it is a testimony to the great entrepreneurial spirit that has 

helped make this country as great as it is. It is too bad the President and others are attacking this spirit. I am sure you heard by 

now President Obama say, ‘‘If you got a business, you didn’t build 

that. Somebody else made that happen.’’ Mr. Hardt, did somebody 

else build your business? 

Mr. HARDT. It was a team effort with myself, my partner, and 

a lot of our employees, but we took the risk, that is a fact, and continue to. 


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Mr. JOHNSON. And government didn’t build your business either, did it? 

Mr. HARDT. Government can assist. Government can assist with 

certain incentives to help invest in what we do, to make sure we 

are globally competitive. But we took the majority of the risk, that 

is a fact. 

Mr. JOHNSON. You bet. Mr. Hardt, with respect to tax reform, 

would you be willing to put all the various deductions and credits 

on the table for a top rate of 25 percent? 

Mr. HARDT. It is a little bit difficult for me to answer that, to 

be honest with you. The reason I say that is I do believe that in 

small manufacturers like ourselves, cash flow is a key priority to 

what we do. And that some of the incentives to recognize investing 

in the U.S., to spending capital, to taking risks, for encouraging 

people to get into the business, such as e, mentioned, the depreciation deductions, are beneficial. However, saying such, looking at 

the total effective tax rate, and looking at lowering the total effective tax rate to allow us to put more into our business is very critical, and would be very welcome. And I am sure both of us, two 

small guys here, would do that. 

Mr. JOHNSON. That is close. So tell me, what key three points 

would you like to leave with us when it comes to tax reform? 

Mr. HARDT. First of all, that manufacturing is very important 

to our economy. And we do need to look at manufacturers, both 

large and small, C Corps and pass-throughs, as being very vital to 

our economy. And I need to support my brethren to my right here, 

the larger companies, because they are my customers, and so they 

need to remain competitive too. And we need to make sure that we 

make all manufacturers competitive. 

Secondly, I encourage us to continue to look to incentivizing people to get into business, to start businesses, to build businesses 

that are vibrant to the backbone of the country and to feel confident that they can take the risk, and they know with some certainty what is going to happen if they take the risk. I need to mention again, uncertainty is very difficult when running a small business or a family business. So those are really my two key points 

that I need to leave you with. 

Mr. JOHNSON. Thank you. Mr. Gjersdal, as you may know, earlier this year the administration released its framework for business tax reform, which calls for a minimum tax on foreign earnings. What are your thoughts about that proposal? 

Mr. GJERSDAL. Well, that is a difficult question to answer because, first of all, we don’t know what that rate might be. Secondly, 

we don’t know how the foreign tax credit mechanism may work 

with it. At a high level, though, it concerns me. First of all, it just 

suggests to me that this will increase complexity, not decrease complexity. And furthermore, I don’t see it really helping us compete 

in the global marketplace. I still believe territoriality is a much 

better answer. 

Mr. JOHNSON. So you more or less think that we need to have 

a less complex system? 

Mr. GJERSDAL. Simplicity, simplicity, simplicity. 

Mr. JOHNSON. Okay. And such a proposal that we are hearing 

could cost jobs in America, could it not? 


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Mr. GJERSDAL. Pardon me? 

Mr. JOHNSON. If we try to stick with a high rate of overseas. 

Mr. GJERSDAL. Absolutely. Absolutely. 

Mr. JOHNSON. Thank you for your testimony. Thank you, Mr. 

Chairman. 

Chairman CAMP. Thank you. Mr. Nunes is recognized. 

Mr. NUNES. I have no questions at this time. 

Chairman CAMP. All right. Mr. Tiberi is recognized. 

Mr. TIBERI. Thank you, Mr. Chairman. To the two manufacturers, the pass-throughs, Mr. Hardt and Mr. Beck, I don’t remember 

which one of you in your written testimony talked about buying a 

piece of machinery over $250,000. But the question is to both of 

you. Mr. HARDT. $270,139 to be exact. 

Mr. TIBERI. Okay. My question to both of you is, I can’t imagine 

how frustrating it is in Napoleon—I am from Ohio, where you are 

from—to hear the President or others talk about the fact that you 

are obligated, you should pay more because of how much money 

you make. And I think your testimony is so very good to try to help 

educate policymakers and the rest of America that if you make 

$250,000, I think you mentioned that, as a business owner who is 

a pass-through entity, or an owner of a business, talk a little bit 

more to us today, both of you, real quick, what that means in terms 

of reinvesting in your business. Out of that $250,000, you have to 

buy machinery, you have to employ more employees. There are 

training costs. So it is not like you are pocketing it and saving 

money to go buy an island in Hawaii. 

Mr. BECK. As a pass-through, such as a subchapter S or a sole proprietorship and you have $250,000 of income from your company, you pay the taxes through your own personal tax forms. And 

it appears to most people that it would be your salary. But it is 

not your salary. 

Mr. TIBERI. Can you say that again? 

Mr. BECK. It is not your salary. It is what your company made, 

which means that out of that $250,000,a large portion goes to 

taxes. You may take a salary of $50,000, $60,000, $100,000, I don’t 

know what people take. A Small businessowner might take a 

$50,000 annual salary. The other $200,000 (less taxes) would be reinvested. What is not paid in taxes would be reinvested in their 

businesses. 

Mr. TIBERI. So if the rate is 35 today and it goes to almost 41, 

the top rate tomorrow, 6 percent, that is pretty significant. 

Mr. BECK. I want you to know, 2 weeks ago I met with my joint 

venture partner in Germany, and I asked him if he wanted to invest in a company in the United States. So we compared corporate 

rates. And he said, ‘‘Your corporate rates are too high.’’ He said, 

‘‘The most I will invest with you is maybe 20 percent,’’ when I was 

hoping to have him coming in and doing a 50 percent investment 

into a venture together. That is Germany. 

Mr. TIBERI. Mr. Hardt, anything to add to that? 

Mr. HARDT. Yeah, I agree. The majority of the profits that we 

make are reinvested into the business. And that is not just us, the 

surveys show it. So there is only so much of the pie to go around. 

Secondly, we need to leave a lot of our profits and our cash flows 


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in the business today to keep our banking brethren happier, because it is tougher to borrow money today without a profitable 

business. 

Mr. TIBERI. So if the rates are increased, that is less that is reinvested? 

Mr. HARDT. Less that is reinvested, and it is less that can be 

potentially borrowed as well, because the banks aren’t as happy 

with our cash flows. 

Mr. TIBERI. Thank you. To the three on the far left, all three 

of you American, large companies, do business overseas. I will start 

with Ms. Dossin, if you could all answer this question. You are 

competing, when you are selling a Ford in Italy, you are competing 

with German companies, you are competing with Korean companies, you are competing with Italian companies, and you as well. 

So the three of you, how difficult is it today to compete when their 

rates are lower and we have a worldwide system? And how does 

it benefit us as Americans when you are expanding in Europe or 

expanding in Asia? How does that benefit America? Does it benefit 

the corporate headquarters? Do you have more employees at the 

corporate headquarters? Can you just comment on that rather than 

this thought of shipping jobs overseas, which is a mantra of some? 

Ms. DOSSIN. Well, that is a little bit of a complex question, because, of course, wherever you compete, in Italy let’s say, in Italy 

your profits in Italy are subject to the same tax whether you are 

BMW or Ford. It is where the more movable profit is, right? It is 

where the entrepreneurial profit is. It is where maybe the profit 

from intellectual property resides. 

Mr. TIBERI. But if you repatriate your profits from Italy back 

to the United States, versus if the German company repatriates it 

back to Germany, there is a disadvantage for you. 

Ms. DOSSIN. It tends not to be our issue. That repatriation issue 

tends not to be our issue. But I would say, it is correct that where 

the residual profit resides, for us it is headquarters, for us it is the 

U.S., and that is the pain that other companies headquartered elsewhere do not suffer, I will say, on that type of profit, on their entrepreneurial profit. 

Chairman CAMP. Just quickly, time has expired. Other two, just 

answer very quickly. 

Mr. GJERSDAL. Just a very quick example. Let’s assume we 

make $100, our competitor that is overseas makes $100. We pay 

a tax rate of 35, they pay a tax rate of 24. We have $65 left, they 

have $76. It is just not a matter of making extra money, they now 

can reduce their prices by $10, $11 and beat us in the marketplace 

and hurt competition. 

In terms of jobs, yes, jobs can be created. Fifty percent of our 

manufacturing is in the U.S. A healthy company will promote HQ 

jobs. And most of our core R&D is here in the U.S., so, of course, 

expansion of R&D would create jobs in the U.S. 

Chairman CAMP. All right. Thank you. Very quickly, if you 

could. 

Ms. FORD. I would just echo briefly that I think the job situation 

is not a zero sum game, it is not U.S. jobs versus foreign jobs. It 

is if you have to have foreign locations and increase your foreign 


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jobs, your U.S. jobs will increase as well. We found that in both our 

R&D center, our IT world, and our corporate headquarters as well. 

Chairman CAMP. All right. Thank you. Mr. Rangel is recognized. 

Mr. RANGEL. Thank you, Mr. Chairman. And thank you all for 

sharing your views with us. My questions are basic. I want to 

thank you once again. Territorial taxes. How does it affect, or how 

does it create jobs or any benefits to the United States? If U.S. 

businesses decide to go overseas and pay no taxes to the United 

States, but whatever the tax rates in a foreign country, how does 

America benefit? Ms. Dossin? 

Ms. DOSSIN. Well, we are not particularly a proponent of one 

system or another. But if it was pure territorial, with no anti-base 

erosion provisions, that could be a worry. I think that is where the 

anti-base erosion—— 

Mr. RANGEL. Is anyone supporting a pure territorial tax? How 

can America get some taxation out of business people that were 

trained and enjoyed the benefit of being American and not pay any 

taxes at all? Paying the taxes to the foreign government at their 

lower rates? Anybody here support any type of territorial tax? 

Come on. All of you said you supported it. I just want to know how 

does our country benefit by your support for it? 

Mr. GJERSDAL. We support a territorial tax system primarily 

because it helps us compete with our international partners. 

Mr. RANGEL. How does it help the United States of America? 

It helps your stockholders. Is that it? 

Mr. GJERSDAL. No, it just doesn’t help our stockholders. 

Mr. RANGEL. How does it help the United States of America 

that you can effectively compete with—— 

Mr. GJERSDAL. Well, 50 percent of our manufacturing base is 

in the U.S. So if we can compete on an international scale with our 

international competitors, it will help our manufacturing base. 

Mr. RANGEL. So you are saying that the profits you make overseas by not paying U.S. taxes helps the base back here, where you 

hope that you will be paying a lower corporate tax? 

Mr. GJERSDAL. It certainly will help the base back here both 

in terms of our manufacturing—— 

Mr. RANGEL. But if you have no base back here? 

Mr. GJERSDAL. We would never be at that point. 

Mr. RANGEL. Strike that. Suppose we create that you don’t have 

to have a base here to have a U.S. business abroad. And so I would 

think under that hypothetical, we won’t benefit at all, no jobs, no 

taxes, you are just a foreign company with a U.S. base with no 

jobs. That is possible too. We have to do a lot of work on this territorial thing. And the chairman is an advocate, so I think you do 

better explain it than they do. Not at this time. 

Chairman CAMP. We do have base erosion provisions in the 

draft. 

Mr. RANGEL. Okay. Okay. Let’s get to the corporate tax. You 

tell me what the one impediment it is for us not to reform the tax 

system where liberals, conservatives, Republicans, and Democrats 

and others all agree that it is loaded with provisions that should 

be eliminated, that there is no problem in reducing the tax and 

paying for it by broadening the base. And yet when all of you get 

together at the country clubs and the cocktail parties you know 


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what it is that stops this Congress, Republicans and Democrats 

alike, from not taking up this sensible reform that has us as the 

highest corporate tax provisions in the entire world. 

Now, you don’t—I don’t need all of you, because I am convinced 

that there is one thing that all of you have agreed upon that stops 

this from doing the right thing, economically and politically. Now, 

what is it that you believe it is? 

Okay. The chairman says maybe my question isn’t that clear. 

But if everyone agrees that this is good for the country, the corporations, the stockholders of America generally, the creation of 

jobs that allow you to be more effective, why aren’t we doing it? Is 

it a question that everyone wants to protect their interests? I 

mean, is anyone here that believes that when we clean it up that 

we should get rid of research and development? No. 

If we were talking about depreciation benefits, you want that. I 

just wonder whether it is a question that corporates want lower 

rates, eliminate the loopholes, but don’t bother their loopholes. And 

so we can’t get you guys to agree. As Ms. Dossin said, everything 

is on the table, and when we get there, we will tell you what we 

insist on and what we will, you know, but I—if it is such a good 

deal for America and the Congress, and you guys pay so much for 

lobbyists, what reason do you hear that we have not moved on it? 

Not this administration, not past administrations. And we are not 

going to do it because of what? Why don’t you think we do it? You 

all are smart Americans, business people. Ms. Dossin, please. 

Ms. DOSSIN. For myself, I will say—— 

Chairman CAMP. If you could answer quickly, because time has 

expired. 

Ms. DOSSIN. I am a chief tax officer. You know, that is my job. 

I would say that a reason is it is just darn hard. Before I came 

here, I kind of reread the story of the 1986 Act. Really, really hard. 

And you can only do it—— 

Mr. RANGEL. I was here. What is the hard part of it? 

Ms. DOSSIN. It is the hard part. And we are ready, we are here 

because we are ready, the chairman is ready. 

Mr. RANGEL. We are here to do hard work. You are here to 

make us do hard work. What part of the job is so hard that you 

can’t figure out why we refuse to do what we were sent here do? 

Ms. DOSSIN. Well, I think the time is right and hopefully—— 

Mr. RANGEL. The time has been right since 1986. 

Chairman CAMP. All right. Thank you. Time has expired. Mr. 

Davis is recognized for 5 minutes. 

Mr. DAVIS. Thank you. I would point out that companies like 

Procter & Gamble, headquartered in my district, or across the river 

from my district have almost 50 percent of their employees are directly related to international business. So territorial taxation 

makes a lot of sense. And you know, I know there are a lot of undertones for manufacturers. I grew up around manufacturing, blue 

collar background, worked in manufacturing, run with manufacturing small business owners now. And you know, the only club 

that my friends belong to is Sam’s. And I think that is an important thing to point out. And I understand this issue, the S corp 

issue, the pass-through issues. 


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I would like to bring some context on these issues of tax reform, 

particularly for the small manufacturers that make up the backbone of the supply chain feeding into the parts into my Ford F–250 

I have been driving for 15 years. And thanks for the Ford Tough. 

I appreciate that. 

Mr. Beck, in your testimony you took particular time discussing 

the importance of expensing, of depreciation, and the R&D tax 

credit. You and Mr. Hardt are both small business owners. It is the 

core of what I look at as a person with a lot of experience in manufacturing. You describe these provisions as especially important to 

cash-based manufacturers who face particular challenges in managing their accounts receivable and their working capital. 

You guys live on accounts receivable and on that weekly cash 

flow, making sure that that cycle is compressed. Would you please 

provide the committee, starting with Mr. Beck, some examples, 

very specific examples of how the AR cycles and the working capital needs of small manufacturers affect your businesses, and how 

these tax provisions help smooth out that cash flow roller coaster? 

Mr. BECK. Well, from a standpoint of a machinery builder, we have to have enough cash to float, with certain customers, $3, $4, 

$5, $6, and $7 million projects. Now, that is not the same as somebody that is making parts and components for an automobile company. The only way that we can possibly do that is to have profits, 

and to retain those profits and retain the cash in our company. And 

if you use some of the vehicles that you have talked about, like accelerated depreciation, you show more expense for that particular 

year. But what that really does for you, it does allow you to write 

off equipment faster, which means you have a less of a tax burden 

from that standpoint, which means you are not paying as much in 

taxes and you have more cash in your company. 

Mr. DAVIS. Let me take that to the next level. I think that generally we spoke before the hearing for a couple of minutes when 

we met, but we agreed that a reduction in the tax rate and a transition, particularly for the international businesses, to a territorial 

system would be very helpful, in a variety of ways. And they are 

important reforms. But do those reforms alleviate, say, the lowering of the rate, the territorial piece, does that alleviate the need 

for maintaining some sort of cost recovery positions in tax reform 

for you as a manufacturer? 

Mr. BECK. Boy, I am not a tax expert. 

Mr. DAVIS. Let me put it this way: What I am hearing you say 

is that depreciation expensing and R&D as part of this process are 

very important to you. 

Mr. BECK. Well, it is very important to us because you can recoup quicker the costs that you put out there to help develop something or to buy a piece of equipment, which allows you to expense 

it faster, which causes you to have less revenue in those years that 

you are doing that, which means that you are paying less in taxes. 

So you are able to hold on to your cash longer. And if you have 

gone through a situation like we have gone through, and banks 

won’t even talk to you because of the requirements that they were 

under, you know, we had to hold onto every single penny. So basically, it sounds very simplistic, but it is the revenues coming in, it 

is the expenses going out. Taxes is part of your expenses. 


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Mr. DAVIS. Not at all. I mean I had clients in the 1990s, when 

the Clinton tax increases, when those rates went up so significantly, literally couldn’t hire employees to do additional work because of the tax hit on them as S corporations, closely held. Would 

you like to comment briefly, Mr. Hardt? 

Mr. HARDT. I mean the timing of cash flows is critical to a small 

business. When you are trying to grow your business, you have 

cash being tied up in receivables, money is owed from your customers. And of course, usually in a manufacturing business, you 

have to buy equipment as well. And of course, the banks want to 

see positive cash flow to lend you the money, and you have to make 

payroll during that whole period, including hiring new employees, 

planning for training dollars. We have great apprenticeship programs at all of our divisions that we fund internally. 

So the timing of cash flows is key. So retaining cash into the 

business, investing cash into the business, you know, expense deductions for depreciation to help maximize that cash flow during 

investment time periods is very important to us, extremely important. 

Mr. DAVIS. Great. Thank you. I yield back, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Buchanan is recognized. 

Mr. BUCHANAN. Thank you, Mr. Chairman, for holding this important hearing. Also, I would like to thank our witnesses today. 

According to Enterprise Florida, which is our economic development arm in Florida, there are 17,000 manufacturers in Florida. 

They employ over 300,000 folks out of Florida. These skilled personnel represent about 5 percent of the State workforce in the 

State. 

In my district, Atlantic Mold and Machine opened about 5 years 

ago. It is a family-run businesses that specializes in high-precision 

plastics and metal molds. And again, I grew up, I was chairman 

of the Florida Chamber, and I was in business for 35 years, employed a lot of folks. 

I want to get back to Mr. Hardt and Mr. Beck. I got to tell you, 

I did a hearing where we had small business people in there about 

2, 3 years ago, and I just for one reason or another started the 

hearing out with having people raise their hand in terms of that 

had challenges with their banks, either got their line of credits reduced or whatever. I thought it would be about 20 percent. About 

95 percent of the people in the room raised their hand where they 

had challenges. 

It gets back, my point I want to try to make here, when we talk 

about employment, or people, they talk about 3 percent of businesses I heard a gentleman say, the bottom line, there might be 

3 percent of small businesses as they measure at 500 employees or 

less, but the reality of it is, is what is that percentage in terms of 

revenues and in terms of jobs? I know a lot of middle market companies that are considered small companies, but they might employ 

300 employees or 400 employees. 

So from a tax standpoint, what do you think would be the simplest—what would be best in terms of helping your businesses 

moving forward in terms of based on where the Tax Code is at 

today? I mean, my sense what I hear is people want a simpler, fairer, flatter tax. The Tax Code is 73,000 pages. What would your 


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thought be, based on where we are at today, would be the most 

helpful, Mr. Beck, to your business? 

Mr. BECK. Well, when I was filing my taxes on a paper basis, 

and now it is electronic, I think I had a stack that I brought home 

from the accountant that was about that high. Now, you can imagine the intricacy and the amount of work that goes in to create 

those tax returns. To tell you exactly what the percentage ought to 

be, I think that needs to be worked out not by us, but by the committee, because you are looking at the revenues that the government needs. 

However, a flatter tax, a simpler tax, one that doesn’t change 

with the wind, one that is set helps businesses plan accordingly for 

the long term. You know, we have to be able to plan for the long 

term. We have to be able to look out 2, 3, 4, 5, 6 years. You know, 

when I developed this product, I got the R&D tax credit. It is now 

5 years into it, and we haven’t made a penny off of it yet. We are 

hoping in this next year that we can bring it to market. So we have 

to look out. And small businesses are in it for the long term. They 

are not in it month- to-month. Small businesses are not looking at 

the quarterly or the monthly return, they are looking at the longterm viability of their company. So we need a very stable Tax Code. 

And we need one that competes internationally. 

Mr. BUCHANAN. Mr. Hardt, I know we have touched on it quite 

a bit, but I think it is important for people to understand, as both 

of you know, that if you make 750, you don’t take home 750. And 

if you make 750 in a company, you end up paying a third out to 

taxes, you might take out 100 each or whatever you need to live 

in terms of your own, and the balance stays in, the banks require 

it. Do you want to expand on that anything more? I know you 

touched on it a couple times. But I don’t know that it can be 

touched on enough, because a lot of jobs are created through these 

pass-through entities. And when you put a floor in at 250 and you 

have got 100 employees and the banks are requiring more and you 

are paying out a third of what you make to taxes, you know, that 

is not a great thing in terms of where we are at in terms of our 

country. 

Mr. HARDT. I will simplify it and put it into numbers. In Wisconsin this year, our capital budget is about $2.3 million. We have 

already hired five new apprentices in the spring, we hope to hire 

five new apprentices this year, and we have some open positions 

for engineers, et cetera, as we grow our business. Our profit projection for this year is about $2.4 million. So 2.4 million is going to 

go through personal tax returns as a pass-through entity, $2.3 million is going back into the business. I can’t simplify it any further. 

You cannot look at this as just money going into our pockets, going 

into our clubs, whatever we say here. The overwhelming majority 

of small business profits goes back into the business. It is our livelihood, it is the future for hopefully our families and children. And 

again, I also support simplification, however, because we need to 

plan. We need to plan how to transition our businesses to the next 

generation, how to plan to grow our businesses. So simplification 

and transparency are very important. 

Mr. BECK. It is uncanny, my numbers are almost exactly as his. 

Almost exactly. And my salary isn’t even $100,000. 


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Mr. BUCHANAN. Thanks, gentlemen. I yield back. 

Chairman CAMP. Thank you. Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Ms. Dossin, you 

said it is complicated. And I would like to enter into the record an 

article from the National Journal called Guns and Stethoscopes. 

Chairman CAMP. Without objection. 

[The article follows: The Honorable Jim McDermott] 


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f 

Mr. MCDERMOTT. In 1992, I had a memorable discussion with 

a manufacturer. He was the H.R. person from a major automobile 

company. And he said, you know, our costs, number one is steel, 

and number two is health care costs. And taxes is way down there 

somewhere. He said, I could look across the river into Windsor and 

see automobiles made for $2,000 less than they are made in the 

United States because of health care costs. He said, our second biggest expenditure, Blue Cross Blue Shield of Michigan. So the President has been trying to deal with making manufacturing more 

competitive. And one of the things he did was come out with the 

Accountable Care Act. Now, I would like to ask all the six of you 

who have companies, how many of you provide employees with 

health insurance? 

Ms. DOSSIN. Ford does. 

Mr. GJERSDAL. 3M does. 

Mr. MCDERMOTT. You can just put your hands up. All six of 

you do, right? How many of you support the effort at the Accountable Care Act to shift and make sure that everybody is in and try 

and get ahold of costs and get the free riders out of the system? 

How many of you supported it? Did Ford? 

Ms. DOSSIN. I am not sure of the question, and I am not a 

health care expert, but I think that Ford does not have to adjust 

much of anything in reaction to that Act—— 

Mr. MCDERMOTT. Okay. 


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Ms. DOSSIN.—because of what we already do. 

Mr. GJERSDAL. I am the vice president of tax. I am really not 

a specialist in health care. So I really cannot comment on that. If 

there is anything that I can do after the hearing to get you an answer, I would be happy to. 

Mr. MCDERMOTT. Okay. Let me get to the guys who are buying 

it for themselves, the two in the middle. 

Mr. BECK. All I can say to you is our that health care rep came 

in the other day and said he has seen the largest increases ever 

for health care for companies of our size. So if you ask me if I support that, I have to say no. 

Mr. MCDERMOTT. And that is different from last year? Last 

year you didn’t have an increase? 

Mr. BECK. We have increases all the time. But he said the increases are substantially higher coming. 

Mr. MCDERMOTT. And you? 

Mr. HARDT. Our plan increase for 2013 is over 12 percent. We spend over $12,000 for family and over $8,000 for single right now. 

There are certain provisions, in reading the voluminous Act, that 

we can support, but overall I think a simplification is what we really support. 

Mr. MCDERMOTT. So what I hear you saying, all of you, is you 

in the corporate sector want to keep control of your own health 

care costs to your employees. You want to do it. You don’t want any 

help from us. Is that right? That is not a cost item you worry 

about. I guess if you are going to hide behind the silo of being a 

tax person, I don’t know how to deal with you, because it is so simplistic to come in here and talk about taxes as being the only issue 

that affects a company’s profitability. 

The big issues are not taxes, they are these other personnel costs 

and material costs that when you buy something, you buy a machine that is $250,000, I don’t know where that ranks in terms of 

the costs in your company in terms of the health care costs. What 

is your health care bill in comparison to that? 

Mr. HARDT. Our health care bill is rather substantive. It is a 

big part of what we do. I just mentioned the numbers per family 

and per individual. 

Mr. MCDERMOTT. What percentage is it of your expenses every 

year? 

Mr. HARDT. Approximately 10 percent. 

Mr. MCDERMOTT. How about next? Mr. Beck? 

Mr. BECK. I don’t know the number off the top of my head. 

Mr. MCDERMOTT. You don’t know how much you spend on 

health care? You really don’t? 

Mr. BECK. No, I don’t. 

Mr. MCDERMOTT. Wow. 

Mr. BECK. But it is a substantial amount. And I would guess 

it is probably about 10 percent. 

Mr. MCDERMOTT. And how much are your taxes? What percent 

of your expenses go into taxes? 

Mr. BECK. It depends on whether we are losing money or making money. 

Mr. MCDERMOTT. So it could be nothing. But you still got to 

pay that 10 percent in health care? 


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Mr. BECK. Yeah. You have to pay that health care part. But you 

know, oftentimes when the health care has gone up, we have had 

to shift some of that cost back into the individual because we 

couldn’t cover it as a company. 

Mr. MCDERMOTT. When I listened to you, I thought it is very 

interesting you would get involved with a guy from Germany. Germany has had a national health plan since 1883. And he comes 

over and he looks at your business and says to himself, why should 

I buy into this crazy health care system they have in the United 

States, which has no control? They are spending 12 percent of GDP 

on health care costs, we are spending 17, and you don’t have any 

control whatsoever. The rep comes in and says here is what it is 

going to cost you next year. So what I have a hard time understanding is how taxes gets all the attention, when nobody wants to 

talk about what happens in health care. It is like—— 

Chairman CAMP. Time has expired. 

Mr. MCDERMOTT. It is not because of taxes we have got problems in productivity. 

Chairman CAMP. Quick answer, please. 

Mr. BECK. I prepared today for taxes, I didn’t prepare today to 

talk about health care. I am sorry. 

Chairman CAMP. All right. Thank you. Mr. Smith is recognized 

for 5 minutes. 

Mr. SMITH. Thank you, Mr. Chairman. And thank you to our 

witnesses today. I am wondering a little bit about temporary tax 

policies that we know abound, and certainly emphasis on the temporary nature. We have to renew them oftentimes on an annual 

basis. I was wondering if any one of the businesses could reflect a 

little bit how you plan for that, whether it is a business plan from 

the beginning, or how you plan for that for the future, on the temporary nature of so many of these tax provisions. 

Mr. GJERSDAL. Well, the problem is, you really can’t plan for 

it. Take the R&D credit, which is really the classic. We assume 

that eventually it will be renewed. It may or it may not be. But 

the fundamental question becomes with that kind of uncertainty, 

how could it ever go into a business person’s decision in making a 

decision? That is the fundamental problem. I can plan for it in my 

tax rate, but I can’t recommend to a businessman to take it into 

account in making a business decision. 

Mr. SMITH. And so then the cost of compliance, I mean that is 

slightly different, but certainly needs to be considered as well given 

the complexity. Do you ever put an actual number to the cost of 

compliance? 

Mr. GJERSDAL. Well, we are fortunate we are a cap audit taxpayer. And so we have reached agreements with the IRS as to how 

to compute the credit, how to compute the manufacturers’ deduction. So our cost of compliance in those areas has gone down substantially. But before that, it was a very, very expensive proposition both at the time of computing it, and then also at the time 

when you had to discuss it with the IRS, and needless to say, have 

a controversy. 

Mr. SMITH. Okay. Anyone else? Can you elaborate then on that 

process with the IRS that you went through? 


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Mr. GJERSDAL. The cap audit process? It is a program that was 

established I think it was about 7 or 8 years ago. Basically, what 

it allows you to do is have a much more open relationship as a 

large corporation with the IRS. Through this process, we are current now on our audit. We are basically closed through 2010. Our 

requirement is to be much more transparent. We have to disclose 

all our transactions during the year as they occur. The IRS, on the 

other hand, their view is to get the audits done. So they don’t bring 

up all these frivolous issues that they used to bring up. They bring 

up key issues. 

It is not like we don’t have controversies. We still do have controversies. But when you think about it, 5 years ago we had issues 

going back 10 years. That creates a lot of business uncertainty. 

Today, our 2010 audit is done. Think of the business certainty that 

creates. 

So I really applaud the IRS in this effort. This has been a wonderful process we have been involved in. The other companies we 

know of that are involved in it also think it is a very good process. 

Mr. SMITH. Mr. Hardt, could you reflect on the temporary tax 

provisions and the cost of compliance? 

Mr. HARDT. I think the uncertainty again weighs on a small 

business’s mind more than anything else. You pick up the paper in 

the morning, you hear what is going on in Europe, you are not sure 

what your tax bill is going to be at the end of the year. We both 

of us in particular, and all of us, lived through the great recession 

a couple years ago and how we had to struggle to get through that. 

The uncertainty of the current Code causes you to be cautious. It 

causes you to maybe not make that investment you would like to 

make to see if you can make it pay off, but it causes you to be cautious. That is the biggest thing I can comment on. 

Mr. SMITH. Mr. Beck. 

Mr. BECK. I think it is basically the same thing as what Mr. 

Hardt said. I mean, I really can’t elaborate on it much more other 

than if it is simplified and more stable, then we can plan further 

out. And as far as the R&D tax credit, we had never taken an R&D 

tax credit until we started the R&D this particular machine. A 

small company doesn’t have ideas like this every day. Maybe in a 

larger company it might be used more often. But it did certainly 

play into our final decision whether or not the R&D tax credit 

would help us alleviate some of the risk going forward. So I have 

to admit that in this particular case, it made sense for us. But 

overall, just knowing what the taxes are, and knowing they will be 

stable over a longer period of time certainly is helpful to small 

businesses. 

Mr. SMITH. Okay. Thank you. I yield back. 

Chairman CAMP. Thank you. Mr. Lewis is recognized. 

Mr. LEWIS. Thank you very much, Mr. Chairman. Let me take 

this opportunity to thank all of the witnesses for being here. Dr. 

Boushey, I grew up in Alabama, where we once had booming manufacturing industries. Most of the south did back then. But manufacturers are gone, the jobs are gone, and left behind hundreds and 

thousands of families who have struggled and continue to struggle 

to find their place in America’s middle class. 


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Can you repeat for the members of this committee why keeping 

manufacturing here in the United States is good policy for local 

community and families? And I want you to feel free to speak from 

your heart. 

Ms. BOUSHEY. Thank you, Congressman. Thank you. This has 

been just a very interesting hearing. There is a couple things on 

that. I mean, certainly manufacturing has traditionally provided 

solid middle class jobs. And there is some new research by an economist Susan Helper from the Brookings Institution and her colleagues that shows that manufacturing workers are paid about 8 

percent more even once you account for all of the characteristics of 

jobs and those workers. So even once you account for the fact that 

these are union workers, these workers are paid more than other 

nonmanufacturing workers. And the research has shown, and of 

course, I am not a business expert like all of you, but the research 

has shown this is because those workers also have specific skills. 

Which gets to the second reason why manufacturing is vitally 

important to our economy, which is one of the key sources of innovation. There is a lot of emerging economics research that is showing, and you from Corning talked about this, I think very eloquently in your testimony and here today, that there is what economists call either industrial commons or other reasons why having 

different kinds of manufacturing together, both suppliers and the 

companies that they are working with, in one place creates innovation and vitality. And if our country wants to remain a leader in 

the world in terms of technology and innovation moving forward, 

making sure that we support that manufacturing base so that 

when you talked about the glass being very thin, needing to be 

near where the TV screens or whatever is being made, that is 

being done in Asia or wherever for a reason. We want those kinds 

of synergies to be happening here in the United States. 

So it is not just having one, you know, kind of manufacturing, 

but having that variety is very, very important and vital, and important if we want to remain a leader in terms of technology in the 

next century. And then finally, manufacturing plays a vitally important role in our macro economy. I mean, over the course of the 

recovery, manufacturing has been a leader in terms of job gains. 

It has been very good. That has been very encouraging to hear. But 

it is also vitally important for our trade deficit. Over the long term, 

this is something we are going to need to address. And if we don’t 

start bringing manufacturing back into this country as one of the 

easiest ways we can address our trade deficit, and if we don’t, we 

are going to have to continue to borrow from abroad, and eventually we will have to pay that back. 

If we don’t deal with this, we will be looking at a lower standard 

of living in the decades to come. And I would add that energy is 

a key component of this. You know, as we both deal with rising energy costs in terms of oil that we are importing, and we are all 

looking for new ways to produce energy, green technologies, the extent to which we can do those here will be good for our trade deficit 

10, 20, 30 years down the road. 

And then one just note, Congressman Smith, on your question on 

things about uncertainty, there is a lot of uncertainty right now 

about the extension of a number of the tax credits and provisions 


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for manufacturing in the green sector, including the production tax 

credit and the advanced energy manufacturing tax credit, which 

are causing a lot of uncertainty for particularly those manufacturers. 

Mr. LEWIS. Dr. Boushey, one member of the panel, responding 

to our colleague Mr. Johnson, said that you made it on your own, 

that you developed your own business. Don’t we all live on this little piece of real estate we call America? And what about the roads, 

the bridges? Or what about the transit system? What about the 

clean water, the sewer system? Could you respond? 

Ms. BOUSHEY. Well, I am glad you asked that question because 

this is of profound importance. I was reading The New York Times 

this morning, and there was an article on the cover of the paper 

about Stockton, California, which is about to go into bankruptcy. 

And talking about how they don’t have any police, murders have 

doubled, that there is this devastation in this American city, a lot 

of which is because they don’t have tax revenues. And we have just 

lived here through in the District of Columbia this massive power 

failure, hundreds of thousands of people without power for over a 

week because of a set of storms. These are our Nation’s infrastructure. And if we don’t have safe streets, if we don’t have electricity 

that you can count on, if you don’t have roads and bridges and all 

the things, and importantly a public school system that can compete with the rest of the world, we will not be able to remain an 

economic powerhouse. 

If we do not educate the next generation that can create the kind 

of workforce that all of these companies benefit from, we will not 

be able to do that. So while any innovator, and of course, small 

business owners, they take an enormous amount of risk, an enormous responsibility for moving their investment forward, but they 

do so because they can hire workers that had been educated in 

their community and because they can build on the infrastructure 

that is there. These are two pieces of puzzle, and we need to think 

of them always simultaneously. 

Mr. LEWIS. Thank you, Dr. Boushey. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. Ms. Jenkins is recognized for 5 

minutes. 

Ms. JENKINS. Thank you, Mr. Chairman. Good hearing. Thank 

you all for being here. Mr. Hardt and Mr. Beck, in your testimony, 

you both raised the issue of the impact of the estate tax and the 

effect it has on family-owned businesses. Mr. Hardt, in your testimony, you made the point that the primary reason for structuring 

a business as an S corp is the hope that someday you can pass 

along that business to your children. 

Family-owned businesses, from farming and ranching families to 

family-owned manufacturing companies such as yours deserve an 

opportunity to pass that business from generation to generation, 

and preserving these good paying jobs in our communities. I believe 

families shouldn’t be forced to sell their farm or their business to 

pay estate tax. So I am a strong supporter of a full repeal of the 

estate tax. But I was wondering if you could each comment or tell 

me personally how the estate tax has affected your business and 

your decision-making, and what recommendations might you have 


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for Members of the Committee on how we could treat the estate tax 

and any tax reform proposal. 

Mr. BECK. Well, because of changes in the estate tax it would 

be more advantageous to plan when you die. But I can’t plan on 

when I am going out. And so an estate tax needs to be set so that 

a businessowner can have something to plan around. Because ultimately you get to the point where you can’t plan for how much 

cash you would have to generate to keep the business in your family. 

I think that is the biggest fear that a lot of family-owned companies have. How do you pay that estate tax burden? Do you start 

saving for that tax burden a the expense everything else you are 

trying to do—while you are trying to buy machinery, you are trying 

do R&D and you are trying run your business? How do you finance 

it if you come to the point where you have a huge tax burden to 

try to keep the business into your family? 

Let me tell you from the standpoint of a family-owned business, 

(I am not saying that large companies don’t treat their people well, 

because they do treat them well) there certainly is a closeness that 

we have in our company. It is important to us that our people are 

successful. When our people took 40 percent pay cuts because we 

were trying to survive, I was worried about those people, that they 

couldn’t pay their mortgages on their homes and that they were 

going to lose their homes. They stuck by us through that whole 

thing. And I truly believe that family-owned businesses have a real 

closeness to their employees, and really want to try to help their 

employees. And when often times you have to sell your business, 

it gets sold to a bigger company. Then when business gets bad, 

they just close them up or they consolidate them down. 

And that is what happens if you can’t keep the business in your 

family. So I think estate tax planning is very critical for keeping 

these family businesses for long term and for protecting employees 

and small enterprising companies. I also want to say is when it 

comes to infrastructure, I paid a lot of taxes for infrastructure. I 

think I paid my fair share. And I do believe we all as companies 

pay our fair share in infrastructure. We are part of the infrastructure of this country because we pay taxes to support it. I got a little 

off topic. 

Ms. JENKINS. No, I totally agree. Mr. Hardt. 

Mr. HARDT. I want to follow up on the infrastructure thing too, 

I mean, after coming through the great recession, I am glad to pay 

taxes. Those weren’t fun years. 

Anyway, the issue of estate planning is very important, and 

again, I am going to put the tone on as a manufacturer. A manufacturer has to put a lot of capital back into the business. So a lot 

of us are faced with estate taxes, whether uncertain, or certain, 

with the decision if we can’t put enough money back into the business because we have the huge estate tax liability to pay for, then 

it results in almost an inevitable sale, and we have many second 

and third generation workers working within our business, just as 

we have four family generations. 

So from a manufacturing standpoint when you have to invest so 

much capital back into your business, an uncertain estate tax, or 


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the ability to plan for such, does result in a sale too often a time, 

and usually it is not good for the business. 

Mr. BECK. No. 

Ms. JENKINS. Thank you. Mr. Chairman, I yield back. 

Chairman CAMP. Thank you very much. Mr. Thompson is recognized. 

Mr. THOMPSON. Thank you, Mr. Chairman, and thank you to 

all of the witnesses who are here today. I appreciate your coming 

in, and appreciate what you do, and what your companies do, and 

all of your employees. It is very important to our economy, and 

very important to our country, and I don’t think I speak for myself 

when I say that I want to do all that I can to help make sure that 

business in America is successful. 

It is important to the entire country, and to our future, and I 

think tax reform is a very, very big part of that, but I do want to 

say that tax reform has got to be smart. It has got to be smart, 

and it has got to do a couple of other things. It has got to keep jobs 

in America, and it has got to bring jobs back to America. It needs 

to be revenue neutral, and as one of the witnesses said, it needs 

to pay the freight. It needs to pay the bills on everything that our 

country does. 

I think that Mr. Lewis was very specific on those issues, and the 

sewer systems, the highways, et cetera. And I don’t think we can 

just pick a number out of the air to say that is what the corporate 

rate should be, and that 25 percent number has become the kind 

of number of the week, or the month. And I was very interested 

in when all of you who own and run businesses talked about what 

should be on the table to get to 25 percent. 

This is the second hearing similar to this that we have had. The 

last one, I don’t remember all of the witnesses, but I know Caterpillar was here, a couple of the big corporations, and they were all 

very specific. They said almost to a person, take all of the other tax 

expenditures away. Just get us down to a number. And that was 

about the 25 percent number, I think. 

I understand that from the people that advise us, that you can’t 

get to revenue neutral at 25 percent, even if you get rid of all of 

the tax expenditures. It gets you down to about 28 percent. So if 

you do that, you can’t just put it on the table. You have got to pay 

for it. If you don’t pay for it, we are in a bigger soup than when 

we started. And I think, Mr. Beck, you talked about that. 

You talked specifically about how you were able to pull through 

this recession because you had very little debt, and that you were 

fiscally responsible. And I think that is an important takeaway for 

us, because we have to be fiscally responsible as well. And ‘‘fiscally 

responsible’’ means that we pick up the tab, or at least part of the 

tab for education, because you can’t educate your own workers. We 

pay for a Navy that keeps the shipping lanes open, that allow you 

to move your product overseas; a Coast Guard that responds to 

emergencies on the water; the medical professionals that Mr. 

McDermott talked about; the infrastructure that is so critically important to your companies. 

Secretary Geithner was in before this committee, and told us 

that the infrastructure problems we have is a hidden tax on the 

very people that are before us today testifying. And I think we all, 


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we all know that, and that is not—that is not helping your business either. 

I also want to mention that the American jobs stuff is critically 

important. And it is not all going overseas. As a, matter of fact, we 

are seeing a change in that. A lot of it is coming back. I visited 

with a person just last week in my district who has seen his business grow by about, I think, 18 percent per year. And he has got— 

he is a supplier to one company. He makes stuff for snowmobiles 

and ATVs, and his growth is because they are not making their 

components in China anymore, because they have huge costs for 

quality control. They have to send somebody over there to make 

sure that it is done correctly, and they—the cost of shipping stuff 

back and forth is extremely expensive. 

They are better off making it, Factory Pipe in Ukiah, California. 

And I think it is a prime example of the sort of thing that we need 

to figure out how to make that more prosperous so that you and 

your colleagues can continue to grow jobs overseas. 

But I think we need to be honest and fair about it. We can’t just 

pick numbers out of the air. We need to do it in a way that balances the books, and is able to pay for the things that allow all of 

you to run the companies that you run so well today. 

So I hope we can get to that, and I hope we can have a good discussion on that. Mr. Chairman, thank you. 

Chairman CAMP. Thank you. Mr. Marchant is recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. I represent a district that basically surrounds the DFW Airport. So I have a very 

small geographical district. So when you land at DFW Airport and 

you begin to drive through my district, you see the corporate headquarters of not Ford, but companies like Exxon, and Fluor, and 

these multinational, and you begin to get the impression that this 

is the main driver, business driver in my district. But the truth is, 

it is the small manufacturing companies that have gravitated there 

near the airport, near the multinational companies that are there 

basically to serve the needs of, to supply these larger companies. 

When you begin to talk about taxing incomes over $250,000 at 

a higher rate, you are not talking about really taxing the large 

multinational companies. You are talking about talking about taxing those small manufacturing companies who rely totally on retained earnings to fund their equipment purchases, your grinder, 

to fund new jobs being created, the three positions that will operate 

that grinder, and you are talking about the physical expansion of 

their plant facilities. 

All of these companies use their retained earnings to do that. If 

you raise the tax on those retained earnings an additional 5 or 6 

percent, the direct result of that will, there will be 5 or 6 percent 

less money put into facilities, equipment, and new job creation. 

So it has a very detrimental effect on it. And it is really to the 

advantage of the big companies who rely very heavily now on justin-time inventory, rely on the efficiency of the smaller manufacturing and the smaller and mid-sized companies that are out there 

that are providing all of this. 

So I believe if you begin to target, what I would call the job creators in any kind of a tax reform, or any kind of a tax extension, 


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that you will eventually end up driving costs higher at the large 

company level. Now, that is my comment. 

My question to all of the companies here is, since an increasing 

number of targeted business tax expenditures are enacted on a 

temporary basis, is there a greater value in a permanent tax rate 

reduction than these temporary benefits that must be renewed by 

Congress every year or so? And I will start with Ms. Dossin. 

Ms. DOSSIN. I think that is undeniable. It would be far better 

to have a stable system that would inform good decision-making. 

That is what we would hope for. 

Mr. MARCHANT. Thank you. 

Mr. GJERSDAL. Just one word, absolutely. 

Ms. FORD. I would agree. I think the temporary provisions are 

particularly painful. Corning, in particular, benefits from the lookthrough as well as the R&D credits, and having those bounce temporarily is very troublesome. 

Mr. HARDT. Again, uncertainty, I think I have used the word 

about ten times so far. It makes it very difficult to plan when you 

have all of the things on your mind as a small business. I believe 

that a stable, longer-term environment is what we all need. I would 

also, however, state that I also agree that if there is anything that 

can be retained or implemented to encourage investment in our 

country, to encouraging people to get into manufacturing, stay in 

manufacturing, that should be considered. 

Mr. BECK. I just think a stable tax is the best tax. I probably 

would lean more a little bit the other way. If you had a lower tax, 

and you had to give up some of these other things, at least we 

know the playing field that we are playing on. Faster depreciation 

and R&D tax credits certainly are important incentives for manufacturers, and we certainly appreciate those incentives. But at 

what cost? I think stability to me is still the most important thing. 

Mr. SPINKS. In a capital-intensive business like ours where it 

takes typically 2 to 3 years to build a plant, understanding what 

the tax result will be when the plant is finally placed in service 2 

or 3 years down the road, and the predictability of that is a huge, 

huge advantage and a game changer, I think. 

Ms. BOUSHEY. I would like you to point you to a couple of citations in my testimony about what lowering the rate in a revenueneutral way would do to a variety of industries. So that would lead 

to the elimination of many of these deductions, and there is some 

work by an economist named Martin Sullivan who showed that if 

you reduce the rate in a revenue-neutral way, this would be most 

detrimental overall to domestic manufacturing in his analysis, and 

that the biggest winners would be securities who would see a net 

reduction of 12.3 percent, insurance, credit intermediation and retail trade and bank holdings, so reducing the rate overall, but 

eliminating these deductions would primarily go to finance and retail, while overall, it would mean a net in aggregate increase for 

manufacturing, and in particular, computers and electronics would 

see the largest increase in their taxes under that proposal. So I do 

think that there is—it seems to be that there are some concerns. 

Chairman CAMP. Thank you, Mr. Blumenauer is recognized. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. I would hope, 

just a question to Mr. Beck and Mr. Spinks at some point, not now, 


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but if I could just get a one-page explanation about the reinvestment in the business. You were talking about the uptick in the tax 

rate would be a disincentive for you to invest in the business, and 

my understanding is that in many instances, the reinvestment is 

a deductible expense. 

And so if you could just explain on one page at some point, we 

don’t have time to go into it now, and I am probably not smart 

enough to understand it, if you could explain to me whether or not 

these are deductible expenses and how that works for your enterprise. 

I am sorry, my friend, Mr. Davis, is not here because he talked 

about the negative consequences of employment when the Clinton 

tax increases were put in effect. 

Because if memory serves, the 8 years of the Clinton administration, there was something like 22 million jobs created, versus less 

than a tenth of that during the 8 years of the Bush administration 

with two rounds of tax reductions. But I appreciate the range of 

discussions that are here, because I think there is no question, but 

what as a result of hearings we have had, and conversations we all 

have, that the tax system is broken. And the focus on manufacturing is important because as I look at the manufacturers that I 

represent, they are some who manufacture in the United States. 

They are some of the few people who actually pay that statutory 

rate. 

As you know, that top statutory rate is not what most businesses 

pay. The average is much less than that. But it is manufacturing 

in the United States that gets hammered. And so your helping us 

focus on that, and think about how we protect that and move forward, I think is very, very important. 

I appreciate what my colleague, Mr. Thompson, talked about in 

terms of how we go forward and how we are balanced. Because despite all of the rhetoric, we are collecting less in tax as a percentage of our Gross National Product, than any time since Truman 

was President. So tax collections are down in the aggregate. We 

have a growing and aging population. Something has got to give. 

We want to help manufacturing. We have a system that is not particularly rational, but it seems to me we need to be able to look at 

the big picture. 

I was intrigued the reference to Germany. Germany has a total 

corporate hit of somewhere in the neighborhood of 49 percent when 

you look at all of the business costs in. When you look at the 

amount of money that governments collect from business, the 

United States is 27.3 of total revenue that come from business. 

The average of the OECD is 36.2 percent. So these collect more 

from business and they have almost without exception, much higher personal income tax rates. So if we are going to undertake a 

change and pay our bills and not much less deal with what has 

been referenced this infrastructure deficit, we have got to figure 

out how to get about this. 

One of the differences is all of these countries we are competing 

with have a value-added tax along with the territorial system. So 

they make up the gap by having a substantial revenue flow. And 

again, there isn’t time, and I don’t want to trap anybody, but I 


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would hope that if any of you have some thoughts about how a 

value-added tax would fit into long-term, we would welcome that. 

If you have got super policy people, or you just have some random thoughts, I spend a lot of time on airplanes going back and 

forth every week to Oregon. So in addition to reading your testimony, I would really love if you have some thoughts about how a 

value-added tax might fit into this. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Reed is recognized. 

Mr. REED. Thank you, Mr. Chairman. Ms. Ford, if we could 

spend a little time together here. I wanted to explore a little bit 

more in detail your comments that you offered on the transition 

rules, because one thing that I have come to the conclusion, and 

I am glad to be at this conclusion, is that it is not a question of 

if we are going to do comprehensive tax reform; it is a question of 

when. So in order to prepare for that, I would like to have a little 

bit more of your comments and detail on the issues dealing with 

transition and transition rules and what are the pros and cons that 

you could offer us? What issue will be you focusing on? 

Ms. FORD. Certainly, I think there are pros and cons to the general concept that in order to go to a territorial system, we have 

treat the cumulative foreign earnings that are have existed to date 

in a certain way. I think the current proposal that Chairman Camp 

has put forward is that all of the earnings that have accumulated 

abroad would be taxed immediately prior to the transition, and 

that they would be taxed at a reduced rate. 

I think, obviously, the pros there are for companies trying to 

compete is that the reduction in rate helps reduce the overall liability. I think the concerns are that all of the cumulative earnings are 

not necessarily in the form of cash, and so to some extent there is 

a disparity between the actual money we could bring home under 

that, and the amount that we would be taxed on. 

So I think that is a major concern. And then some of the things 

that can help address that concern are the permission to use carryover losses and foreign tax credits that have accrued over time to 

reduce that cash liability, and I think allowing it to be paid over 

time is helpful. And maybe some indication or agreement to limit 

the amount that is subject to tax to the extent that there is a very 

huge disparity between the cash available, and the actual earnings. 

Mr. REED. So as a small business owner, that was always something that was so important to me, is that cash is king. 

Ms. FORD. Cash. 

Mr. REED. And if those bills are due, you have to have the resources to pay for it. So I appreciate that. And then on option C, 

you mentioned it as part of the base erosion protection issues. Can 

you also gets a little bit more in detail what the pros and cons of 

pursuing that option would be? 

Ms. FORD. I think one of the common themes that applies to any 

tax reform is that the devil is always in the details. I don’t think 

there is anyone on the panel that will disagree with me there. I 

think the biggest concern with respect to option C is how broad 

that base becomes. The reduction in the tax rate on income from 

intangibles is of course very helpful. It is competitive compared to 

some—compared to some of what our competitors enjoy, but I think 

the biggest concern is, is how will that base be defined? To the exVerDate Mar 15 2010 04:56 May 29, 2013 Jkt 080844 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80844.XXX GPO1 PsN: 80844

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tent that there is foreign source income or foreign source intangible 

income in foreign locations, the challenge is how much of that 

would be brought into and be subject to this tax. I think that is 

the greatest concern. 

Mr. REED. I appreciate that. And Mr. Gjersdal, do you have any 

comments on option C, again, in particular, the pros and cons of 

what is being proposed and can you over some insight from 3M’s 

perspective? 

Mr. GJERSDAL. Well, 3M historically has had 100 percent of its 

IP here in the U.S. The only IP that is actually offshore is the IP 

that we might have acquired in acquisition, and it is simply too expensive to move back here. 

So any type of option that would go after some of the abuses that 

do exist with IP offshore, you know, I think would be welcomed; 

welcomed by me. At the same time, I think we do need a kind of 

a carrot-and-stick approach, and that is that the carrot approach 

is why would we not do more to encourage research and development here in the U.S., and IP ownership here in the U.S. We spend 

a $1.6 billion each year on R&D. Our R&D credit is $20 million. 

Obviously, that is not going to change a whole lot of minds in 

terms of where we investment. 

But if we did something like the patent box which is becoming 

quite common in Europe as a carrot, you might see a fundamental 

change in the way IP is developed and owned by U.S. companies. 

Mr. REED. And why is that so important to keep that IP here 

in America? 

Mr. GJERSDAL. Well, I mean certainly, the patent protection, 

and I am not a patent lawyer so I can’t address it in detail, but 

certainly the patent protection, having the IP here. The fact that 

where the IP is also going to encourage where it is developed. For 

3M, our fundamental innovation is in the U.S., is in St. Paul. Thirty-two percent of our products that we are selling this year have 

been developed in the last 5 years. We want to keep that innovation here in the U.S. We do have labs offshore. That is a necessity 

of our business also, but we want to keep the base innovation here. 

Mr. REED. And with that base innovation, I would assume the 

jobs that are associated with it, like in Corning, my hometown of 

Corning, those are typically your research scientists, your engineers, and others; is that correct? 

Mr. GJERSDAL. Correct, and then obviously, a successful company adds to the headquarters staff. Fifty percent of our manufacturing is here. And to be perfectly honest, if you look at some of 

the really innovative stuff that we have, for instance, we have revolutionized the abrasive industry over the last 5 years. That technology is not going anywhere. We are going to keep it here. We are 

going to make it here. That is simply not technology we are going 

to readily put offshore. Other technologies, however, that are older 

and less IP protected, certainly, manufacturing ends up offshore, 

because we are a short cycle supplier. Our customers are demanding that we be close to them, very much like the Corning example. 

Mr. REED. And I appreciate that. I know my time has expired 

and with that IP being here, I always keep the hope out that manufacturing would then blossom next to the IP center here in America. With that, Mr. Chairman, I yield back. 


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Chairman CAMP. Thank you, Mr. Kind is recognized. 

Mr. KIND. Thank you, Mr. Chairman. I, too, want to thank our 

panelists for your testimony here today. It is helpful and we have 

been hearing countless hearings throughout the year on what comprehensive tax reform should entail. So getting this feedback, I 

think, is very beneficial. But unless or until, and I have made this 

point in previous hearings, unless we start putting something in 

draft, putting something on paper, we are all dealing in a 30,000- 

foot theoretical level, because we all know that at the end of the 

day, and the chairman knows this and every member of the committee knows this, once you put something on paper, you are immediately going to be creating winners and losers, no matter what 

we do. It is just going to make reform very, very difficult. 

And that is why we are going to be asking you to do some pretty 

hard calculations, and those of who you are representatives of the 

manufacturing sector of this country, of what you are willing to live 

with, and what you are willing to give up for the sake of a shared 

goal of trying to lower rates, broaden the base, and simplify, simplify, and simplify. 

Now, we are getting contradictory messages from some of you 

witnesses here today, where you are telling is, not all of you, and 

Mr. Gjersdal, we had a nice conversation about this, and 3M is— 

you were clear with me yesterday, and you were clear in your testimony today that you are willing to give up a lot of the expenditures 

that you currently take for the sake of a lower rate and I appreciate that. But you can’t have both, and we are hearing from some 

of you that you like lower rates, but you would also like to keep 

R&D. You like to keep depreciation. You like to keep 199. 

And that is the concern that I have. Because the goal of trying 

to get to 25 percent, the Congressional Budget Office already told 

us that in order to try to get there, we have to take away every 

tax expenditure that exists on the C side. And even then, the best 

we can do is get to 28. So if the goal is really to get to 25, then 

somehow you are going to have supplant that lost revenue and dip 

into the pass-through side. So Mr. Hardt, Mr. Beck, that is when 

your ears perk up, as they should in a hurry. Because I don’t think 

you are going to be willing to pay more as a pass-through entity 

for the sake of C corps getting a lower 25 percent rate if we are 

going to do this in a deficit-neutral fashion. 

And yet, most of the expenditures that are talked about being 

eliminated are the ones that directly benefit manufacturing. And 

Dr. Boushey, I want to ask your opinion in a second of what the 

impact would be on the manufacturing sector of our economy if we 

do take away R&D, if we do take away depreciation, we do take 

away 199 for the sake of lowering the rates and broadening the 

base, because I happen to believe that a country as great as ours, 

we have to have the ability to make things, and to produce things, 

and to invent things, and create things, and grow things, but we 

are no longer going to be a super power in this world. 

And therefore, I think there would be more interest on this committee of what type of changes we have to make in the Tax Code 

that would benefit companies such as yours that make things, and 

invent things, and create things here in the United States of America. 


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That is why earlier this year I introduced legislation called the 

Promoting American Manufacturing Act, which calls for reducing 

the manufacturing rate from 35 to 20, for those that make things, 

for those manufacturers of our country. And we are not going to be 

able to do that for every industry, for every sector of our economy. 

But what is being pitted right now against each other are basically 

your manufacturers and your technology sector, versus everyone 

else, from the retailers, the wholesalers, financial corporations, the 

service sectors, who are paying a high rate right now, but they are 

not getting these deductions. They would love to have a lower rate. 

But in order to get there you are going to be taking away a lot of 

the expenditures that directly benefit manufacturers in the process. 

And we need help in trying to figure this out, and you guys are 

going to have to make those hard calculations of what you are willing to live with for the sake of lower rates, what you are willing 

to give up. But maybe Dr. Boushey, I ask you first, and then Mr. 

Hardt, I want to go back to you to get your perspective on this, too. 

But what do you think will be the impact on domestic manufacturing if we take those expenditures off that directly benefit manufacturing in the high-tech sector today just for the sake of lowering 

rates for everyone? 

Ms. BOUSHEY. Well, from where I sit looking at the big picture 

as an economist, it seems like that would be bad for U.S. manufacturing, and we already have an industry that certainly has been in 

trouble, that has been—we have seen a decline in many ways in 

manufacturing employment, and as a shared GDP, and I think it 

should be a national goal to make sure that manufacturing remains a vital part of our economy and grow it. 

And so these kinds of tax expenditures that seem very important 

to manufacturing should not be done at the expense of lowering of 

the rate, when a lowering of the rate, at least according to all of 

the analysis, if you did that in a revenue-neutral way, would disproportionately benefit other industries like finance, and insurance, 

and retail, which while are, of course, certainly important, don’t 

have the pivotal place that manufacturing plays, both in terms of 

job creation, but also as a key sector for innovation. 

Mr. KIND. Dr. Boushey, not to sound too crass in my analysis 

and listen, I don’t hold myself out as an expert, but if you take a 

look at the manufacturing and tech sector, these jobs are highly 

mobile. You guys can go anywhere around the globe, where it 

makes sense for you to do it. But you look at the other sectors, retailers, wholesalers, financial, the service sectors, they are less mobile. I mean, where are they going to go? They have to stay here 

in the United States, provide jobs here, because this is where the 

customer base is. 

Chairman CAMP. Your time is expired, so if you could just be 

brief. 

Ms. BOUSHEY. Okay, not only are they less mobile, but they 

don’t create the same kind of innovation effects that are so critical 

for us remaining the sort of the economic powerhouse that we have 

been. 

Chairman CAMP. Thank you. And I would just say, Mr. Kind, 

the tax expenditure report that you mentioned is incomplete. It 


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does not include all of the tax expenditures and it is not necessary 

to get rid of every tax expenditure in order to get to 25. 

So Mr. Brady is recognized for 5 minutes. 

Mr. BRADY. Mr. Chairman, thank you for hosting this hearing. 

We are hearing from iconic American companies, and to top it off, 

we have a company headquartered in Texas. So it doesn’t get any 

better than this panel. 

Clearly, if America wants to have the strongest economy in the 

world for the next 100 years, we have to get our Tax Code right. 

Today, despite what you see on the campaign trail, there aren’t incentives in the Tax Code to send jobs overseas. The Tax Code itself 

is the problem, making it harder to locate jobs, especially manufacturing jobs here in merge. 

The Ways and Means Committee led by Chairman Camp last fall 

laid out a draft proposal to make us competitive again, both lowering the rate, moving to a territorial system to make sure that we 

are not out of sync with the rest of America, allowing companies 

both to compete overseas and to bring those profits back to invest 

in America. 

The President has, in a less specific way, outlined two general 

approaches. He, too, wants to lower the rate which I commend. But 

he keeps in place, or at least the White House keeps in place the 

territorial system, the outdated system we have today. In fact, even 

removes some of the provisions that would create double taxation 

risks for companies. Looking at those two approaches, the draft 

that has been laid out by this committee, and from the White 

House, I want to start with our business witnesses. 

From a competitive standpoint, both competing around the world 

in the competition you face here in America, do you have a preference on which concept, which direction allows you to compete 

best going forward? 

Ms. DOSSIN. My written testimony, and I think my oral today, 

said Ford does not have a particular position. We think a variety 

of different approaches could work. 

Mr. BRADY. So may I ask, so a territorial, you would be—you 

have no problem leaving the territorial system in place, the worldwide system in place? 

Ms. DOSSIN. Well, I mean, we have been working with that for 

some years. To us, the low U.S. tax rate is the single-most powerful 

thing, and because of our profile, because of where we historically 

have operated near our customers, our profile does not suggest to 

us a leaning strongly one way or the other. But if it is territorial, 

anti-based erosion provisions are really important. 

Mr. BRADY. Okay. 

Mr. GJERSDAL. We clearly support the chairman’s proposal, at 

least the outline of the chairman’s proposal. As far as the lower 

rate is concerned with the base broadening, we create a more even 

playing field here in the United States, and make the U.S. more 

competitive internationally. Territoriality is really a separate issue. 

It will enable us to compete with our foreign competitors, so both 

are really important. One does not go without the other. But clearly, the chairman’s proposal would be our preference. 

Mr. BRADY. Thank you. 


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Ms. FORD. I think our preference would also be to shift more towards a territorial system, because so many of our competitors and 

customers are located internationally and those companies have 

territorial systems that leaves it as an unfair advantage. We do 

spend some time when we look at expenses in the U.S., funding our 

R&D, funding our corporate headquarters. We do spend a lot of 

time analyzing, is it actually cheaper to borrow in the U.S. to fund 

those activities instead of bring money home that we already own. 

So I think it is a significant issue for companies like Corning and 

territorial would be more competitive. 

Mr. BRADY. Great, thank you. Mr. Hardt. 

Mr. HARDT. Well, the territorial doesn’t really impact us, being 

a domestic manufacturer. One point to Mr. Kind, there is an exhibit in my testimony on a tax template, how the tax changes 

would specifically impact pass-through manufacturers, so that is in 

my testimony for the review. 

Again, I have to state that the ability in the Tax Code and we 

are a capital-intensive business, and that is what we have to remember here. We are a capital-intensive business, so we need profits to reinvest in our businesses; we need profits to leave in our 

businesses in order to borrow money. So an overall effective tax 

rate will clearly allow us to do that. However, I continue to encourage the fact that since we are a capital investment business, if 

there is anything that can be retained to assist with those incentives, it is for the best of all us. 

Mr. BRADY. And can I make a point there? I think this is a 

healthy discussion, one we have wanted to have for a long time. 

The reason we have held almost 20 hearings on this issue, having 

a discussion about the lowest rate possible, or pro-growth Tax 

Code, the cost of capital and the impact, this is all part of getting 

to, I think, the best Tax Code we can create for our companies. So 

thanks for that. 

Mr. HARDT. Well, working with manufacturing capital investment isn’t just about us. I mean, I have 120 suppliers to me. We 

have service businesses in our community that respond to our capital—— 

Mr. BRADY. Got it. Can I hear real quick from Mr. Beck and Mr. 

Spinks? 

Chairman CAMP. Real quick, because your time is expired. 

Mr. BECK. Being territorial doesn’t affect us either, but going 

back to accelerated depreciation, when you talked about that, I 

have been in this business and running it for 35 years. I bought 

machinery where we didn’t have accelerated depreciation, and I 

have bought machinery where we have had it. When you have it, 

it is certainly may be an incentive intended to make a decision that 

you may not make ordinarily because you have that advantage. It 

certainly can help when the economy isn’t good. 

Mr. BRADY. Good. 

Mr. BECK. But I have lived under both. 

Mr. BRADY. Thanks, Mr. Beck, I have run out of time. Mr. 

Spinks. 

Chairman CAMP. Mr. Neal is recognized. 

Mr. BRADY. Thank you. 


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Mr. NEAL. Thank you, Mr. Chairman. I appreciate Mr. Brady’s 

emphasis on the lowest possible corporate tax rate. Mr. Gjersdal, 

would you comment on the idea, if you had the option of a 27 percent rate, or giving up R&D, which one would it be? 

Mr. GJERSDAL. For the R&D credit versus 27 percent? 

Mr. NEAL. Yeah. 

Mr. GJERSDAL. 27 percent. 

Mr. NEAL. 27 percent. We would be assured that you would 

never have anybody come back for looking for the R&D afterwards? 

Mr. GJERSDAL. Well, I mean, right now, it is such a small number that it really doesn’t affect our decision-making process right 

now. 

Mr. NEAL. It is a big issue in Massachusetts, to be very frank, 

as you might expect. 

Mr. GJERSDAL. And obviously, every corporation is in a different position. 

Mr. NEAL. And we have had these conversations back and forth. 

I appreciate the testimony. It is really very, very helpful. The problem is, that at this stage of the question and answer period, every 

question either has been asked or exhausted. So what is the—after 

the issue of taxation, what for manufacturers is the next big issue? 

Any member of the panel. 

Mr. GJERSDAL. Well, if I could, I have noticed today that there 

is violent agreement to do something, and that is really encouraging. The problem is, is what we do has to recognize that we are 

now in a global economy, and a global economy—and a globe that 

is becoming smaller and smaller every day. We can’t look at the 

past as to how we might do manufacturing. We have to look at the 

future as to how we might do manufacturing and where can the 

U.S. succeed. Everyone wants the U.S. to succeed. There is no 

doubt about that. But you have to go overseas and see what is 

going on in other places to see how much we have to learn how to 

compete in this economy. 

Mr. NEAL. And the other panelists, what other considerations 

would you have just besides the issue of taxes? 

Mr. HARDT. Definitely a skilled workforce is very important to 

us. It takes skilled and talented employees to innovate. 

Mr. NEAL. Are we falling down on that front? 

Mr. HARDT. To be very honest, we usually have to take young 

apprentices and send them to community colleges for basic skills 

in mathematics and everything else just to get them into our apprenticeship programs. We are falling down a little bit on the basics. 

Mr. NEAL. Okay, the other panelists? 

Mr. SPINKS. To be honest, I think as an internationally 

headquartered company, we still see the United States as probably 

the premier place in the world to do business. But when we compare the tax rates that we see in other industrialized countries to 

the United States, there is a serious disadvantage here. 

Mr. NEAL. Okay, Ms. Boushey. 

Ms. BOUSHEY. I would like to direct your attention, there was 

an article yesterday in The Wall Street Journal that talks about a 

number of firms that are insourcing, in-shoring back to the United 

States, and they cite a number of examples for why they are doing 


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it. Some of it has to do with patent protection, some of it has to 

do with education, and a skilled workforce, but there is a long list 

of things that is not just about taxes that is very—I will get this 

to you. 

Mr. NEAL. I saw the article and you gave me the run-up. Any 

of the panelists, are you considering bringing jobs back right now 

for those of who you have international interests? 

Ms. FORD. I think as a general rule, our view is if we grow 

internationally, we grow domestically as well. And I think since the 

recession, I believe we added about 1,500 jobs in China, because 

many of our businesses sell to Chinese markets and we added 

2,000 in the U.S. So but I don’t think it is a zero sum game. I think 

we continue to add in both. 

Mr. NEAL. Fair enough, Mr. Hardt. 

Mr. HARDT. We have added jobs back, and again, exports are 

a big part of our business, 22 percent overseas. So you know, international and globalization is part of what we have to deal with 

every day. 

Mr. NEAL. Okay, Mr. Gjersdal. 

Mr. GJERSDAL. Well, as a short-cycle material supplier, if our 

customers come back to the U.S., we will be coming back to the 

U.S. 

Mr. NEAL. Any immediate plans to? 

Mr. GJERSDAL. We are not seeing that great of an increase in 

U.S. manufacturing at this point in terms of our customers, but as 

I say, when they do come back, I mean, we will be right next to 

them. 

Mr. NEAL. Great. Ms. Dossin. 

Ms. DOSSIN. We locate where our customers are. So I will just 

channel Alan Mulally and say profitable growth for all is what we 

want for all parts of the world. So U.S. included. 

Mr. NEAL. Okay, just a last comment, Mr. Chairman. One of the 

frequent concerns that I hear from the manufactures where I live, 

it really is the issue of skills. I hear it all of the time. And the fact 

that they are subsidizing additional education, remedial education, 

and then on to the community college, which is a very important 

part of the economic discussion in America. But it is a frequent 

topic of discussion now. And again, particularly with the high-end 

manufacturers. 

Chairman CAMP. I couldn’t agree more. I mean, it is an issue 

and obviously, that is something that the workforce committee and 

Chairman Kline are trying to address. And this committee’s general focus is tax policies and tax issues, but understanding there 

are a variety of issues that affect our ability of our businesses to 

compete, and grow, and create jobs. But at this time, I recognize 

Mr. Schock. 

Mr. SCHOCK. Thank you, Mr. Chairman. I am specifically interested in the several small business owners that are represented on 

the panel here today. Are you guys aware of the President’s comment this past week about business owners? And if so, I am just 

curious your perspective. 

Mr. BECK. Yes, I am. And it is interesting. I talked to a number 

of small business owners, and they weren’t, needless to say, very 

happy. They said, ‘‘I am sure glad you are going to speak to the 


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House Ways and Means Committee because you won’t use any uncivil swear words in front of them, but we would because of the 

feelings that the small business people have back in our communities about those types of words,’’ about what President Obama 

had said. And I said to myself, you know, these people are really 

upset. 

Mr. SCHOCK. Anyone else wish to comment? I am just curious 

because I will tell you, as an entrepreneur before I came to Congress, maybe I was foolish to think that it was my hard work that 

helped me be successful, and the businesses that I had worked in 

that I thought I was building, but I know some of you are a little 

bit older than I am and perhaps been in business longer than I 

was. And I thought maybe I would like to get your perspective, because I found them very spellbinding when I read them first, and 

then saw them, that as we talk about jobs, we talk about a President with a record of unemployment for the longest period of consistency in my lifetime, and we are all throwing up our hands here 

in Washington, D.C. wondering why people won’t hire. 

And the Commander-in-Chief, the leader of the free world, says 

things like, if you built a business, if you have a successful business, you didn’t build it. Somebody else did. Somebody else made 

that happen. 

Mr. BECK. Every one of us wants to see our business grow. 

Every one of us wants to be profitable. Every one of us when we 

are profitable, we pay taxes. When we pay taxes, we pay for the 

infrastructure. We are part of the infrastructure of this country. 

Mr. SCHOCK. I just thought that you had a perspective on who 

made you guys successful if it wasn’t, in fact, you and your—— 

Mr. BECK. I think my colleague over here already said it. We, 

along with our team, and those people that work with us each day, 

made our company successful. We never asked for a penny from 

anybody. And we have paid our fair share in taxes. 

When I went from 110 people down to 25, I couldn’t ask for a 

government bailout. There were no loans that were going to keep 

my doors open. We had to figure it out ourselves. And our people 

took great sacrifice in salaries and worked really hard to help pull 

the company back out of the hole. We are now seeing some real 

strength in our company as we have come back from it. But to— 

but we would never have received any help from any place. We 

would have just gone away. We are only 110 people. We would 

have just gone away. 

Mr. SCHOCK. Well, as one elected official, I want to say thank 

you, because I believe you guys are the ones who create jobs. And 

I believe that you are successful as businesses because of your 

work ethic, your ability to take risk, your willingness to put in the 

time, talent, and energy necessary to be able to do so. So know that 

there are some of us on Capitol Hill who recognize why small businesses and entrepreneurs are successful. 

With that, I want to ask some specifics on tax reform as it relates to manufacturers. I am curious if anybody up here represented small or large, currently utilizes LIFO in their accounting 

practices. Ms. Dossin, could you maybe please speak to this, because I know we have had scores of businesses small and large 

come to my office, and we have had testimony here from big compaVerDate Mar 15 2010 04:56 May 29, 2013 Jkt 080844 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80844.XXX GPO1 PsN: 80844

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nies, small companies, and most of them say what you have said, 

which is get rid of the credits, get rid of the deductions. 

I know Caterpillar, which is in my hometown said, look, we will 

give up R&D even though we use it. Get us down to 25 percent, 

and we will give it all up. LIFO seems to be one that, because of 

its retroactivity in terms of the tax collection, it is not moving forward, that has the potential to really put some businesses out of 

business. 

And I am just curious to what degree it would affect you if LIFO 

was repealed moving forward, but also the retroactivity in terms of 

the liability it would mean for you? Have you guys looked at that? 

Ms. DOSSIN. We have, but you will notice it was not part of my 

testimony because it wouldn’t have been effective for me to come 

here and say I want to lower rate and A, B, C, D, E, F, G, right? 

So I didn’t list it as one. It will be painful to lose it, but I think 

the degree of pain is not what you hear from some others. 

Mr. SCHOCK. Would you agree that it is important for us to try 

and, when eliminating deductions, accounting practices, whatever 

you want to call them, that we do it moving proactively, and that 

we limit what is retroactive? In other words, I would assume if we 

tried to get back all of the depreciation retroactively that the bonus 

depreciation has awarded over the last couple of years, there might 

be some screaming and gnashing of teeth if we tried to do that. 

LIFO seems to me to be a similar mechanism where going forward 

is one discussion, proactive, but retroactivity seems a lot more 

harmful. 

Ms. DOSSIN. Well, once—— 

Chairman CAMP. Your time is expired, so if you could just answer as fast as you can. 

Ms. DOSSIN. I will just say, once you have the bones of an idea 

of a tax package, transition rules are going to be really important, 

and you won’t want to cause harm in the transition. 

Mr. SCHOCK. Thank you. 

Chairman CAMP. Thank you. Mr. Pascrell. 

Mr. PASCRELL. Yes, Mr. Chairman, we are now 19 months into 

this Congress. We have yet to see comprehensive jobs agenda, let 

alone a comprehensive manufacturing plan. 

We have already established, I think, reestablished today that 

while we complain about regulations and taxes, they apparently 

were not the cause of what happened beginning in 2006 to the 

manufacturing sector going back 20 years. What concerns me is 

that from January of 2000 to January 2010, we lost—the United 

States of America lost 5.5 million manufacturing jobs. In my home 

State of New Jersey, we lost 11 percent of our manufacturing base. 

A recent study by Alan Blinder and Alan Krueger, who is the 

chairman of the President’s Council of Economic Advisors has 

shown 1/4 of American jobs—this is what really concerns me—are 

potentially offshoreable, with 80 percent or over 600,000 of these 

jobs in manufacturing. 

That is almost 150,000 manufacturing jobs in New Jersey, 

300,000 in Michigan, over half a million in Texas, and 365,000 in 

Ohio. The light of our economic recovery is powered by domestic 

production. You are right. Over the past 2 years, the manufacturing sector has added 400,000 jobs. Who would have thought 2 


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years ago that this would be the lead factor in getting the economy 

started and starting to get the economy back on its feet. 

The first period of sustained growth since the 1990s, we need to 

enact policies to keep up the momentum, and that is why the gentleman and ladies are here today. The recently released nonpartisan Congressional Budget Office report entitled ‘‘Fiscal Policy 

Options for Increasing Economic Growth and Employment in 2012 

and 2013’’ has made it clear that what we can be doing is reducing 

cost of adding employees and investing. 

Those are two things that are available to us if we have the urge 

to do that. Yet, we have great legislation to do just that; we have 

been unable to move it, including bipartisan legislation with 100 

percent expensing for capital expenditures. 

To me, that is a no-brainer. I think it is a no-brainer to all of 

you. Today the Senate will block action on legislation that I have 

introduced, the Bring Jobs Home Act aimed and lowering the cost 

for companies looking to in-source jobs back to America. 

Ms. Boushey, I even had to battle some of my own party about 

my belief that manufacturing provides a substantial economic impact. Can you elaborate on how it helps drive our economy in your 

eyes? 

Ms. BOUSHEY. Well, it drives it in a number of ways. I mean, 

looking immediately at the short-term certainly manufacturing as 

a sector has one of the biggest multipliers of other industries, so 

when you create a job in manufacturing, you create many more 

other jobs in other sectors than you do if you create a retail or a 

service-sector job. So certainly, in the short-term, the fact that the 

recovery has been led by gains in manufacturing has certainly been 

something that has been optimistic, that certainly we could gain 

on. 

But second, I think that one of the key ways that manufacturing 

is vital for our economy, is because it is—manufacturing is where 

innovation happens. And so if we want to be the kind of economy 

that creates the next great inventions, we need to be the kind of 

economy that supports the kinds of sectors in our economy that employee engineers, that employee the innovators of the future, and 

manufacturing certainly does that. 

So it has both the big multiplier effect, it has the innovation effect. And I would just add that it is also critically important for our 

macro economy. 

Mr. PASCRELL. So we made a big mistake in listening to corporate America 30 years ago, in moving towards a service economy 

while we have lost millions and millions of manufacturing jobs, and 

really reviving the old Jefferson-Hamilton debate that we did not 

have to have a multifaceted economy. And Jefferson, the great hero 

of America, told us, let’s keep on our path, and agriculture will see 

to the conclusion. Hamilton was correct. 

Can you compare how the 20 percent tax credit for insourcing in 

the Bring Jobs Home Act would help employment in the United 

States as opposed to proposals to exempt overseas profits from U.S. 

taxes? 

Ms. BOUSHEY. That is a long question. 

Chairman CAMP. And if you could respond in writing because 

time is expired, the committee would appreciate that. 


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Mr. PASCRELL. Can she give a short answer, Mr. Chairman? 

Chairman CAMP. If you can give a few-second answer. 

Mr. PASCRELL. Thank you. 

Ms. BOUSHEY. Certainly, I think would it be better to encourage firms to relocate to the United States than to stop taxing their 

ventures overseas. But I will—— 

Chairman CAMP. You can elaborate in writing to the committee. 

Thank you, Mr. Berg is recognized. 

Mr. BERG. Thank you, Mr. Chairman. I really appreciate you 

being here. I am from North Dakota, and North Dakota a long 

time, our manufacturing has been a core passion of mine. You 

know, I come out here and our challenge as a country is, quite 

frankly, we need more revenue. And manufacturing, we always 

used to use the term ‘‘primary sector.’’ 

Manufacturing creates new wealth in America. And I mean, that 

is a core fundamental of our economy, and it has worked for a long 

time. I look at a lot of the rhetoric out here and, you know, 95 percent of our consumers live outside the United States. 

What we should be doing is not focused on, worried about foreign 

competition as much as we should say, how can our manufacturers 

be that competitor in all of these foreign markets? And very clearly, as you have talked today, we have heard about that. 

One question, Mr. Hardt, I mean, obviously you don’t have a lot 

of foreign—my understanding is you don’t do much business outside of the United States. 

Mr. HARDT. We export to 15 different countries, about 22 percent of our sales. 

Mr. BERG. So it is big. 

Mr. HARDT. A big part of our business. 

Mr. BERG. My question really was, you know, even if there are 

companies that aren’t exporting out of our country they are still 

facing that foreign competition from their customers, they are making different choices. Let me just—I had a thought the other day, 

and we heard it today. And the thought is, your profit, you have 

got a partner that is taking 1/3 of your net profit. That partner is 

the Federal Government. They are not putting $1 of capital in, but 

kind of, they are your partner. And what we are here sitting here 

today, this is like a different board of directors for that silent partner. 

I am just frustrated because the Federal Government should be 

doing everything it can do to help you increase your revenue, increase your profits. And I am sitting here thinking, it can’t be for 

American manufacturing, at the same time, increase the cost on 

that manufacturing and increase the uncertainty on that manufacturing. You know, and that is kind of what we have heard over and 

over again. 

My question really gets down to, we are talking about a flatter, 

fairer tax, and we heard some comments that that is bad for manufacturing. I guess my question here is, if we go with a flat tax, flat 

or fair tax, 25 and 10 percent like we have talked, got rid of some 

of the exemptions, not all of the exemptions, there are some key 

ones we talked about, research, et cetera, but it was a net dollar 

equal, would your company do better in that environment? Would 


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they make more money, which obviously, the great comment about 

making $1.4 million and investing $1.3 back in capital. 

So I would just like to ask the manufacturers here, if it was a 

flat tax or a flatter tax from what we have got, would that generate 

more revenue for your company? 

Ms. DOSSIN. I will give you a quick answer, but I might have 

to think about that one a little bit, because I suspect what it would 

do is allow business decisions to be made on the basis of business 

factors more than tax factors. And we hope that is good everywhere 

we operate. So I think it is directionally correct. 

Mr. GJERSDAL. Devil is in the details, but rough math would 

tell me we would do a lot better. 

Ms. FORD. Similarly, we would also do better because our competitors are more international and their tax costs are much lower. 

Mr. HARDT. A stable longer-term system would help us with 

better business decisions. 

Mr. BECK. And it would be the same for us. You normally make 

a decision based upon the business first, and then the tax second. 

Mr. SPINKS. I completely agree that a more competitive rate 

versus the other countries in the world would achieve, go a long 

way towards the real goal which is to increase investment in the 

United States. 

Mr. BERG. Again, Ms. Boushey, you mentioned that report that 

said the exact opposite, and we are hearing from manufacturers, 

and I couldn’t agree with you more. So anyway, this along with 

some stability in your regulatory environment, I think would help 

American manufacturers be more competitive, and would bring 

more manufacturing jobs in America. So thank you for being here 

today. 

Chairman CAMP. Well, thank you. Mr. Crowley is recognized. 

Mr. CROWLEY. I thank the chairman. I am going to go right to 

questioning. Ms. Dossin, would you agree that the U.S. manufacturing industry, and more specifically, the U.S. auto industry, is in 

far better shape than it was on January 19, 2009? 

Ms. DOSSIN. I guess so, yes. 

Mr. CROWLEY. You would agree with that. I would agree as 

well. I think that the deal that was worked out by Ford’s CEO, 

Alan Mulally, as well as with President Obama, and working with 

Democrats here in the House on a rescue package for the U.S. auto 

industry, and it worked, and literally saved millions of jobs, and 

created new jobs in our economy. 

Would you, Ms. Dossin—Ford received a Federal loan guarantee 

from the Department of Energy through the advanced technology 

vehicles manufacturing loan program in the amount of $5.9 billion. 

The goal of the loan was to provide capital to the U.S. auto industry for the purpose of funding projects that help vehicles that are 

manufactured in the United States. Did this program benefit Ford 

and saved jobs here in the United States? 

Ms. DOSSIN. In my testimony, I talked about all of the things 

Ford did to restructure itself. And that included, you know, completely overhauling a great deal of the business, and once we did 

that and reached a point of financial viability, we were in a position to go look for funding to accelerate the plan. And when we do 


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that we will go to the lowest cost source of funding. And we did 

go to the government for those—— 

Mr. CROWLEY. So you would agree that that particular loan 

program—— 

Ms. DOSSIN.—for the loans, and it did support jobs in many facilities. Probably—— 

Mr. CROWLEY. Ms. Dossin, my time is very limited, so that specific loan program was beneficial to your company, was it not? 

Ms. DOSSIN. It was. 

Mr. CROWLEY. Okay, so you would agree that these loan programs are generally beneficial to job creation, would you not? 

Ms. DOSSIN. They were a good low-cost source of borrowing at 

the time. 

Mr. CROWLEY. Thank you. Mr. Beck, if President Obama did 

not create a rescue package for the U.S. auto industry, a package 

championed and crafted with the support of Ford CEO Alan 

Mulally, where would your business be today? 

Mr. BECK. Well, I think Ford would have probably survived. 

Mr. CROWLEY. Where would your business be today? 

Mr. BECK. Very good. 

Mr. CROWLEY. You would be good if GE—I am sorry, if Chrysler and GM had gone under? 

Mr. BECK. Right now, most of my work is with Ford. 

Mr. CROWLEY. So you think that overall—do you think that 

Ford would have survived had the others gone down? 

Mr. BECK. I think Ford would have survived. 

Mr. CROWLEY. I think many economists would disagree, including Mr. Mulally—— 

Mr. BECK. I just gave you my opinion. 

Mr. CROWLEY. And I am going to—it is my time, so I am going 

to take it back, and I am going to say that many economists would 

disagree with your position, and would suggest that the entire industry would have collapsed and therefore, your business, had we 

taken the Romney approach of let Detroit go bankrupt, I think 

your business would have gone the way of the Studebaker. 

Finally, I just want to follow up on what my colleagues Mr. Johnson and Mr. Schock were talking about before in terms of interpreting what President Obama’s comments on how no one is an island, and America is a society. And so that behind every successful 

small business is another hand to help them get there. 

I would like to think that I didn’t get to Congress on my own; 

that the fact that my parents saw to it that I had the right kind 

of education, helped along the way, that people helped get me elected, helped me get here as well. So people are ridiculing him because they are parsing the words, distorting his words, but I think 

the President was right. 

Mr. Hardt, do you think that we as a Nation, that we owe a debt 

of gratitude to our veterans? Do you think that you would be where 

you are today without the work and sacrifice of our veterans and 

the men and women who died to protect the interests of this country? 

Mr. HARDT. That is clearly an important part of our society. 


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Mr. CROWLEY. You would agree, would you not? An important 

part of our society, people dying to maintain our way of life is an 

important part of society? 

Mr. HARDT. Correct. 

Mr. CROWLEY. That is the level of enthusiasm you give to that? 

Mr. HARDT. I am not here to have political labels. 

Mr. CROWLEY. Again, I am surprised by the lack of fervency 

there. 

Do you think that we owe a debt to those individuals? Do you 

think that your company could have survived had America not survived, had those soldiers failed in their attempt to maintain our 

way of life, our capitalist way of life? 

Mr. HARDT. No way we could have survived. 

Mr. CROWLEY. I am glad that you agree that your business 

would not have survived had those sacrifices not been made. 

Chairman CAMP. Mr. Crowley, I have to say that this line of 

questioning is really not on topic. 

Mr. CROWLEY. Mr. Chairman, it is on topic. 

Chairman CAMP. You have a few seconds. Why don’t you conclude. 

Mr. CROWLEY. With all due respect, Mr. Schock raised this 

point and I am clarifying the point Mr. Schock raised. 

Chairman CAMP. Complete your questioning. 

Mr. CROWLEY. I will. Thank you, Mr. Chairman. None of us 

would be here, none of us without the patriotism and dedication, 

and sacrifices of our veterans. So I urge all of my colleagues to stop 

questioning the patriotism and dedication of our military, our veterans, and stop playing politics with the President’s remarks. 

Chairman CAMP. The gentleman’s time has expired. 

Mr. CROWLEY. No man or woman is an island. 

Chairman CAMP. The gentleman’s time has expired. Ms. Black 

is recognized. 

Mr. CROWLEY. Thank you, Mr. Chairman. 

Mr. PASCRELL. You can hit the gavel all you want. 

Mrs. BLACK. Thank you, Mr. Chairman, and I want to thank 

the panel for being here today. It is a very good conversation on 

topic about our tax reform and the necessity for that, and I want 

to thank you all of you, both the large companies and also the 

smaller companies. Having been a business owner who started a 

business, I can say that I know those challenges that we have. But 

I want to turn our attention to one area that has not really been 

explored fully, is to look at why foreign companies invest in the 

United States. 

And we know that nearly 40 percent of all of those foreign direct 

investments by global companies into the United States are connected to manufacturing, which statistics show, directly translate 

into about 2 million jobs, which is pretty important. 

Mr. Spinks, probably this question is best for you. How does the 

United States tax system affect those choices that are made by 

those foreign-based manufacturers when they evaluate whether to 

invest in the United States or to go to another country? 

Mr. SPINKS. Thanks. As I said in my testimony, we do look. We 

are in many, many countries around the world. We evaluate our 

projects on an after-tax cash basis. And when we look at the other 


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industrialized nations, particularly in the OECD, what we are seeing now is a U.S. tax rate that is the highest in the world. So what 

it means is that the mathematics of getting to an after-tax return 

on investment, it is very, very difficult when you have got corporate 

rate differences of 7 to 10 percentage points. 

In the particular case of Air Liquide over the last 5 years, even 

with the global recession, we basically doubled down on the U.S. 

economy. We have doubled our investment in the United States in 

the last 5 years. We would like to continue to do that. And we 

think that a system that is more predictable, more simple, and 

with a more competitive tax rate will allow us as well as a lot of 

other global companies to do exactly that. 

Mrs. BLACK. Thank you. I want to now just talk about the fact 

that we need to have all of this. We need to have the global investment into our country, the smaller businesses, and then also the 

larger corporate businesses that do worldwide work as well. 

And Ms. Ford, I want to turn to you, because you noted that the 

major of the Corning’s employees are located right here in the 

United States, but 80 percent of those sales are to customers located abroad and that Corning also has extensive foreign operations. 

How do you, or how, excuse me, how do your worldwide operations affect your U.S. operations in employment, such as areas of 

R&D, and headquarter jobs? 

Ms. FORD. Thank you for the question. Because we conduct 

probably 99 percent of our research and development here in the 

United States, and we are a technology manufacturer, we send our 

engineers all over the world to our plants where we are located 

close to our customers, and there is a very strong exchange there. 

So when—at the location they need a certain development piece 

and they need something done, much of that comes back to the 

U.S., and we add R&D jobs to support it. 

And certainly our corporate headquarters is here in the U.S., as 

well as our IP is maintained here in the U.S., and so we have our 

fill of lawyers and accountants, and corporate folks, and they are 

also all located in the U.S. So, you know, I have stated previously 

that it is not, you know, it is not a zero sum game. It is not U.S. 

jobs versus foreign jobs. As our foreign markets grow and we are 

able to continue to compete there, we add U.S. jobs as well. 

Mrs. BLACK. I think the importance here is to say that it takes 

all of this to make a vibrant economy. It is not one. It is not just 

the small businesses. It is not just the large businesses. It is not 

the investments that come from foreign entities, but it is the combination of, and I really appreciate you all being here today and 

sharing what it is from your individual perspective that would be 

good for moving the United States forward in our taxing area to 

be able to continue to have and grow a more vibrant economy. So 

I thank you all so much, because I think this dialogue is so good 

as we move forward. 

I think the time, and several of you mentioned this, that you believe that the time is here. I believe the time is here. Obviously, 

the chairman believes the time is here, and I want to commend 

him for putting a draft out of the territorial so that you all will 

have the input, and it is with us all working together as partners 


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that are going to bring us to the conclusion of doing good tax reform that will continue to move this country forward to be the 

strongest economic country in the world. 

So thank you so much, and thank you, Mr. Chairman, for this 

very interesting hearing. 

Chairman CAMP. Well, thank you. And this concludes our hearing. I want to thank all of our witnesses for taking time away from 

your usual responsibilities to come here and give us the benefit of 

your expertise. 

And let me just say that we have been trying to conduct over the 

last 20 hearings an open process where we actually hear from 

those who are in industries, and in this case, manufacturing, academics, experts, economists, so that we can make the best decision 

as we try to move the issue forward of fundamental and comprehensive tax reform, because the fact is, our economy is not recovering as quickly as we would like it to be. 

We still have unemployment that is far too high, and I believe 

that if we can move the issue of comprehensive tax reform, we will 

see a pro-growth tax policy that is adopted by this country that 

helps us do better here in the United States, and also that we can 

help those companies who are U.S.-based doing business around 

the world. 

As you have all so articulately stated, we are in a global economy 

and we need to make sure that we compete in that way. So I just 

want to, again, thank you for being here on a very long day, giving 

the opportunity for members to get the benefit of your experience 

and advice. And with that, this hearing is now adjourned. 

[Whereupon, at 12:40 p.m., the committee was adjourned.] 

[Submissions for the Record follow:] 


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3M 


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Commlnee on V~ia."s ami Me,ws 

He-arillg on ~"Tax Rt'form and the U.S. rVianufacturing Sector" 

July 19, lOU 

"Vrittt'u Statt'ment of Henry \\" G.it'Pi(bl 

Vire Pn.>si(h.~nt of Tax 

3M Company ("3M") appreciates the opportunity to testify before the Committee on 

\\/ays and Means on "Tax Reform and the U.S. Manufacturing Sector." 

3M is a large U.S.-based employcr and manufacturer established over a eentlll), ago in 

Minnesota. Today, 3M is one of the largest and mo~t diversified manufacturing companies in 

the 'world. \Ve are a global company conducting the majority of our manufacturing and research 

tlctivities in the United Slaks. 3M thanks the Committee for its 1ctldership on the critical issue of 

tax reform and for considering our perspecti"e in this impol1ant debate. 

Our comments are written to share the practical impact of corporate tax ret'Jfnl on 3 M. 

3M respcctililly urges the Committee to continue making the global competitiveness of 

American businesses and workers a key objective of reform. From 3M's perspective, this means 

tl significant reduction to the cOllJortlte tax rate and the adoption ofa territorial system. 3f\1 

generally supports the approach outlined in the Ways and Means October 2011 discussion draft 

on a P3rticipation Exemption (TelTiwrial) System. We recognizc that to reform the system in 

this way, all cun'ent incentives, credits and deductions must be reviewed. 

3M looks forward to working \vith the Committee on achieving meaningful and 

comprehensive tax reform. 

Background on 3M 

3M, formerly knO\vn as Minnesota Mining and Manufacturing, is an American company 

currently headquartered in St Paul, Minnesota. The company, created in 1902 by a small group 

of entrepreneurs, initially began as a small sandpaper product manufacturcr. Today, 3M is one 

of the largest and most diversified manufacturing companies in the world. 3M is home to such 

we!J-kno\AlTI brands as Scotch, Scotch-Brite. Post-it@}, Nexcare@, FiltrcteQ{J, Command@, and 

Thinsulate,:g) and is composed of six business sectors: Consumer and Office; Display and 

Graphics: Electro and Communications; Health Care; Industrial and Transportation; and Safety, 

Security and Protection Services. 

Ahcad of their peers, 3M's founders insisted on a robust investment in R&D. Looking 

back, it is this early and consistent commitment to R&D that has been the main component of 

3M's success. Today, 3M maintain.:. 40 diiTcrcnt technology platforms. These divcrse platforms 

allov·/ 3M scientists to share and combine technologies from one business to another, creating 

unique, innovative solutions for its customers. The financial commitment to R&D equated to 

$1.6 billion of R&D spending in 20 II and over $7 billion during the past five years, and 

produced high quality jobs for 3900 researchers in the United Statcs (and 7000 total worldwide), 
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Th~ results are equally impressive with 571 U.S. paknts a\vardcd in 2011 alone. and over 40,000 

global patents and patent applications. Over 32% 01'201 1 sales came from products developed 

in the la.'.t 5 years. 

3M's \vorldwidc sales in 2011 \vere nearly $30 bilhon. 3M is one of the 30 companies on 

the Dow Jones Average and is a component of the Standard & Poor's 500 rndex. Owned by 

millions of shareholders directly and indirectly through mutual funds, 3M has consistently 

delivered positive results to its owners. It has paid dividends lo its shareholders every quarter 

since 1916. 3M paid dividends ofS1.6 billion in 2011 and a total of SR.2 billion over the past 

five years. Most remarkably, fix the last 50 consecutive years, annual dividends have 

consistently increased. 

This success is attributable to the people of 3M. Generations of imaginative and 

industrious employees in all ofib busines::-. sectors throughout the world have built 3M into a 

successful global company. 

3M: Competing in A Highly Competitive Global Economy 

3M is a U.S. company that manufactures and sells its products throughout the world. 

Headquartered in S1. Paul, Minnesota, 3M has operJtions in 28 U.S. states, where approximately 

halfof3M's worldwide manufacturing operations are located. lnternationally, 3M has 

historically had J large mClnufacturing presence in Western Europe, Canada and Japan. 3M 

employs approximately 33,000 in the United States. In addition. 3M conducts over 6()f% or its 

v..orldvvidc R&D activities in the United States. The U.S. market currently accounts for 

approximately one-third of 3M's global business. 

While its U.S. presence is strong, 3M is increasingly a global company. 3M operates in 

more than 70 countries and sells products into more than 200 countries. In 2011, approximately 

t\\.:o-thirds of3M's sales \Vl..":re outside thl..": United States, a percentage that is projected to rise in 

future years. In the current global economy, where international markets are growing faster than 

U.S. markets. being able to compete successfully in the global marketplace is critical to 3M. 

Global market competition has made "localization" critically important for the 

company's IhtUTe success. If 3M is going to successfully compete against its foreign 

compelitors, it must invest in new tllcililies in those foreign markets to be closer to its non-U.S. 

customers, 3M must hire international employees with an in-depth understanding of their 

markets. 3M's success has depcnded on our ability to tap into the talent or a richly diverse 

global employee base to share ideas and innovate. Local knowledge and execution, supported by 

3M t<.)chnologies, products, and brands, is an overarching strength and competitive ad'·antage. It 

enables 3M to provide international customers with leading-edge products. strong marketing 

support and re:-.pon:;ive service. thereby achieving borderless cLlstomer success. 

This business-driven need for furthi0r localization, as well as the need to simplify 3M's 

historically complex supply chains, has led 3M to I:ldopt a regional sourcing initiative, 3M 

pursues more customer-focused supply chains \,vith an increased localization target - meaning 

that more of our products sold in a region will be produced in the same region as that of the 

customer. This shift to greater localil:ation is not tax-driven, but ratherresu!t:-. from competitive 

pressures to better serve the needs of our global customcrs. 
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Reforming the Current U.S. Business Tax SYstem 

Tax refonn is essential to ensure long-tenn competitiveness of American businesses and 

workers. As the Commiuee knov·/s. the US corporate tax rate is the highest ta.\. rale of any major 

country. In some cases. the high US tax rate is mitigated by tax credits and deductions. These 

credits and deductions, ho\vevcr, often fail to adequately encourage the behavior they ,,'.ere 

designed to incentivize and ollen create competitive imbalances betw'een US companies. 

In addition. the Internal Revenue Code ha,<, not kept up with the rapidly changing 

international business environment. Virtual!) every developed country has responded to these 

changes by adopting tax systems that provide their domestic corporations the tools to compete in 

the global marketplace. Also, part of this new global reality is that nearly 50% orthe world's 

largest public companies - and many of our competitors - are now based outside ()f U.S. and 

Western Europe. They can start with a competitive advantage in the marketplace because o[the 

Im,ver tax rates they enjoy. 

3M submits that the U.S. could take a few key steps to address tbese competitive 

imbalances while simultaneously creating b'Teatcr simplicity and predictability for its domestic 

corporations. 

Significantly Lower the Corporate Income Tax Rate. First and foremost. wc 

recommend the corporate tax rate be reduced. We support the Chairman's proposal to reduce the 

rate to 25%; a rate which is more in line with other developed countries that view a lower 

corporate tax rate as a competitive advantage. From 3M's perspective, thc current high corporate 

tax rate has two adverse effects on domestic investment: it reduces the after-tax return on 

domestic investments and creates significant inefficiencies in the deployment of the Company's 

capital and the management of its balance sheet. 

Since 3M maintains the majority of its manufacturing and R&D activities in the United 

States. our effective tax rate is one of the highest among our competitors. For 2012, 3M is 

anticipating a \vorldwide etfective tax rate 0[29.5%. In 201 I. 3M's \vorldwide t1X expense \\as 

uvt:r 51.6 biliioll.In an im:rea~illgly glubal markctplace, 3M'~ high c1Tectivt: tUA rult: is a 

competitive disadvantage. 

In addition. the high U.S, tax rate imposes an undue cost barrier to repatriating foreign 

earnings under the current international tax system. American businesses should be encouraged 

to successfully compete in foreign markets and repatTiate foreign eamings back t,) the United 

State~. A significantly reduced corporate fa>.. ratc would eliminate significant inef1ieieneics in 

the deployment of the Company's capital and the management or its balance sh:et We recognize 

that a large reduction in the corporate tax rate would re4uire substantial offsets from existing 

deductions and credits. For example, 3M utilizes the Section 199 manufacturer's deduction, 

accelerated and bonus depreciation, and the R&D tax credit. 

The manufacturer's deduction provides a significant benefit to our company since 3M has 

a majority of its manufacturing base in the US, However, lowering the t~IX rate to 2YXJ would 

offset the benefit of this deduction and would also eliminate the complex and time consuming 

record keeping requirements. 

3M would also support the repeal of accelerated and bonus depreciation to partially pay 

for a signiticantly Imver ta,( rate. While the depreciation provisions provide a signitieant benefit 

to the company, these rules merely change the timing of deductions and result in un up front cash 
106 

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107 

American Council for Capital Formation 


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Tax Reform, U.S. Investment and Job Growth: Does Cash Flow Matter? 

By 

Margo Thorning, Ph.D. 

Senior Vice President and Chief Economist 

American Council for Capital Formation 

Testimony submitted for the record for the hearing on 

"l\'lanufacturing and Tax Reform~' 

Committee on "Vays and Means 

U.S. House of Rcpresentati"es 

,July 19,2012 

Executive Summary 

Cash Flow, U.S. Investment and Jobs: Ne\v academic research provides evidence of the strong link 

between investment and cash tlow; a dollar of CUlTent and prior-year cash flow is associated with $0.32 

of additional investment for tirms that are least likely to fnce difficulty in raising money in capital 

markets and 'with $0.63 of new investment for firms likely 10 face constraints. These results have 

implications for U.S. investment and job growth since ACCF research shows that each $1 billion in 

nev..: investment is ass('Iciated with an additional 23,300 jobs. 

Accelerated Depreciation, the Cost of Capital, U.S. Investment and ,Jobs: If accelerated and bonus 

depreciation for equipment is repealed and replaced with economic depreciation which is generally 

longer than the current Modified Accelerated Cost Recovery System (MACRS), the cost of capital for 

ne\v equipment will rise and investment is likely to decline. The benefit of MACRS and bonus 

depreciation is its positive impact on cClsh flO\\', which occurs immediately as the investment is put in 

place. Ie as seems likely, higher hurdle raks 'were to cause U. S. investmenl in equipment (which 

averaged $1.1 trillion in 2011) to decline, there would be a significant negative impact on employment. 

Role of Oil and gas Industry in U.S. Economic Growth: In the last 4 years, the U.S. oil and gas 

sector has been onc of thc few bright spots in terms of investment and job growth. Maintaining a 

viable, grO\ving domestic energy industry can help strengthen U.S. economic recovery. In addition, 

other U.S. industries such as steel, chemical and plastics production have benefited from the energy 

boom, especially from rcduccd priccs for natural gas. 

Tax Reform and U.S. Energy rnvestment: Several tax reform proposals put forward in the last 

several years eliminate accelerated and bonus depreciation, UFO and other deductions applicable to 

capital intensive industries, including oil and gas, while lowering the corporate income tax rate. As a 

new report by the Progressive Policy Institute notes, strong domestic investment by U.S. oil and gas 

companies in 2011 was due in part to outlays that would be classified as intangible drilling costs and 

geological and geophysical expenses. lflDCs had to be depreciated rather than deducted or, in the case 

of G&G, am0l1ized over longer periods, it is likely that less investment would have occurred in the oil 

and gas industry and tc\ver ne\v jobs would have becn created in the U.S. 

Conclusions: As policymakers contemplate fundamental tax reform. they need to weigh carefully the 

possible consequences of eliminating accelerated depreciation and other provisions which affect the 

cash tlow from new investments and s1O\\I the payback period in order reduce the corporate income tax 

ratc. It may be well to consider "paying for" corporate and business income tax rate reductions with 

cuts to entitlements for LIpper income individuals (as suggested in the Bo\vles/Simpson tax reform 

plan) rather than eliminabng proven investment provisions such as accelerated depreciation that 

enhance growth and further, consider even more pmverful approaches to tax reform such as a 

consumed incomc tax whcre all invcstment is expensed. 
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Tax Reform, U.S. Investment and Job Growth: Does Cash Flow Matter? 

Introduction 

By 

Margo Thorning, Ph.D. 

Senior Vice President and Chief Economist 

American Council for Capital Formation 

Testimony submitted for the record for the hearing on 

"'1\1anufacturing and Tax Reform" 

Committee on Ways and Means 

U.S. House of Representatives 

July 19,2012 ** 

Chairman Camp, Ranking Member Levin. and members of the Committee, my name is Margo 

Thorning, senior vice president and chief economist, American Council for Capital Fonnation 

(ACCF)! Washington, D.C. I am pleased to submit this testimony for the hearing record to 

discuss how tax reform, including reducing the corporate income tax and eliminating provisions 

in the current tax code which reduce the cost of capital for new investment may impact key 

sectors of the U.S. economy including manufacturing and the energy sector. 

rhe American Council for Capital Formation represents a broad cross-section of the American 

business community, induding the manufacturing and financial sectors, Fortune 500 companies 

and smaller finns, investors, and associations from all sectors of the economy. Our distinguished 

board of directors includes cabinet members of prior Democratic and Republican 

administrations, former members of Congress, prominent business leaders, and public finance 

and environmental policy experts. The ACCF is celebrating over 30 years of leadership in 

advocating tax, regulatory, environmental, and trade policies to increase U.S. economic growth 

and environmental quality. 

Background 

Some in the business community support giving up current tax code provisions such as 

accelerated depreciation, Section 199 and other provisions that reduce the cost of capital for new 

investment in exchange for a reduction in the corporate income tax rate. For example, testimony 

~Folinded ill 1973, the American COllneil for Capdal Formation is Q lIonprofit. nonpartisall organization 

adl'Ocaiing fax, energy. regulatory and cnvimmneniul policie,~ 'hut (aei/ilale ,Hiving, ifll'esfmenl, economic 

growth Ql1djoh crealion. For more ahoutthe COllneil or for copies ofthi,\ 

the ACCF; 175() K Street. ,V.w.. 400. Washington. J).C 20006-2302: telephone: 

2()2, 785.8165: c-mail: mfo:Zijunf'org: ,j'ehsite: ,-1')\ Ii ,{It (/wy 

** Submitted for the record for the Committee on Ways and Means hearing held on July 19,2012 

2 
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by Henry W. Gjersda of 3M at the July 19 hearing supports repealing accelerated and bonus 

depreciation and Section 199 (the deduction established in 2004 to help U.S. manufacturers) in 

exchange for a substantial reduction in the corporate income lax rate. 1 Other witnesses, including 

Diane Dossin of Ford Motor Company and Ralph Hardt of Jagcmann Stamping Company, 

support reducing the tax rate on business income but want to retain accelerated depreciation and 

other provisions used by capital intensive companies.2 Another witness, Heather Boushey of 

Center for American Progress Action Fund recommends eliminating cost recovery provisions 

used by domestic energy producers to help pay for corporate tax rate reduction. although she also 

clearly suggests that tax reform should not disadvantage manufacturers and in fact that tax poEcy 

should focus on "supporting our manufacturing base", J 

Given the \veakness of the U.S. GDP growth, the unemployment rak remaining above 8 % and 

real non-residential investment still 6.5% below the 4" quarter of2007, policymakers need to be 

sure that tax refom1 proposals will help. rather than hinder, new investment and economic 

growth. Therefore, as policymakers contemplate tax reform it seems appropriate to carefully 

consider how various approaches may impact overall U.S. im"estmeni. For example, the National 

Commission on Fiscal Responsibility and Rctonn (Bowles/Simpson) calls for broadening the tax 

base by eliminating virtually all tax deductions and credits used by both corporations and 

individuals, including those which reduce the cost of new investment in order to pay for reducing 

corporate and individual income tax rates. 

A key question is ho\\' reducing cash tlow to capital intensive industries by eliminating 

provisions such as accelerated depreciation and Section 199 and other provisions will impact 

U.S. investment and economic growth. Another important question is how eliminating provisions 

used by the U.S. energy sector such as lengthening the period for amortizing geological and 

geophysical expenses and deducting intangible drilling costs will impact the cost or capital and 

new investment in the oil and gas industry. In the last 4 years, the U.S. oil and gas sector has 

been one of the few bright spots in tenns of investment and job gro\\rth so maintaining a viable, 

growing domestic energy industry can help strengthen U.S. economic recovery. In addition, 

other U.S. industries such as steel, chemical and plastics production have benefited from the 

energy boom, especially from redueed prices for natural gas . .J Thus, increasing the cost of 

tlnding and developing domestic oil and natural gas will reduce investment and could also lead 

to more imported oil. 

How Important is Cash Flow to Investment? 

Over the past three decades. economics and finance experts have examined the question of 

whether financial variables such as cash flow and cash stocks have a significant effect on 
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investment. Some studies conclude that cash flow is mainly relevant for situations in which 

capital market imperfections exist and access to external debt and equity is costly, 

Numerous other economic analyses and surveys have concluded that financial factors are 

impoliant in determining investmentlcvels. For example, a new analysis by Dartmouth College 

professors Jonathan Lewellen and Katharina Lewellen (L&L) provides evidence of the strong 

link betwct!n investment and cash flow.::: Using an improved measure of cash flow and data from 

Compustat for 1800 firms per year !i'om 1971-2009, L&L's results show that a dollar of current 

and prior-year cash flow is associated with $0.32 of additional investment for tlnns that are least 

likely to [ace difficulty in raising money in capital markets. For tinns likely to lace capital 

market constraints, each additional dollar of cash flow is associated with $0,63 of new 

investment. L&L's results have significant implications [or U.S. investment and job gro'wth 

because historical data show that each $1 billion dollars of ne\\! investment is associated with an 

additional 23,300 additional jobs in the U.S. (see figure I). 

Additional support for the important role of cash tlow in stimulating investment is fOlmd in a 

new repOli by the Joint Committee on Taxation6 The new report "Background and Present Law 

Relating to Manufacturing Activities Within the United States" concludes that: 

"However, for the most part, the economic literature on tax policy and 

investment docs lean toward the conclusion that changes in taxes do have a noticeable 

impact on investment. A well-known survey of the literature. for example, concluded 

that investment was highly responsive to changes in the cost of capital.~70 One study 

looking at the period from 1953 to 1988, during which time accelerated depreciation 

and investment tax credit provisions were both enacted and repealed, found that tax 

policy had a strong efTeet on the level of investment, especially ror machinery and 

equipment.271 The authors also provided evidence that suggests firms with lower net 

cash flows, which may be more liquidity-constrained, are more responsive to changes 

in the cost of capita1.2-;~ If this is true, then firms with less access to capital markets 3re 

particularly sensitive to changes in tax incentives for investment. Moreover, insofar as 

tax changes affect both net cash flows and the user cost of capital, some economists 

have found that the cash-flow effect is stronger.273 Recent research on the bonus 

depreciation provisions enacted in 2002 and 2003 found a noticeable impact of tax 

incentives on investment in capital goods.27-+·, 

Previous economic analyses also support the idea that cash flow is an important detemlinant of 

investment. For example, a 1998 empirical analysis by Professors Gilchrist and Himmelberg 

concludes that for the average tinn in their sample, cash flow and cash stocks raise the overall 

response of investment to an expansionary shock by 25% relative to a baseline case where 

financial frictions (capital market imperfections) are zero.7 They note that "Consistent with 

working 

.ht'[J} '::\!n.;;:::?1a;d\)·''''!l_~~j~~::+·~73. page 87. 

Mllllm,,,,,,;rg. "Investment, FundamentaJs and Financc", NBER Working Paper 6652, 

see 

4 
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theory, small firms and tllms without bond ratings sho,,, the strongest response to financial 

factors .... Because bond-rated firms account for 50% of aggregate manufacturing investment 

our results suggest that the overall amplification of manufacturing investment (from cash flow 

and cash stocks} is somewhat less than 25%:' 

Similarly, a recent analysis of large number of Swedish firms during the 1989-2005 periods 

concludes that cash flow has a signiticant impact on investment and the effect is particularly 

sU"ong for constrained firms, especially during recessions. 8 

To summarize, mounting recent evidence suggests a sU'ong cOlTelation between available cash 

flow and new investment, both for firms which are constrained in terms of access to capital 

markets and those which are unconstrained. 

Accelerated Depreciation, the Cost or Capital, U.S. Investment and ,Job Growth 

If accelerated depreciation for equipment is repealed and replaced with economic depreciation 

which is generally longer than the cunent Modified Accelerated Cost Recovery System 

(MACRS), the cost of capital for new equipment will rise and investment is likely to decline, 

relative to the baseline forecast. The benefit of MACRS is its positive impact on cash flow, 

\vhich occurs immediate1y as the investment is put in place. As noted above, there is a direct 

conclation betwcen available cash flow and ncw investment and thus retaining or enhancing 

MACRS (e.g. by retaining bonus depreciation) will increase new investment, while reducing 

cash flow by eliminating MACRS can be expected to reduce new capital investment. 

Further, in an increasingly uncertain world in which markets. demand and production costs can 

shift almost overnight, the rapid payback from MACRS depreciation substantially rcduces the 

risk premium for investment in equipment. For long-tenn investments which take many years to 

plan and complete, the impact of MACRS on hurdle rates and c3sh flow may be particularly 

imp0l1ant as profit expectations may have changed significantly by the time the project comes on 

line. While a lower corporate income tax rate would also make investment attractive, if M ACRS 

and other provisions that increase the cash flow from investment are repealed, it seems likely that 

the slower payback period will raise the hlll"die rates and slow the productivity enhancing 

investment in new equipment. 

ff higher hurdle rates were to cause U. S. investment in equipment (which averaged $1.1 trillion 

in 2011) to decline, there would be a significant negative impact on employment since each $1 

billion in investment is associated with 23,300 new jobs. Tn addition, reducing corporate income 

tax rates benefits "old capital" and provides a windfall to previous investments. Thus, to the 

extent that the rate reduction is "paid for" by repealing accelerated cost recovery provisions, new 

investment will be slowed, exactly the opposite result that policymakers would want to achieve. 

8 Ola Mdandcr, "The EfTect of Cash F1ov, on Inycstmcnt An Empincal Test of the Balance Sh('ct Channel", sec 

h!~p)/'.\ \\ '\ :;:;kl?~l)\~ ._~~C;llrJ~);~(l/rt~~~! ~f)\q!l __ rj,(sl:f.r\~~~~i! __ r:;~b !lcenl\.'-'~: :i:~ ~i)gp<lper'>!~~)~)_?'_,-\!?;?~ _pd r 
112 


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Has Bonus Depreciation Helped to Stimulate the U.S. Economy" 

Since the 4th quarter of 2007, which marks the beginning of the recession, through the 2nd 

quarter of2012, real U.S. equipment investment has increased by 2.4%, from $1.1 tTillion to $1.2 

trillion. Given the \veakness of growth in GDP and consumer demand during this period (real 

GDP growth has averaged only 0.24% and real personal consumption expenditures increased by 

a total of only 2.4% during the past 4 years), it seems likely that accelerated and bonus 

deprecation have played a major role in sustaining investment in equipment. In fact, if bonus 

depreciation were made pelmanent, and thus could be incorporated into the planning for all 

future projects, we \vQuld expect to see an even greater hoost to domestic investment. Thus, tax 

policies such as repeal of MACRS, Section 199 and bonus depreciation would reduce the cash 

l1m·v from new investment and could have negative consequences for growth in investment, GDP 

and employment. 

U.S. Economic Recovery, Tax Rdorm and Investment by the U.S. Ellergy Industry 

The Role uf the Energy Industry ill V.S. Economic Recovery 

For the last several years, personal income and job growth in major energy producing states such 

as Texas, Oklahoma, Montana, Wyoming, North and South Dakota has been much greater than 

in other states (see Figure 2). In addition, a new analysis by the Progressive Policy Institute. 

"investment Heroes: "'Vho's Beflinf,( on America's Future" notes that in 2011, four of the top ten 

non-financial companies investing in the U.S. were oil and gas companies (see Table 1)9, These 

four companies. Exxon Mobil. Occidental Petroleum, ConocoPhillips and Chevron, invested a 

total of $28.3 billion domestically in 2011. As noted above, historically each S I billion increase 

in investment is associated with an additional 22,300 jobs in the U.S. Thus, the $28.3 billion of 

investment by the four oil and gas companies may have produced over 600.000 new jobs in 

2011. 

The PPI rcpOit notes that most of the U.S. capital expenditures by energy companies consisted of 

production and exploration costs. which includes building out oil and natural gas pipelines and 

exploratory costs for new drilling sites. The report concludes "Despite any environmental 

concerns, the fact remains that sllch large amounts of domestic investment by these individual 

companies have the ability to prop lip local area economies while meeting the realities or 

increased power demand."!G 

Tax Reform and U.S. Euergy Iuvestment 

As mentioned above, several of the tax reform proposals put forward in the last several years. 

including the National Commission on Fiscal Responsibility and Refann (Bowles/Simpson) 

eliminate accelerated depreciation, bonus depreciation, last in-first out (LIFO) accounting and 

other deductions used by bOtll capital intensive and other industries while lowering the corporate 

10 Ibid, p.5. 

6 
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income tax rate,l1 The Presidenfs Frame\vork for Business Tax Reform. released in 2012, would 

eliminate or curtail many current law tax provisions which reduce the cost of capital for new 

investment such as accelerated depreciation. deduction for interest expense, LIFO as well as 

provisions applicable to the oil and gas industry." For example, the President's plan calls for 

eliminating expensing for intangible drilling costs (IDes), requiring such costs to be depreciated 

over time. When companies drill for oil or gas, they incur IDCs which are largely the labor costs 

of locating and drilling wells. IDCs are costs (hat cannot be recovered as they have no salvage 

value (in contrast to the drill pipe and casing itself, which is a "tangible asset" and is subject to 

depreciation), It is noteworthy that all other natural resource industries (e.g., minera1s and coal 

production) have almost precisely the samc rules as apply to oil and gas and other industries such 

as sofuvare development and pharmaceuticals are able to expense research and development 

costs. In addition. the President's FY 20 I 3 budget also calls [or increasing the amortization 

period for geological and geophysical costs (Cj&G). G&G expenses include the costs incurred for 

geologists, seismic surveys, and the drilling of core holes; like IDes, they have no salvage 

value." Further, the President's FY 2013 budget would repeal Section 199 for only oil and gas 

companies, leaving it in place for all other companies that manufacture, produce, extract or grow 

items in the U.S. {Section 199 (c)). 

Given the importance of cash flow to investment spending, policymakers need to weigh carefully 

the impact of repealing current law provisions that reduce the cost of capital for new investment. 

As the new report by the Progressive Policy Tnstitute notes, the strong domestic investment by 

U.S. oil and gas companies in 201 I was due in part to outlays that would be classified as 

intangible drilling costs and G&G. If IDeS had to be depreciated rather than deducted or, in the 

case of G&G, amortized over longer periods. it is likely that less investment would have 

accUIred in the oil and gas industry and fewer new jobs would have bcen created in the U.S. 

Tax Reform to Promote Saving and Investment and ,Job Growth 

Ovor the years, many economic analyses haw estimated that if the u.s. switched to a consumed 

income tax in \vhich all investment was expensed, investment and economic growth would be 

enhanced. In an attempt to understand how such a system would have impacted the U.S. 

economy had it been in place in the 199 I ·2004 periods, Dr. Allen Sinai, president and chief 

global economist of Decision Economics, used his large scale macroeconomic model to simulate 

the impact of a consumed income tax compared to the federal tax code in effect in 200 I. The 

simulation modeled a system in which all saving is tax exempt, all new investment is written otT 

in the first year, and interest expense for business and individuals is not tax deductible. The 

consumed income tax simulation shows strong increases in GDP, investment, employment, and 

federal tax receipts compared to the baseline forecast. If the consumed income tax system had 

been in place starting in 1991, GOP would have been 5.2 percent higher, consumption and 

investment would have been greater. and employment higher by over 140,000 jobs per year by 

2001 (see Table 2). In addition, federal tax receipts would have been $428.5 billion larger in 

200 1 compared to the baseline forecast. 

7 
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Conclusions 

As policymakers contemplate fundamental tax reform, they need to weigh carefully the possible 

consequences of eliminating accelerated depreciation and other provisions which affect the cash 

flow from new investments and slow the payback period in order reduce the corporate income 

tax rate. 11 would be pUl1icularly ironic if the choices made in tax refonn actually hanned versus 

increased economic growth. Further, as many practitioners will remember, the cut in the 

corporate rate to 34(10 in 1986 only survived five years, so there is no guarantee that a future rate 

cut will endure. It may be well to consider "paying for" corporate and business income tax rate 

reductions with cuts to entitlements for upper income individuals (as suggested in the 

Bowles/Simpson tax refonn plan) rather than eliminating proven investment provlsions such as 

accelerated depreciation that enhance growth. If we are to embark on the enormously complex 

and difficult task of comprehensive tax refonn, it is imp0l1ant to maximize the economic benefits 

from that exercise. Thus we also recommend considering even more powerful approaches to tax 

refoml such as a consumed income tax where all investment is expensed. 
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140 

120 

~ . 100 c. 

r~ 80 0 .... 

1i.'" £! 60 

40 

20 

0 

0 

Private Domestic Fixed investment 

(Billion $)' 

~ 5.1'<t~("l<ll:V <ldju,>l<,tl 8t ;;~;m-":i: r~I"',>, \.l:;;'<.<t -s.~wn(' 13l';e<tt' o! fr~mO""'lk t\r.:3ly:;.", 

dati< ,,~!.:tc;?" $un"-,>>l of lStU:;::·f S.ta:;1stkc, 

co:..'.')Ci! fOf Cqp',al fN~~s.tft:<n, }ulv l7, lOll. 

9 
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Figure 2. Total Personal Income 

Growth from the end of th~ ra"l!Ssloo In JUtll! 2009 through til<> first quart<!r of :2012 

NAnONAL RATE; 10.6% 

! 

NATIONALIlATE: 9.5% NATIONAL RATE: !l.2% 

B.% ~~~~~~~ n ~J 41 llb% • 11 H 10, ma®lll!lllmmam ········::::~il!I!IIlIlIil!I!IIlIlIm 

Source: "Which States Have Best Income Gnm1h.'· The Wall Street Journal. July 16,2012. 

hHfJ:!/blogs.wsj .cc'111!econom i cs/20 12/07/ 16/whichcslates: ha ve:besl·jnCOll1c,growlh! 

10 
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Table 1. Investment Heroes: Top 25 Nonlinancial Companies by U.S. Capital Expenditure* 

AT&T** 20.1 

3 Exxon Mobil 11.7 

Intel 1,4 

Chevron 4.8 

11 Hess 4,4 

13 !=ord Motor 3.9 

15 Enterprise ProouQ: pqrtf'l~($H 3.fi 

17 WaltOisfley 3.(1 

19 Time Warner Cable"'* 2,9 

21 Target 2.S 

"Unlverse indudes nonfinancial Fortune iSO {;Qrnpanies from 2011; finandal reporttngfrom Pfl1 

"'*ReportEld to have U,S. operatinns only~ may It'1clud~a $.maU amount of rton·US lnv~$tment 

11 
118 

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119 

Advanced Medical Technology Association 


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Testimony of Stephen J. Ubi 

Pre~ident and CLO 

Advanccd Mcdieal Technology Association (Ad\aMed) 

Tax Refoml and the Manufacturing Sector: Hearing before the Hou~e Ways and Means 

Committee 

July 19,2012 

Thank you lor the opportunity to submit testimony on behalf of Ad\ aMed and the medical 

technology mdustry. And thank yotl for holding a hearing on this itnpOltant topic. 

I would particularly like to thank Chairman Camp for his leadership on thc issue of tax rctoml. 

fax reform is critieal if America is to eompcte wece~sru!ly in this globalil.ed economy. and your 

kadership, Mr. Chairman, has been in'itrumental on elevating tax reform to the top of the 

l1[1tlOnal priority list. 

AdvaMed is the world'~ leading trade association representing manufacturers of medical devices 

and di[lgnostics. Wilh a membership consisting of over 1,600 of the \\orld's leading medical 

technology inno\ ators, AdvuMed member companies produce the medical devices and 

diagnostic products that are transforming health care through earlier disease detection. less 

in\ <lsive procedlll"es and more dfective treatments. AdvaMed members range (·rom the !arge~t to 

the smallest medical technology innovators and companies, and over 70°;0 OrOllf membcrs are 

small companies with sales ofles~ than S30 million pcr year. Our members manufaetlll"c 

approximatcly 90% of the medica! technology sold in the United States and halfofLhat sold 

worldwide. America is the acknmvledged \\-'Ofld leader in thi~ knowledge-based, high-value 

added industry. 

Let me make three points al the oulset. 

The medical technology indu~try has been a significant contributor to employment and economic 

gnnvth. Our future potential is great, but that future is threatened by competition from other 

countries. 

The current corponlte ta>. system is <l ball and chain dragging dO\\'n our ability to compete in the 

world and American markets. Reform is essential. 

As far as our industry IS concerned, job one for tax reform is repeal of the anti-competitive, jobdestroying medical dey ice excise ta:>.. scheduled to go into effect January iir~t. 

The medical technology industr)" and its contribution to the U.S. economy 

The medical tcchnology indu~try i~ an American success story. Our industry directly employs 

more than 400,000 workers natio!1\\ide. Typically, for every \vorkcr our industry directly 

employs, anothcr four \\orkers are cmployed by businesses supplyil1g components and services 

to our industry and Ollr employees, ~o that the total numbers generated by our industry exceed 

two million. 
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The jobs our industry provides arc good jobs-the kinds or jobs that allow employees to livc the 

Arneril:all dream. Industry [lay level" arc 38 percent higher than average pay for all U.S. 

employment and 22 percent higher than other manufacturing employment. While the number or 

manufacturing jobs was plummeting aeross the largcr economy, e\en before the recent economic 

cit)\\ ntum, employment in our industry was eApanding, Between 2005 and 2007, medlcal 

technology cmployment grew 20.4%. adding 73,000 jobs. During the recession, between 2007 

and 2008, MedTech employment dropped 1.1 percent, compared to 4.4(Yo fiJr manufacturing as a 

whole. 

Medical technology is also one ofthc fe\\- manufacturing industries th<:lt has m<lintained a 

hnorable balance oftfade, \ ... ith S36 billion in total exports in 2010. 

The fhtun::: oppm1unities ror our industry to grow and to contribute good jobs to the American 

economy are great. Markets for mcdical technology will expand dramatically as populations age 

in countries around the globc. In the U.S. alone, the elderly POpullltion \vill increase by 32 

million o\er thc next two decades ----a jump ofRO%. World\vide, the elderly popUlation \\ ill rcach 

1.2 billion by 2025- -and growth of the elderly in that year will he 3.5 times as fast as the 

population as a whole. 

The exponential growth 111 middlc-clas~ populations in countries like China. India and BraLil 

demllnding \\odd class medical care i~ another eAtraordinary opportunity. China's middle elass 

alone is projeckd to exceed the entire U,S. population by 2015, and India'~ middle class could 

reach 600 million by 2025. 

Finally, in this century of the life sciences, technological advance:. fueled by fundamental 

advances in knowledge of human biology and continued progress in computing, 

communications, materials science, physics and engineering can be expected to drivc creation of 

ncw and bettcr medicalleehnology products. The potential for economic gains is as great as 

those attributable to the advances in the physical :.ciences in the previous ecntury that fueled the 

development ofthc airplane, the computer, and the cell phonc. 

The Competitivc Challenge and the Role of America's Corporate Tax Structure 

\Vhilc the medical technology industry in America is still the clcan ... orld leader, its competitivc 

po~ition is slipping, and its leadership is increasingly challenged by other countries adopting 

targeted policies to support home-gnmn competitors and attract multinational companies, While 

the future prospects for the indu~try are bright, it is increasingly questionable whethcr that ruture 

\\ ill be madc in America. 

A survey of medical technology companies found that most eApccted 10 grow employment both 

inside und outside the U.S., but gro\\·th \\as expected to be much faster in both percentage and 

ah.'>olute terms abroad. A reccnt study by Pricc\valcrhouseCoopers (PwC) found that the U.S. 

slillieads on five key dimensions of medical technology innovation. but our lead is slip[ling on 

every dimension. As they state. "The innovation eco~ystem for medical device technology, long 

eenten:d in the United Slates, is moving offshore." While the U.S. has maintained a t~lVorabk: 
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balancc oftradc, thc surplus of exports ovcr imports has hecn narrowing both in absolutc terms 

and rdati\e to the sile of the cxport-imp011 sector. In 199R, imports and exports together totaled 

S24.6 billion and the trade surplus was 56.6 bi!lion-morc than one-quarter or total tradt.'. By 

2010, lotal traue had almost tripled- ---to S70 billion, but the trade surplus had shrunk by more 

than two-thirds-to $2 billion, and the surplus was only 3'J,i1) of total trade. 

America's carporote tax structure is a key hH:tor contributing to the dedinc ofthc 

competitiveness of the American medical technology industry. It was designed for a v-.. orld in 

which Americfl was economically unchallengcu-not for fI one of globalizcd ilO\vs of 

inve~tment, kno\-vlcdge and production. It was conceived in a \\-'orld in v.hieh our major 

competitors had not fldapted their tax systems to compete h1r the high value-added industries tbat 

arc key to intemational compctition. And \\'hile the corporate tax structure is riddled with special 

preferences tailorcd to the desires of various cconomic interests, it lacks the kind of strategic 

policics necessary to ~upport a truly competitivc and healthy economy in a globuli/.cd \\-orld 

system. 

AdvaMed's Recommcndations 

There arc a number ofaspects of the U.S. corporah:: tax code that make it more difTicult for 

America to retain its world leadership in medical technology and other high value-added 

manufacturing industries and arc a powerful dekrrem to cxpanding employment in the Unikd 

States rather than abroad. 

Mr. Chairman, you ha'\c pointed to the fact that corporate taxes in America are the highcst in the 

\\orld-far higher than most of our major tT<lding partner~. In eflcet, the tax sy~tem provides a 

powcrJul incentive for both U.S. based and foreign-based companies to locate manufacturing 

research and other w:..:tivities abroad, whether the good~ produced \\'ill ultimatdy be comumed in 

the United States or in international markets. In this inerea~ingly compeliti\ c \\odd, \\-e can no 

longer afford to handicap products im'ented and made in America with tim kind of dysfunctional 

corporate tax structure. 

The most important tax policy issue facing the medical technology industry today is the 

imminent imposition, effective January 1, of the medical device excise tax inclu(kd in the 

/\ fford8ble ('are Act. '1l1is tax singl.::s out this indust!), 8nd adds a hem y burden to comp8nies 

that arc already weighed down by thl..' underlying anticompe{itive gcneral corporate tax structure. 

Sev.::ral studies havc projected job losses in the tens of thousands as the result of this tax. 

Companies are already laying off employee:-., deferring new hire'> or cutling buck on research and 

development in anticipation of the tax. Mr. Chairman, to preserve this industry us the \vorld 

!c<lder and a~ an engine or economic growth, the most important single step Congress can take is 

to repeal this tax. For us, this is job one of" tax rdorm. I thunk the Committee and the whole 

I·louse for recently passing bipartisan legi:-.lation to accomplish this goal, and I urge the Senate to 

tollow your lead. 

Beyond the device tax, there a number or l"und8111cntal refonDs that \\-ould go a long way to 

improving the competitive po:-.ition of the medical technology industry in America. First, we 
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support the emerging consensus that the United States needs a corporate tax structure that is 

simpler and provides lower rates. 

Second, for manufacturing industries generally and for knowledge-based, high value added 

manufacturing industries like ours in particular, the tax structure needs to create a !evel playing 

field with competitor nations. Simply lowering the overall rate-while very helpful-would not 

by itself create anything approaching parity. In the tax reform principles we have adopted. we 

have presented a number ofslIggestions as to how to make the tax structure for our industry 

more competitive. including an "innovation box." and a more generous and rational research and 

development tax credit. The President's proposal for a speciallowcr rate for advanced 

manuf1cturing also deserves serious consideration. 

A key clement of international competitiveness is to adopt a territorial tax system, as have 

virtually all of our competitor nations. Tt makes no sense that America should stand alone in 

rejecting this approach. I commend you, Mr. Chairman, for your leadership on this issue. 

Finally, for our industry to thrive-and I think this is true of many other highly innovative, 

knowledge-based industries· ...... a continual flow of venture capital into smal!, stan-up firms is 

essential. In our industry, many of the new breakthrough products driving the markets of the 

future arc created by thcs~ finns. Th~y are highly dependcnt on venture capital investment, but 

venture eapitallnvestmcnt has been slmving dO\v111n recent y0ars-partlcularly for the carlystage. highest risk investments that are the seed corn of our future competitiveness. 

For a long time, America's venture capital community was unique in the world and a powerful 

asset suppOlting American technological leadership. Today, that has changt:d. Other counlries 

are developing large pools of venture capital. Tndeed, China now has the second largest pool of 

venture capital in the world, und American venture capital now makes investments world\vide, 

not just in the United States. Accordingly, we think it is important that reform ofthe tax code 

provide additional incentives for investment in innoYative, high risk start-up finns in industries 

like ours. 

T thank the Committee for the opportunity to submit these comments for the record. ] have 

attached an AdvaMed \vhite paper thut discusses these issues in depth and lays out our principles 

for tax reroTITI. 
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Overvie\\ 

AdvaMed's Tax Re[orm Principll..!s 

Fehruary 7, 2012 

There is broad bipartisan agrel..!ment that comprehensive corporate tax reform is essential to 

imprO\.e America's competitivene~s and rebuild our nation's economic future. Ad\aMed has 

de\ eloped a sct of broad principles for tax reform that, if adopted, will make a significant 

contrihution to maintaining our nation's world leadership in the medical technology industry. In 

this century of the lire sciences, medical technology has an exceptionally hright future as a 

source ofjob~ and sustained economic gro\\ tho Thc open question, howeyer, is whether this 

future will continue to be made in America. 

While the principlcs described in this report werc designed by AdvaMed based on the necds of 

thc medical technology indu~try, \ve believe they are broadly applicable to al! knowledge-bO'lsed 

manufacturing indu~tries ···a key patt o1"lhe high \alue added tradable sector which is essential to 

America's ruture as a pro~perous country \vhere wages arc high and prosperity b hroadly shared.' 

Tax policy i~ certainly not the only factor dri\ing American eompetiti\elless-but it is a key 

factor.;] Because tax reform is maturing as public issue and b..:cause we believe that medical 

tcchnology has an important perspccti\'e to acid'·"··not only for our industry but more broadly,,·· 

we tcc! it is impOitant to participate fully in the tax reform discussions to come. The principles 

described in this paper provide a broad conceptual base for the active role we expect to play. 

The Economic Potential of Medical Technology 

The medical technology industry is comprised of companies dc"eloping and manufacturing 

medical device~ and diagnostics. These products arc diverse, running the gamut from tongue 

depressors to the most complicated molecular diagnostic tests and cardiac implants. They are an 

essential part of modern medical practice, and development Orne\V medical technology has been 

one of the main engines of medical progress. 

Small firms arc O'l key part of the medical technology industry. A 2007 study by the U,S. 

International Trade Commission (USITC) found a total 0[7,000 medic<ll technology firms in the 

U.S,'" The U.s. Department ofComl1lerec estimatcd that 62% ormcdi.:al technology fil111S had 

fewer than 20 employees and only 11yo had nlore than SOO." Even large comranies in the medical 

technology space tend to be smaller than large companies in many other sectors. There are only 

t()Ur pure device O'lnd diagnostic companies in the Fortune 500 and non!.'! in the Fortune 100. 

'1 he~e small firms, often \enturc capital fund..:d, arc particularly critical to the future of U.S. 

scientific and technology leadership, because they are the source of <l disproportionate number of 

the breakthrough technologies that dri\e medical pmctice and industry growth.' 
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Whether created by large or sm<1!l1ir11l~. medica! techno!(lgies are characteriLcd by a \ery mpid 

innovation cycle. The typil.:al medical device is replaced by an impro .. ed ver::.ion every 18-24 

months. 

To fuel innovation, the mcdical device industry is highly research intensivc. U.S. medical 

technology firms spend over twicc the U.S. average on R&D. l1igh technology medical device 

companics dcvote upwards of 20'% of revcnuc to R&D." 

In parl hecause o[this rapid innovation cycle. the medical technology industry is highly 

competitive. A study of" medical dcvice prices from 19S9 to 2009 found that they increased, on 

average, only one-tilth as fast as other m..::dical prices and le::.s thrln one-halfrls fIst a::. the regular 

CPI. Because the hig.hly competitive market kcpt priccs low. medical devices and diagnostics 

accounted rOT a relatively constant 6°1.) of national health expenditures throughout the 20-year 

pcriod despite <1 nood ofnc\v product~ that profoundly changcd medical practice.'" 

The U.S. medical tcchnology industry is a vcry dynamic pal1 o1'thc U.S. economy rind a sourcc 

of economic gro\vth and good johs. Th~ future opportunities for grO\vth arc immense. The 

industry empl()y~ more than 420,000 people in the U.S. It generate~ an additional four johs in 

suppliers, component manufacturers, and other companies providing scrvices to tbe industry and 

its employees. for ever~y dircctjob--for a total ol"more than two million job::. nationwide."" 

The jobs the medical technology industry provides arc goodjob~. The average medical 

technology v·;orker enjoys wages that are almost 400

/0 higher than average pay f(Jr the economy 

as a v.,hole and 22% higher even than the awrage for manufacturing \".age~." 

While employment in other manufacturing indu::.tries ha<; been declining, the medical technolog.y 

industry has been e).panding. Between 2005 and 2007, medical technology employment gre\\ 

20.4%. adding 73.000 .iob~.~ During the rece~sion. behH:en 2007 and :2008. MedTech 

employment dropped 1.1 %, compared to 4.4% f{)r manutllcturing as a whole.'! 

The medical technology industry is abo a strong sourcc of exports and is almost alone among 

manufacturing industries in consistently maintaining a favorable balance of trade. Exports in 

2010 totaled 536 billion. \lJ 

The future opportunities for industry growth are grcat. Worldwide markets for medical 

h:chnolog.y \\ill expand dramatically a.<. population.'. ag.e in countries around the globe. In the 

U.S. alone. the elderly population will increase 32 million oyer the next two decade~-·~a.iump of 

80%.~m Worldwide. the elderly pOPlllation will reach 1.2 billion by 2025-and growth of the 

elderly in that year will be 3.5 times as fast as the popUlation as a whole.'" 
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1 he exponential growth in middlc-cla~s populations in countries like China, India and Bral:il 

demanding world duss m .... dical care is another extraordinary 0pp0l1unity. China's middle cla~s 

alone i~ projected to exceed the entire U.S. population by 2015, and India's middle class could 

reach 600 million by 2025. 

Finally, In this century of the ]ife sciences, technological ad\anc .... s fueled by fundumental 

advances in knowledge of human biology and continued progre~s in computing, 

communicutions. materials science. phy~ic<; and engineering can be t!xpected to ruel creation or 

ncw and hetter medical technology products. The pot .... ntial tor economic gains is as great as 

those attrihutahle to the advances in the physical ~cience<; in the pre\ ious century that fueled the 

de\c!opment of the airplane, the computer. and thc cell phone." 

The Competitive Challenge and the Role ofAmerica's Corporatc Tax Stna:ture 

Whik the medical technology indu~try in America is still the clear world leader. its competitive 

position is .. lipping and its leadership is increasingly chClllcnged by other countries adopting 

targeted policies to gro\\ home-grown eompetitor~ and attract multinational companies. A sun'ey 

of medical tt!ehnoillgy companies found that most expected to grow employment both insidt! and 

outside the U.S., but growth \\;as expected to be much faster in both percentage and absolute 

tcnm abroad.~" A recent study by Price\\aterhouscCoopers (PwC) found that the U.S. still leads 

on five key dimensions of medical technolog.y innovation, but our lead is slipping on every 

dimension. As they ~tatc, ''The innovation ecosystem fi.lr medical dC\'iee technology, long 

centered in the United States. is mo\ing otrshore.,·~'n While the U.S. has maintained a favorable 

balance of trade, {he surplus of exports over imports has heen narrowing both in absolute terms 

and rciati\-e to the si/c ofthc c:o..port-impmt sector. In 1998, imports and c:o..ports togdhcr totaled 

S24.6 billion and the trade surplus was 56.6 billion more than one-qll~111Cr of total trade. By 

2010, total trade had almost tripled-to 370 billion, but the trade surplus had shrunk by mor..:: 

than two-thll·ds·····-to S2 billion, and the surplus was only 3uA) o!"totaJ trade. ~\"j 

America's corporate tax stmcture is a key factor contributing to the decline of the 

competiti\cn .... ss of the American medica! technology industry. It was d .... signed for a world in 

\vhich America was economically unchallcnged~·-·not for a one ofglob8lized nows of 

investment. knowledge, and production. It \vas concei ... ed in a world in which our major 

compditors had not adapted their tax ~yste1l1s to compete for the high \ alue-added indu:.tries that 

arc key to intcmational competition. And \vhi Ie the corporate tax structW"e is ridJled \\ ith special 

preferences tailored to the demes of various economic interests. it lacks the kind of strategic, 

targeted policies n..::eessary [0 support a truly competitive and healthy economy in a globalil:ed 

world <;ystem. 

There me a numher ofdspects of the U.S. corporate tax cod .... that make it more dif)'ieu!t for 

America to retain its world leadcrship in medical technology and other high value added 
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manllhlctw'ing industries and are a pO\Verfll! deterrent to expanding ~mploymel1t in the United 

States rather than abroad: 

General corporate ta:\ rates are high and ullcompelitive. The statutory tax rate (()r the U.S. 

is 56°;;) higher than the nOll-U.S. OECD a'l.'erage. 1ndeed, tbe U.S. now has the second 

highest tax corporate tax rate among all OreD countries, exceeded only by Japan."~ For 

manufacturing industries in particular, there is a similar \\ ide disparity in effccthc tax 

rate:.. For a typical small or medium si/cd manufactu[ing busines,<" the effectivc tax [ate 

in the U.S. is 25.9'1<). higher than 31 out 01'34 ()rgani..:ation for Economic (\)operation 

and Development countries and 58%) higher than the non-U.S. OECD a\"Cragc or 

16.4%.'X 

The United States is an outlier among competitor nation~ in retaining tax system that 

taxes \\orld\vide income oCU.S. corporation'> rather than adopting a territorial tax system 

that taxes only income earned from dome~tic acti\ities.\~j Under the U.S. system, income 

earned abroad by foreign sub~idiarics is subject to ulxation (offset by tu;..cs paid to the 

fOTcign ta ... authority) but the taxes are deferred unless and until the income camed is 

brought back to the United States to be inve~ted or paid Ollt in dividends. This system 

provides a double blm\' to U.S. competitiveness. First, it encourages protib earned abroad 

to be invested abroad rather than in tbe U.S. Second, a U.S. based multinational firm that 

wants to invest in the u.S. sometimes is n.)rced to borrow money to make the 

inYestmcnt-- ---potentially raising thl.! cost of the mvestl11ent rather than using profits 

earned abroad to generate economic activity at home. 

The U.S. has failed to match competitor nations in p01>itivc tax incentives to attract 

knO\\ ledge-based, high vaiue manufacturing: industries like Incdical technology. Tbcsl! 

inecmi\ cs have the effect of lowering the etl'cclive corporate ([Ix rate abroad for such 

industries far bc!o\'" thc (already more competitive) general tax rate. 

o R&D. The U.S. was the 1ir~t country to establish an R&D tax credit. but 2J 

countries now offer a generous tax incentives for R&D than we do. "jj Our 

reliance on temporary extensions orlhe credit means that it doe~ little to stimulate 

investment. since it cannot be relied on for planning purposes. The credit does not 

cover building R&D facilities or purchase of equipment forthose facilities, e ... en 

though the decision to locate an R&D facility in a particul<lr countTY cerlainl) 

stimulates furthcr R&D investmcnt to make use of the fhcility. 

Innovation box. Nine counlries, including China, hme introduced or plan to 

introducc a tax benefit refcrr~d to as a "patent box" or "inno\ation box" "",,, Many 

more are con~idering establishing one. While the exact features of these programs 

\ nry. they esscntially provide for a mueh 100\cr corporate tax rate tor 3cti\'ities 

based on intellectual property. 
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o Additional tailored incenti\cs. In addition to genera! tax incentives, other 

countries provide targeted incentivcs for projecb that offer johs and cconomic 

groVlth, cspecially projects in high value-added industries. The~e incentives 

include waiving or reducing taxes on the project, providing direct subsidies in the 

flmn ofbcJow inkrest loans or grants. or making land and infrastructure available 

as needed. Emerging gro\vth markets like China. India, and Bra7il ha\·e bl.':en 

especially aggrcssive at offering :;,pccial tax concessions or other incentives tl)r 

individual projects or group~ ofprojcets. 

The medial dc\·ice excise ta.\ enacted in 2010 and scheduled to go into etl'eet in :2013 puts 

a special and heavy competitive burden on the medical technology industry. This tax is 

e~timated by the Joinl TaA Committee to average approximately S3 billion per year. 

While the mcidenee of an excise tax is al\\ays difficult to estimate. the high le\el of price 

eompctitiv~ne~s in the industry ~uggests that much oftlw cost \\ill he borne by 

manufacturers, and a number have already begun to streamline their operations in order 

to off~et the expected tax burden. In many cases. the operational d'1kicncies arc achieved 

by reducing the v,:ork force. Tbe additional burden of the ta"'{ could raise the overallla-x 

burden for this industry by one-third or more .... \0 a level that would ~llfely he one of the 

highe~t experienced by any American manufacturing sector and make the American tax 

nlte even more uncompetiti\ e \\ ith foreign nations."'" 

The problems small and :.laJ1-Up companie:. face in the medical device s<:ctor in attracting 

needed capital are especially acute right now. A recent survey by the National Venture 

Capital i\s~oejation tl)und that 40% ofrl.':spondents had decreased thdr invcstml.':nt in 

medical devices over the last three years, while only 22% bad increased their in\'e~tment, 

and continued dedines in imestment \\erc projected over the next three years. Perhaps 

most troubling for the future of the industry, is the decrea<;es were di~proportionately 

concentrated in early-stag.:: start-up c0111panie:. and that investors arc increasingly moving 

the fOCLlS of investment to Europe and Asia."'" Overall. the a\'ailability of Vl':nture capital 

China now represents the second,largest 

O\'eral1. the much higher d1Cctivc rates paid by mcdieal technology companies tor activities 

located and ta,,"~d in [he United States ver~us activities located and taxed abroad ···are a major 

disinccntivl': to industry job and economic gnmth in thc United States. Data from AdvaMed 

member companie:. showed that the average dl'ecti\e tax rak on acti\ i!ie~ located in the United 

States \\(\s 35 percent compared to 14% fiJI' acti\ ities located and taxed abroad."'" 

In a recent survey ofmernber companies, respondent!', were asked "Based on your own 

company's experience, does a more tln orable lax system or direct subsidies provided by t()reign 

goYemments playa role in the decision to locate manufacturing activities abroad rather than in 
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the U.S.'! Sixty-three percent of the Tc~pondents identified these factor~ a~ playing a major rok 

and lO()!,Vg said it played a major role or somc role. 

AdvaMcd's tax refonn principles 

In response to the necd to maintain American leadership in medical technology. AdvaMed has 

de\l.!loped a broad set of principles for corporate tax rctl1rlll. As noted earlier in thi~ paper. ,,",hile 

these principles were developed specifically lor our industry, we believe they arc broadly 

applicable to knO\\:1cdge-ba,>ed manufacturing industries [<Icing internali01wl completion. 

Our pTinciple~ ~Iate: 

or he goal of lax reform c;hould be In support job creation. economic growth <lnd eompetitivenes~ 

To :l.l:hicye that objective: 

fa.'\. reform should provide a level playing field for medical device companies compcting 

in \\orld markets. 

I"ax reform should cncourage retention and expansion of jobs in the U.S. by providing tax 

incentives at comparable to or bl:tter than our major competitor nations. 

Tax ref 01111 should provide incentivcs for the inv~~tment in research and development. 

which b key to the growth orthe knowledge-based, high value added industrics on \\hich 

America's economic future depend~. 

fax reform should encourage the a\ ailability of capital for small and start~up companies 

that playa vital role in inventing and developing innovative breakthrough products. 

Implications of Ad,· aM ed's tax reillTlll prjnciple~ 

AdvaMed intends to engage fully in the tax reform debate and will be advocating both for 

spccilic proposab to support these principles and commenting on others that may arise alTecting 

{he industry. As a statting point, Ad\ aMed believes that the following policies should be part of 

tax re!()t"Jn: 

I"he medical device cxcise ta.\. should be repealed. for the reasons noted above, the 

mcdical device tax is a serious drag on the industry and adds an additional heavy 

competitive disadvantage to an industry that is already struggling 10 reLain \ .. orld 

leadership. 

The United State~ ~hould adopt a territorial tax sy"tem consistent with tax regime of 

\ irtually every other advanced economy. If this is not possible, the current "ystem of 

deferral oftdxes on f()reign earnings should be retained. As dbCll"sed above. the lack ofa 

territorial ta); "ystc111 inhibits in\'estment and economic gro\\1h in the United States. 
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Absent a territorial system, eliminating or significantly curtailing deferral \\ould raise the 

cfTective tax mte of international companie~ competing in world markets very significantly. 

Thc combll1ed Federal and Stak corporate tax rate should be lo\\cred to 1e",.:ls 

~omparah[e ~(~ Qr_19\y.;;r_tban_ e_O!11p~titQr_n_ati(111~. 

rhe R&D tax credit ~hould be made permanent and provide research and development 

incenti\'cs comparahle to or bctter than competitor nations. The U.S. needs to encourage 

research and development here in America. since R&D is so critical to industry 

leadership and g1"'O\\ tho 

The U.S. should institute an "innovation box" regime that provides a substantially 

reduced corporate tax rate for profits derived from intellectual property developed in the 

U.S. or used in manufacturing producl~ in the U.S. Since even a substantially jmvercd tax 

rate----to 26%, [or example-----\\ould stilllea\c a \'Cry large differential net\\cen the tax on 

economic activities conducted in the U.S. and those located abroad, targeled tax 

incentives are needed lo create a level playing Geld for industries in the tradable 'lector"'· 

especially kmm ledge-based high value industries. If rile U,S, is to create a future of 

economic growth and broad prosperity, it must he able to compete in these industries. An 

innovation box regime is one mechanism for leveling the playing field j(,)J" the medica! 

device industry and the much broader group ofindustrie:. \"ho fall in this catcgOl)'. 

'Michael Spence and Sandrik Hlatshwayo, "the Evolving Structure of the American Economy and the Employment 

Challenge," Council on Foreign Relations, March, 2011. For the special importance of manufactUring In driVing 

economic growth, see The Competitiveness and Innovative Capacity of the United States, prepared by the u.s 

Department of Commerce In consultation with the National EconomiC Council, January, 2012. 

" For AdvaMed's full agenda to maintain America's medical technology industry's preeminent world pOSition, see 

the reports listed under "AdvaMed's Competitiveness Agenda," at www.advamed org. 
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American Fuel & Petrochemical Manufacturers 


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August 2, 2012 

fhc Honorable Dave Camp 

Chairman 

U.S. House Committee on Ways and Means 

1102 Longworth HOllse Ofliee Building 

Washington, D.C. 205 15 

Chanes T, Drevna 

President 

American 

Fuel&Pelrochemica! 

Manufacturers 

1667KStreet.NW 

Slllte700 

202457.0480 office 

2025528457 direct 

202457.0486fax 

Cdrevna@alpmorg 

rhc Honorable Sander Levin 

Ranking Member 

U.S. House Committee on Ways and Means 

1106 Longworth House Om.ce Building 

Washington. D.C. 20515 

RE: Committee Hearing on Tax Reform and the ll.S. Manufacturing Sector 

Dear Chainnan Camp and Ranking Mcmber Levin: 

AFPM, the American Fuel & Petrochemical Manufacturers, respectfully submits this letter for 

the reeord regarding the U.S. House Ways and Means Committee's July 191h• 2012 hearing on 

"Tax Rci(xll1 and the U.S. Manufacturing: Sector." 

AFPM is a trade as~ociatlOn representing high-tech Americun 1l1anull\eturer~ or virtually the 

entire U.S. supply of gasoline, diesel, jet fuel, other fuels and home heating oil, as \ve!l as the 

petrochemicals used as building blocks for thousands of products \ital to everyday life. AFPM's 

mcmbl:rs operate in a highly competitive international markd. where fractions of a penny on a 

per gallon basi:. can mean th!.! difference bet"we!.!n a refinery continuing operation:. or shuttering 

its doors. 

As the U.S. economy continues to struggle in its recovery. AFPM applauds the Committee's 

commitment to examining the t<lX code in order to explore reforms that .... vil! make U.S. business 

more competitive and promote new investment in America. Although U.S. refiners provide 

more than 95 percent ofth!.! fuel consumed in the United States, a bli:rzard of reduced demand, 

the high price of crude oil, increased regulatory costs, and government mandates ha\'(' posed 

~igniticant challeng!.!s for several retlneries in the past le\v years, particularly tho:',e on the Fust 

Coast. Lowering the statutory tax rate \vouJd provide welcome relief to domestic refiners, but 

only ifil resulted in a net decrease in their overall effeetiye t<lX: burden. In contrast. raising the 

tax burden on U.S. rdlners would only !.!xacerbatc these challenges, further increasing the real 

cash costs of doing business in our own country and serving to make domestic industry less 

competitive. Thus. reducing the regulatory and dTectivc tax burdens on U.S. relin!.!fs and 

petrochemical manuradurers. and all other domestic manLJt~lcturers, should be the goal-these 

changes will have a positive effect by helping to kecp companies competitive and providing 

high-quality. high-paying jobs in the U.s. 

As the Committee explores refornls to the tax code and, in particular, lowering the statutory rate, 

AFPM urges Commith.o:e members to tread cautiously \vhen dealing with so-calJed "base 
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broadencrs" that result in highcr taxes on domestic refiner:'. and petrochemical manufacturers. In 

particular, AFPM would likc to cal! to the Committee's attention the following tax codt: 

prO\ isions, which arc used by U.S. manuElcturers in many industries:. 

'''Last-In, First-Out" (LIFO): LIFO is a well-accepted accounting method used by 

American businesses i:lnd approved by the IRS since the 19305. It is primarily used to 

determine book and taxa hie income 11)[ companie.) that anticipate inflation or rising prices 

over the course of their operations. For refiners, it is an efTective way to better take into 

account replacement CO.)t5, purticularly as the cost ofcrudc oil increases. Repcaling 

UFO accounting [or all taxpayers, and in pm1icular the oil <lnd gas industry. would 

amount to a multi-bil!ion dollar tax penalty in retroactive tax hikes that would adjust 

inventory on hand as incomc. Refineries keep large inventories in order to maintain 

supplies and keep an even predictiyc flow of crude cosb. Repealing LIFO \'l:ould require 

companies to redirect cash or sell as<;ets in order to cover the tax payment - potentially 

devastating. businesses and American jobs. There is no justification to enuct a retroactive 

tax on American bu.sine.'.ses. 

Section 199: The American Jobs Creation Act of2004 contains the "Section 199 

Domestic Production Activities Deduction", orten-but incom:ctly-rderred to as the 

"domestic manufacturing deduction." The Section 199 deduction applics broadly to 

income rrom property "manufacturcd, produced, grown. or extTactcd by the taxpayer" in 

the U.S., and further applies to qualified films, electricity, natural gas, or potuble water 

produced in the U.S. and construction or real property in thc U.S., including associated 

engineering or urehitectural services (sec 1.R.C. Section 199(c). It provides needed tax 

relief fix domestit: production activities orall kmds-which support middle class jobsincluding support to help stimulate manufacturing activity in the Unikd States. 

Petroleum refining and the production of domestic oil and natural gas resources are one 

of'many sectors eligible for this credit, v.hich incenti\·iLcs the expansion of U.S. relining 

capacity, energy supplies, and infrastructure. The deduction is needed to keep American 

fuel and pctrochcmical manufacturers eompetiti\·c in an increa.)ingiy tough global 

marketplace. Since 2010. the oil and gus industry has received a discriminatory smaller 

deduction (6 percent) than every other manufacturer or producer (9 percent), including 

Hollywood film producers. This discrimination should he eliminated in any tax reform. 

Depreciation: US taxpayers have bcen using the Modified Accdcratcd Cost Recovery 

System (MACH.5) since the 1980s. This long-standing method of depreciation has a 

po~itive impact on cash flow, which is un imp01iant dctcnninant in the lc\'el of 

invcstment in nev.' tangihle property. In an increasingly unccl1ain world in \\'hich market 

demand and production -.:osts can shin quickly, the rapid cash payback from MACRS 

depreciation substantia!!y reduces the risk premium and hurdle rate to make new 

investments attractive. Studies have shown that US depreciation rates arc not more 
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American Chemistry Council 


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AMERICAN CHEMISTRY COUNCIL 

WRITTEN STATEMENT SUBMITTED FOR CONSlDERA nON TO 

COMMITTEE ON WAYS AND MEANS 

u.S. HOUSE OF REPRESENTATIVES 

HEARING ON "TAX REFORM AND THE u.S. MANUFACTURING SECTOR" 

DATE OF HEARING: JULY 19, 2012 

The American Chemistry Council (ACe) thanks the Committee [or continuing to examine 

comprehensive tax reform, and specifically for the n.~cent examination of tax reform and the U.S. 

manufacturing sector. Because of the importance to thl! U.S. economy of the manufacturing industry and 

the effect of tax rules on manufacturers, the subject is particularly significant to the Committee's 

consideration of a rdonned business tax system. 

Ultimately, our comm~nts address whether the manufacturing sector grows or rdrench.:s, th..: 

corresponding economic effects. and \vhether jobs will be created or lost. 

Ace untl irs pluce ill U.S. nl(Jllu/(J('(uring: 

Ace repn:sCnls the leading companies engaged in the business ofehemistr),. Ace member 

companies apply the science of chemistry to create and manufacture innovative products that make 

people's lives better, healthil'J' and safer. The busincss of chcmistry is a $720 billion ",nterprisl' and a key 

element of the nation's economy. Nearly 27% of U.S. GDP is generated from industries that rely on 

chemistry, ranging from agriculture to oil and gas production. from semiconductors and electTonics to 

textiles and vehicles, and from pharmaceuticals to residential and commercial energy efficiency products. 

Our industry directly employ:s over 780,000 Americans in high-paying, quality jobs and each of those 

jobs supports an additional 5.5 American jobs in other manufacturing industries, meaning that over 5 

miUion Americans are working in the industries thilt rely on chemistry to drive economic growth, 

innovation. and American competitiveness. Importantly, our industry is one of the nation's largest 

exporting sectors, \\lith over $171 billion in exports in 2010, or more than ten cents out of every export 

dollar. The US chemical industry is a leader in the amount of R&D performed, innovation delivered, and 

exports shipped, contributing enormously to the nation's economy. Further, given thc recent surge in the 

development and availabilit:r of domestic natural gas, which is an important feedstock for the production 

of chemical products, the US chemical industry has reacted by announcing pJans for bilJions of dollars of 
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new US based investment. These investments will spur the US economy, increase employment and 

increase the US standard of living. 

As <l major US advanced manufacturing industry, we arc keenly interested in hmv tax reform can, 

and v,:ill, affect ollr industry and manufacturers generally. To ensure the US regains its competitive edge, 

our tax code should be rcfomlcd 10 drivc US investmcnt, innovation and productivity to create US jobs. 

The focus or your July 19,2012 hearing on manufacturing was timely, and the decisions YOLI make can be 

critical to the health of the manufacturing sector in general, and to the American chemical industry in 

panicular. In considering the outlook for tax rcfoml. last November, the Ace Board adopted the 

following "Guiding Principles for Corporate Tax Reform." 

T(L¥ njorm should produce a/air, simpler, and internationally competitive tax system Ihm 

prornotes economic growth alldjob creation in America. 

Tax ujiJrm should recognize and reflect the important role of American manuje,cturing and 

the jobs it creates. 

- lv1anujhcturhlg is a capital intensive activity, and therefore, tax treatment of capital 

cost recov('J'Y is (~lkey importance. 

- Advanced mamdacturing techniques and products rely on research. and therefbre. 

incentivesfin< research and development expenses also 5dwutd be supported. 

Ace supports adoption ofa competitiFe territorial system./or the taxation (~lincome earned 

outside the United States. 

• ACe suppurts a substantial income tax rate reduction tu rejlecf raIes comparable to 

(hxanizalion/or Economic Development and Cooperation (OEeD) averages. 

Tux reform must produce a "level pla)'ingfield concept" sllch that American companies 

investing abroad can compete equall)' with/hreign investors. and American andjbreign 

companies investing in the United States are trealed equally. 

Tax reform should be enacted comprehensively. not piecemeal. and should inclllde 

transitional rules that allow taxpayers to adjust to a new tet.r regime without financial 

dislocation, contractioll. or reduction in emph)}·menl. 

Our comments below' reflect these principles. 

Proposals for business ttlX reform: 

As our principles state, the ACe believes that business tax reform should produce a fair, simpler, 

and internationally competitive tax system that promotes ecooomic growth aod job creation in America. 

The measure of each decision und trade olTmade in the process of lax refonn should he whether it 

advances these goals. We also support the adoption ofa more internationally competitive and 

modernized system of taxing earnings outside the US. 

\Ve note that business tax reform is generally proposed within a rramc'\,"ork of revenue neutrality, 

under which the r~rormed system of business income taxes would produce the same amount O[hIX 
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revenue as the current system, but at a lower tax rate-requiring repeal of a broad range of so-called "tax 

expenditures." We respectfully suggest that the Committee take into account the impact on revenues that 

would result from a reformed system, more supportive of economic gro\Vth, in assessing whether such 

reforms -v,'ould be revenue neutraL We fear that embarking on a complex and difficult tax reform process 

that simply achieves revenue neutrality on a "static basis" would be less dfective in promoting economic 

growth since, by detinitioll, it would create winners and losers in a zero sum game 

We are also concerned that a base hroadening effort to repeal a number of so-called tax 

expenditures could disproportionately and adversely affect US manufacturing. For example, accelerated 

depreciation is highly significant in encouraging and supporting investments and job creation by the 

manufacturing sector. Without careful balancing of the impact of changes in current law on the 

manufacturing Sl:ctor, solid, middle class jobs could be impacted. 

A poorly designed system could reduce the chemicul industry's ability to compete in U.S. and 

glohal rnn.rket.", could c.ause the industry to f'xperience reducf'd growth or contraction, re"ulting in a 

corresponding reduction of the manufacturing workforce. Likewise, spill-over consequences would 

adversely atJect suppliers and servicc-providers that depend upon manufacturing customcrs. 

Our concerns ::trise from recent economic analysl's of ct'ltain tax t'xpenditures and the consequent 

effed of repeal or such provisions on economic growth. I Specifically, unless the statutory tax rate under a 

ref()rmed husiness tax system is 10\,·/ enough to compensate industry for the los~ of tax provisions for 

investment reductions in capita! investment and economic growth are likely lo result. 

Similarly, tax reform must also provide fair mles for the taxation of earnings outside the US. 

Finally. uny comprehensive changes to the tax code must include transition rules in order to ensure that 

taxpayers have time to adjust to a neV·l tax regime without economic contraction and consequent reduction 

in employment. 

Rute reductionThe US has the highest marginal corporate tax rate of any major industrial nation in the world. 

This high tax rate acts as an imp~diment to US investment and expansions for both US and foreign owned 

finns. The lJS needs to enact comprehensive tax reform that sign{ficr.mtly reduc~s the tax rate. Doing so 

can provide powerful incentives for US investment, particularly \yhcn not neutralized by other changes 

that directionally increase the (;05t of capital. ACe realizes that coupled with the tax rate, a wide number 

of tax expenditures may be eliminated or reduced to fund the lo\ver tax rate. But if the rate reduction is 

not sufficiently large and if the loss of tax expenditures disproportionately aff~cts the manufacturing 

sector, thc result may be less, not more, growth. 

1 See, e.g., Joint Committee on Taxation Report, "Background and Present Law Relating to Manufacturing 

Activities Within the United States", July 2012, p. 87. 
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Accelerated Co~t Reco~'e,:r--

The accelerated depreciation of capital assets, known as '''accelerated cost recovery" or "ACW', 

has been allO\\'able under the lax code [or decades ACR is a central element in the business plans of 

most chemical manufacturers. It allows recovery of the cost of capital investment more quickly for tax 

purposes than under financial accounting rules that amortize asset value over asset life, but slO\vcr than 

under expensing or recent "bonus depreciation" rules. 

ACR encourages new investment in manufacturing, by providing a cost-recovery filles that 

compensate companies in part for the risk ofinvestil1g large amounts of capital in relatively low-profit 

enterprises. For the chemical industry, this typically means longer start-up periods for bringing ne\v 

assels on !ine and longer pay-out times in order to achieve relUrns commensurate \vith the investment. 

Because ACR is extremely significant to manufacturing, rcpeal would have an obvious, and 

dispropOltiOlwte adverse effect on the industry. ACR leverages the value of capital investment in 

productive assets. Accordingly, greater investment means more: growth and more U,S jobs, all or\\lhich 

could be at risk iftax refoml removed the provision. 

We respectfully question whether "reroml" and the progress the term implies, actually would 

occur if changes in the tax law meant a significant economic discouragement from making new capital 

investments, with less grov.:th, and erosion of the national economic ballast that the manutacturing sector 

currently represents. 

Illcentives/or researl'h and developmentThe chemical industry is among the largest creators and users oftcchnology. Accordingly, the 

cunent federal tax incentives for research and development represent a key factors in retaining a 

domestic chemical industry that can compete with chemical manufacturers globally that typically enjoy 

more favorable home-country tax regimes. The tax reform debate should consider the continuing and 

important role of competitive incentives for creation of US technology, including expensing and an 

effective R&D credit, \-vhile addressing the mobile nature of capital and intellectual property. As a goal. 

the tax system should encourage investment in the US in R&D activities, the mvnership of resulting 

intellectual property (IF) in the US and exploitation of the IF from the US. 

A tcrritorial.\J'.wemfor Illxutiol1 ufflJreign eurningsAce endorses adoption ofa competitive territorial taxation system in replacement of the obsolete 

and o"crburdcned world-wide system ill!' taxation of foreign earnings from active busilless operations. 

The US is the only major industrial nation \vith a worldwide tax system. The incremental US tax jmpos~d 

upon ACC member companies' foreign op~rations causes such l:ompanies to he less competitive than 

4 
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their foreign competitors. This is not just <l matter of abstract theory since 95(}{) of the world '5 population 

is outside the US. To serve this large and growing market, we encourage the Committee to continue to 

search for \>.:ays to promote exports of property manufactured in the US to meet these global needs. But 

in addition to serving such markets by CXP0rLS, as explained below, ACC member companies must also 

expand oyc-rsc[ls to grow and prosper. ft is important to note that as these companies expand throughout 

the world, new high value jobs in the US in R&D, engineering and administration are created in the US. 

Manufacture of chemical products is a global industry and highly competitive. Freight is a 

significant cost for ACC member companies: to compete efTectively they cannot produce all products in 

the US, ship them across an ocean and truck them to a customer in the interior of a continent. We must be 

loc[ll to compete effectively and the current US tax code acts as an impediment to our competitiveness. 

Finally, movement to a territorial taxation system would eliminate the current "Jock out" effect of 

existing tax law and allow substantial amounts of cU.'ih to be repatriated to the lJS. This result, when 

couple-d with pro-gTO\vth dOlTIe-stic t"x change,;;, wOllld drive addition,,1 capit::l! ll1ve"tme-nt and 

employment in the US. 

LlFOCongress enacted the LIFO tax accounting method in 1939, concluding that for some taxpayer:;, 

UFO is a more accurate means of calculating taxable income. A business cannot thrive and maintain 

operations, unless it generates enough after-tax cash flow to prodllce and purchase replacement goods at 

cuneot ·not hiswrical prices. By matching current revenues against current inventory costs, UFO can 

provide a better measure of the true economic performance of a business. 

Without LIFO, a business could not deduct current prices from taxable income and its ability to 

produce or purchase new, replacement inventory and to maintain and grow investment would be 

impaired. Purely innationary gains would be masked and taxed as "profit." 

Like ACR, inventory accounting methods bave been designed to appropriately reflect taxable 

income and to serve as prime instruments for encouraging reinvestment of earnings. Far from a 

"Ioophole', LIFO is an essential dement in th~ ')tructurc or a tax on business nd income. Elimination of 

UFO represent.';. a tax increase to manufacturers. a significant cash cost, and would hinder growth. 

Summary: «Level playing fields" 

As reflected in the attached Guiding Principles for Corporate Tax Reform and as an overall principlc 

to guide policymakers, ACC believes that US tax refoml must provide for ::l "'le\-el playing rield" where 

US companies investing abroad cun compete equally \vith forcign investors, and where US subsidiaries of 

foreign investors which invest in the US and US parented companies are treated equally. Further, \"ie 

believe that tax reform should not create winners and losers among industries or among types of 

business('s, but should attract invcstment and cnhance job creation throughout U.S. business enterprises 

and foreign enterprises investing in the United States. Tn summary: 
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Biotechnology Industry Organization 


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Biotechnology 

Industry 

Organization 

Written testimony of the 

Biotechnology Industry Organization 

Submitted to the United States House of Representatives Committee on Ways and Means 

"Tax Reform and the U.S. Manufacturing Sector" 

July 19, 2012 

The Biotechnology Industry Organization (BIO) represents more than 1,100 innovative 

biotechnology companies, along with academic institutions, state biotechnology centers, and 

related organizations in all 50 states. Entrepreneurs across the biotech industry are 

conducting ground breaking science and are deeply invested in solving the problems that our 

nation and world face, Biotech companies are searching for new medicines to treat 

devastating diseases, developing advanced biofuels and renewable chemicals to reduce our 

dependence on foreign oil, and improving agriculture to feed a growing world. 

The biotechnology industry is a powerful economic growth engine, directly employing 1.61 

million Americans with an average salary of $82,697 and supporting an additional 3.4 

million jobs. 1 Biotech employees are scientific researchers, lab technicians, factory workers, 

and support staff in all 50 states. 

In order to protect these jobs and support biotech research and development, Congress 

should promote innovation in tax reform. A simpler tax code, lower corporate rate, and 

competitive territorial tax system will allow the U.S. to lead the world in biotech 

development. The tax code should also support innovation through specific tax structures 

and incentives for pre-revenue, pre-tax R&D companies as they continue to create highquality American jobs, stimulate long-term economic growth, and bolster America's 

competitiveness on an increasingly global stage. 

International Competitiveness 

As it currently stands, the U.S. corporate tax code impedes America's ability to innovate and 

to compete with other industrialized countries on the global stage. Since 1988, the 

average OECD corporate income tax rate (excluding the U.S.) has dropped 19 percentage 

pOints while the U.S. federal rate has increased by one point. In 2011, the average DECO 

corporate tax rate was 25.1%, nearly 15 percentage points lower than the U.S. combined 

rate of 39.2%. With Japan recently reducing its rate, the U.S. has become the 

industrialized nation with the highest statutory corporate tax rate. A burdensome and 

complicated tax code does little to promote life-changing innovation. 

The United States is in danger of falling behind/ in part because of a worldwide corporate 

tax system that stifles growth. America's competitors have largely moved to territorial tax 

systems, imposing domestiC taxes only on income generated within their borders. 

Meanwhile, the U.S. continues to have a burdensome worldwide system out of step with the 

1 Battelle/BIO State BIOSCience Industry Development 2012. Battelle Technology Partnership Practice, June 2012. 

BID Contact: Charles H. Fritts 

cfritts@bio.org 

(202) 962-6690 
141 


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rest of the world. Every other G-7 nation has moved to a territorial system, as have 26 of 

the 34 countries in the OECD. Both Japan and the United Kingdom recently made this 

change, recognizing the value of a competitive corporate tax structure. 

With international competitors gaining ground in the biotech industry, the u.s. cannot afford 

the competitive imbalance faced by domestic fjrms forced to comply with worldwide 

taxation. Moving to a territorial system is a critical step towards creating a competitive tax 

code. Freeing up over one trillion dollars that is currently trapped overseas due to the 

inefficiencies of the tax code will boost economic growth and capital investment. Congress 

should bolster domestic innovation by instituting a territorial tax system that allows U.S. 

innovators to compete effectively and fairly, 

In addition to a lower corporate rate and competitive territorial tax system, tax reform must 

go further than "broadening the base and lowering the rate." By appropriately incentivizing 

innovation through the tax code and eliminating barriers to international competitiveness, 

Congress has the opportunity to support and inspire breakthrough discoveries and bolster 

economic growth. BIO supports a U.s. tax code that recognizes innovation as a crucial part 

of the 21st century American economy. 

For health-focused biotech companies, the tax code takes on increased import due to their 

unique life cycle and development timeline. It takes more than a decade and over $1 billion 

to develop a lifesaving biotechnology treatment. Further, of every 1,000 compounds 

discovered at the pre-clinical stage, only one will make it through the FDA approval process. 

The entire extended development period is undertaken in the context of tremendous risk 

and without the benefit of product revenue, so all operating capital must come from 

investors. These investor-backed companies depend on substantial private - not 

government - investment to provide the necessary funding for their capital-intensive 

research, development, and manufacturing. And yet, the current set of incentives for 

investors in the tax code do not do enough to stimulate biotech investment. 

It is essential that investors in start-up businesses have a reason to invest early in a 

company's life cycle and hold that investment. Structures which allow them to utilize a 

small company's tax assets that it cannot currently use or expand their options for liquidity 

would provide incentives to invest. A reformed tax code should include incentives for 

investors in high-risk industries, including preferential capital gains treatment, pass through 

structures to utilize certain tax assets, and investment credits. Congress should provide 

important incentives and structures to stimulate an innovation-led economy. 

Congress has also historically recognized the importance of innovation at the companies 

themselves. Provisions like the R&D Credit are examples of the tax code providing 

incentives for innovative job creators. However, because most biotechs are in a loss 

position, these provisions do not do enough to stimulate innovation. Small companies that 

are pre-revenue are unable to immediately utilize these incentives; instead, they are 

accumulated as deferred tax assets for use later to offset future profits. These deferred 

assets do not incentivize much-needed investments in pre-revenue companies because they 

do not provide immediate or short-term tax benefits to investors or to the companies 

themselves. 

While a lower corporate rate will be helpful in the event that these companies become 

profitable, it will not stimulate investment in the near term. More should be done to support 

innovation by growing companies, including allowing them to either immediately utilize their 
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deferred tax assets to attract investment or maintain their value during transactions. The 

unique nature of innovative companies with very long-term product cycles must be taken 

into account in tax reform, and the tax code should reflect the needs of these pre-revenue 

capital~intensive businesses. 

Under the current tax system, companies are unable to use the tax code to attract 

investors, prevented from taking advantage of innovation and R&D incentives from a loss 

position, and hamstrung by a high corporate rate when they finally do become profitable. 

Congress should reform the tax code to make the corporate rate globally competitive while 

also providing important incentives for the development and manufacturing of innovative 

products. 

RQl~t9J __ ttH~LT~!LCQJt~ ___ bLPrtyJngJ;_n_y_g~trr'-~~ntJ~Lr!L~Jl!tf~~_t!H:in9-_QfJ:~_gnJ~W~lb-'g 

Chemicals.r BiQb~~~~_ p_r9_~loI~t~r_ ~!1_~ Advanced Biofuels 

BIO's Industrial and Environmental Section represents 85 leading companies in the 

production of advanced biofuels, renewable chemicals, biobased products, and other 

sustainable solutions to energy and environmental challenges. BIC member companies 

apply industrial biotechnologies to help resolve important challenges in synthesizing new 

products, whole cell systems and other biologic processes to improve the range of 

manufacturing and chemical processes. BIO members include the leaders in developing new 

crop technologies for food, feed, fiber, and fuel. 

In the industrial and environmental biotechnology sector, tax policy is particularly important 

to emerging technologies that have not yet achieved commercial scale. This is especially 

true for emerging technologies that must compete with well-established incumbent 

technologies that have benefitted from longstanding support within the tax system. The 

growing portfolio of emerging technologies for the conversion of renewable biomass to 

advanced biofuels, renewable chemicals and biobased products is such an example. 

By combining America's leading positions in agriculture and manufacturing innovation, 

industrial biotechnologies have outstanding potential to create jobs and economic growth, 

stimulate the U.S. bioeconomy, enhance America's energy security and improve the 

environment. Emerging technologies in renewable chemicals, biobased products, and 

advanced biofuels are ready for commercial deployment, but are in need of capital for firstof-a-kind biorefinery construction. 

Commercialization of these technologies is especially challenging because the markets they 

seek to enter are dominated by mature fossil-based incumbents with a long history of 

federal government support. In the case of biofuels, Congress has recognized the important 

role of tax policy in overcoming market barriers. Tax incentives for first generation biofuels 

have played a key role in reducing the nation's dependence on imported petroleum! 

mitigating fuel price volatility and providing consumer choice at the pump. The next 

generation of cellulosic and other advanced biofuels offers even greater benefits. Congress 

has again recognized the societal benefits of these technologies in providing targeted tax 

incentives for celluloSiC and other advanced biofuels even as first generation tax incentives 

have been phased out. But the first commercial cellulosic biorefineries are only just coming 

online this year. Comprehensive reform of tax policy must ensure that the tremendous 

progress in advanced biofuels commercialization is not thwarted by a heavy new tax 

burden. 

In substituting domestic, renewable biomass feedstocks for traditional fossil-based chemical 

feedstocks, renewable chemicals and biobased products offer the same wealth of public 
143 

f 


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144 

Center for Fiscal Equity 


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Comments for the Record 

United States House of Representatives 

Committee on Ways and Means 

Tax Reform and the U.S. Manufacturing Sector 

Thursday, July 19,2012,9:30 AM 

1100 Longworth House Olliee l3uilding 

By Michael Bindner 

Center for Fiscal Equity 

Chaimlan Camp and Ranking Member Levin, thank you for the opportunity to address 

these topics, which \vcre also submitted to the Senate Finance Committee in March. Tn 

our comments, we \vill address how our four part tax plan relates to these issues, 

specifically how investment expenses arc paid for in a consumption tax ellvironment, the 

impact or lower tax rates on productivity and jobs, how corporate ownership may be 

impacted under various scenarios for Personal Accounts in Social Security and the impact 

of tax reConn on globalization. 

As you know, the Center for Fiscal Equity has a four part proposal for long term tax and 

health care reform. The key elements arc 

a Value Added Tax (VAT) that everyone pays, except exporters, 

a VAT-like Net l3usiness Receipts Tax (NI3RT) that is paid by employers and 

includes OASI cmployer contributions but, because it has otTsets for providing 

health care, insured personal retirement accounts, education benefits and family 

support, does not show lip on the receipt and is not avoidable al the border, 

an employee payroll tax to for Old Age and Survivors lnsurance (OASI), and 

an income and inheritance surtax on high income individuals so that in the shOli 

teml they arc not paying less of a lax burden because they arc morc likely to save 

than spend - and thus avoid the VAT and indirect payment of the NBRT. 

In a VAT and Net Business Receipts Tax environment, tax is paid to the suppliers of 

plant and equipment when services are invoiced. VAT is receipl visible, while NBRT. as 

a vehicle f()r deductions, is designed not to be (hence the need lor a second tax). Those 

providers then pay taxes to the taxing authority based on those sales. How these assets 

arc accounted for in the price of the product. however, 1S open tor debate, 
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The credit against VAT and NBRT collections resulting trom purchasing investment 

assets might be applied in the year the purchase is made or, if Congress so desires. the 

credit can be applied over the llselullife or the assel. Extending the credit allows the 

taxpaying business to ~ven out tax paym~nts over time and wil! caus~ less disruption 

along the supply chain so that the entire price of the item is not a VAT credit at the next 

stage in the production process. How other nations deal with these questions is dealt with 

in the V AT literature and is beyond the scope of these comments. Should the Committee 

desire a more complete treatment of this issue, a separate hearing \-YQuld be appropriate. 

Separate rules could conceivably be adopted for V AT and NBRT, as V AT is collected on 

a transaction basis, similar to Sales Taxes. while NBRT can be calculated on a period 

basis, like Corporate Income Taxes. This is especially the case ifNBRT collections are 

not "receipt visible" due to their purpose as a vehicle for claiming offsets for the Child 

Tax Credit, the health insurance exclusion and other tax expenditures. 

As imp011ant as hmv capital expenditures are treated as a factor of production is how 

dividends and capital gains are taxed. Prior to ] 981, tax rates at the highest income levels 

were conjiscatory. especially between 1956 and 1965 when the tax rate was 91%. During 

this era, special tax benefits \\lcrc necessary so that \vhen combined \vith state taxes, the 

etlect1\'e tax rate was not over 100(1'0 of income. Beginning in 1981, tax obligations for 

these [onus of income declined in several steps, including the 1986 tax reJ()rm, the 1997 

decrease in capital gains tax rates to the cunent pem1anent rate of 20% and the 2003 tax 

legislation which dropped these rates to 15%. 

While technology exploded during this period, as we moved from the mainframe 

computer to Cloud Computing, robotic and the iPad, much of this explosion lVas 

incentivized by the ability of owners to keep an ever increasing percentage of the 

resulting productivity gains, as well as productivity gains ti'om taking advantage of the 

expansion of free trade due to the North American Free Trade Agreement, other trade 

actions and the opcning of China as a source of cheap assembly. Tf the gains from these 

investments were all kept by the government. they might not have been made. The 

downside of slich gains, ho,,\,ever, is the loss of manufacturing jobs, as well as a greater 

incentive to engage in union busting and the threat of union busting to keep \vage 

increases 10\v, essentially excluding the middle class from enjoying the benefit of these 

gains through \vages. although somc might realize them to the extent that they have 

accumulated either pension assets or patticipated in defined contribution plans. 

Studies have shown that dividend payouts or these productivity gains are generally at the 

level of normal profit. Dividend levels have not substantially increased due to these 

gains, Instead, they have gone mainly to CEO bonuses and stock grants and options. 

While CEO leadership is. of course, important to the adoption of innovation and 

investment, it is not so great that this factordese:rves the lion's share: ofrewmd. 
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It is rather unseemly that tiscal policy has had what amounts to a causal effect on what 

can be described as disastrous levels of inequality, leading most consumers to bcmow to 

mainlain lheir standard 0[' living and parlake in the rise of advanced consumer eleclronics 

that in another form has reduced their wages. This overleveraging has led us to the 

financial situation now plaguing this nation, which can best be described as 3 long term 

Depression, even though lhere are periods of recession and recovery within this era. 

Tax reform can ameliorate these effects. Adoption of consumption taxes like a VAT and 

N£lRT impact labor and capital egually. Tn Europe, this allows for the adoption oflower 

rates tor capital gains taxes. While protit is theoretically taxed by the ('orporate Income 

Tax, such taxation is uneven given the maze of special tax provisions favoring some 

industries and businesses over others, lcaving prollt untaxed in many cases, except as part 

of personal income taxation. Given the probability of ension, lower rates are not 

justified. This Center opposed these rate cuts in 2003 and we continue to oppose them. 

In the mea of personal income taxation, the Center favors a single rate structure for 

dividend. capital gain, wage and inherited income (ralher lhan inherited assets that are not 

yet liquidated ... with the only exception being that proceeds from sales oflhese a,gels to a 

broad based Employee Stock Ownership would remain tax free). Tax rates could range 

from 4% on at the $100.000 a year level Illr joint lilcrs or widows ($50,000 for 

individuals) to a top level of 28% - which is roughly the effective rate lor the NBRT (to 

discourage income shifting). While fewer, less graduated rates arc possible. most middle 

income taxpayers would not find them desirable. As tax tables will only have a single 

rate for each income level, the existence of multiple rates does not increase complexity 

li)f the taxpayer. 

Another option to ameliorate the maldistribution of wealth is the adoption of Personal 

Retircmenl AccounLs for Social Security, although doing so is like holding a lighlning rod 

in a thunderstonTI. We do agree with President Obama that such accounts should not be 

used ror speculative investments or even for unaccountable index fund investments where 

fund managers ignore the interests of workers. Investing such accounts in insured 

employee-ownership ofthe workplace would have an entirely differenl outcome, 

especially ifvoting shares occurred on an occupational basis with union representation. 

The impact a1 the internationallevd of such employee-ownership if extended to 

subsidiaries and the supply chain is also potentially profound, espeeially in regard to 

transfer pricing and the international growth ofthe union movement. 

A major strength of Social Security is its income redistribution funclion. We suspect that 

much of the supporl for personal accounts is to subvertthal function - so any proposal lor 

such accounts must move redistribution to account accumulation by equalizing the 

employer contribution. 
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We propose directing personal account investments to employer voting stock. rather than 

an index funds or any fund managed by outside brokers. There arc no Index Fund 

billionaires (except those who operate them). People become rich by ""ning and 

controlling their own companies. Additionally, keeping tllllds in-house is the cheapest 

option administratively. We expect it is eV0n cheaper than the Social Security systcm ~ 

which operates at a much lower administrative cost than any defined contribution plan in 

existence. 

Safety is, of course, a concern \vith personal accounts. Rather than diversifying through 

investment, however, we propose diversifying through insurance. A portion of the 

employer stock purchased would be traded to an insurance fund holding shares from all 

such employers. Additionally, any personal retirement accounts shifted li'om employee 

payroll taxes or trom payroll taxes from non-corporate employers would go to this fund. 

The insurance fund will serve as a safeguard against bad management. If a third of shares 

were held by the insurance fund than dissident employees holding 25.1 % o[the 

employee-held shares (16.7% oflhe tolal) could combine with the insurance fund held 

shares to fiw management if the insurance fund agreed there was cause to do so. Such a 

fund \vould make sure no one loses money should their employer fail and would serve as 

a sword of Damoc1es' to keep management in line. This is in contrast to the eatol PCSSS 

approach, which would continue the trend ofmanagcment accountable to no one. The 

other patt of my proposal that does so is representative voting by occupation on corporate 

boards, with either professional or union personnel providing such representation. 

The suggestions made here are much less complicated than the current mix of proposals 

to change bend points and make OASI more ofa needs based program. If the personal 

account provisions are adopted, there is no need to address file question of the relirement 

age. Workers will retire when their dividend income is adequate to meet their retirement 

income needs, \vith or even \vithollt a separate Social Security program. 

No other proposal for personal retirement accounts is appropriate. Personal accounts 

should not be used to develop a new income stream [or investment advisors and stock 

traders. It should certainly not result in more "trust fund socialism" with management that 

is accountable 10 no calise but short term gain. Such management often ignores the longterm interests of American workers and leaves CEO, both over-paid and unaccountable 

to anyone hut themselves. 

Progressives should not run away from proposals lo enact personal accounls. If the 

proposals above are used as conditions for enactment, I sllspect that they won't have to. 

The inveslment sedor will run away ii'OlTI lhem instead and will mobilize their 

constituency against them. Let us hope that by then workers become invested in the 

possibilities of reform. 
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All of the changes proposed here work more effectively if started sooner. The sooner that 

the income cap on contributions is increased or eliminated, the higher the slock 

accumulation lor individuals at the higher end or the age cohort to be covered by these 

changes .... although conceivably a firm could be allowed to opt out of FICA taxes 

altogether provided they madc all j'lrnler workers and retirees whole with the equity they 

would have otherwise received if they had started their careers under a reformed system. 

I suspect, though, that most will contjnue to pay contributions, with a slower phase In·'' 

especially if a slower phase in leaves CUlTent management in place. 

The international consequences of adopting personal retirement accounts which include 

employee-ownership are also interesting. As employees begin to own and control their 

workpJace, tht:y \yjJ( find it in their best interests to include overseas subsidiaries and 

their supply chains in the same type of arrangement. They are also more likely to sel 

transfer pricing so that all employct::s in an international enterprise wceivc the same 

standard of Jiving from work, so that incentives to exploit other workers would be 

eliminated. This development would not only revive the labor movement, it would make 

it international in a way that trading agreements have not been able to accomplish. 

Recognition o1'th1s fact should make the possibil1ty of personal accounts more attractive 

to progressives and the more populist members of the Tea Party. but not to the more 

corporatist members of either party. 

International aspects are wlavoidable in a discussion of tax rd'lrm. Indeed, one of the 

reason~ for engaging in tax reform is to increase the competitiveness of American 

manufacturers. While VAT does not tunction as an explicit tarin~ the lack of one while 

many of our trading partners have one essentially builds all of our tax costs into the eost 

of exported products, where competing na60ns exclude these costs at the border. The 

current regime violates the spirit, though likely not the letter, of constitutional provisions 

banning export taxes. 

As the Committee is \vell aware, VAT is good for competivcness because it ean be zero 

rated at the border tor exports and collected fully for imports. Unlike a VAT, an NBRT 

would not be visible on receipts and should not be zero rated al the border - nor should it 

be applied to imports. While both collect trom consumers, the unit of analysis lor the 

NBRT should be the business ralher thao the transaction. As such, its application should 

be universal- covering both public companies who eurrently file business income taxes 

and private companies who currently file their business expenses on individual returns. 

It is not appropriate tor NBRT to be zero rated, as doing so would decrease the ineeotive 

to pass Child Tax Credit aod Health Insurance tax beoetlt' to employees. As importantly, 

the tax benellts and government services provided under this tax go to workers and their 

families. As such. overseas purchasers accrue benefits from these services and should 

therefore participate in their funding. 
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If the NBRT is t!nacted in this way, the United States should seek moditication to our 

trade agreements to require that similar expenditures not be funded with taxes that are 

zero rated at the border. As foreign consumers bencfit from subsidies for American 

families, American consumers benefit from services provided to overseas workers and 

their families. This benefit should be recognized in intemational tax and trade policy and 

American workers should not be penalized when other nations refuse to distribute the 

cost ofbenelits to foreign workers to the American consumers who receive the benef1t of 

these services. [1' our trading partners do not match this initiative, some items of spending 

could be shifted from NBRT funding to VAT funding, so that we are not making 

unilateral concessions in this area. 

The final question on capital investment is the repatriation of profit tl'om overseas 

subsidiaries. Under a consumption tax regime, there would be no separate levy on profit. 

Value added taxes are already paid in the country where the product is sold and these 

taxcs include both the contributions of labor and capital. For the purposes of businesses, 

profit should not be taxed again when repatriated, except to the extent that this prot\t 

results from value added in the United States. Use of VAT exemptions must not be 

allowed as a tax avoidance scheme. Products with parts that have been produced or 

developed in the United States, then sent elsewhere for assembly, must reacquire any 

obligation to pay that was shed at the border. Not providing for this contingency opens 

the door for a great deal of abuse. 

The source nation of dividend income, meanwhile, must be irrelevant for purposes of 

collection of the proposed high income and inheritance surtax. The subject of this tax is 

not the income ofthe business, which has been shifted to the NBRT [or individual filers, 

but the income of households for personal consumption and savings. The existence of 

this tax takes into account the decreased likelihood that this income will he spent and 

therefore taxed under NBRT and VAT regimes and to safeguard savings opportunities for 

the non-wealthy, who would otherwise be priced out of the market [or investments by 

higher income individuals who, because they have greater opportunities to save, garner 

greater and greater shares of America's wealth. The proposed surtax is an attempt to 

level Ule playing field so that everyone can invest. 

Thank you t,)r the opportunity to address the committee. We are, of course, available for 

direct testimony or to answer questions by members and staff 

Contact Sheet 

~fichael Hindner 

Center for Fiscal Equity 

4 Can terbury SCluare, Suite 302 

Alexandria, Virginia 22304 

571-334-8771 

Committcc 011 'Vays and Means 

Tax Reform and the U,S. Manufacturing Sector 

Thursday, July 19, 2012, 9:30 AM 

1100 Longworth House Office Building 

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

behalf the wittless appears: 

This testimony is not submitted on behalf of any client, person or organintion other than 

the Center itself, which is so far unfunded by any donations. 
f 

150 

Ernest Christian 


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ERNEST S. CHRISTIAN 

WRITTEN STATEMENT SUBMITTED FOR CONSIDERATION TO 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON TAX REFORM AND THE U.S. MANUFACTURING SECTOR 

Hearing Date: July 19, 2012 

Introduction 

My name is Ernest S. Christian. I am pleased to submit on my own behalf this written 

statement about the dynamic role of lower tax rates and improved capital cost recovery 

allowances in economic growth -- with special emphasis today on manufacturing. 

I am a former Treasury tax official and, in and out of government, have been a tax lawyer in 

Washington, DC since the early 1960s. At present, I am a co-chairman of the Center for 

Strategic Tax Reform (CSTR). a role that I share with several former members of this 

Committee. CSTR is a nonprofit §501(c)(6) organization that Dr. Murray Weidenbaum, former 

Chairman of the President's Council of Economic Advisors, and I formed over 20 years ago to 

promote pro-growth tax reform. The views expressed here are solely my own. 

During the 1970s, I served as both the Deputy Assistant Secretary and Tax Legislative 

Counsel of the Treasury Department, where I designed and drafted the Asset Depreciation 

Range System (ADR) of depreciation enacted in 1971. That tax reform measure continued the 

essential acceleration of depreciation allowances that began in the Kennedy administration. 

During the Reagan administration, I assisted with further reforms, including lower tax rates and 

designing the present capital cost recovery system known as MACRS and its predecessor --

ACRS. 

Overview 

Changes in tax rates and capital cost recovery allowances both have profound effects -- for 

good or ill -- on manufacturing's key role in job creation. On the positive side, to maintain and 

expand manufacturing and manufacturing jobs, and for the overall health of the U.S. economy, 

the Congress should reduce the corporate tax rate and make permanent either 50 percent or 

100 percent first-year expensing of business capital equipment. That should be followed with 

tax reforms that better enable businesses to export goods and compete directly in foreign 

markets. 

On the negative side, the worst thing Congress could do is, with one hand, cut nominal or 

statutory tax rates, and with the other, reduce capital recovery allowances from their already 

inadequate levels. This would increase the effective tax rate for many manufacturers and 
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others -- and would increase the "tax cost" of job-creating investment all across the U.S. 

economy. The tax code should not drive more manufacturers offshore. 

Ever since the Kennedy administration in the 1960s, tax reformers who have focused on 

economic growth have sought not just to lower tax rates, but also to accelerate depreciation 

allowances so as to alleviate the long-standing tax bias against job-producing "capital-intensive" 

businesses. It would be a tragedy if, because of budget pressures outside the jurisdiction of this 

Committee, the Congress were to reverse the course of tax reform and start back down the 

road of making manufacturing in the U.S. even more tax-expensive and less productive. 

I applaud this Committee's focus on the need to remove tax impediments to economic 

growth. And I agree especially with Chairman Camp's emphasis on the need both to lower the 

tax rate and to have a correct tax base to which that rate is applied. If the Congress were to go 

in the wrong direction on either of these elements of the tax code, we would end up with a 

system that further retards economic growth and the true cause of tax reform could be set 

back for decades. 

My purpose is to assist in the Chairman's effort to keep tax reform on the right path 

toward producing highly positive economic results. This can be accomplished by making firstyear expensing permanent and phasing in a major reduction in the corporate tax rate in a way 

that maximizes the bang-for-the-buck from these two components offundamental tax reform. 

Phase-In of Pro-Growth Tax Reform That Works 

Alex Brill, a former Policy Director and Chief Economist of this Committee, recently 

suggested that 50 percent first-year expensing be made permanent and that a corporate rate 

cut be phased in. (See "A Pro-Growth, Progressive, and Practical Proposal to Cut Business Tax 

Rates," AEI Tax Policy Outlook No.1, January 2012.) 

Following up on that, I have worked with Gary Robbins, formerly a Treasury Department 

tax economist and now president of Fiscal Associates, to formulate a specific proposal and to 

quantify its revenue consequences (both static and dynamic) as well as its all-important growth 

effects. 

Our proposal is permanent 50% first-year expensing for all businesses and a phased-in 

reduction of the corporate tax rate to 25%. The results are illustrated in Table I below. 
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Calendar 

Year 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

2021 

2022 

Table 1- One Percentage Point Per-Year Corporate Rate Cut 

plus 50% Expensing for All Businesses 

Corporate Static Cost ($) Static Combined Combined 

Rate Cut of Rate Cut Cost of 50% Static GOP 

($) Expensing Cost Growth 

plus MACRS ($) 

34% -9.2 -70.5 -78.5 0.3% 

33% -24.4 -66.8 -88.9 0.7% 

32% -37.9 -62.7 -97.4 1.0% 

31% -49.9 -48.0 -94.6 1.4% 

30% -66.4 -36.7 -99.9 1.7% 

29% -79.0 -27.8 -103.9 1.9% 

28% -90.9 -20.9 -109.3 2.1% 

27% -101.5 -16.5 -115.8 2.3% 

26% -116.2 -14.3 -128.2 2.5% 

25% -131.1 -12.5 -141.5 2.6% 

-1,057.8 

% Reflow 

Combined 

Dvnamic 

Cost 

($) 

-68.9 

-67.8 

-61.9 

-44.1 

-35A 

-25.9 

-17.5 

-11.0 

-lOA 

-9.8 

-352.7 

66.7% 

Note: All dollar amounts are in billions of dollars. The column "Static Cost of Rate Cut" shows the cost of 

changing the corporate rate to the rate indicated in the "Corporate Rate Cut" column from 35 percent 

without 50% Expensing. The "Static Cost of 50% Expensing plus MACRS" shows the effect of 50% 

Expensing without a change in the corporate rate. The "Combined Static Cost" column is not equal to the 

sum of the two prior columns because it accounts for interactions between the parts of the plan. 

Additional GOP results in additional federal receipts. That is the difference between the combined static 

and dynamic cost of the plan. The "% Reflow" is the ratio of the additional receipts to the "Combined 

Static Cost." 

Note: For this purpose, MACRS includes other cost recovery provisions that under present law remain in 

effect in 2013 and thereafter. So-called "bonus depreciation", a temporary provision which expires, is 

replaced by the more correctly denominated 50% expensing rule which works in essentially the same 

way except that it is a permanent part of the law. 

Table I tells us many important things. The static "cost" of rate reduction builds up over 

time, but the static cost of 50% expensing declines rapidly and is nearly gone after 10 years. 

The combined annual static cost of these two reform components is on average about $100 

billion per year -- essentially equal to the annual cut in spending beginning in 2013 that is 

required by the Budget Control Act of 2011. Those who are concerned about the potential 

negative impact of spending cuts on our fragile economy might welcome the significant tax cuts 

in 2013 - 2015 as shown by Table I. 

Indeed, the most powerful part of the story is in the last two columns of Table I which 

illustrate the highly efficient, large bang-for-the-buck growth effects of combining rate 

reduction and expensing. The dynamic cost is only $353 billion over 10 years and the boost to 

GDP is a whopping 1.8% or, in dollar terms, roughly $3,599 billion -- thereby providing a 10-to-l 

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return ($3,599 divided by $353). Moreover, even the 10-year $1,057.8 billion static cost (for 

those who prefer old-fashioned accounting) is only 29% of the $3,599 billion of induced GDP 

growth -- thereby providing almost a 3.5-to-l return. 

Given the current fragile condition of the economy, fine-spun arguments about the 

distinction between dynamic and static scoring are largely irrelevant. Absent a powerful progrowth tax cut, and sensible long-term reductions in spending, it is highly likely that we face a 

4% economic decline starting in the first quarter of 2013 according to the Congressional Budget 

Office (CBO). Keep in mind that compared to where we would have been if GDP had returned 

to its historic trend of 3.2% per year growth, we are already $2 trillion in the hole (i.e., GDP is 

that amount smaller than it should be this year). 

It is in this context that the pro-growth tax cut in Table I is almost "free" in the sense that if 

we don't do it, the economy and revenue will continue to muddle along at a subpar or worse 

rate. CBO's current-law forecast shows the result of accepting this low level of recovery and 

growth as the "new normaL" By the end of the budget window, in 2022, GDP will be 16.5% 

below its SO-year trend level or $3.6 trillion too low, or a $12,000 loss for every man, woman 

and child, each and every year into the future. 

The tax cut illustrated in Table I is especially powerful and needed not just because it 

reduces the corporate rate. Indeed, most of its strong boost to economic growth comes (a) 

from moving closer to the free-market neutrality of full expensing and farther away from the 

distortive, efficiency-reducing effects of the "winners and losers" class lives that underlie the 

MACRS system; and (b) because the 50% expensing rule applies to capital investments made by 

unincorporated businesses as well as in the case of corporations. 

Although not discussed in detail here, we have analyzed and would also recommend a 

proposal that reduces tax rates for unincorporated businesses as well as corporations. When 

combined with first-year expensing for all businesses, that approach would produce an even 

more powerful boost to economic growth. 

Important Perspectives on Tax Reform 

Nominal VS. Real Tax Rates 

Alan Viard, a Resident Scholar at the American Enterprise Institute, recently reiterated the 

perils of tax changes that reduce the nominal statutory rate, but ignore the effective rate of tax. 

(See "The Benefits and Limitations of Income Tax Reform," AEI Tax Policy Outlook No.2, 

September 2011.) When the nominal rate is cut, but deductions are denied, and the tax base is 

therefore changed, the effective rate of tax may go up or down or remain the same. 

Suffice it to say that if the corporate tax rate were to be cut and depreciation deductions 

for new purchases of capital equipment were reduced, the effective rate of tax (Note) for job-

(Note) Here we are talking about the real (cash) effective rate, not the somewhat different "effective 

rate" often used as a financial accounting term. 
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creating companies that are purchasing a lot of new capital equipment would go up, but would 

go down for those that are not, and would remain about the same for those in the middle. 

Chris Edwards at the Cato Institute has correctly pointed out that when Canada cut its 

corporate tax rate from 29 percent to 15 percent over the last decade, the reforms did not 

broaden the tax base in anti-growth ways such as by reducing depreciation allowances. In 

addition, recent research by Douglas Holtz-Eakin and Ike Brannon at the American Action 

Forum reveals that of 96 corporate rate cuts of one percentage point or more among OECD 

countries since the year 2000, only 25 were paid for with some other tax increase. 

The "Economic Efficiencyll Notion 

The notion that lowering the business rate while cutting back depreciation to the vastly 

disparate "class lives" would introduce efficiency gains for the economy is wrong. It assumes 

that the existing class lives are accurate, closely matching the ever-changing, almost impossible 

to quantify decay rates for innumerable kinds of business assets across various industries. They 

aren't -- and here I speak from experience, having been at the Treasury Department in the 

period 1971-1975, where I was responsible for updating and rearranging the class lives, often 

using data that was even then out of date. 

Despite the best efforts of many people in the 1970s, including those in the Treasury 

Department's then, but now disbanded, Office of Industrial Economics, the task proved to be 

impossible -- and still is. Therefore, the class lives in the old ADR system -- and as now carried 

forward into MACRS -- are at best only rough approximations and make arbitrary distinctions 

that have become more distortive with the passage of time. Consequently, if present capital 

cost recovery allowances were, for example, to be cut back to the class life system, disparities 

in depreciation rates would tend to be magnified and, instead of economic inefficiencies being 

reduced, they would be increased. 

Neither MACRS nor Expensing Is a loophole 

There are loopholes in the Internal Revenue Code -- hundreds of them, in fact, but allowing 

a business to deduct when incurred (or soon thereafter through MACRS) the costs of the tools 

that it puts in the hands of its workers is not one of those loopholes. Allowing expensing is not 

a subsidy like allowing a business to deduct the cost of healthcare benefits that are not included 

in employees' income. The costs of a machine tool, a forklift, a rolling mill in a steel plant, the 

components of a refinery and so forth are in all cases just as much an expense of doing business 

as the wages of the employees who operate the equipment. 

Expensing the cost of capital investments produces the correct measure of income when 

the goal is to avoid double taxing investment. Double taxation occurs under a depreciation 

regime because deductions are allowed only over a period of years -- and, as a result, the 

present value of the deductions is always less than the actual expense incurred. Thus, because 

only a partial deduction is allowed, the equipment is partially double taxed, with the severity of 

the penalty being proportionately greater the longer the so-called "class life" arbitrarily 

assigned to the item of capital equipment. As the Treasury Department recognized in its 1984 
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tax reform proposal ("Tax Reform for Fairness, Simplicity, and Economic Growth: The Treasury 

Department Report to the President, November 1984"), if deductions for capital cost recovery 

are deferred and devalued, the face amount of deductions should be increased to start with in 

order to avoid double taxation. It is far simpler to allow first-year expensing. 

When Economy Slows Congress Improves Capital Cost Recovery 

Typically, when the economy slows, one of the first things almost every administration and 

Congress has done is to improve capital cost recovery by enacting an investment credit, a more 

accelerated cost recovery system, and/or allowing for partial or full expensing of the costs of 

the tools and equipment necessary for economic growth and job creation. It would be 

counterproductive and wrong for Congress in the current extraordinarily difficult economic 

circumstances to move in the opposite direction. 

Tax Reform Requires Lower Rates and a Movement Toward Expensing 

Since the 1960s, tax reform has been about lowering the tax rate and correcting the tax 

base to assure that there are no incorrect omissions from the tax base and that nothing is 

included in the tax base twice and double taxed. For a long time, the most obvious example of 

double taxation was the corporate income tax itself. Because the same dollar of earnings is 

taxed both to the corporation and its shareholders, tax reformers sought to integrate the two 

taxes. The effort partially succeeded in many foreign countries, but not here. In recent years, 

the two-Iayers-of-tax problem has been alleviated somewhat by the soon expiring lower tax on 

dividends and by increased use of "pass-through" entities. But the more damaging double 

taxation from the failure of the tax code to allow for first-year expensing continues. The 

problem should be fixed, not made worse. 

It may be appropriate to "capitalize and depreciate" capital equipment costs for the 

purpose of financial accounting, but when done for the entirely different purpose of imposing a 

tax, the result is to discriminate against capital equipment, which is the most critical component 

of economic growth and job creation. 

Since the 1970s (the renowned Blueprints for Tax Reform, for example) all the way up 

through Congressman Paul Ryan's current-day Roadmap, tax reform proposals have provided 

for the combination of lower rates and a movement toward expensing. 

Here are a few examples: The National Commission on Economic Growth and Tax Reform 

in 1996 ("The Kemp Commission"); The President's Advisory Panel on Federal Tax Reform in 

2005 (the "Breaux-Mack Commission"); and The USA Tax -- the ground-breaking, bipartisan 

proposal by then Senators Sam Nunn and Pete Domenici (USA Tax Act of 1995, as introduced in 

S. 722 on April 25, 1995) and subsequently fully explained in "USA Tax System -- Description 

and Explanation of the Unlimited Savings Allowance Income Tax System," Tax Notes Special 

Supplement, Mar. 10, 1995, pp. 1481-1575. 
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Chairman David Camp 

Ways & Means Committee 

341 Cannon Office Building 

United States House of Representatives 

Washington, DC 20515 

August 1, 2012 

';1 ~ 

HANESl7tCn uts INC 

Ranking Member Sander Levin 

Ways & Means Committee 

1236 Rayburn Office Building 

United States House of Representatives 

Washington, DC 20515 

Re: Hearing on Tax Reform and the U.S. Manufacturing Sector 

Dear Chairman Camp and Ranking Member Levin: 

We are writing to thank yon for holding this important hearing on Tax Reform and the 

U.S. Manufacturing Sector. In these challenging economic times, Congress should seize 

on every opportunity to facilitate U.S. manufacturing and to incentivize the purchase of 

U.S.-made goods. In this spirit, we would like to bring to your attention an initiative 

which would make U.S. manufactured goods more attractive to buyers overseas who arc 

making finished goods and importing them back into the United States. 

Chapter 98 of the U.S. Harmonized Tariff Schednle (USHTS) was created to avoid 

"double taxation" of U.S. goods since such goods are taxed already when they are 

produced in the United States. Chapter 98 allows for the value of the U.S. component to 

he subtracted from the dutiahle value of a finished good which incorporates the U.S. 

component. Duties are still assessed on the foreign made good, but the U.S. component 

is exempted from the additional taxation. This system has heen in place for nearly 50 

years. It is vrI'O compliant. It encourages the use of more U.S. inputs on goods made 

abroad. 

Unfortunately, while this benefit is available to many manufacturing sectors, it is 

narrowly limited with respect to textiles and apparel. Consequently, U.S. inputs such as 

cotton, as well as yarns and fahrics (with the limited exception of sewing thread and 

narrow elastic fabric), are not able to benefit from a Chapter 98 duty reduction. The 

implications of this are wide-reaching. Were Chapter 98 to be amended, we could 

expect henefits to tlow into many sectors of the economy, and regions of the country, 

particularly to those not abundantly served by other manufacturing sectors. 

Cotton is grown in 17 states in the U.S. including Alabama, Arkansas, Arizona, California, 

Florida, Georgia, Kansas, Lonisiana, Mississippi, Missouri, New Mexico, NOlth Carolina, 

Oklahoma, South Carolina, Tennessee, Texas and Virginia. U.S. cotton is in high 
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Statement for the Record 

HOUSE WAYS AND MEANS COMMITTEE 

Hearing on Tax Reform and the 

U.S. Manufacturing Sector 

July 19,2012 

Submitted July 18, 2012 by: 

Jade C West 

Senior Vice President - Government Relations 

National Association of Wholesaler-Distributors 

Executive Secretariat 

The LIFO Coalition 

1325 G Street, N.W., Suite 1000 

Washington, D.C. 20005 

202-872-0885 

jwest@naw.org 

www,saveliro.org 

The LIFO Coalition (the Coalition), tV}z;c!l represents trade associations and businesses a/every 

si::e and industry sector that employs the LIFO method, was organized in April 2006, lichen LIFO 

repeul was first proposed in the SC:'nate LIS a rel'enue ojJ\'et to fund unrelated policies. Since Ihen, 

the Coalition has grown to include rnore than 120 members including trade associations 

representing a wide swath (4'American inciusflY - including mam!lclcluring, wholesale 

distribution and retailing - and companies o/all sizes. The Coalition's mission is to preserve the 

option qf companie,", to va/ut' their inventories pursuant to the LIFO methodfbrfederal income 

tax purposes. A list olthe Coalition memhers is attached to this Jocl/ment. and can hefound at 

http://www.sa\el[[c).org/pdPLIFOMcmberl.isl.pdC 

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The UFO Coalition respectfully submits this Statement for the Record to the House Ways and 

Means Committee in connection with the hearing on "Tax Reform and the US Manufacturing 

Sector." The UFO Coalition membership is not limited to the manufacturing sector, but the 

issue of UFO repeal has been considered in a number of recent discussions of broad-based tax 

reform. The tax reform debate is therefore critically important to all of the industries represented 

by the Coalition, and we very much appreciate the opportunity to provide our views to your 

committee. 

OVERVIEW OF LIFO 

UFO is an accounting method used by businesses with inventory to clearly determine both 

"book" income and tax liability and has been an accepted and established accounting method in 

the United States for 70 years. LIFO and FIFO (first-in, first-out) in fact achieve the same 

purpose: most closely matching cost of goods sold with cost of purchasing replacement 

inventory. LIFO is used extensively by both publicly-traded and privately-held companies, 

manufacturers, extractive industries. wholesaler-distributors, retailers, newspapers, automobile 

and equipment dealers, and a wide range of' other businesses. According to two separate recent 

studies, one by Georgia Institute of Technology and the other by the American Institute of 

Certitied Public Accountants. UFO is used by between 36% and 40% of businesses ill every 

industry sector that maintains inventories. It is widely used by small businesses and is 

particularly important to businesses which have thin capitalization, small profit margins, and/or 

particular sensitivity to rising materials costs. Many ofthese companies have been using UFO 

for decades. creating many years of LIFO reserves. 

The LIFO Coalition does not believe that repeal of the LIFO method should be a part of any tax 

reform proposal for two primary reasons: the LIFO method is not a tlLY: expenditure. anti 

repeal would be an unprecedented retroactive tax increase, The Coalition has previously 

prepared detailed analyses of these issues, both of which are attached as part of this submission, 

along with the Coalition's respollse to a letter from Jeffrey Zeints, Acting Director of OMB. to 

22 members of the House of Representatives defending the Administration's call for repeal of 

the UFO method. 

Repeal of LIFO would have a devastating effect on many of the companies that use it, 

particularly small, privately-held companies. This point was made emphatically by the Small 

Business Administration's Office of Advocacy in their September 29, 2009 letter to the Tax 

Reform Subcommittee of the Presidential Economic Recovery Advisory Board (PERAB). In 

their letter, they wrote: 

TI1e longer that the business uses LIFO, the larger its reserves will be relative to its 

inventory. If LIFO were no longer permitted, these reserves would be taxed at rates up to 

35 percent, even though the reserves reflect nothing more than the impact of economic 

innation on the value of the business' inventory over ten years. Ultimate(v, eliminating 

the ability to use LIFO would result in tax increases for small business that coulll 

ultimately jilrce many .mall businesses to close, (Emphasis added.) 

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Ironically, proponents of repeal often base their call for repeal on the completely erroneous belief 

that the companies that use LIFO are large, publicly-traded corporations, primarily gas and oil 

companies. In fact, in testimony in February before the House Budget Committee, in response to 

a question from Mr. Yanmuth, OMB Deputy Director for Management Jeflrey Zients made that 

incorrect claim when he said: "On the LIFO, that disproportionately benefits oil and gas 

producers who have record profits." 

LIFO is not a tax expenditure, is not used exclusively or even primarily by "big oil" or other 

large corporations but by hundreds of thousands of smaller companies, and its repeal would be a 

devastating retroactive tax increase that would force many small businesses into insolvency. 

This is surely not what tax reform is intended to accomplish, 

THE COALITION'S PRINCIPAL ARGUMENTS 

LIFO repeal would be an unprecedented retroactive ttL, increase: 

The UFO repeal proposal in the President's FY 2013 budget is estimated to generate about $74 

billion. It is important to note, however, that most of the revenue generated by this proposal 

would come not tram prospective repeal of the LIFO method but rather hom the proposal's 

retroactive effecl. LIFO users would be required to recalculate their income for all the years in 

which they used LIFO and "recapture" into taxable income their entire LIFO reserve - the total 

benefit that tbey received hom the use of the LIFO method over the taxpayer's entire lifetimeollen many decades, (For a detailed explanation orthe LIFO reserve, please see attached LIFO 

Coalition papers on retroactivity and tax reform.) 

Because the LIFO method has been authorized for more than 70 years, many companies have 

accumulated extraordinarily large reserves over time. In many cases these reserves are greater 

than the net worth of the company, The tax liability associated with taking those reserves into 

income, even over tbe I O-year period provided by the Administration's LIFO repeal proposal, 

would severely harm large numbers of businesses and would render many of them insolvent. 

The LIFO Coalition is not aware of any other serious revenue raising proposal that has this type 

of retroactive effect. For example, no proposal for the elimination of accelerated depreciation or 

the research credit or the mortgage interest deduction includes a requirement that taxpayers pay 

back the taxes that they saved from the prior use of these methods. No proposal to increase tax 

rates on dividends andlor capital gains ever suggests that taxpayers pay back the benefits of 

reduced rates on tbose types of income for past years, 

The income tax liability associated with recapturing the Ll FO reserve into taxable income would 

severely ham1 most companies and potentially bankmptmany of them. It should be noted that 

the savings represented by a company's LIFO reserve is not sitting in a liquid investment 

awaiting the repayment; instead, the savings are reinvested annually in the company's inventory. 

In this sense, a company's LIFO reserve is different from a depreciation reserve that reflects tax 

savings which companies are expected to set aside in order to be available to replace plant and 

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equipment that becomes obsolete. The tax saving trom a company's LIFO reserve has already 

been spent because the saving is continually reinvested in replacement inventory. 

Recapture of a company's LIFO reserve into taxable income ordinarily occurs only when a 

company experiences a permanent decline in the level of its inventories. [n such circumstances, 

cash is freed up from the sale of inventory that is not replenished, so that repayment of the prior 

(ax saving trOl11 the use of the LIFO inventory method at such time is both logical and 

appropriate. 

In contrast, if a company must repay the tax saving from the prior use of the LIFO inventory 

method at a time when the company's inventory is not declining in real quantity terms, fu'l would 

occur if LIFO were repealed retroactively as proposed, cash will not be readily available from 

the sale of inventory to pay the increased tax burden caused by the recapture of LIFO reserves. 

Even with a 1 O-year amortization period for the payment of the retroactive tax burden, a 

company would be faced with the choice of either shrinking its busincss or financing its 

inventory through additional borrowings. assuming that credit is available, or it would go out or business. 

It should further be emphasized that if Congress properly rejects the imposition of an 

unprecedented retroactive tax increase for the reasons noted above, consideration of LIFO repeal 

in the context of comprehensive tax reform makes little sense - the amount or revenue generated 

in exchange for reduced rates would be a small percentage of the amounts that have typically 

been associatcd with LIFO rcpeal proposals. Any such amount would not come close to 

justifying the dismption and other adverse economic and policy consequences that would 

inevitably result from prospective repeal. For these reasons, therefore, the Congress should 

reject any tax reform proposal that includes either total (i.e., prospeclive and retroactive) repeal 

or prospective-only repeal of the LIFO method. 

UFO is an accepted inventory l'ltiuation method, not a ttlX expenditure: 

It is the position of The LIFO Coalition that the LIFO inventory method is not a tax expenditure. 

It differs significantly trom the other provisions now classified as tax expendimres in the Joint 

Committee on Taxation (JCT) stairs annual list of tax expenditures, should not be classified as a 

tax expenditure, and should not be eliminated from the Internal Revenue Code in exchange for a 

reduction in income tax rates as part a tax reform program. 

According to a 2010 OMB publication, "A tax expenditure is an exception to baseline provisions 

orthe tax structure that usually results in a reduction in the amount of tax owed. The 1974 

Congressional Budget Act, which mandated the tax expenditure budget, did not specify the 

baseline provisions of the tax law. As noted previously, deciding whether provisions are 

exceptionsj thereforej is a matter of judgment. ') Ol\.1B, A na(rtical Perspectives, Blld,r;et of the 

u.s. Government. Fiscal Year 2010. at 298 (2010). 

The LIFO inventory method has been part of the Internal Revenue Code since 1939, but for more 

than 33 years following the enactment of the 1974 Budget Act. LIFO was not c1assitied as a tax 

expenditure by .ICT staff. It was not until a 2008 .ICT reexamination of the criteria for defining 

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tax expenditures that JCT statTbegan classifying the LIFO inventory method as a tax 

expenditure. The JCT reexamination was not prompted by any change in the 1974 Budget Act; 

the JCT stafTsimply invented a new class of tax expenditures labeled "Tax-Induced Structural 

Distortions" and included the LIFO inventory method in this new class oftnx expenditures. 

Tax-Induced StTuctural Distortions are structural elements of the Intemal Revenue Code (not 

deviations from any clearly identifiable general tax rule and thus not Tax Subsidies) that 

materially affect economic decisions in a manner that imposes substantial economic efficiency 

costs. 

The foregoing definition ofa new category of tax expenditure bears no relationship to the 

definition of a tax expenditure contained in the 1974 Budget Act. The .ICT staft'makes no effort 

to reconcile its definition of tax expenditures with the 1974 Budget Act definition. 

The Office of Management and Budget ("OMB") publishes its own list of tax expenditures, and 

has not classified the LIFO inventory method as a tax expenditure either prior to 2008 or 

subsequent thereto. See Omce of Management and Budget, Ana(l'iica/ Perspectives, Budget of 

the U.s. Government. Fiscal Year 2013. 

This inconsistency in classification between two branches of government is particularly 

signilicant considering thaI the OMB under the Obama Administration has proposed that 

Congress repeal the LIFO inventory method. Thus, even though the Obama Administration 

favors the repeal of the LIFO method, the Obama Administration does not classify the LIFO 

inventory method as a tax expenditure. 

In fact, under any rational classi fication system, the LIFO method should nol be classified as a 

tax expenditure. If the criteria for classifying provisions in the federal income tax law as tax 

expenditures are developed in an objective and logical way, the LI FO inventory method would 

surely be excluded from classification as a tax expenditure. Under any type of rational income 

tax system, a reasonable method for distinguishing between merchandise that is sold and 

merchandise that remains in ending inventory \.vould be absolutely indispensible. Moreover, a 

system for assigning costs to merchandise that is sold and to the merchandise that remains in 

ending inventory would also be essential. 

The main reason in support of the LIFO inventory method is that, if a company is to remain a 

going concern, the company must replenish or replace the inventory that it sells. If prices of 

merchandise are increasing and a company must pay an income tax based on the historical cost 

of the merchandise that is sold, but must pay r<1f replacement merchandise at its higher 

replucement cost. the capital for such replenishment is eroded by the income tax that the 

company must pay on the inflationary increase in the cost of its inventory The LIFO method 

enables companies to finance the replacement or inventory that is sold by using the increased 

after-tax profit that results from employing the LIFO inventory method. 

The LIFO method, as well as any other generally accepted method ofinvcntory acconnting, thus 

should be viewed as a rational response to the need for effective tax treatment of inventories. It 

should not be viewed as a tax expenditure, a "loophole," or any other aberration from the n01111. 

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Repeal of the method thus has no place in a tax reform regime that is designed essentially to 

lower rates - and perhaps deticits - by repealing tax expenditures or loopholes. It is therefore 

distinguishable from the many base-broadening elements of recent tax reform proposals in this 

regard, as well as in the retroactivity uniquely associated with LI FO repeal and discussed earlier. 

OTHER MAJOR CONSIDERATIONS 

Repeal of the LIFO method is not an appropriate offset to reduced business tax rates: 

The size of a company's LIFO reserve, particularly ifthe company has used the LIFO inventory 

method for an extended period oftime, is likely to dwarf the future tax savings resulting from the 

reduction in tax rates contemplated by tax reform. If one multiplies the annual intlation rate over 

the past several decades on a compowlded basis by the amount ofa company's inventory each 

year, it is not difticult to see how a company's cumulative LIFO reserve might exceed the 

company's entire taxable income for a taxable year, ii'not the company's entire net worth. No 

realistic amount of rate reduction ,viII significant1y ameliorate the size of that additional tax 

burden. 

Most companies using the LIFO inventory method are pass-through entities: 

Given that tbere are approximately 30 million pass-through entities today and fewer than 2 

million C corporations and that approximately 36~% - 40% of the companies in all industries that 

maintain inventories use the LIFO method, it is not an exaggeration that hundreds of thousands 

of companies use the LIFO method. The overwhelming majority of those companies using UFO 

are privutely-held, and the overwhelming majority of them are not organized as C corporations, 

but as pass-tlu'ough entities, and are therefore taxed tmder the individual rather than the corporate 

tax code. 

Accordingly, the main premise of one type of tax refonn that has been discussed, which is to 

broaden the tax base tor corporations while lowering the rate of tax on corporations, would 

simply be inapplicable to many users ofthe LIFO inventory method, Repealing that method in 

exchange for a reduction in corporate tax rates which does not benefit a user of the LIFO 

inventory method would impose an enormous burden on small businesses not taxed as 

corporations and would undoubtedly lead to a significant number of business failures, 

As noted above, The LIFO Coalition submits that even for corporate taxpayers, tax reform that 

emails a reduction in corporate tax rates in exchange for the repeal of the UFO method and other 

provisions listed as tax expenditures by JCT staff, will not make corporations whole, given the 

size of the typical LIFO reserve relative to a company's net worth. For non-corporate husinesses, 

repeal of the LIFO inventory method in exchange for rate reductions that benefit only corporate 

entities would be an unmitigated disaster in financial terms. It's hard to conceive of another tax 

provision the repeal of which would destroy lTlore businesses and eliminate more jobs than repeal 

of the L1 FO inventory method so constructed. 

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International.financial reporting standards olul U.S. competitirene . .,s con",'ideratiol1 . .,,': 

Both ofthese issues are covered in depth in the attached coalition document, Reasons Why The 

Liti) Method Should Not Be Repealed In The Context (JfBusiness T(LT RcjiJrm, but both warrant a 

brief mention in this statement. 

First, for the last several years the Securities and Exchange Commission (SEC) has been 

considering the adoption in the U.S. of the International Financial Reporting Standards ([FRS), 

which do not permit thc use of UFO. Companies may only usc UFO for federal income tax 

purposes if they use UFO for financial reporting purposes (the "UFO conformity rule"). 

Accordingly, if the use of IFRS were to be required for SEC registrants, those companies may be 

barred from continuing to use the LIFO inventory method for federal income tax purposes. 

Thus, the argument was made tbat the UFO method may well be eliminated as a practical matter 

in the near future and Congress should take action before this happens in order to take credit for 

the revenue gain that would result trom the repeal of the UFO inventory method. 

However, a move by the SEC to adopt IFRS is not imminent, as was made clear in the July 13, 

2012 Staff Report on the subject released by the SEC. Further, it is equally clear from the Report 

that the Commission is unlikely to fully adopt IFRS even if they move in that direction; rather, 

they are morc likely to incorporate IFRS into U.S. GAAP with FASB retaining an active role in 

the standard setting process. Under such an endorsement process, local deviations from IFRS, such 

as the use of LIFO, could be accommodated. 

The Staff Report speciflcally notes that LIFO usage is one of several "fundamental differences" 

between IFRS and U.S. GAAP, concluding that "In some cases. the resolution qlthe ..... ·e differences 

j-vil/ he individuully challenging (e.g., removal (d; or an_v chunKe to, LIFO), and all.'F attempt by the 

SEC or others to resolre these differences in a time period even as long as five to seven years m(~r 

prove to be difficult." S~C Work Plan for the Consideration of incorporating international Financial 

Reporting Standard\' into the Financial Reporting '~.I'stemf()r U.s. issuers Final Stq/.T Report at 14. 

Second, repeal of LIFO, especially in the context ofa tax reform initiative to increase the 

competitiveness of U.S. Corporations, simply makes no sense. Since only U.S. companies use I ,lPO, 

it is one of the very few provisions oflLS. tax la\v that gives companies that use it a competitive 

advantage against their foreign competitors. Tbi5 is of great significance 11mv with the U.S. 

corporak tax rate the highest among industrialized economics; and even if broad-based tax reform is 

enacted in the U.S, in the near term, it is highly unlikeJy that our business tax rate wii! be reduced to 

a rate lower than that of most of our competitors. 

[n light of the fact that the UFO inventory method: (i) allows U.S.-based companies to better 

compete against foreign-based companies that are generally subject to lower efTective tax rates, 

and (ii) is consistent with the United States' international trade obligations, it is essential that the 

UFO inventory method be retained in the tax code, regardless of any tax reform effort. 

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CONCLUSION 

UFO is a 70-year-old, long-accepted inventory accounting metllOd which, just like Rrst-in, firstout (FIFO), allows a company to most closely match cost of goods sold with cost of purchasing 

replacement inventory to allow the company to stay in business. LIFO is neither a tax 

expenditure nor a tax preference under any rational delinition of those terms. Repeal of the 

LIFO method would be an wlpreccdented retroactive tax increase that would cause economic 

harm, cost jobs, and put a significant number of companies out of business. The members of the 

UFO Coalition strongly urge the members of the Ways and Means Committee not to consider 

rcpeal orthc LIFO method in lax reform legislation. 

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THE LIF 

OALITION 

1325 G Street N. W., Suite 1000, Washington, DC 20005 • TEL: 202·872·0885 

Alabama Grocers Association 

American Apparel & Footwear Association 

American Chemistry Council 

American Forest & Paper Association 

American Fuel and Petrochemical Manufacturers 

American Gas Association 

American International Automobile Dealers 

Association 

American Petroleum Institute 

American Road & Transportation Builders 

Association 

American Supply Association 

American Veterinary Distributors Association 

American Watch Association 

American Wholesale Marketers Association 

Americans for Tax Reform 

AMT-The Association for Manufacturing 

Technology 

Associated Equipment Distributors 

Association for High Technology Distribution 

Association for Hose & Accessories Distribution 

Association of Equipment Manufacturers 

Automobile Dealers Association of Alabama 

Automotive Aftermarket Industry Association 

Brown Forman Corporation 

Business Roundtable 

Business Solutions Association 

California Independent Grocers Association 

Caterpillar Inc 

Ceramic Tile Distributors Association 

Connecticut Food Association 

Copper & Brass Servicenter Association 

Deep South Equipment Dealers Association 

Deere & Company 

East Central Ohio Food Dealers Association 

Equipment Marketing & Distribution Association 

Far West Equipment Dealers Association 

·9-

Farm Equipment Manufacturers Association 

Financial Executives International 

Food Industry Alliance of New York State 

Food Marketing Institute 

Forging Industry Association 

Gases and Welding Distributors Association 

Greater Boston Chamber of Commerce 

Healthcare Distribution Management Association 

Heating, Airconditioning & Refrigeration 

Distributor. International 

Illinois Food Retailers Association 

Independent Lubricant Manufacturers 

Association 

Industrial Fasteners Institute 

Industrial Supply Association 

International Foodservice Distributors 

Association 

International Franchise Association 

International Sanitary Supply Association 

International Sealing Distribution Association 

International Wood Products Association 

Iowa Grocers Industry Association 

Iowa Nebraska Equipment Dealers Association 

Jewelers of America 

Kansas Food Dealers Association 

Kentucky Association of Convenience Stores 

Kentucky Grocers Association 

Louisiana Retailers Association 

Manitowoc Company Inc (The) 

Maryland Retailers Association 

MDU Resources Group 

Metals Service Center Institute 

Mid-America Equipment Retailers Association 

Midwest Equipment Dealer. Association 

Minnesota Grocers Association 

Minnesota-South Dakota Equipment Dealers 

Association 
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Missouri Grocers Association 

Missouri Retailers Association 

Montana Equipment Dealers Association 

Moss Adams LLP 

NAMM-The International Music Products 

Association 

National Association of Chemical Distributors 

National Association of Convenience Stores 

National Association of Electrical Distributors 

National Association of Manufacturers 

National Association of Shell Marketers 

National Association of Sign Supply Distributors 

National Association of Sporting Goods 

Wholesalers 

National Association of Wholesaler-Distributors 

National Auto Dealers Association 

National Beer Wholesalers Association 

National Electrlca! Manufacturers Association 

National Federation of Independent Business 

National Grocers Association 

National Lumber and Building Material Dealers 

Association 

National Paper Trade Alliance 

National Roofing Contractors Association 

National RV Dealers Association 

Nebraska Grocery Industry Association 

New Hampshire Grocers Association 

New Jersey Food Council 

North American Equipment Dealers Association 

North American Horticultural Supply Association 

North American Wholesale Lumber Association 

-10-

Ohio Grocers Association 

Ohio-Michigan Equipment Dealers Association 

Paperboard Packaging Council 

Pet Industry Distributors Association 

Petroleum Equipment Institute 

Power Transmission Distributors Association 

Printing Industries of America 

Professional Beauty Association 

Retail Grocers Association of Greater Kansas City 

Retail Industry Leaders Association 

Safety Equipment Distributors Association 

SBE Council 

Security Hardware Distributors Association 

Society of Independent Gasoline Marketers of 

America 

SouthEastern Equipment Dealers Association 

Southern Equipment Dealers Association 

SouthWestern Association 

Souvenir Wholesale Distributors Association 

SPI: The Plastics Industry Trade Association 

State Chamber of Oklahoma 

Textile Care Allied Trades Association 

Tire Industry Association 

U.S. Chamber of Commerce 

Washington Food Industry Association 

Wholesale Florist & Florist Supplier Association 

Wine & Spirits Wholesalers of America 

Wine Institute 

Wisconsin Grocers Association, Inc. 

Wood Machinery Manufacturers of America 
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THE LIFO COALITION 

1325 G Street N.W., Suite 1000, Washington, DC 20005 • TEL: 202·872·0885 

March 2011 

(updated July 2012) 

THE ADMINISTRATION'S LIFO REPEAL PROPOSAL: 

HISTORICALLY UNPRECEDENTED RETROACTIVITY 

A Brief Background on LI FO. 

LIFO is an accounting method lIsed by businesses which maintain inventory to 

clearly determine both "book" income and tax liability and has been an accepted and 

established accounting method in the United States for 70 years. LIFO and FIFO (tirst-in. lirstout) in fact achieve the f:,alTIC purpose: most closely matching cost or goods sold with cost of 

purchasing replacement inventory. UFO is used extensiwly by both publicly-traded and 

privately-held companic~~ manufacturers, extractive industries, wholesaler-distributors, retailers, 

newspapers, automobile and equipment dealers, and a \vide range of other businesses. 

According to two separate recent studies, one by Georgia Institute of Technology and the other 

by the American Institute oC Certified Public Accountants, LIFO is used by behveen 36% and 

40% of businesses in every industry sector that maintains inventories. It is widely used by small 

businesses and is particularly impOltant to businesses which haye thin capitalization, small profit 

margins, and/or particular sensitivity to rising materials costs. Many of these companies have 

been on LIFO for decades, creating many years of LIFO reserves. 

The Repeal Proposals. 

The Obama Administration has continued to call j()r LIFO repeal in its annual Budget 

submissions to Congress, including the Fiscal Year 20 13 Budget. The Administration's proposal 

\vould not, however, simply prohibit the use of the method prospectively. Rather, it would 

require each I ,IFO taxpayer to take into income over a 10-year period the full amount of the 

ta,payer"s LIFO "reserve," \\'hieh. as will be discussed more fully behnv, is equivalent to the 

amount oral1 deductions of the taxpayer attributable to the UFO method ever since that method 

was first adopted by the taxpayer. In effect. therefore, it would retroactively r0pcal all of those 

deductions - in some cases deductions taken by the taxpayer as many as 50, 60 or 70 years ago. 

The extent ofthis retroactive Teach by the govemment appears to be unprecedented in the history 

of the Internul Revenue Code. 

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The FY 2013 proposal has been scored by the Joint Committee on Taxation as generating 

approximately $74 billion in revenue for the federal treasury over 10 years. What is often not 

understood, however, is that by far the most significant pOition of that revenue would come from 

the retroactive feature of the proposal just described. The adoption of that feature would be 

analogous to a repeal of the tax code's bonus and other accelerated depreciation provisions not 

only for future acquisitions of depreciable property, but also for all previous acquisitions for 

which tax savings had been enjoyed by the taxpayer under the provisions - i.e., the taxpayer 

would be required to pay back all of those t[LX savings retroactively. It is hard to imagine the 

Congress adopting an accelerated depreciation repeal so configured. 

The purpose of the discussion that follows is to attempt to describe the mechanism by which this 

retroactivity would come about under the LIFO proposal and how that retroactivity would result 

in excessi vely harsh ~ it is fair to say punitive ~ treatment of taxpayers during already 

challenging times. 

The LIFO "reserve" - What is it? 

The retroactive repeal of decades-old deductions referred to above would result Irom the 

proposal's requirement that a LIFO taxpayer's LIFO "reserve" must be "recaptured" under the 

terms of the proposal. An understanding of this result may be facilitated by an explanation of the 

concept of a LIFO "reserve." To begin, the value of the LIFO method to a tax paying company 

is that, in periods of rising prices sllch as those typically experienced since the LIFO method was 

included in the tax code more than 70 years ago, the method allows the company to assume that 

the inventOlY sold during any given year is the company's higher-priced inventory -the "last in" 

- rather than the company's lower-priced inventory - the "first in" - which the company would 

be required to assume had been sold during the year if the company were on the alternative FI FO 

method. The company therefore is typically permitted to take a higher deduction under LIFO 

during a given year for the cost of the goods sold by the company in that year than would be 

permissible under FIFO.] The "reserve" the company is required to establish -- which is not an 

actual accumulation of company lunds. but rather a figure the company is simply required to 

compute and record - represents the difference between these two deduction amounts. The 

company is required to add each year to the reserve the difference between the amount of its 

cost-or-goods-sold deduction under LIFO and the amount orthe deduction that would have been 

allowed to the company nnder FIFO. At any given time, therefore, the company's LIFO reserve 

is the cumulative amount over the years of these "incremental deductions" permissible under 

LIFO but not under FIFO. ' 

I A taxpayer's cost of goods sold as a technical matter is not actually a dcductit)Jl from gross income but 

is rather an ekment of gros., income that reduces the gross incom~ amount hdore adjustments and 

deductions are applied to that amount. Trcas. Reg. § 1,61-3. Since that cost operates in a manner similar 

to a deduction. however. and is often referred to in common parlance as a deduction. this pap~r will refer 

to it as sllch. 

2 It is worth repeating that there neither is nor ever H'as any cash in a company's LIFO reserve. The tax 

savings the company received were invested back into the company to purchase replacement inventory, 

thus contributing to economic growth and job creation. With no actual cash in the reserve, repeal of LIFO 

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~'Recapture" of the reserve - \-Vh" it amounts to unprecedented retroHctiyitv. 

A significant feature of the reserve requirement is that it provides a mechanism for the 

"recapture" - or the taking into income - by the taxpayer of the amount of the reserve in certain 

detined circumstances. \Vhen the reserve is taken into income. this has the effect of undoing, or 

retroactively repealing, the deductions that were responsible for the build-up of the reserve. The 

deductions that are repealed are, as noted, the amount by which the deductions allowed the 

taxpayer under LIFO exceed those that would have been allowed under FIFO. Recapturing the 

reserve effectively puts the taxpayer in Ule same position as irthe taxpayer had been on FIFO all 

along and had never had the tax benefits of LIFO accounting. 

The tax code currently provides that a taxpayer's LIFO reserve will be totally recaptured only 

under certain conditions. Principal among these is when the company undergoes a complete 

liquidation of its assets, including its inventories. LIFO taxpayers have long been aware that the 

very significant consequences of recapture would he triggered by any such action by the 

company. Taxpayers have not operated on the assumption, however, that such consequences 

would be triggered by an act oflaw, and that all of the deductions associated with their use of the 

LIFO method over the life of the company would be retroactively repealed by such legislation. 

Yet the Administration's proposal to recapture existing LIFO reserves over a lO-year time frame 

would produce just such a repeal. The taxpayers would be treated as if they had been on FIFO 

all along and would be deprived retroactively of all the tax benettts they had receivedsometimes over the course of many decades - from their use of LIFO accounting. 

Moreover, they would be required to pay back those tax benetits at a time when they have 

generated no cash to enable them to do so. While a company's liquidation of its inventories and 

other assets under current law typically can be expected to produce Sll bstantial amounts of cash 

with which to pay the resulting LIFO recapture tax bill, the proposed repeal "ill generate no cash 

whatever. Alfected taxpayers, accordingly, will be forced to borrow very large sums oemoney, 

if indeed they can obtain such linaneing at all. The impaet of such a signiticant and retroactive 

tax increase on economic recovery and job creation cannot be overstated. 

~etr()~ctiyityw.o~.ld .. "e .. e.!.trel1lelyu.l1fa!r .".11.<1. gxtrel1leIY.ll .• r~ll.!() .. ajTecte<lcQI1l"".I1ie~., 

The proposal is wlfair beeause it departs so dramatically tram the taxpayer expectations just 

described. As noted, existing law has long provided that reserves will be recaptured only under 

certain conditions, and it is now proposed to require recapture even in the absence of those 

conditions. The harshness of the proposal results from the magnitude of the reserves involved. 

\vmJid require affected companies to find or borrow the funds to pay the recapturc tax. With 36- 40 % of 

U.S companies using LIFO, the resulting huge demand for credit to pay recapture taxes would in many 

circumstances have a dHl11aging impact on credit availability and interest rates. A seriously adverse 

macroeconomic impacl could also be expected, since inailable credit resources \vould be tapped not to 

help create jobs and grow the economy, but 10 transfer funds in payment ofretroaclive taxes. 

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Because the LIFO method has been authorized for more than 70 years, many companies have 

accumulated extraordinarily large reserves over time. In many cases these reserves are greater 

than the net wortb oftbe company. The tax liability associated with taking those reserves into 

income, even over a IO-year period~ would severely harm large numbers of businesses and would 

render many of them insolvent. Enacting the legislation in the midst of the nation's current 

adverse economic circumstances no doubt would add to the disruption by creating a serious 

chilling elTect on competitiveness andjob creation at a fragile time.] While the Administration's 

proposal would not trigger recapture until 20 14, the prospect of these very large tax liabilities for 

affected companies inevitably would reduce available credit and investment capital for these 

companies immediately upon enactment of the proposal. 

Conclusion. 

For the reasons discussed, the Administration's and other similarly configured proposals to 

repeal LIFO should be strongly opposed. This discussion has focused solely on the problems 

associated with the retroactive effect of the Administration's proposal, which is perhaps tbat 

proposal's most undesirable feature. The proposal should be rejected, however, for other reasons 

as well. LIFO is an accepted and longstanding accounting method that remains as conceptually 

sound as it was when it was first approved by the COnb'fess. There would be no justification for 

repealing the method, especially in the CUlTent ecollomic and employment circumstances, even if 

the repeal were prospective only. The tact that the proposed repeal involves a degree of 

retroactivity not seen elsewhere in the tax code, however, provides sufficient reason by itself to 

reject the proposal. 

3 For thinly capitalized closely-held companies, the requirement to recapture a company's LIFO rC5.crvc 

\voldd probably exhaust all working capital and, notwithstanding a I O-ycar spread oflhe tax on recapture, 

\volild prevent bank borrowing and might f0fCe insolvency and shut down of the company, thereby 

eliminating jobs. 

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THE LIFO COALITION 1325 G St.reet N.W., Suite 1000, Washingt.on, DC 20005 • TEl.; 202-1l72-00115 

March 2011 

(updated July 2012) 

REASONS WHY THE LIFO METHOD SHOULD NOT BE 

REPEALED IN THE CONTEXT OF BUSINESS TAX REFORM 

L Background 

The LIFO Coalition has previously provided its views on why the Llro inventory 

method. presently contained in section 472 of the Internal Revenue Code, is a proper method of 

accounting and should not be repealed as pat1 of any genera! defkit reduction errort. These 

views were provided in connection with proposals by members of1he Senate Finance Committee 

to repeal the LIFO inventory method in 2006 and in response to proposals by the Obama 

Administration to repeal the LIFO inventory method as part of the Administration's budget 

proposals [or Fiscal Years 2010-2013. The LIFO Coalition also provided its views on the 

propriety of the LIFO inventory method in the contcxt of deliberations concerning possible tax 

reform by the President's Economic Recovery Adyisory Board and the President's Deficit 

Reduction Commission. 

Tax refonn is increasingly pati of the ta:\. debate today: it was actively discussed during 

the deliberations of the "Super Committee" in 201 !, a number ofproposa!s are being drafted by 

Members of Congress, Congressional tax-\\riting committees are conducting hearings 011 various 

aspects ofrelorm, and consideration ofhroad-based reConn is certain to be a major issue facing 

the JJ3th Congress next year. In this context, the theme that has heen discussed by the Obama 

Administration and some members of Congress is that business tax expenditures should be 

curtailed in exchange for a reduction in the business income tax rates in an efTort to broaden the 

tax base and promote tax reform in a revenue neutral environment. 

It is important to note that while the President and some in Congress \\-'ere originally 

discussing reform only of corporate taxes. Subchapter S corporations and other pass-through 

business entities pay tax.es at individual and not (':orponltc rates. Refonning the corporate tax 

code while leaving individlwl rates unchanged would have dire consequences tor the 

approximately 30 million Subchapter S corporations, as will be addressed later in this document. 

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Since the LIFO inventory method is characterized as a tax expenditure in the list of tax 

expenditures prepared annually by the staff of the Joint Committee on Taxation ("JCT staff"), 

the propriety of retaining the LIFO inventory method in the Internal Revenue Code could well be 

considered in the context of comprehensive tax reform. However, in contrast to prior 

consideration of this subject, in the present circumstances, the use of the LIFO inventory method 

is not being singled out for possible elimination, but instead, the possible repeal of the LIFO 

inventor} method is being considered together with other tax provisions that are included in the 

JCT starr list of tax expenditures relating to businesses. 

It is the position of the LIFO Coalition that the LIFO inventory method should not be 

classified as a tax expenditure and should not be eliminated from the Internal Revenue Code 

either as part of any defleit reduction effort or in exchange ror a reduction in income tax rates as 

part of a revenue neutral tax reform program. While the UFO Coalition takes no position on the 

desirability oftax reform generally, the Coalition submits that the elimination of the use of the 

LIFO inventory method for federal income tax purposes, whether or not in the context of a tax 

reform effort that entails broadening the business tax base in exchange for a reduction in ta" 

rates, would be extremely·· in many cases irreversibly··· damaging to users of the LIFO 

inventory method and calise lasting damage to the economy and job creation in the United States. 

The reasons for the LIFO Coalition's position are set forth below. 

II. Summary of Reasons for Opposition to Repeal of the LIFO Inventory Method in the 

Context of Corporate Tax Reform 

1. lftax expenditures are going to be the main category of provisions that will be 

considered as ofisets for reductions in business tax rates in the context of tax reform, the system 

of classifying tax provisions as tax expenditures needs to be reviewed and drastically revised. 

The present criteria for including pmticular tax provisions in the annual list of tax expenditures 

reponed by JCT staff m'e neither logical nor internally consistent. 

2. Whatever criteria are ultimately adopted for classifying tax provisions in the 

lnternal Revenue Code as tax expenditures, the LIFO inventory method should not be classitied 

as a tax expenditure. The LIFO inventory method is not a tax expenditure; it differs significantly 

from the other provisions now classitled as tax expenditures in the JeT staffs annual list of tax 

expenditures. 

3. The overwhelming majority of the revenue that would result Irom the repeal of 

the LIFO inventory method comes from the recovery of income taxes that were deferred in 

taxable years prior to the eflective date of any repeal of the UFO inwntory method. 

Accordingly, in contrast to other tax expenditures that might be eliminated with prospective 

effect, the repeal ofthe UFO invontolY method would single out users of the LIFO inventory 

method for a unique retroactive increase in taxes. 

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4. Future tax rate reductions would in no \'lay compensate companies for the 

damaging effects to their capital base resulting from the recapture of LfFO reserves into taxable 

income as a result of repeal of the LIFO inventory method. In addition, the damage to 

companies' capital base would not be eliminated by the allowance of an amortization period to 

recapture deferred taxes resulting from the repeal of the LIFO inventory method. 

5. A majority of the businesses using the UFO inventory method are smaller 

companies organized in the rOml of pass-through entities, such as partnerships or S corporations. 

The real owners of these entities are taxed at individual tax rates. Accordingly, any reduction in 

corporate income tax rates that might accompany a repeal of the LlFO inventory method and 

other tax expenditures employed by both non-corporate and corporate taxpayers would not 

provide any offsetting relief for pass-through entities. Should this option be pursued, the 

consequences for the small business community would be more devastating than any other 

alternative yet proposed. 

6. Once companies' UFO reserves arc lully recovered through amortization into 

taxable income by reason or the repeal of the LIFO inventory method, the ongoing annual 

revenue savings Ii-om the elimination of the LIFO inventory method would not be significant. 

Thus, in contrast to other provisions listed as tax expenditures by JCT stall; the repeal of the 

LIFO inventory method represents primarily a "one-shot" boost to federal revenues and would 

not pay for business tax rate reductions in taxable years outside the budget horizon. 

7. Some commentators have mentioned that the LIFO inventory method may be 

repealed in the near future without Congressional action because of the forthcoming adoption of 

International Financial Reporting Standards ("I FRS") in the U.S. IFRS does not recognize the 

LIFO inventory method and taxpayers using the LIFO inventory method for federal income tax 

purposes must usc that same method for financial reporting purposes, which would not be 

permissible if IFRS were adopted in the U.S. However, the SEC Staff Report on IFRS released 

in July. 2012 makes it clear that convergence will not occur in the near term, if at all, as the 

timetable for an SEC decision has been indelinitely postponed. The Statr Report also makes 

clear that if convergence were to occur. it \vould most likely occur in a way that does not result 

in the elimination of tlle LIFO method for financial reporting purposes, thus avoiding a conflict 

between lFRS and the LIFO conformity requirement in sections 472(c) and (e) of the Internal 

RC\cIlue Code. 

8. Repeal of the LIFO inventory method will harm U.S.-based companies and 

benetit their foreign competitors. Since, as noted above, U.S. accounting standards ("U.S. 

GAAP") pennit the use of the UFO inventory method, but international accounting standards 

("I FRS") do not permit the use of the LIFO inventory method, at present only U.S.-based 

companies are able to use the LIFO inventory method. As a result, if the LIFO inventory method 

is repealed, this action would raise taxes on U.S. companies, but not their [orcign competitors. A 

compelling reason in support of retaining the LIFO inventory method is that it is one orthe few 

tax incentives that enhances the competitiveness of U.S.-based companies in the global 

marketplace without violating the United States' international trade obligations. 

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Each of these points is discussed in detail below. 

III. Detailed Reasons for Opposing the Repeal of the LIFO Inventory Method 

1. The Present System for Classifying Tax Expenditures by JCT is Not Logical, 

Uniform or Fair 

Section 3(3) orthe Congressional Budget and Impoundment Control Act of 1974 (the 

"1974 Budget Act") defines "tax expenditures" as: 

[T]hose revenue losses attributable to provisions of the Federal tax laws which 

aI1mv a special exclusion, exemption, or deduction from gross income or which 

provide a special credit, a preferential rate of tax, or a deferral of tax liability 

Pub. L. No. 93-344, 93d Cong., 2d Sess., § 202(d) (1974). 

The legislative history orthe 1974 Budget Act further provides: 

The term 'tax expenditures' means those Federal revenue losses aHTibutable to 

provisions of the Federal tax laws \vhich allow a special exclusion, exemption, or 

deduction from the taxpayer's gross income, or which provide a special credit, a 

preferential rate of tax, or a deferral of tax liability representing a deviation from 

the normal tax structure for individuals and corporations. 

S. Rep. No. 93-688, 93d Cong., 2d Sess. reported in 1974 U.S.C. Congressional & 

Administrative News 3504, 3532 (1974). 

However, nowhere in the statute or legislative history of the 1974 Budget Act is there any 

description of what constitutes the "nonnal structure" of a tax law. There is no unilorm 

definition of a "normal" income tax, so that deviations from such norm may be identified as tax 

expenditures. What is a special deduction, credit or preference may vary from one country's tax 

laws to the next. Thus, there is 110 consensus as to what constitutes a tax expenditure. 

This conclusion is conllnned by the following acknowledgement from a 20 I 0 publication 

of the Olliee of Management and Budget: 

A tax expenditure is an exception to baseline provisions of the tax 

structure that usually results in a reduction in the amount of tax owed. The 1974 

Congressional Budget Act, which mandated the tax expenditure budget, did not 

specify the baseline provisions of the tax law. As noted previously, deciding 

whether provisions are exceptions, therefore, is a matter of judgment. 

OMB, Analvtical Pcrspecrives. Budget (~f the US Government. Fiscal Year 2010, at 298 (2010). 

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The LIFO inventory method is a perfect example of the imprecise nature of the concept 

of tax expenditures. While the UFO inventory method bas been part of the Internal Revenue 

Code since 1939. for over 33 years following the enactment of the 1974 Budget Act, the LIFO 

inventory method was not classified as a tax expenditure by JCT staff. 

However, in 2008, the JCT staff performed a reexamination of the criteria for dctining 

tax expenditures and JCT stalf issued a revision to its criteria. See stalT of the Joint Committee 

on Taxation, A Reconsideration o{Tax Expenditure Analysis (JCX·37·08) (May 12.2008). As a 

result of this reconsideration, JCT staff began classifying the LIFO inventory method as a tax 

expenditure starting with the 2008 taxable year. Staff of the Joint Committee on Taxation, 

t;stimales a/Federal Tax Erpendilures/or Fiscal Years 2008·2012,21 (Oct. 31, 201l8). 

The JCT staffs reexamination of the concept of tax expenditures in 2008 was not 

prompted by any change in the j 974 Budget Act. Instead. as pmi of this reexamination, the JCT 

stalf on its own initiative simply invented a new class of tax expenditures that .JCT stalflabc1ed 

'·Tax·lnduced Su'uctural Distortions." The JCT staff then included the LIFO inventory method 

in this new class of tax expenditures. The actions ofJCT stalno include the LIFO inventory 

method in this new class of tax expenditures has had the effect of raising the prolile of the UFO 

inventory method and making it appear that this long·accepted method of inventory accounting 

that is permissible for GAAP is suddenly an exception from a '''normal'' income ta."'( law. 

The foregoing invention by JCT staff of a new category of tax expenditures and the 

inclusion of the UFO inventory method in such category of tax expenditures is surprising for 

several reasons. First, the Ollice of Management and Budget (OMB) publishes its own list of tax 

expenditures and the estimated revenue effects reSlllling from the inclusion of such provisions in 

the income tax laws. However, the OMB has not classitied the UFO inventory method as a tax 

expenditure either prior to 2008 or subsequent thereto, even though the JCT stalf now includes 

the LIFO inventory method in its list of tax expenditures. See Omce of Mmlagement and 

Budget, Analytical Perspecti,·es. Budget of the u.s. Government. Fiscal Yellr 2013. This 

inconsistency in classification between two branches of government is particularly significant 

considering that the OMB under the Obmma Administration has proposed that Congress repeal 

the UFO invcntory method. Thus, even though the Obama Administration favors the repeal of 

the LIFO method, the Obama Administration docs not classily the UFO inventory method as a 

tax expenditure. 

Second, in conducting its reexamination of tax expenditures, JeT staff was mindful of the 

criticism that would be attached to any effort to redefine tax expenditures in a way that was 

considered politically motivated. In this regard, JCT statf noted in its initial implementation of 

new criteria for defining tax expenditures: 

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The concept of a normal tax baseline as the underpinning of tax 

expenditure analysis has evoked serious and continuous criticism, however, since 

its introduction in the late 1960s. Numerous tax academics and policy experts 

have rightly observed that the ideal "normal" tax system does not correspond to 

any generally accepted formal delinition of net income. Instead, many observers 

view tax expenditure analysis, in the form envisioned by Stanley Surrey, as a 

thinly veiled agenda lor a specific tonn of tax reiorm. Under this view, the 

nomlative tax system is not simply an analytical tool but is also an aspirational 

goal of the political process. 

Tax expenditure analysis cannot serve as an effective and neutral 

analytical tool ifthe premise of the analysis (the validity of the "nonnal" tax 

base) is not universally accepted. The "normal" {ax is admittedly a commonsense 

extension (and cleansing) of current tax policies, and not a rigorolls fraITIc\vork 

developed from tirst principles. As a result, the normal tax cannot be defended 

from criticism as a series of ultimately subjective or pragmatic choices, and its 

use as a baseline has diminished the utility of tax expenditure analysis. 

Staff of the Joint Committee on Taxation, Estimates ojFedaal Tax Expelldituresjor Fiscal 

Years 2008-2IJIJ, 5 (Oct. 31, 2008). 

Notwithstanding its own admonitions to the cOlmary, the JCT staff embarked on what 

can only be perceived as a politically-motivated endeavor to create a new category of tax 

expenditures that it labeled '"Tax-Induced Structural Distortions:' JCT stalT delines '"TaxInduced Structural Distortions" as follows: 

ld. at 7. 

Tax-Induced Structural Distortions are structural elements of the Internal 

Revenue Code (not deviations from any clearly identitiable general tax lUle and 

thus not Tax Subsidies) that materially affect economic decisions in a manner 

that imposes substantial economic efficiency costs. 

The foregoing definition of a new category of tax expenditure bears no relationship to the 

dellnition of a tax expenditure contained in the 1974 Budget Act. The JCT staff makes no effort 

to reconcile its definition of tax expenditures with the delinition in the 1974 Budget Act. Any 

doubts as to JeT stafT's motivations for adding this new category of tax expenditures arc 

reinforced by JCT staWs decision to include the lower of cost or market inventory method in this 

new category of tax expenditures at the same time that it added the LIFO inventory method to 

the list of tax expenditures. 

The specific detinition of"tax expenditures" in the 1974 Budget Act clearly requires that 

in order to be classified as a "tax expenditure:' a tax provision mllst be reflected in a special 

provision in the tax statutes. However, the lower of cost or market inventory method has never 

been prescribed by statute. Thus, the inclusion oflhe lower of cost or market inventory valuation 

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method in the JeT staffs list of tax expenditures is clearly inconsistent with the express terms of 

the 1974 Budget Act~ which limits tax expenditures to provisions in a tax statute, not in income 

tax regulations. 

11,e history of the lower of cost or market method is thatthe tax law in Code section 471, 

and its predecessors, dating back to 1918, simply contains a general authorization to the 

Secretary of Treasury to promulgate regulations stipulating which generally accepted inventory 

methods will be acceptable for federal income tax purposes. In 1918, the Treasury aCled on this 

authorization to issue regulations accepting the use oftlle lower of cost or market method for 

federal income tax purposes. Moreover, apart from the fact tha1 the lower of cost or market 

method is not a creature of statute, such method is part of the foundation of GAAP and has been 

an accepted method for federal income tax purposes for over 90 years. Such method was not 

classified as a tax expenditure by the JCT staff for over 33 years following the enactment of the 

1974 Budget Act. However, in 2008, the lower of cost or market method suddenly appeared in 

JeT's annual list of tax expenditures. 

JCT staffs analysis of tax expenditures is rife with such inconsistencies. While the lower 

of cost or market method, which is not even specifically authorized by statute, is classified by 

JCT statT as a tax expenditure, special stalUIOI)' provisions such as the allowance of a reserve for 

inventOlY shrinkage in section 471 (b) of the Code, the amOliization of goodwill in section 197 of 

the Code and the amortization or business organizational expenses in section 248 of the Code are 

not classified as tax expenditures by .reT statt: 

Moreover, if Congress had intended the definition of tax expenditures in the 1974 Budget 

Act to include methods of accounting that are authorized by regulation or other administrative 

action of the Treasury Department, rather than expressly by statute, then why hasn't JeT staff 

classified the progressive or rolling average inventOlY costing method permitted in Rev. Proc. 

2008-43,2008-2 C.B, 186, and the replacement cost method pennitted in Rev. Proc. 2002-17, 

2002-1 CB. 676, and Rev, I'roc.1006-14, 2006-1 C.B. 350, as tax expenditures? Why isn't the 

retail inventory method authorized in Treas. Reg. !i 1.471-8 c1assit1ed as a tax expenditure? Why 

aren't all ofthe special inventory costing methods contained in the regulations under section 

263A of the Code classitied as tax expenditures') 

The point of this exercise is not to cast aspersions on any of these other special methods 

of accounting [or inventories, but rather to highlight the [act that a "normal" income tax law may 

accommodate a wide variation in accounting and inventory methods. What is special, Of an 

exception from the norm, is an extremely vague standard. About the only conclusion one could 

draw ti-OJll examining JeT statTs list of tax expenditures is that methods of accounting seem to 

be included in, or excluded ti-om, thc list of tax expenditures depending on the whim of JCT 

staft: rather than on the basis of a logical and consistent standard. In fact, an objective analysis 

of JCT staffs list of tax expenditures might lead an observer to conclude that whether a method 

of accounting is singled out for inclusion in JeT staff's list of tax expenditures depends more on 

whether the method is in or out offavor with JCT staff, rather than on the nature of the method 

itself. 

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In conclusion, if Congress is going to use JeT staffs list of tax expenditures as the 

starting point in looking for offsets to pay for a reduction in business tax rates, Congress needs to 

reevaluate the criteria being used by JeT statlto determine what provisions are and are not 

classified as tax expenditures, 

2. Under Any Rational Classilication System, the LIFO Method Should Not be 

Classified as a Tax Expenditure 

If the criteria for classifying provisions in the federal income tax law as tax expenditures 

are developed in an objective and logical way, the UFO inventory method would surely be 

excluded from classification as a tax expenditure. Under any type of rational income tax 

system, a reasonable method for distinguishing between merchandise that is sold and 

merchandise that remains in ending inventory would be absolutely indispensible. Moreover. a 

system for assigning costs to merchandise that is sold and to the merchandise that remains in 

ending inventory would also be essential. 

One could argue that the "norm" for an income tax statute ought to be based on the 

specific identification and actual cost of the merchandisc in ending inventory and the specific 

identification and actual cost of the merchandise that is sold, thus rendering any methods that 

deviate from such norm as tax expenditures. However, use of the specitic identification method 

to identity merchandise in ending inventory or the tracking of the actual cost of merchandise in 

ending inventory are not possible in most cases. Most merchandise within a product category is 

homogenolls in nature and tracking the actual cost of such merchandise is not feasible. 

Accordingly, any rational income tax system mllst permit the use of cost flow assumptions. 

Moreover, sllch cost flow assumptions need to be adaptable to accommodate the software 

systems commonly in usc under modern computer technology. 

There are presently in llse for federal income tax purposes four different cost flow 

assumptions aparl from the specific identification method: (1) the first-in, first-out method or 

"FIFO": (2) the last-in. first-out method or "UFO"; (3) the average cost method; and (4) the 

replacement coslmethod. Each ofthesc methods reflects a reasonable, but significantly 

difTerent, cost flow assumption. When prices of merchandise are rising, the UFO method, 

followed by the replacement cost method, produces the largest cost of goods sold and the lowest 

amount oftaxahle income of the fOllr methods. In contrast, when prices of merchandise are 

declining, the FIFO method, followed by the average cost method, produces the largest cost of 

goods sold and the lowest amount of taxable income of the four methods. When prices of 

merchandise are relatively stable, all four methods yield approximately the same result. 

Nevertheless, while all four cost flow assumptions are now penmitted for tax purposes, only the 

UFO inventory method is singled out for inclusion in JeT staWs list of tax expenditures. 

Moreover, for totally inexplicable reasons, the specific identification method for homogeneous 

merchandise is also listed as a tax expenditure, albeit with minimum revenue loss associated with 

such method. 

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In a 20 I 0 smdy conducted bv the Congressional Research Service (CRS) and published 

by the Senate Budget Committee, CRS offered several reasons for the inclusion of the LIFO 

inventory method in .ICT staff's list of tax expenditures. See S. Rep. No. 111-58, TAX 

EXPENDITURES Compendium of Background Matcrial on Individual Provisions, prcpared by 

Congressional Research Service, III ,h Cong., 2d Sess. 517-19 (Dec. 2010). In most respects, 

these reasons mirror those offered in JCT staft's initial classification of the LIFO inventory 

method as a tax expenditure in staff of the Joint Committee on Taxation, Estimates a/Federal 

Tax Eypenditures/or Fiscal Years 2008-2012, 21 (Ocl. 31, 2008). 

First, CRS nOles that while the specific identification mcthod would be the 110nn for 

valuing inventory (while ignoring the fact that this method is listed as a tax expenditure), due to 

its impracticality in the case of homogeneous merchandise, CRS asserts that the FIFO inventory 

method should be considered the norm based on the expectation that companies would sell their 

oldest merchandise first. Second, CRS contends that all of the cost !low assumptions pennit 

taxpayers to reduce their tax burden for the difference between the sales price and cost of the 

merchandise, but the FIFO inventory method comes closest to valuing inventory at its market 

value, whereas the UFO inventory method permits inventory to be valued at a level below its 

market value. Finally, CRS asserts that the use of the UFO inventory method facilitates tax 

planning opportunities that are not available to taxpayers using the FIFO inventory method. As 

examples, the CRS suggests that Ilrms expecting a high tax liability may be able to purchase 

additional inventory at year end to increase costs and reduce taxable income, whereas firms 

expecting losses may reduce taxable income by shrinking inventory. 

111e reasons offered by the CRS arc completely invalid and in some instances 

demonstrate a complete lack of understanding of how the inventory rules in general and the 

UFO inventory method in particular operate. For example, the first reason that CRS offers to 

support the classification of the UFO inventory method as a tax expenditure is that the method 

does not mirror Ille expccted pattern of sales of merchandise by companies. However, in IllC 

case ofhol11ogeneow; merchandise, there is no evidence that companies necessarily sell their 

oldest merchandise tlrst. Moreover, the CRS' reasoning is internally inconsistent, as the CRS 

notes in its own study that '"[a]llowing specific idcntiJication permits lirnls to select higher COSl 

items and minimize taxable income:' 

The second reason that CRS offers as support for treating Il,e UFO inventOlY melllOd as 

a tax expenditure is that the FIFO inventory method comes closest to valuing inventory at its fair 

market value, whereas the use of the UFO inventory method permits companies to value their 

inventory at below its fair market value. However, no inventory system values inventory at its 

market value except lor a "mark-to-market'· system, wch as is required by section 475 of the 

Code for securities dealers. Moreover, CRS cites nothing to SUppOlt its unstated premise that 

valuing inventOlY at market value is a desirable goaithat would be part of any normal income tax 

system. In fact, the "realization" concept, which is a cornerstone of the U.S. income tax system, 

is flatly inconsistent \v1th the concept of valuing inventory at its market value. Moreover, one 

should not confuse offering prices for merchandise with its fair market value. The fact that a 

company offers its merchandise for sale at a particular price does not insure that a customer will 

actually buy the merchandise at that selling price or at any other price at which the merchandise 

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is ofTered for sale. In fact, no one can say what is the fair market value of merchandise in 

inventory until someone actually buys the merchandise. 

The tinal reason that the CRS orfers for treating the UFO inventory method as a tax 

expenditure conllrms that the CRS does not understand how the LIFO inventory method 

operates. CRS suggests that companies expecting a high tax liability may purchase inventory at 

year end to lower their tax liability, whereas companies expecting losses can reduce their taxable 

income by shrinking inventOl)'. 

Taking CRS' llrst point, under any inventory system, the cost of purchases near year end 

that arc included in ending inventory offset each other and have a neutral effect on taxable 

income except where the additional purchases are valued at less than their cost. However, under 

the LIFO inventory method, purchases of merchandise at the end ofa taxable year are typically 

included in an increment in a taxpayer's LIFO inventory, which would be valued at the currentyear cost orthe purchased merchandise and thus would have no impact on taxable income, 

Alternatively, if decrement in UFO inventory would otherwise be expected, taxpayers would not 

purchase additional inventory to reduce taxable income, as CRS claims. Moreover, the tax la\v 

is replete wilh provisions and cOllrt decisions that prevent taxpayers from engaging in taxmotivated purchases of LIFO inventory to manipulate their income. Thus, the CRS' concems in 

this regard are totally misplaced. 

The main reason in support of the LTFO inventory method is that if a company is to 

remain a going concern, the company must replenish or replace the inventory that it sells. If 

prices of merchandise are increasing and a company must pay an income tax based on the 

historical cost of the merchandise that is sold, but must pay for replacement merchandise at its 

higher replacemellt cost, the capital ror such replenishment is eroded by the income tax that the 

company mllst pay on the inflationary increase in the cost of its inventory. Most merchants 

would not consider themselves enriched simply because they have the same quantity of 

i11vent01)' as in the previous year, but the inventory is now valued at a higher replacement cost. 

The LIFO method enables companies to finance the replacement of inventory that is sold by 

using the increased after-tax profit that results from employing the LIFO inventory method. 

The CRS responds to this argument with two criticisms, neither of which is persuasive. 

First, the CRS argues that the LIFO inventory method defers or excludes real gains Ii-om income, 

However, the CRS fails to explain or justity its definition of real gains. The CRS illustrates its 

contemion by focusing on the substantial increase in oil prices that occurred during the llrst half 

of2008. In fact, most observers would regard the increase in oil prices that occurred during the 

(irst half of2008 as a temporary aberration, in light orthe sharp drop in oil prices that occurred 

thereafter. The LI Fa method is designed to defer taxes on permanent increases in the 

replacement cost of merchandise that must be reinvested in a business in order for that business 

to remain a going concenl. Moreover, the LIFO inventory method is an annual system that 

measures the change in the price of merchandise from one year end to the next year end. 

Temporary fluctuations in prices of merchandise \vithin a year, such as the situation illustrated 

by CRS, have no real effect on companies' income tax liabilities when the LIFO inventory 

method is employed, 

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CRS' second argument against permitting the continued use of the LIFO inventory 

method is that the LIFO inventory method represents a form of indexation of inventories for 

inflation, a concept that CRS argues the federal income tax law does not pennit for any other 

type of property. However, the CRS overlooks the role that the allowance of accelerated 

depreciation and MACRS depreciation periods play in the case of depreciable plant and 

equipment. While the allowance of accelerated depreciation and shorter MACRS depreciation 

periods may not represent indexation in form for capital equipment, these methods produce the 

same overall effect as indexation for capital investment. See Viard, "Why UFO Repeal is not 

the Way to Go," TAX NOTES, 574 (Nov. 6, 2006). 

Most merchandising companies' two largest investments that are necessary to remain a 

going concenl are investment in plant and equipment and investment in inventory. Thus, it is 

appropriate to compare the tax treatment of these two investments. As Mr. Viard so eloquently 

explains in tile above-cited article, the LIfO method of valuing inventories and the allowance of 

accelerated depreciation for plant and equipment may be viewed as equivalent tax treatment in 

substance, ifnot in form, of these two major asset classes. 

In conclusion, the criticisms leveled at the UFO inventory method by CRS in its recent 

study are not valid and should be rejected when considering the subject of tax rcfonn. 

3. The Repeal of the LIFO Inventory Method Would Represent a Unique 

Retroactive Tax Increase on Companies Using the LIFO Method 

In marked contrast to the other provisions listed as tax expenditures in JeT staff's annual 

study, the repeal of the LIFO inventory method would have a retroactive effect on users that 

would be unique in the annals of tax reConn. Since any legislation to eliminate tax expenditures, 

including the LIfO inventory method, that might be enacted as an offset to lower income tax 

rates would undoubtedly have a prospective etTective date, one might question how this form of 

legislation could be retroactive in ellect insofar as the legislation might apply to the repeal of the 

LIFO inventory method. 

To answer this question requires a brief explanation of how the LIFO inventory method 

works. Each year that a company employs the LIFO inventory method lor federal income tax 

purposes, the taxpayer starts out by valuing the portion of its ending inventory equal in quantity 

to the quantity of merchandise in its beginning inventory at the original cost of the merchandise 

in beginning inventory. To the extent the quantity of merchandise in the ending inventory 

~xcecds the quantity of merchandise in the bcgimring inventory, that increase or increment in 

quantity of merchandise is valued at its current-year cost. Over time, the effect of this 

methodology is to value the ending inventory at the historical cost of the merchandise when 

additional quantities of merchandise were tirst added to the company's ending inventory. 

In addition to valuing its ending inventory under the LIFO inventory method, as 

described in the preceding paragraph, a company using the LIFO inventory method must also 

maintain a parallel record of what its inventOlY value would be each year if the company had 

used the FIFO inventory method. The cumulative difference between the value ofa company's 

inventory based on the LIFO inventory method and the FIFO inventory method is referred to as a 

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company's '"LIFO reserve." Thus, the LIFO reserve represents the cumulative reduction in a 

company's ending inventory (and hence taxable income) that resulted from the usc of the LIFO 

inventory method instead of tlle FIFO inventory method. 

However, the term '''LIFO reserve" is misleading in the sense that it does not represent 

actual funds set aside by a company to pay back the tax deferral reflected in the company's LIFO 

reserve, Instead, the LIFO reserve is merely a memorandum account that tracks the cumulative 

ditference between the value ofthe company's inventory using the LIFO and FIFO inventory 

methods. 

In the past. all of the legislative proposals to repeal the LIFO inventory method have 

included as a key feature the requirement that a company repay all of its cumulative prior tax 

savings from the use of the UFO inventory method by including the amount of its UFO reserve 

in taxable inconte when the use of the LIFO method is discontinued. Under some tax reform 

proposals, relief is provided in the form of an amortization of the amount of the recapture of the 

company's LIFO reserve over a period of years, such as 10 years. 

Thus, the etTect of the repeal of the LIFO inventory method would not be limited to the 

nlture lise of the LIFO inventory method, bllt companies would have to pay back all of the 

historical tax savings that they enjoyed tram the use of the LIFO method over the entire history 

ofthe company. As noted above, the LIFO inventory method has been part orthe federal 

income tax law since 1939, so that for some companies, the UFO reserve was built up over a 

period of more than 70 years. 

There is no other provision listed as a tax expenditure by JeT staff which, if repealed, 

would entail this type and degree ofretroactivity. For example, if the usc of accelerated 

depreciation and shOlter MACRS depreciation periods were repealed to offset a reduction in 

business income tax rates, no one would suggest that taxpayers repay the tax savings that they 

enjoyed in all prior years by virtue of having claimed depreciation deductions on productive 

property for federal income tax purposes that exceeded straight line depreciation over the 

physical useful life oCthe productive property. 

Moreover, it 15 unlikely that there is any other type of tax provision which could have the 

potential for this degree of retroactivity, The longest lived type of depreciable property has a 

MACRS depreciation period of39.5 years, whereas most property is depreciated over a much 

shorter life. In theory, a company's LIFO reserve could have been built up over 70 years. In 

practice, the lion's share of companies adopted the LIFO inventory method in the early 1970s, 

meaning that for the typical company the UFO reserve is at least 40 years old. 

Based on inflation over this length of time, the typical company's LIFO inventory is 

valued at less than half of its FIFO value and its LIFO reserve could easily exceed the company's 

net \vorth, The income tax liability associated with recapturing this amount of LIFO reserve into 

taxable income would severely harm most companies and potentially bankrupt many of them. 

As noted above, the savings represented by a company's LIFO reserve is not sitting in a liquid 

investment awaiting the repayment; instead, the savings is reinvested annually in the company's 

inventory. In this sense, a company's LIFO reserve is different from a depreciation n~serve that 

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retlects tax savings which companies are expected to set aside in order to be available to replace 

plant and equipment that becomes obsolete. The tax saving from a company's LIFO reserve has 

alrt:=ady been spent because the saving is continually reinvested in replacement inventory. 

ll1ese circumstances might calise an observer to wonder why anyone proposing the 

repeal of the LIFO inventory method would require the recapture ofa company's LIFO reserve. 

The answer to that question is: "That's where the money is." The overwhelming share of the 

revenue raised by the repeal orthe UFO inventory method resulls from the recapture 01 

companies' UFO reserves. As an offset to reduced business tax rates, ifs not w011h repealing 

the LIFO inventory method if such repeal is not accompanied by a recapture of companies' LIFO 

reserves. 

Therein lies the dilemma; the LIFO inventory method is the only tax expcnditnre listed 

by JCT stalftllat needs to be repealed retroactively in order to raise the type of money needed to 

tinanee a significant reduction in income tax rates. For that reason, tax refonners "rill not 

relinquish retroactivity as part ofthe proposed repeal of the UFO inventory method. but for that 

same reason, tax reform should not include the repeal of the LIFO inventory method. 

4. Neither a Reduction in Business Tax Rates, Nor Amortization of the 

Recapture of LIFO Reserves, Would Eliminate the Damaging Ell'ect of Recapture of a 

Company's LIFO Reserve 

The premise of proponents of the idea of repealing the uro inventory method as part of 

business tax reform is that the additional income triggered by the requirement to reeapture a 

company's LIFO reserve would be offset by the reduction in future income tax rates and the 

amortization of the recapture of the LIFO reserve oyer a period of years. Both of these premises 

do not withstand analysis. 

First, with respect to the offset for reduced business tax rates, as noted above, the size of 

a company's LIFO reserve, pmticularly if the company has used the LIrO inventory method for 

an extended period of time, is likely to dwarf the future tax savings resulting from the reduction 

in tax rates. If one multiplies the annual innation rate over the past several decades on a 

compounded basis by the amount of a company's inventory each year, it is not difficult to see 

how a company's cumulative LIFO reserve might exceed the company's entire taxable income 

for a taxable year, ifnot the company's entire net \vorth. No reallstic amount of rate reduction 

will signiticantly ameliorate the size of that additional tax burden. Thus, while the impact of the 

ongoing disallowance orthe LIFO method on future years' taxable income might be otfset by 

future tax rate reductions, the tax burden of recapture ofa company's entire LIFO reserve on top 

of the loss in the annual benctit from the LIFO inventory method cannot possibly be offset by 

future annual tax rate reductions. 

Second, the fact that a LIFO repeal proposal permits amortization of the amount of 

recapture of a company's Llro reserve will not materially ease the tax bW'den that accompanies 

the recapture ofa company's LIFO reserve. Apart trom the size of the typical company's LIFO 

reserve, the main reason why amortization would not materially ease a company's lax burden is 

because orthe way that the UFO inventory method operates. Companies using the UFO 

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inventory method do not expect to recapture their LIFO reserve, except as a result of transactions 

that generate cash to pay the resulting recapmre tax. 

The LIFO inventory method is designed to indefinitely defer the tax on any inflationary 

gain in the value of inventories that remains reinvested in replacement merchandise. As noted in 

the preceding section, as long as actual deflation does not occur, if a company's ending inventory 

equals or exceeds its beginning inventory in real quantity terms, a company's LIFO reserve will 

either increase in amount or remain steady and, accordingly, will not be recaptured into taxable 

income. 

Recapture ora company's LIFO reserve into taxable income ordinarily occurs only \vhen 

a company experiences a pennanent decline in the level of its inventories. tn such 

circumstances, cash is freed up from the sale of inventory that is not replenished, so that 

repayment of the prior tax savings from the use ofthe LIFO inventory method at such time is 

both logical and appropriate. 

In contrast, if a company must repay the tax savings from the prior use of the LIFO 

inventory method at a time when the company's inventory is not declining in real quantity terms, 

such as by reason orthe repeal of the LIFO inventory method, cash will not be readily available 

trom the sale of inventory to pay the increased tax burden caused by the recapture of LIFO 

reserves. In such circumstances, amortization over a period of years of the tax burden resulting 

from recapture of LIFO reserves is not a sufficient offset to enable a company to finance its 

increased tax burden because the tax savings from the prior use of the LIFO inventory method 

remain invested in the company's inventory in these circumstances. Thus, a company would be 

faced with the cholce of either shrinking its business or financlng lts i.nventory through additional 

borrO\vings, assuming that credit is available. 

Accordingly recapture ofa company's LIFO reserve in a setting where inventories are 

not rcduced is a recipe for disaster. Companies will be forced to either shrink in size or go out of 

business in order to pay the tax on the recapture of LIFO reserves. Business tax rate reductions 

and amOttization of the LIFO reserve recapture amount will not eliminate the significant 

additional tax burden placed on companies by the repeal ofthe LIFO inventory method. 

5. Many Companies Using The LIFO Inventory Method Do Not Operate In 

Corporate Form And Would Not Benefit If Only Corporate Tax Rate Reductions Are 

Considered To Offset The Repeal of The LIFO Inventory Method And Other Tax 

Expenditures Employed By Both Non-Corporate And Corporate Taxpayers 

The use of the LIFO inventory method is not restricted to large, publicly-held 

corporations; the method is available to all taxpayers with inventories. See S. Rep. No. 648, 76th 

Cong., I" Sess., 1939-2 C.B. 524, 528. Moreover, as the CRS notes in its study of tax 

expenditures, apart from its use in certain basic manufacturing industries such as petroleum, 

chemicals and metals, the LIFO inventory method is most prevalent in industries such as motor 

vehicles (i.e., dealers), food and beverage production and retailing, and general merchandise 

retailing. See S. Rep. No. III-58, TAX EXPENDITURES Compendium of Background 

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Material on Individual Provisions, prepared by Congressional Research Service, I I It" Cong" 2d 

Sess, 517, 518 (Dec, 2010), 

In fact, as the memhership of the UFO Coalition underscores, LIFO is used hy a far 

hroader range of businesses and industries tban CRS identified. (A copy of the membership list 

of the Coalition is appended to this document.) According to two separate recent studies, one by 

Georgia Institute of Technology and the other by the American Institute of Certified Public 

Accountants, LIFO is used by between 36% and 40% of businesses in every industry sector that 

maintains inventories. Clearly, rcpeal of LIFO would not he removal of a narrowly-used tax 

deduction or preference and would have wide-spread consequences. (You ean access the GA 

Tech study here: http://www.savelifo.org/pdf20 11/GA %20T cch%20Study%20C onscquences%200f'/o20the%20 E I iminati on%200f%20LlFO. 

pdf.) 

Many of the businesses operating in these industries, as well as other industries where the 

use ofthe LIFO inventory method is prevalent are relatively small businesses. The use ofthe 

LIFO inventory method by small businesses is manifested in the composition of the membership 

of The LIFO Coalition. The lion's share of the trade associations that make up the core of the 

membership of The LIFO Coalition represent small businesses that employ the LIFO inventOlY 

method. 

Many, ifnot most, of these small husinesses are organized in non-corporate form. For 

example, many of the businesses that employ the LIFO inventory method are organized as passthrough entities and are taxed either as S corporations or partnerships. Businesses organized as S 

corporations or partnerships are not taxed at the entity level at the rate of tax imposed on 

corporations. Instead, the individual o\vners of these businesses are taxed at individual tax rates. 

Accordingly, the main premise of one type of tax reform that has been discussed, which 

is to broaden the tax base for corporations while lowering the rate of tax on corporations, would 

simply be inapplicable to many users of the LIFO inventory method. Repealing that method in 

exchange [or a reduction in corporate tax rates which does not benefit a user of the LIFO 

invcntOlY method would impose an enonnous burden on small businesses nOl taxed as 

corporations and would undoubtedly lead to a significant number of business failures. 

As noted ahove, The LIFO Coalition submits that even for corporate taxpayers, tax 

reform that entails a reduction in corporate tax rates in exchange for the repeal of the LIFO 

method and other provisions listed as tax expenditures hy JeT staff, will not make corporations 

whole, given the size of the typical LIFO reserve relative to a company's net worth. For noncorporate businesses. rcpeal ofihe LIFO inventory method in exchange for rate reductions that 

benelit only corporate entities would be an lUlmitigated disaster in financial terms. It's hard to 

conceive of another tax provision the repeal of which would destroy more businesses and 

eliminate more jobs than the a repeal of the LIFO inventory method so constructed. 

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6. The Repeal ofthe LIFO Inventory Method Will Not Pay for Lower Business 

Tax Rates in the Long Term 

As noted above, the vast majority or the revenue raised rrom the repeal orthe LIFO 

inventory method comes Irom the recapture of companies' existing LIFO reserves. A much 

smaller portion of the revenue that would be raised from the repeal of the LIFO inventory 

method would come from the ongoing effects oftbe elimination of the UFO inventory method. 

This disparity in revenue sources derives from the fact that tl)T companies that have used 

the LIFO inventory method for many years (which is the case for most companies using LIFO), 

the amount oflhe company's UFO reserve is usually a signilicant mUltiple of tile annual 

increase in the company's LIfO reserve. Thus, for example, assuming relatively uniform 

inflation rates over time of between three to five percent and relatively constant inventory levels 

over the period of usage of the LIFO illYentory method, one would expect that the annual 

revenue gain trom the repeal of the LIFO inventory method for a company that employed the 

LIFO inventory melhod for 40 years would be small Jractioll of the company's cumulative UFO 

reserve. 

In addition, the rate of inflation in the United States for the past few years has been 

relatively modest. In contrast, the inflation rate in the United States over the past forty years has 

greatly exceeded the recent rate of intlatioll. Accordingly, a company's cumulative UFO 

reserve is likely to greatly exceed the result of multiplying the CUlTent intlation rate by the 

number ofycars that the UFO method has been employed and multiplying that amount by the 

average cost of inventOl)' at the company. 

One additional reason why projected luture savings lfom the repeal of the LIFO 

inventory method is comparatively modest is the fact that companies have been reducing the 

levels of inventory that they maintain by relying on computerized order and record keeping 

systems, such as just-in-time inventory systems, in order to minimize the capital tied up in 

inv~ntory. Accordingly. future revenue projections do not take illtO account much growth in the 

levels of LIFO inventories. 

The conclusion that consideration of all orthese factors leads to 1S thaI once cutTenl LIFO 

reserves are fully included in taxable income through amortization over some period of time, 

ongoing revenue savings from the repeal of the LIFO inventory method will not be available in 

signiticant enough amounts to balance out the long-term costs of business tax rate reductions. 

This is in marked contrast to other tax expenditures listed by JeT staff which display consistent 

or increasing revenue gains resulting from their repeal. This point is masked in the Obama 

Administration's proposal to eliminate the LIFO inventOlY method because the projected 

revenue gains from the proposal are shown through only the budget time horizon often years. 

Accordingly. the repeal orthe LIFO inventory method would prove to be a bighly 

temporary and unreliable SOUTce of significant revenue after the amortization of companies' 

LIFO reserves is completcd. 

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7. The Likelihood of Convergence with IFRS Has Significantly Diminished and 

Should Not Affect or Inllueuce Decisions about the Retention oftbe LIFO Inventory 

Method 

One final reason that some have offered in support of repeal of the LIFO inventory 

method is that the Securities and Exchange Commission (SEC) is giving serious consideration to 

requiring SEC registrants to issue their tinancial statements in compliance with lFRS. Because it 

is based primarily on European accounting standards where the LIFO method is not widely used. 

IFRS does not permit the use of the LIFO inventory method in reporting net income for financial 

reporting purposes. However, section 472(c) and (e)(2) of the Internal Revenue Code require as 

a condition for companies to use the LIFO inventory method for federal income tax purposes that 

they use no method other than the LIFO method in reporting their net income for financial 

reporting purposes. 

Accordingly, if the lIse of [FRS were to be required for SEC registrants, those companies 

might be barred from continuing to use the LIFO inventory method for federal income tax 

purposes. Thus, the argument was made that the LIFO method may well be eliminated as a 

practical maller in the near fUlure and Congress should take action before this happens in order to 

take credit for the revenue gain that would resull from the repeal ofthe LIFO inventory method. 

However. this reasoning is flawed, was premature, and is rendered moot by the indetinite 

postponement of a decision by the SEC on the adoption of IFRS. On July 13, 2012. the SEC 

released its Staff Report on convergence. which makes no recommendation to the 

Commissioners on the adoption of IFRS in any fann or time frame and contains the following 

introductory statement: 

The Commis~ion beli0ves it is important to make clear that publication of the Sta11' 

Report at this time does not imply-and should not be construed to imply-that the 

Commission has made any polley decision as to whether International Financial 

Reporting Standards should be incorporated into the financial reporting system for U,S. 

issuers, or how any sllch incorporation, if it were to occur, should be implemented. 

Further, the Report references UFO several times, describing it as one of the 

"'fundamental differences" bet\veen U.S. GAAP and IFRS, concluding that '"In some cases, the 

resolution of these differenees will be individually challenging (e.g., removal of: or any change to, 

LIFO), and any attempt by the SEC or others to resolve these differences in a time period even as 

long as l1yc to sC'ven years may prove to be dirricult." Sec "Wurk Plan/or the Consideration of 

Incurporating Internatiunal Financial Reporting Standards into the Financial Reporting S.vstemfor 

US. Issuers Final SfqflReport" at J 4. 

Even if the SEC were to eventual!y move to the adoption ofthe international accounting 

standards. it is increasingly unlikely that they will do so by fully moving from GAAP to IFRS as 

originally intended. Rather. an endorsement method of adoption is more likely, by whieh US GAAP 

will continue to used, FASO will retain an active role in devising and implementing accounting 

standards, and (FRS will b0 incorporated into GAAP. Under such all endorsement process, local 

deviations from IFRS, such as the use of LIFO, could be accommodated. 

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The SEC Staff Report referenced above makes this point very clearly: 

fT1hc staff focused on other methods of potential incorporation~ such as an 

endorsement mechanism or continued convergence of 8ccounting standards issued by 

the Financial Accounting Standards Board ("FASB") and the lASB .. As noted in the 

20 I 0 Progress Repol1, very few jurisdidions provide for the usc of standards issued by 

the lASB without measures to ensure the suitability of those standards. Rather, most 

jurisdictions generally rely on some mechanism to incorporate IFRS into their domestic 

reporting system. Mechanism~ range from converging ajurisdiction's &tandards to 

IFRS '\vithout necessarily incorporating fFRS fully into its national framework, to 

various forms of endorsement approaches whereby IFRSs are incorporated into the 

national framework on a standard-by-standard basis. if the newly issued IFRS standard 

passes some prescribed threshold 

In addition, wholly apart from the uncertain timing and scope of any decision concerning 

the possible adoption orIFRS in the U.S., any requirement that U.S. companies follow IFRS and 

di,continue using the UFO inventory method in computing net income in the body o[their 

financial statements would not automatically result in the termination of the use of the UFO 

inventory method [or federal income tax purposes. Under the Internal Revenue Code, the 

Treasury has broad discretion to permit the continued use of the LIFO inventory method in these 

circumstances. Accordingly, it does not necessarily tallow that adoption ofIFRS in the U.S. will 

result in the termination of the LIFO method for tax purposes. 

in sum, the possibility of changes in the financial accounting \vorId should not be allowed 

to influence any decision by the Congress on whether to repeal the UFO inventory method for 

tax purposes. Any such decision should be based solely 011 the merits of LIFO repeal, rather 

than on any assessment of what actions an agency such as the SEC may take in the future. The 

SEC Staff Report demonstrates quite convincingly that actions of this sort basically defy 

prediction. 

8. Repeal ofthe LIFO Inventory Method will Harm U,S.-Based Companies and 

Benefit their Foreign Competitors. 

Under the U.S. worldwide system oftaxation, U.S.-based companies face both a high 

U.S. statutory ta.x rate and remain subject to tax on their foreign earnings when repatriated to the 

United States. It is well established that these factors contribute to U.S.-based companies that 

operate v·lOrldwlde bearing effective tax rates that are among the highest in the world. Sec, e.g, 

Chen and Mintz, "New Estimates of Effective Corporate Tax Rates on Business Investment," 

Cato Institute (Feb. 1,2011) repOlted in TAX NOTES TODAY, 2011 TNT 37-17 (Feb. 24, 

20 II). Chen and Mintz note that the elTective U.S. tax rate on corporations was 34.6 percent in 

20 I 0, which was the highest rate in the Organization for Economic Cooperation and 

Development and the fifth highest rate among 83 countries in the world. Moreover, this study is 

not just based on statutory tax rutes, but takes into account such tax provisions as accelerated 

depreciation and Inventory allowances: 

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Id. 

This bulletin presents estimates of effective corporate tax rates on new 

capital investment for 83 countries. "EfTective" tax rates take into account 

statutory rates plus tax-base items that affect taxes paid on new investment, such 

as depreciation deductions, inventOl)' allowances, and interest deductions. 

One can infer from the Chen and Mintz study that the detrimental impact or such high 

effective tax rates on the competitiveness of U.S.-based companies is mitigated to a limited 

degree by the LIFO inventory method, As noted above, only U.S. companies use the LIFO 

inventory method, which allows them to better compete against foreign-based companies who 

are generally subject to lower effective tax rates, but cannot use the LIFO inventory method 

undcr inte111ational accounting standards. 

As the Congress and the Administration consider how to revise the tax code to encourage 

the competitiveness of U.S.-based companies. the United States must be mindful that any export 

subsidies it considers must be consistent with the United States' international trade obligations, 

particularly lhose imposed by the World Trade Organization (WTO). Indeed, a number of prior 

export subsidies, such as the foreign sales corporation and extraterritorial income regimes, have 

been found to violate these obligations and were required to be repealed. The LIFO inventory 

method, by contrast, has not been subject to challenge by the WTO and, therefore, remains a 

permissible means to encourage U.S.-based companies to manufacture and export domestic 

products in the global marketplace. 

In light of the fact that the LIFO inventory method: (i) allows U.S.-based companies to 

better compete against foreign-based companies that are generally subject to !mver effective tax 

rates, and (ii) is consistent with the United States' inte111otional trade obligations, it is essential 

that the UFO inventOlY method be retained in the tax code, regardless of any tax rerorm elTort. 

Moreover, as the Chen and Mintz study confirms, repeal of the UFO inventory method, along 

with other tax expenditures, in exchange for lower business statutory tax rates, will still leave 

corporations with an effective tax rate that is among the highest in the world. 

IV. Conclusion 

In the final analysis, repeal of the UFO inventory method, in the context of business tax 

reform that involves base broadening in exchange for lower statutory tax rates, wi II not 

accomplish the goal oflowering the effective tax rate on businesses. Repeal of the UFO 

inventory method \\'ill not enhance the competitiveness of U.S. businesses tIl the worldwide 

marketplace and, in fact, will damage the capital position of businesses in many industries that 

rely on the LIFO inventory method to finance their replacement of inventory in an inflationary 

environment. Finally, even if individual tax rates are reduced for businesses operating in noncorporate form, such as pass-through entities, repeal of the UFO inventory method will severely 

damage such businesses, which are the life-blood of job creation in the United States. Moreover, 

withom such rate reductions, the effect of the repeal of the L1FO method on small businesses 

would be devastating. 

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THE LIFO COALITION 

1325 G Sireet NW., Suiie 1000, Washington, DC 20005 TEL: 202·872·0885 

Mr. Jeftrey D. Zeints 

Acting Director 

Office of Management and Budget 

Washington, D.C. 20503 

Dear Mr. Zeints: 

June 6, 2012 

On Januruy 27'h, a bi-partisan group 01'22 Members of the House of Representatives sent a letter 

to President Obama urging that LIFO repeal not be included in the Administralion's Fiscal Year 

2013 Budget. On April 2''', you responded to the letter Iro111 the Members of Congress on behalf 

of the Obama Administration. 

The LIFO Coalition, a coalition of more than 120 business organizations and trade associations, 

was provided a copy of both lhe letler to the President and your response on his behalf 

The Coalirion has prepared a detailed response to the points you raised in your letter to the 

Members of Congress. 

Please tind enclosed the UFO Coalition's response to your letter with a list of the members of 

the coalition, a copy of your letter to the Members of Congress, and a copy of their original letter 

to the President. 

Sincerely, 

~a.<k.. \.i:b+-

Jade West. Senior Vice President-Government Relations 

National Association of Wholesaler-Distributors 

Executive Secretariat, The LIFO Coalition 

Enclosures: 

I. Coalition response and membership list (pages 2-10) 

2. OMB Letter to ,1Jembers olCongress (page I I-I2) 

J. Members oleollgress letter 10 the President (pages I3-I5) 

cc: Honorable TImothy F. Geithner 

Secretary 

U.S. Department of the Treasury 

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THE LI.FO COALITION 

1325 G Street N.W, Suite 1000, Washington, DC 20005 TEL: 202·872-0885 

,June 2012 

LIFO Coalition Response to the Adminisnoation's Proposal to Repeal the 

Last-in, First-out (LIFO) Inventory Method 

Executive Summary 

LIFO has been permitted in the lax code since] 939, is all accepted general 

accounling principle, and is used b.v milliuns of companies in a wide range (~f induslries. 

Repeal a/LIFO would have a major damaging impact on (he US economyandjob 

creation, particufar~)' among small and mid-sized businesses, and most (?f the JTVt'tlUC 

that would be generated by LIFO repeal would be/iom the "recapture tax" an 

unprecedented retroactive tax increase. 

Tn January, a bi-patiisan group of21 Members of Congress sent a letter to 

President Obama urging the Administration to exclude repeal of UFO from its Fiscal 

Year 2013 Budget. On April 2nd, the Office of Management and Budget (OMB) 

responded to the Congressional letter, rejecting their request and defending the proposal 

to repeal UFO on three separale grounds. 

The LIFO Coalition believes that the three arguments outlined by OMB for the 

Administration's proposal fail to justify repeal of the LIFO method. 

OMB: The LIFO inventaty method provides unwarranted defi!rra! of income taxesfor 

taxpayers experiencing increasing costs in their inventories. 

Coalition response: The LIFO method simply recognizes the reality that inflationary 

gains should not be taxed until the benefits from those gains arc permanently withdrawn 

from the business. In order for a business selling merchandise to remain in operation, 

that business must consistently reinvest the profits that it earns trom the sale of 

merchandise in order to replenish the merchandise that has been sold. When costs 

increase due to inflation, the business must invest an ever increasing amount of capital 

simply to maintain the status quo. If the business must pay taxes currently on that 

inflationary income, it would have to either acquire additional capital in order to maintain 

existing inventory levels, or shrink the level of operations and thereby reduce 

employment, so as to be able to afford the additional taxes. 
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OMB: LIFO repeal would simplifv the Intanal Revenue Code by eliminating a complex 

lind burdensome accounting method rha! has been the source of tux controversies. 

Coalition response: Any complexities or burdens under the LIFO method have 

generally been eliminated. When LIFO was initially adopted by Congress over 70 years 

ago, there were a number of complexities and uncertainties about the way that the LIFO 

method operated. However, approximately 30 years ago, the IRS made a concerted elfort 

to simplify the most complicated aspect of LIFO usage, permitting taxpayers to use 

standardized industry-wide statistics to compute the inflation in their inventories. The 

adoption or this method tTansfol1ned the LIFO calculation process into a relatively 

formulaic process. 

[n fact, the Administration's default method, tlrst-in, tirst-out (F[FO), is the basis for 

LIFO calculations. Moreover, FIFO and LIFO serve the same function - most closely 

matching the cost of goods sold with the cost of replacement inventory - so eliminating 

LIFO would i()fce companies which use it into a disadvantaged position vis a vis 

companies for which FIFO is the more economically appropriate method. 

OMB: The UFO jllethod is an Impediment to the Adoption of IFRS in the Us. 

Coalition response: The presence of LIFO as a proper method of inventory valuation is 

not having the slightest effect on the adoption of [FRS in the U.S. All recent news 

rep0l1s indicate that the SEC is leaning towards an "'endorsement" model under which the 

U.S. would continue to evaluate what accounting principles would be acceptable for use 

in the financial statements of U.S. issuers. Moreover, numerous articles in the j,naneial 

press have highlighted far more serious ditferences between [FRS and U.S. GAAP than 

the treatment orthe LIFO method. Finally, ifan initial decision is made by the SEC to 

require or pennit [FRS to be used by U.S. issuers of financial statements, such a decision 

will simply be the beginning of a long process whereby the two sets of accounting rules 

will be brought into closer alignment, and that evolutionary process does not mean that 

the UFO method will necessarily be prohibited for financial repOliing purposes in the 

U.S. 

Conclusion: The LIFO Coalition believes that the Administration has failed to make 

an effective case for LIFO repeal, and that the addition(ll federal revenue th(lt repeal 

would generate would be more than ofJset by the economic h(lrm thllt repeal would 

calise. The negative imp(lct of LI FO repeal wOlild be felt by companies of a/l sizes and 

in a wide r(lnge of industries. The p""pective and retroactive tax increases imposed by 

LIFO repeal will take >'IIllIable /'esollrces aW(ly from business operations, investment 

and job creation and can be expected to remit in the decline or failure of mllny 

currently viable companies. We strongly urge policy makers to reject efforts to repeal 

this long-standing and widely accepted accounting method. 

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THE LIF 

COALITION 

1325 G St,eet N.W., Suiw 1000, Washington) DC 20C05 TEL: 202~872~0885 

.June 2012 

LIFO Coalition Response to the Administration's Proposal to Repeal the 

Last-in, First-out (LIFO) Inventory Method 

Background: On JanuaI)' 27, 2012, a hi-partisan group of 22 Members of Congress sent a letter 

to President Obama urging the Administration to exclude from its Fiscal Year 2013 Budget 

Proposal a proposal to repeal the last-in, t1rst-out (UFO) inventory method, which had been 

included in prior budget proposals. The Administration ultimately rejected this request and 

included in its Fiscal Year 20!3 Budget Proposal a proposal to repeal the LIFO inventory 

method for federal income tax purposes. 

On April 2, 2012, Jeffrey Zients, Acting Director, Office of Management and Budget (OMB), 

responded to the January 27, 2012, Congressional letter and explained the Administration's 

decision. In the letter, OMB defended the Administration's decision to propose the repeaJ of the 

LIFO inventory method on three separate grounds1. The LIFO inventory method provides unwarranteu deferral of income taxes for 

taxpayers experiencing increasing costs in their inventories; 

2. The repeal of the LIFO method woulu simplify the [nternal Revenue Code by 

eliminating a complex and burdensome accounting method that has been the source of 

tax controversies in the past; and 

3. The repeal of the LIFO method would remove an impediment to the adoption of 

International Financial Reporting Standards (lFRS) in the Unitcd States by the Securities 

3nu Exchange Commission (SEC). 

The UFO Coalition (the Coalition), whieh represents trade associations and businesses of every 

size and industry sector that employ the LIFO method, was organized in April 2006. when LIFO 

repeal was first proposed in the Senate as a revenuc offset to fund unrelated policies. Since then, 

the Coalition has grown to include more than l20 members including trade associations 

representing a wide swath of American indusll), - including manufacturing, wholesale 

distribution and retailing .... and companies of all sizes. The Coalition's mission is to preserve the 

option of companies to value their inventories pursuant to the LLFO method for federal income 

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tax purposes. A Jist of the Coalition members is attached to this document, and can be found at 

htti"1: i/'y\,vv\,\/.savelifo.orgJpdtlLfrO\femhtr[ l:-.it.pdf 

Coalition's Position: As discussed in more detail below, the LIFO Coalition believes that the 

three arguments outlin~d by OMB for tbe Administration's proposal do not justify repeal of the 

LIFO method. 

1. The LIFO Method as an Unwarranted Defe .... al of Taxes 

OMS's assertion that the LIFO method results in an umvarranted deferral of income 

taxes ignores the fact that the LIFO method has been included in the Internal Revenue Code (the 

Code) as a permissible method of inventory valuation tor federal incomc tax purposes since 

! 939. Moreover, the LIFO method has been a pan of generally accepted accounting principles 

(GAAP) ill the United States for more than 70 years. 

In fact, the LIFO method is widely used as an inventory valuation method for both tax 

and financial reporting purposes in a wide range of industries. According to two separate recent 

studies. one by Georgia institute of Technology and the other hy the American Institute of 

Certified Public Accountants, LIFO is used by bet\veen 36% and 40% of businesses in every 

industry sector that maintains inventories. 

Ac(;ordingly, the LIFO method is not an unintended loophole or, in any sense, a tax 

expenditur~. The UFO method is based on sound economic principles and operates 011 the 

economic theory that in order for a business selling merchandise to remain in operation, the 

business must consistently reinvest the profits it earns from the sale of merchandise to replenish 

the merchandise that has been sold and/or the raw materials that are used in the production 

process. As a result, unless the business chooses to either reduce the level of its operations or 

terminate its business altogether, the profits tl'om the business must be permanently reinvested in 

merchandise offered for sale by the bll~iness or raw materials used for production. 

When a business operates in this type of environment and eosts increase due to innation, 

the capital investment in the busincss is placed in an even morc precarious state. Thus, a 

business must reinvest the same amount of capital that financed the original quantity of 

merchandise necessary to maintain the operations of the business 'W9 invest an ever increasing 

amount of capital simpJy to maintain the status quo. 'Alhilc in some abstract scnsc onc might 

view the business as having '"realized" additional income due to the effect of inflation on the 

sales prices of the merchandise, the additional income resulting from that increased sales revenue 

must remain permanently invested in the capital of the business to preserve the ongoing 

business' operations. If the business must pay taxes currently on that inflationary income, the 

business will be unable to preserve its ongoing operations without either locating additional 

capital or shrinking the size of its operations. 

As a matter of tax policy, the LIFO method recognizes that innalionary gains should not 

be taxed until the benefits from those gains an: permanently withdrawn from the business. Under 

the LIFO method, the inflation clement in a business' profits is taxed only \vhen that proJit is 

pemlanently withdrmvn from the business through reductions in im'cntory levels. The tax law 

deals with inflation in a numher of different \vays, depending on the type of property involved. In 

the case of machinery and equipment, aceelaated depreciation methods and shorter recovery 

periods than the physical life of the machinery and equipment enables a business to replace the 

machinery and equipment that wears out \\'ith more costly machinery and equipment. Tn the case 

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of capjtal assets. preferentjal rates for capita! gains are designed, in part, to compensate for the 

tact that a pOliion of the gain taxed is due to the eftecls ofintlation. Similarly. the LIFO method 

addresses the effects of intlation on business inventories. 

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LIFO is a necessary and appropriate inventory valuation method under any economic 

circumstances. However, given the present busincss environmcnt and the fragility of the 

economic recovery. eliminating the LIFO inventory method at this time would be particularly 

inadvisable. If adopted, this proposal \vould require businesses to either acquire additional capital 

to maintain their exi~ting inventory levels or shrink the level of operations and reduce 

employment to afford the additional taxes that would accrue on inflation-induced protits. 

In conclusion, the LIFO method addresses the effects of iniIation on inventory and does 

not constitute a tax loophole or subsidy, The method has a sound economic underpinning and 

should be preserved to enable businesses to reinvest their profit in inventory that becomes more 

costly due to inflation. 

2. The Repeal of LIFO Would Facilitate Simplification of the Tax Law 

The Coalition also disagrees 1rvith OMB's argument that the LIFO method is complex and 

repeal would simplify U.S. tax laws. 

When the LIFO method was initially adopted by Congress over 70 years ago, there were 

a number of complexities and uncertainties about how the LIFO method operatcd. Ovcr the past 

seven decades, however, a series of COUli decisions and lniemai Revenue Service (IRS) rulings 

have addressL'd these issues. 

One of the most complex aspecls of the UFO method was the computation procedure 

that a taxpayer must use to compute intlationj i.e" a taxpayer's method of computing its LWO 

price index. Approximately 30 years ago, IRS issued regulations to simpliry this aspect of the 

LIFO calculations. These rules, issued in 1981, aHo"\' taxpayers to elect to use standardized, 

industry-wide statistics as a basis 1(Jr computing the inHation. This simplified index method is 

referred to as lhe Inventory Price Index Computation (lPIC) and these regulations were further 

refined almost ten years ago. The adoption or this method trans[orm0d the LIFO calculation 

process into a relatively formulaic process, and the use of this simplifIed method is widespread 

among taxpayers that use LIFO. 

As a result, there ure very fe\\- remaining complexities and uncertainties under the LIFO 

method. In fact. very few rulings issued by the IRS deal with the LIFO method. Similarly. there 

have been very few couI1 decisions in the last ten years involving the operation of the LIFO 

method. 

The LIFO Coalition submits that. at this point. the UFO method has ceased to be a 

particularly complex and/or controversial provision. In fact, the Adminititration's default 

method, lirst-in, tirst-out (FIFO) is the basis for UFO calculations. Consequently. eliminating 

LIFO would not climinak any perceived complexities. Mon:ovcr, since FJFO and LIFO serve 

the same function - most elosdy matching the COSt or goods sold \\'ith the cost of replacement 

inventory eliminating LIFO would pJace current LIFO companies at a competitive 

disadvantage as compared lo companies for which FIFO is the more economically appropriate 

method. (In this regard, the Coalition continues to have concerns that the Administration's 

approach remains critical or deferrals associated with the use of LIFO when corresponding 

deferral opportunities are also integral to the FIFO method.) 

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3. The LIFO Method is an Impediment to the Adoption of IFRS in the U.S. 

Similarly, the Coalition does not agree \vilh the Administration that Ule preseno;;e of the 

LIFO method in the U.S. tax law. together with the elTcct of the financial conformity 

requirement for LfFO users, is an impediment to the adoption of International Financial 

Reporting Standards (IFRS) in the United States. The OMB reasoning is premised on the fact 

that the LIFO method is prohibited by lFRS for financial reporting purposes. At the same time, 

the "conformity requiremt:nt" in the Code requires companies that use LIFO for tax purposes to 

usc LIFO [or financial reporting, Specifically, OMB is concerned that the Securities and 

Exchange Commission (SEC) will be reluctant to adopt IFRS tor issuers of financial statements 

regulated by the SEC because that will force users ofll'RS to discontinue the usc of LIFO for tax 

purposes. 

In reality, however, the presence of LIFO as a proper method of imentory valuation for 

ta'( purposes, together \-vith the LIFO conformity requirement, is not having any eHeet on the 

adoption of IFRS in the United States. Based on news reports. the SEC is leaning towards an 

"'endorsement" model for the adoption of IFRS in the United States. Undcr an "'endorsement" 

model. the Financial Accounting Standards Board (FASB), which currently sets the standards for 

Generally Accepted Accounting Principles (GAAP) in the United States, would retain its 

authoritative role in evaluating what accounting principles would be acceptable [or use in the 

financial statements of U.S. issuers. Thus, rather than adopting IFRS on a \\holesale basis, FASB 

would evaluate each accounting principle adopted by IFRS to determine its suitability for U.S. 

GAAP. If the accounting principle that is part of I FRS is deemed suitable for U.S. GAA P 

purposes, FASB would endorse that principle and accept it as part of U.S. GAAP. In contrast, if 

FASB dctennined that a particular accounting principle that is palt of IFRS was not suitable for 

U.S. GAAP. the FASB would decline to endorse that principle and the FASB would adopt its 

own separate accounting standard for U.S. GAAP. 

It is important to note that the LIFO method was not widely used in Europe and, as a 

result, the Llro method was not included in the list of acceptable inventory valuation methods 

under [FRS. However, that does not mean that the FASE would reach the same conclusion lor 

U.S. GAAP. In light of the long-standing acceptance and broad usage of the LIFO method in the 

United States. FASB could conclude the LIFO mcthod should continue to be acceptable under 

U.s. GAAP. notwithstanding lFRS. In any event, it is premature at this point to predict what the 

F ASB would do on 1his issue. 

Moreover, the presence of the LIFO method and the LIFO conformity requirement in the 

Code does not prevent the adoption of IFRS for U.S. financial reporting purposes. As noted in 

numerous articles in the financial press, there are far more serious differences between IFRS and 

U.S. GAAP than the treatment of the LIFO method. If an initial decision is made by the SEC to 

require or pennit IFRS 10 be used by U.S. issuers of tlnancial st<ltements, the decision will be the 

beginning ofa long process of aligning two sets of accounting rules. 

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4. Rcpcal of LIFO Would be an Unprecedented Retroactive Tax Increase 

Finally, the Coalition docs nol agree with the Administration thm a ten-year amortization 

period for the recovery of the eflccts of discontinuing the LI FO method in any scnse makes the 

UFO repeal proposal acceptable. 

It is impol1anl to note that the impact of LIFO repeal is not prospective only. Under the 

proposal, taxpayers also would be required to recapture into taxable income the entire benefit 

that a taxpayer rccl':ived from the usc of the LIFO method over the taxpayer's entire lifetime, i.c., 

the LIFO reserve. In facl, most of the revenue generated by this proposal comes from its 

retroactive eftect. 

The LIFO Coalition is not a\varc of any other seriolls revenue raising proposal that has 

this type of retroactive cfTect. For example, no proposal for the dimination of accelerated 

depreciation or the research credit or the mortgage int0rcst deduction includes a requirement that 

taxpayers pay back the taxes that they saved from the prior usc ofthcse methods. No proposal to 

incn:ase tax rates on dividends and/or capital gains ever suggests that taxpayers pay hack the 

benefits of reduced ratcs 011 those types of income for past years. The proposal to rcpcal the 

UFO method is the only serious tax proposal thut The UFO Coalition is aware of that has a 

rctroactivc effect of the magnitude that is contemplated. Accordingly, while a ten-year 

amortization of the effect of repeal of the LIFO method might otherwise seem reasonable, it in 

no \vay compensates for the double-barrelcd effect of repeal of LIFO for the future combined 

with repayment ofthc benefits of UFO from the past. 

Conclusion 

As outlined above. the Coalition believes that the Administration has failed to mah::c an effective 

case lor UFO repeal, and that thc additional tCderal revenue that rcpeal would generate would be 

more than otJset by the economic harm that repeal would causc. The ncgative impact of LIFO 

rcpcal would bc felt by companies of all sizes and in a wide range of industries. The prospective 

and retroactive tax increases imposed by LIFO repeal will take valuable resources away from 

business operations, investment and job creation and can be expected to result in the decline or 

failure of many cturently viable companies. We strongly urge policy makers to reject efforts to 

repeal this long-standing and widely accepted accounting method. 

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THE LIFO 

COALITION 

1325 G Street N,W" Suite 1000, Washington, DC 20005 • TEl: 202·872-0885 

Alabama Grocers Association 

American Apparel & Footwear Association 

American Chemistry Council 

American Forest & Paper Association 

American Fuel and Petrochemical Manufacturers 

American Gas Association 

American International Automobile Dealers 

Association 

American Petroleum Institute 

American Road & Transportation Builders 

Association 

American Supply Association 

American Veterinary Distributors Association 

American Watch Association 

American Wholesale Marketers Association 

Americans for Tax Reform 

AMT-The Association for Manufacturing 

Technology 

Associated Equipment Distributors 

Association for High Technology Distribution 

Association for Hose & Accessories Distribution 

Association of Equipment Manufacturers 

Automobile Dealers Association of Alabama 

Automotive Aftermarket Industry Association 

Brown Forman Corporation 

Business Roundtable 

Business Solutions Association 

California Independent Grocers Association 

Caterpillar Inc 

Ceramic Tile Distributors Association 

Connecticut Food Association 

Copper & Brass Servicenter Association 

Deep South Equipment Dealers Association 

Deere & Company 

East Central Ohio Food Dealers Association 

Equipment Marketing & Distribution Association 

Far West Equipment Dealers Association 

Farm Equipment Manufacturers Association 

-43-

Financial Executives International 

Food Industry Alliance of New York State 

Food Marketing Institute 

Forging Industry Association 

Gases and Welding Distributors Association 

Greater Boston Chamber of Commerce 

Healthcare Distribution Management Association 

Heating, Airconditioning & Refrigeration 

Distributors International 

Illinois Food Retailers Association 

Independent Lubricant Manufacturers 

Association 

Industrial Fasteners Institute 

Industrial Supply Association 

International Foodservice Distributors 

Association 

International Franchise Association 

International Sanitary Supply Association 

International Sealing Distribution Association 

International Wood Products Association 

Iowa Grocers Industry Association 

Iowa Nebraska Equipment Dealers Association 

Jewelers of America 

Kansas Food Dealers Association 

Kentucky Association of Convenience Stores 

Kentucky Grocers Association 

Louisiana Retailers Association 

Manitowoc Company Inc (The) 

Maryland Retailers Association 

MDU Resources Group 

Metals Service Center Institute 

Mid~America Equipment Retailers Association 

Midwest Equipment Dealers Association 

Minnesota Grocers Association 

Minnesota-South Dakota Equipment Dealers 

Association 

Missouri Grocers Association 

Missouri Retailers Association 
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Montana Equipment Dealers Association 

Moss Adams LLP 

NAMM-The International Music Products 

Association 

National Association of Chemical Distributors 

National Association of Convenience Stores 

National Association of Electrical Distributors 

National Association of Manufacturers 

National Association of Shell Marketers 

National Association of Sign Supply Distributors 

National Association of Sporting Goods 

Wholesalers 

National Association of Wholesaler-Distributors 

National Auto Dealers Association 

National Beer Wholesalers Association 

National Electrical Manufacturers Association 

National Federation of Independent Business 

National Grocers Association 

National Lumber and Building Material Dealers 

Association 

National Paper Trade Alliance 

National Roofing Contractors Association 

National RV Dealers Association 

Nebraska Grocery Industry Association 

New Hampshire Grocers Association 

New Jersey Food Council 

North American Equipment Dealers Association 

North American Horticultural Supply Association 

North American Wholesale Lumber Association 

Ohio Grocers Association 

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Ohio-Michigan Equipment Dealers Association 

Paperboard Packaging Council 

Pet Industry Distributors Association 

Petroleum Equipment Institute 

Power Transmission Distributors Association 

Printing Industries of America 

Professional Beauty Association 

Retail Grocers Association of Greater Kansas City 

Retail Industry Leaders Association 

Safety Equipment Distributors Association 

SBE Council 

Security Hardware Distributors Association 

Society of Independent Gasoline Marketers of 

America 

SouthEastern Equipment Dealers Association 

Southern Equipment Dealers Association 

SouthWestern Association 

Souvenir Wholesale Distributors Association 

SPI: The Plastics Industry Trade Association 

State Chamber of Oklahoma 

Textile Care Allied Trades Association 

Tire Industry Association 

U.S. Chamber of Commerce 

Washington Food Industry Association 

Wholesale Florist & Florist Supplier Association 

Wine & Spirits Wholesalers of America 

Wine Institute 

Wisconsin Grocers Association. Inc. 

Wood Machinery Manufacturers of America 
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'TIle Honorable 

E:XECUTIVE OFI""ICE OF THE pnr::SIDENT 

OFFJCE OF MANAGeMENT AND BUDGE'] 

WASHINGTON, D,C, 205Q3 

April 2, 2012 

U,S, House of Representatives 

Washington, DC 20515 

Deor Representative' 

Thank YOli for your lelter to the l'resident concerning the Fiscal Year 2013 Budget 

proposal to repeal the Last In, Pirst Out (LIFO) ~1ccounting method, 1 am responding on his 

he:hal[ The Administration is commit1cd to a b!llanced nppronch to deficit reduction, and 

proposed in the Budget u number of meflSUfCS to close special tax provisions such as LIFO 

aCCollntiJ'lg. 

In the Administration's view) the repeal ofthe LIFO method of accounting would 

eliminate a tfiX deferral oppottunity avaibblc to taxpayers that hold inventories wHh increasing 

cosls. In addition, LIFO repeal would simplify the Intemal Revenue Code by removing a 

complex and burdensome accounting method that has been the sOUrce of controversy betweeD 

tElxpnycrs and the Internal Revenue Scrvlce, 

InternationAl Financial Reporting Standmds do ti()t permit the use of the LIFO method, 

and their adoption by the Securities and Exchange Commission would cause violations of the 

<;unent LIFO book/tax. conformity requiremel''It, Rcpeuling LIFO would remOve this possible 

impediment to the implementation ofthese stal1dards in the United Slates. 

The Administmtion's proposal would repeal the use of the UFO iIwcntory accounting 

method for Federal income tnx purposes. Taxpayers that currently usc the LIFO metbod "I.vould 

be required to write up their beginning LIFO inventory to its First In~ Fjrst Out value in the iirst 

taxable year beginning ancr December 3 !, 2013. However, this onc~timc increase in g1'OSS 

income would be tnkcn into account ratably over 10 years, beginning with the Jirst taxable year 

begilming after December 31, 2013, 

Thank you Bgaln for expressing your concerns about the UFO proposal in the FY 2013 

Budget. 

d:Q/'l':( lome), D. Zien(s . 

Acting Director 

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Identical Letter Sent to; 

The Honorable Geoff Davis 

The Honorable John Yarmuth 

The Honorable Mike Thompson 

The Honorable Pat Tiberi 

The Honorable Richard Neal 

The Honorable Peter Roskam 

The Honorable Ron Kind 

The Honorable Vern Buchanan 

The Honorable Bill Pascrell, Jr. 

The Honorable Erik Paulsen 

The Honorable Aaron Schock 

The Honorable Ben Chandler 

The Honorable Jim Metheson 

The Honorable Mike McIntyre 

The Honorable Michael H. Michaud 

The Honorable Jim Costa 

The Honorable Dan Boren 

The Honorable Cynthia LUlllmis 

The !Ionorable Randy Neugebauer 

The Honorable Colin Peterson 

The Honorable Reid Ribble 

The Honorable Cedric Richmond 

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(£OJ1llH'fi~ rf 11nitch §if"tc" 

Pr: .. >siili:nt B~U1l(,.'k Oh:.ifbt! 

Th(' \Vhi1c! !~wse 

1600 PenM)'b;\\nia Avenlte 

Wa.,,-hington, D.C. 10500 

tUild,k,jtmr. ncr 211~15 

htm3ry 27, 20 J 2 

resulting rt:twBclil;e la:<:. inc[c-<l.se ~vouJd h,,;ve a dCi'a3lating 

Thl.: ovcraU hlXCS ()\v;:,:d bv comDunies 

this \vonJd signiiicru1rly'n.:tlliC; 

employees. In some cnsc:- it 

preJll~('(L sold and 

'( he impact of LIFO l"tpe.)[ would ,mel), be. felt in our 

Congr03Sk)nai Di::.:trk:L'> tind every comer of Anwric::. 

\vork on dr31ling 

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M..:nlber ufCongrct's 

Rep. Htn Chandler 

i'v1cmL.,<,r of Congress 

Member or Congress 

Sincerely. 

Member ofCong!'css 

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209 

National Association of Manufacturers 


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Statement 

of the National Association of Manufacturers 

For the Hearing Record 

of the 

Committee on Ways and Means 

U.S. House of Representatives 

Hearing on 

"Tax Reform and the U.S. Manufacturing Sector" 

July 19,2012 

The NAM is the largest industrial trade association in the United States, representing over 

11,000 small, medium and large manufacturers in all 50 states. We are the leading voice in 

Washington, D.C., for the manufacturing economy, which provides millions of high wage jobs in 

the U.S. and generates more than $1.6 trillion in GOP. In addition, two-thirds of our members 

are small businesses, which serve as the engine for job growth. NAM members commend 

Chairman Camp and the Committee for holding a hearing on tax reform and the U.S. 

manufacturing sector. 

Manufacturers have long believed that our current tax system is fundamentally flawed and 

discourages economic growth and U.S. competitiveness. To reverse these effects, the NAM 

supports lower tax rates on business income (including dividends and capital gains), a robust 

capital cost recovery system and a permanent and strengthened R&D incentive. We further 

support the adoption of a territorial tax system since current U.S. tax laws make it difficult for 

U.S. companies with worldwide operations to thrive and compete in the global marketplace. If 

U.S. companies cannot compete abroad, where 95 percent of the world's consumers are 

located, the U.S. economy suffers from the loss of both foreign markets and domestic jobs that 

support foreign operations. 

The NAM supports current efforts to make the tax code more pro-growth, pro-competitive, fairer, 

simpler and predictable. Because of the critical importance of manufacturing to our nation's 

economy, any effort to rewrite the tax laws should result in a fiscally responsible plan that allows 

manufacturers in the United States to prosper, grow and create jobs. 

While the NAM is a strong advocate for comprehensive reform of our current tax code, we also 

believe that it is important to keep our current tax system in place until policymakers agree on a 

final reform plan. In particular, we urge Congress to renew the tax extenders, like the R&D 

credit, the look-through rules and deferral for active financing, which will provide a bridge of 

certainty and predictability for manufacturers. These provisions help manufacturers innovate 

and compete in a global marketplace. 

In contrast, the expiration or pending expiration of these and other business "tax extenders" 

represents a tax increase for manufacturers and businesses of all sizes that use these 

incentives. Similarly, other piece-meal changes or repeal of long-standing rules will inject more 

uncertainty into business planning, making U.S companies even less competitive and threaten 

economic growth and U.S. jobs. 
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As we move toward tax reform, we strongly urge you to revive and extend these important 

incentives that are part of the current system and avoid other changes that will make an 

uncompetitive system even worse. 

Overview 

In anticipation of the current tax reform effort, NAM members developed a set of principles for 

comprehensive tax reform that incorporate Manufacturers' tax reform goals and also serve as a 

framework for evaluating proposals and developments as the tax reform debate moves forward. 

The following principles, which were approved by NAM's Board of Directors in March 2012, 

touch on several areas including business tax rates, international competitiveness and research 

and technology investment. More generally, the principles focus on several issues that need to 

be addressed to ensure a simpler, fairer, more predictable and more balanced code. 

Encouraging Investment and Job Creation 

NAM members believe that any tax reform plan should encourage capital investment and job 

creation. To this end, a comprehensive tax reform plan should include: 

Lower Corporate Tax Rates: Reducing the corporate tax rate to 25 percent or lower 

would make the United States' tax system more competitive with our major trading 

partners. Any accompanying base broadening should recognize the impact of those 

changes on economic growth. Some current tax provisions, including capital cost 

recovery rules, are key to a strong manufacturing sector and broader economic growth 

and the benefits of these provisions should be maintained in a new system. 

Lower Taxes for Flow-Through Businesses: Two-thirds of manufacturers are 

organized as "flow-through" entities and pay taxes at individual rates. For these entities, 

it is critical that the tax rates on individuals be as low as possible. A new system should 

not ~ncrease the tax burden on these businesses to pay for other tax reform measures. 

Permanent R&D Incentive: It is critical that any tax reform plan recognize the important 

role of research and technology investment in the growth of U.S. jobs and innovation. 

The goal is for the United States to retain and attract global R&D activities. The certainty 

provided by a strengthened, permanent R&D provision would enhance its incentive 

value. 

Taxation of Investment: Keeping the tax rate on dividends and capitai gains as low as 

possible and applying the same rate to all investment income will help public companies 

attract investors and aliow them to finance investment and create jobs. An effective way 

to spur business investment and make tile tax system mom competitive is through a 

robust capita! cost recovery, 

Promoting International Competitiveness 

Current U.S. tax laws make it difficult for U.S. companies with worldwide operations to tllriV8 

and compete in the global marketplace. If U.S. companies cannot compete abroad, where 95 

percent of the world's consumers are located, the U.S. economy suffers from the loss of both 

foreign markets and domestic jobs that support foreign operations. In order to make U.S. 

multinationals more competitive, in addition to lower corporate lax rates and a permanent R&D 
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incentive, the NAM supports the adoption of a competitive territorial tax system that meetings 

the following criteria: 

Elimination of the double tax burden: A U.S. territorial system should be based on the 

principle that there should be no double tax burden imposed by the United States. At a 

minimum, a new system should exempt active foreign earnings from taxation and avoid 

tho imposition of a stealtl1 tax on foreign earnings througl1 expense allocations. 

Alignment with international norms: A U.S. territorial system should be structured to 

enhance U.S. competitiveness, not raise revenue. Moving to a territorial system like 

those used by other industrialized countries will allow U.S.-based companies to be more 

competitive. 

A smooth and effective transition: A move to a territorial tax system should include 

fair transition rules that aHow repatriation of foreign-earnings on a voluntary basis, 

minimize administraUve and compliance costs on companies and allow existing foreign 

business entities to compete with foreign-headquartered companies. 

Ensuring a Simpler, Fairer and Balanced System 

A new tax system should be simpler and more administrable find should treat all businesses 

fairiy without regard to size. type of entity or sector. Specifically, a comprehensive tax reform 

plan should meet the following criteria: 

No Net Increase in Manufacturers' Tax Burden: Any alternative that stlifts more of the 

current tax burden on to manufacturers wil! hamper economic growth and job creation, 

Elimination of the Alternative Minimum Tax: A new system should eliminate both the 

individual and corporate alternative minimum tax rules, Wllich are inherently comp!ex 

and unfairc 

Administerability: A new system should ,ncorporate rules that make ,t easier for 

Treasury to administer the law and for taxpayers to comply with the law. Unnecessary 

complexity is not productive from an economic perspective and undermines taxpayers' 

confidence in the fairness of the law. 

Predictability: A tax code tilat is predictable and that provides certainty is essential for 

effective business and tax planning, A fair and stable tax code wi!! make it easier for U.S, 

manufacturers to complete in the global marketplace. 

Transition Rules: A new system must include broad transition rules that provide fair 

and equitable treatment for taxpayers that have generated substantial attributes based 

on current law. For example, it is important for transiton rules to allow future timely 

utilization of ta,x attributes, B,g" net operating losses, alternaHve minimum tax credits, 

foreign tax credits, depreciation etc., that have been generated but not yet utilized under 

the current system, 
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Conclusion 

As outlined in NAM's "A Manufacturing Renaissance: Four Goals for Economic Growth, 1 " a key 

objective for the Association is to create a national tax climate that enhances the global 

competitiveness of U.S. manufacturers. Manufacturers very much appreciate the efforts of 

Chairman Camp and the members of the House Ways and Means Committee for their diligent 

work to reform the U.S. tax system to put U.S. manufacturers on a level playing field with their 

competitors in other countries, as well as making the United States a more competitive 

environment in which to do business. We appreciate the opportunity to share our thoughts and 

concerns with you. Manufacturers look forward to further discussing these issues and working 

with the Committee to achieve a pro-growth, pro-competitiveness and pro-manufacturing tax 

system. 

4 
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R & D Credit Coalition 


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STATEMENT OF THE R&D CREDIT COALITION 

SUBMITTED FOR THE RECORD OF THE HEARING ON 

"TAX REFORM AND THE U.S. MANUFACTURING SECTOR" 

BEFORE 

COMMITTEE ON WAYS AND MEANS 

ON 

.July 19,2012 

Introduction 

The R&D Credit Coalition welcomes the opportunity to provide comments lor the record or the July 

19.2012. Committee on Ways & Means ("Committee") hearing to examine "'tax reform and the U.S. 

manufacturing sector:' 

The R&D Credit Coalition thanks Chairman Camp and Ranking Member Levin for holding this 

hearing on business tax issues currently t~lcing U.S. manufacturing companies. and examining ho\\' 

comprehensive tax reform could improve the ability of manufacturers to contribute to job creation and 

economic grov.1h. In addition, we would like to thank Ways & Means Committee members Kevin 

Brady (R-TX) and John Larson (D-CO for their leadership in sponsoring H.R. 942. legislation that 

would provide a strengthened and permanent R&D lax credit, an important innovation incentive 

utilized by many manufacturers. The credit ex.pired on December 31, 20 11, and we look forward to 

continuing our work with them and the Committee to advance an extension that v\I'ould provide U.S. 

businesses with the certainty and incentives they need to maintain and increase research and 

development (R&D)jobs here in the U.S. 

The R&D Credit Coalition is a group of more than 100 trade and professional associations along with 

small, medium and large companies that collectively represent millions of Amcrican \vorkcrs engaged 

in U.S.-based r~search throughout major sectors of the U.S. economy, including aerospace, agriculture, 

biotechnology, chemicals, electronics, energy, information technology, manufacruring. medical 

technology. pharmaceuticals, software and telecommunications. 

Although the make-up or the R&D Credit Coalition is diverse, the member companies share a major 

characteristic-they collectively spend billions or dollars annually on research and developmcnt. 

which provides high-wage and highly-skilled jobs in the United States. There is signilicant global 

competition for R&D jobs. which means that companies have an array of choices on where to locat~ 

such jobs and where to invest research dollars-here in the U.S. or abroad. The high u.s. corporate 

income tax. rate and the temporary nature of the U.S. R&D tax credit, compared to the lower corporate 

income tax rates and more stable, robust, and oftcn permancnt research incentives in most other 

developed countries. are key factors that companies consider in detennining wh~re they are going to 

create and maintain R&D jobs. 
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Given the focus of the hearing on manufacturing, it is important to note that manufactures are key 

beneficiaries of the R&D tax credit, and that the credit plays an important role in the strength of the 

manufacturing sectoL As one of the witnesses at this hearing testified, the R&D tax credit was 

beneficial to his company during thc recession and hclped them dcvelop a ne\v product during <l 

dinicult lime; an investment that may not have been made but lor the credit.' The u,s. manufacturing 

sector provides millions of high wage jobs here in the U.S. and generates more than $1.6 trillion in 

GOP. With increased global competition, we need to ensure that the U.S. is the best place for 

companics to do business and conduct r~s~arch. There arc many other countries that ojfcr BOTH lo\vcr 

corporate tax rates and more attractive R&D incentives. The credit is needed to keep the U.S. 

competitive in the global race for investment dollars. 

The goal is for the U.S. to retain and attract global R&D activities across all sectors of the economy. 

The certainty provided by a permanent and strengthened R&D tax credit would enhance its incentive 

value. 

The continued inability of Congress to seamlessly extend the R&D tax credit (retroactive to January I, 

2012) and to agree on a permanent incentive for U.S. research and development expenditures, will 

have a dramatic impact on the number of R&D jobs created and maintained in the U.S. Given the 

Committee's focus on finding a long term solution within the context of tax reform, the R&D Credit 

Coalition urges Congress to pass a permanent, strengthened credit (retroactive to January 1, 2012) to 

ensure that R&D jobs re111ain and increase here in the U.S. 

Discussion 

The R&D tax credit, originally enacted in 1981, was designed to be an important incentive in sputTing 

private sector investment in innovative research by companies of all sizes and in a variety of industries. 

The enacuncnt ofthis incentive helped establish the U.S. as a leadcr in cutting-edge research. The 

purpose of the R&D tax credit is to encourage U.S. based research activity and to ensure that 

companies create high-paying jobs here in the U.S. In tact, during the 19805, the U.S. was the leader 

among OEeD countries in providing the best R&D incentives Cor companies. However, in recent 

years, many other countries have instituted more generous and often permanent R&D inee-nlivcs. As a 

result, according to an OEeD study, the U,S. \vas ranked 24th in research incentives among 

industrialized countries2

. 

In contrast to the incentives offered by a number of other countries, the temporary nature of the U.S. 

R&D tax credit makes it a less powerful incentive in terms of a company's R&D budgcts and decisions 

about where to locate new R&D activities. The certainty of a strengthened, permanent credit, 

especially in a tax retorm environment, is critical to maintaining U.S. leadership in advanced research 

and encouraging companies to continue to spend R&D timds here in the U.S. 

I Testimony of Kim W. Beck, president and CEO, Automatic Feed Company on BehalfofAMT - The 

Association for Manufacturing Technology before the U.S. House of Representatives, Committee on 

Ways and Means, July 19,2012. 

2 OECD, "Science, Technology and [ndustry Scorecard," December 2009. p. 79. 

2 
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The R&D credit has a significant impact on private R&D spending and the creation of research jobs. A 

recent study by the Center for American Progress concludes that, "the credit is effective in the sense 

that each dollar of foregone tax revenue causes businesses to invest at least an additional dollar in 

R&D. h In addition, according to a recem study by Ernst & Young, "In total, the overall policy··· the 

existing credit plus strengthening the alternative simplified credit - is estimated to increase annual 

privale research spending by SIS billion in the shOit-teml and $33 billion inlhe long-term:,4 

As noted above, many other countries offer both lower corporate tax rates and more attmctive R&D 

incentives:'. Accordingly, th~ U.S. should not engage in an '''either/or'' debate with respect to 10\vcr 

marginal rales and boosting U.S. job creation through R&D incentives when looking at options to 

reform the corporate tax code. To remain competitive in the global economy, the U.S. can and should 

provide an ctlcctivc and pcnnancnt incentive for R&D even if the corporate tax rate is reduced. 

MoreOlu, it is important to note that the R&D credit is ajobs credit-70 percent of credit dollars are 

used to pay the salaries of high skilled R&D workers in the U.S. The E&Y study also stated that, "the 

cr~dit and its enhancement is estimated 10 increase research-related employment by 140,000 in the 

short term and 300,000 in the long-teml.'" 

International R&D Tax Incentives 

The U.S. must maintain a globally compelitive tax system that supports high-skilled. high-paying jobs, 

here in the U.S. Failure to extend the credit retroactive to January 1, 20 J 2 as soon as possible and 

failure to permanently strengthen the R&D tax credit will put current jobs at risk of moving abroad, 

and jeopardize the expenditure of R&D funds in the U.S. Research and development will continue; the 

question is where will the R&D jobs be located. 

While the Unitcd States has offercd an "on-again. oft~again" incentive for more than 30 years, thc 

number ofOECD countries offering some sort of incentive for research has grO\vn dramatically in 

recent years as countries attempt to become leaders in research. The U.S. share of global R&D fell 

from 39 percent in 1999 to 33 percent in 2007 7 In addition, the following OECD chart shows that in 

2009. the United States ranked 24 among 38 industrialized countries olfering R&D tax incentives' 

J Center for American Progress, 'The Corpnrate R&D Tax Credit and U.S. Innovation and 

Competitiveness:' by Laura Tyson and Ureg Linden, January 2012, p.2 . 

.J Ernst & Young, '"The R&D Credit: An effective policy for promoting research spending," September 

2011, p. i. 

5 Deloitte, "Global Survey of R&D Tax Incentives," July 2011. 

o Emst & Young. "The R&D Credit: An elleetive policy tor promoting research spending:' September 

2011,1'.1 I. 

7 OECD, Ministerial Report on the OEeD Innovation Strategy, May 2010, p. 8. 

8 OEeD, "Science, Technology and Industry Scorecard," December 2009, p. 79. 
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OECD Science, Technology and Industry Scoreboard 2009 - OECD !&) 2009 - ISBN 9789264063716 

Tax subsidy rate for USD 1 of R&D, large finns and SMEs, 2008 

>,"l.argeflrms IlIISMEs 

0.5 

A recent National Science Board report concluded that the United States' lead in science and 

technology is "rapidly shrinking" as R&D jobs and overall R&D spending continue to increase taster 

outside the U.S. than here at home. The report shows that "betwcen 1999 and 2009 ... tbe U.S. share of 

global research and development (R&D) dropped from 38 percent to 31 percent, whereas it grew trom 

24 percent to 35 percent in the Asia region during the same time.')" 

Bipartisan Support for a Strengthened, Permanent Rc~carch & Development Incentive 

On a positive note, there is broad and bipartisan support for extending the research credit. Every 

Administration has supported the R&D tax credit since it was enacted. In a March 20 II slUdy, the 

Treasury Depattmcnt noted that, "[T]wo years ago, the President set an ambitious goal of achieving a 

level of research and development that is the highest share of the economy since the space race of the 

1960's - 3 percent ofGDP - a commitment he re-emphasizcd in his State of the Union address in 

20 II. The R&D tax credit is a vital component of achieving this goal and helping us out-innovate our 

competition. This is why, in addition to making it permanent, the President proposed ... to expand and 

simplify the credit, making it easier and more attractive for businesses to claim this credit for their 

research investment'. This proposal was subsequently included in the President's FY 2012 and FY 

<) National Science Foundation press release, "New Report Outlines Trends in U.S. Cilobal 

Competitivcn~ss in Science and Technology," January 17,2011. 

4 
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2013 Budget(s) and should be part of the refonn of our corporate tax system currently under 

consideration,,,JO 

Moreover, Congress has extended the credit 14 times since it was first adopted in 1981. In 21l11, 

Representatives Kevin Brady (R-TX) and John Larson (D-CT) introduced H.R. 942, the American 

Research and Competitiveness Act, and Senate Finance Committee Chaimlan Max Baueus (D-MT) 

and Ranking Member Orrin Hatch (R-UT) introduced S.1577, The Greater Research Opportunities 

With Tax Help Act. This legislation would provide impOliant certainty for U.S.-based research 

spending by making the R&D tax credit pennanent as well as simplifying and strengthening it, thereby 

increasing its etTec1iveness. 

Conc]usion 

The R&D Tax Credit was designed to ensure that companies from varied industries, including 

manufacturers and services businesses, condUL:t their research activities in the United States and L:fcate 

well-paying, highly skilled jobs here. That original purpose still holds true today, although increasing 

global competition is making it more difficult. It is vitally important that U.S. policy makers support a 

strengthened and pennanent research and development incentive as part of any tax refonn measure and 

seamlessly extend the credit as soon as possible. A robust and pennanent research and development tax 

credit is critical to competitiveness, innovation and U.S. jobs. tn the global economy many companies 

have a choice as to \.vhcrc they are going to do their research-and with many other countries offering 

both lower corpomtc income tax rates and more robust R&D incentives, the U.S. tax system must 

provide globally competitive R&D incentives that can be counted on by businesses. The R&D Credit 

Coalition looks forward to assisting members of the Committee and their staffs in gaining a more 

detailed understanding orthe competitive pressures faced by companies as well as of the rt!search and 

development lax credit and its impact on U.S. jobs. We also look t()rward to working together to 

advance legislation to scamlessly extend, strengthen and make pcmlancnt the R&D tax credit. 

Links to Studies: 

Center for American Progress, "The Corporate R&D Tax Credit and U.S. Innovation and 

Competitivenessl

' 

http://www.americanprogress.org/issues/2012/0I!corporateJ _and _ d.html 

Ernst & Young, "The R&D Credit: An effective policy for promoting research spending" 

h.lW;.[h~'.\~:YY.:.~n\.~~.!.\D9.1JWrjf~.~.~~!.1.~!r.~:.~,~rg!.p.nE§(rY,_K&..IL.\:~1:~:9.j.t,_g.~P'gIL.~9.1.J"J!.~~ __ A.().:p..4.r 

De1oitle, "Global Survey of R&D Tax Incentives:' 

bltp :!j'iV\v.w. inY(,~ljna ~1"1~fka ~ r~! LUn.~. org,:P 1:1 ~ s/010b~ p~ ·;)~u R,O!;· ~;;. 0S 1l(V~i\)2 (1 F iJ::~ I o/~2,O-~_~;)O~~ q 1 l ~ pdf 

)0 '1nvesting in U.S. Compel;tireness: The Benefits (?lEnhaJ1cing the Research and Experimentation 

(R&E) Tax Credit." U.S. Department of the Treasury, Mareh 25, 2011, page 1. 
219 

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220 

Scott Bucknell 


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I WANT MY COUNTRY BACK. 

All New goods are taxed at the register. 

All invoices include The State and Federal Tax. 

No more wholesale tax, 

No more resale tax. 

Every business sends taxes to the Dept of the Treasury, 

each month. (Government too.) 

There are no longer ANY other taxes. 

ABSOLUTELY NO OTHER TAXES. 

Each grocery store, each car dealer, every business 

Sends taxes to the Dept of the Treasury at the end of each 

month. 

Everyone's taxes are paid. No filing, no tax preparation. 

The Federal Dept. of the Treasury receives The monthly 

taxes, and applies these to the government expenses. 

The Dept. of the Treasury sends a percentage back each 

month, to each State, based on how much that State's 

businesses sent in. 

Results Would Be: 
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Cost of goods would decline immediately. 

Value of the dollar would go up. 

Inflation would go down. 

Manufacturing would come back. 

Exports would come back. 

Jobs would come back. 

Businesses would come back to the country as well as new 

ones from all over the World. 

Collusion and Graft in Congress would greatly diminish. 

Because no lobbies are paying politicians off. 

Special interests and special agendas are largely reduced. 

A banana costs 1.00. 

The store sells the banana for 1.30 

30 cents on the dollar is collected and sent to the Dept. of 

the Treasury. 

The Dept. of the TreasUlY puts 20 cents on the dollar 

toward Federal expenditure. 

The Dept. of the Treasmy sends 10 cents on the dollar back 

to each State. 

Each Month. 

Sure, costs go up for everyone, for a week. 

Then businesses realize they are able to operate and 
222 

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223 

Semiconductor Industry Association 


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House of Representatives Committee on Ways and Means 

Hearing on "Tax Reform and the U.S. Manufacturing Sector" 

(Hearing heid July 19, 2012) 

Statement for tile Record 

by 

Brian Toohey, President and CEO 

Semiconductor Industry Association 

August 2,2012 

The Semiconductor Industry Association SIA ("SIA") appreciates this opportunity 

to submit comments to the Committee on Ways and Means ("Committee") in 

respect of the Committee's July 19, 2012 hearing on "Tax Reform and the U.S. 

Manufacturing Sector" and how the current tax system affects U.S. manufacturers 

and how comprehensive tax reform might affect their ability to expand and create 

jobs. 

Background on SIA and the Semiconductor Industry 

SIA is the voice of the U.S. semiconductor industry, America's second top export 

industry over the period of 2006-11, and a bellwether measurement of the US. 

economy. Semiconductor innovations form the foundation for America's $1.1 

trillion technology industry affecting a U.S. workforce of nearly six million. 

Founded in 1977 by five microelectronics pioneers, SIA unites over 60 companies 

that account for 80 percent of the semiconductor production of lhis country. SIA 

seeks to strengthen U.S. leadership of semiconductor design and manufacturing 

by working with Congress, the Administration and other key industry groups. SIA 

works to encourage policies and regulations that fuel innovation, propel business 

and drive international competition in order to maintain a thriving semiconductor 

industrj in the United States, For more informaUon, see wItJw.sia··onllne,org, 

America's semiconductor industry is critical to our country's economic growth and 

recovery. Semiconductors are the fundamental enabling technology for the 

modern economy and an essential component of our nation's defense and 

homeland security, information and technology, global finance, transportation, 

health care, and many other sectors of our economy. Our industry serves very 
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competitive markets and is engaged in R&D, manufacturing, marketing and 

customer support functions all over the world. Yet today, it has approximately 

two-thirds of its wafer fabrication capacity located in the U.S., and more than 80% 

of sales are sourced outside the United States. Thus, we offer these comments 

from the perspective of U.S. headquartered companies in a leading U.S. export 

industry. We also comment from the perspective of a U.S. industry that spends 

18 percent of its sales on R&D in 2011, a total of $27 billion. This is one of the 

highest levels of investment in research and development of any sector of the 

economy. 

Semiconductor companies generally fall into one of three business models. The 

first business model consists of companies that own and operate their own 

manufacturing facilities, which are located in the U.S. and other countries. These 

companies invest in operations that perform R&D related to proprietary product 

design and manufacturing processes, manufacturing and marketing. Their wafer 

fabrication facilities are in many cases multi-billion dollar investments representing 

the most advanced and most costly manufacturing operations in the world. 

The second business model includes "fabless" semiconductor companies. These 

companies engage in product related R&D, design and marketing. They contract 

with other companies known as "foundries" to manufacture the wafers and 

perform assembly/test. This business model started about 25 years ago, when 

companies capable of manufacturing semiconductor devices from customer 

designs began to emerge. The evolution of this business model brought on a new 

era for the industry. Previously, a company did not have access to manufacturing 

capacity unless it invested a substantial amount of capital in wafer fabrication and 

assembly/test facilities. This was a significant barrier to entry into the 

semiconductor business. However, the evolution of semiconductor foundries and 

the fabless business model meant that small start-up companies with limited 

capital but the ability to develop and market creative new products, could become 

successful semiconductor companies. 

The third business model is made up of those in the foundry business which 

engage in contract manufacturing for the companies engaged in the fabless 

business model. They do not develop and sell their own products in the 

marketplace. Foundries perform R&D related to manufacturing processes and 

manufacturing. In some instances they also help customers with product designs. 

The foundry business model began with foreign companies headquartered in Asia 
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and these companies have grown significantly. Today, foundries exist in both the 

U.S. and foreign locations, but currently most of their manufacturing services exist 

outside the U.S. However, U.S. based foundry manufacturing capacity is 

expected to grow significantly over the next few years. 

Each of these different business models generates high-paying jobs. The 

average salary in the semiconductor industry is approximately $100,000. In 

addition, the semiconductor industry produces significant levels of indirect 

employment through the supply chain of providers of capital equipment and basic 

materials. For this reason, countries around the world compete to attract 

investments by the semiconductor industry. 

Countries Compete for Semiconductor Manufacturing 

The presence of a healthy semiconductor industry, including R&D, engineering 

centers, and in particular wafer fabrication facilities, provides significant benefits to 

a country's economy, not only in the form of the economic value that comes from 

the presence of semiconductor companies, but also in the form of spillover 

benefits as a high-tech infrastructure and an engineering community evolve from 

the industry. The positive effects from the multiplier effect of these spillover 

benefits can be substantial. 

Countries throughout the world are very much aware of these economic benefits 

and many of them have developed government incentives to attract investments 

in semiconductor manufacturing and R&D. These incentives appear in two forms. 

The first are incentives that are available to any company that meets the 

criteria under a statute, which would be similar to, for example, the tax 

credit for research and experimentation under the Internal Revenue Code. 

This type of incentive is aimed at the front end of the innovation process. 

Many countries have also adopted tax incentives for the back end of the 

innovation process. These incentives, referred to as patent and innovation 

boxes, typically provide low tax rates on the income stream, such as 

income from royalties or manufacturing. that flow from the IP that was 

developed. 

The second is incentives that are awarded on a discretionary basis to 

specific companies for proposed investments, where the companies go 
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through an application and selection process for the incentives, which 

would be similar to, for example, the process under which the Department 

of Energy has awarded tax credits under section 48C of the Code. 

Depending on the extent of a proposed investment, it is common for these 

incentives to include a broad package of benefits such as tax benefits 

(including income tax holidays for manufacturing), financing, subsidized 

utilities and technical training for employees. 

The incentives offered by countries around the world can be significant. One 

analysis of the potential cost differential from operating a wafer fabrication facility 

in the U.S. versus a foreign location offering a typical package of incentives, 

including an income tax holiday, indicates that the foreign operation would enjoy a 

$1 billion cost advantage over a ten-year period, and that about 70% of the 

savings would come from tax savings.' 

Thus, our U.S.-based manufacturing faces competitive disadvantages on tax cost 

at two levels. First, as is widely known, the U.S. tax rate is not competitive. When 

Japan reduced its corporate rate in April 2012, the U.S. corporate statutory tax 

rate became the highest in the OECD and most emerging markets as well. A 

manufacturing facility in most of the OECD countries and the developing countries 

key to our industry will enjoy a tax rate lower than the U.S. rate (this is so even 

under the assumption that section 199 causes the relevant U.S. rate to be 32%).;; 

Second, foreign statutory rates are not relevant when comparing the tax cost 

associated with our U.S. manufacturing to the tax cost of a foreign operation that 

has been awarded company-specific incentives. In those cases, the foreign 

effective tax rate often approaches zero. 

Criteria for Evaluating a Competitive Tax System 

In addressing the competitive global landscape, SIA believes that it is important 

for the Committee and policymakers to understand that we should not focus on 

competitive comparisons between the tax cost environment for a company's 

operations in the U.S. to the environment for the operations of that company's 

foreign subsidiaries. Instead, the relevant debate should focus on comparisons of 

the tax cost applicable to the earnings of our foreign subsidiaries to the tax cost 

on the earnings of similarly situated foreign competitors, whether they be standalone companies or subsidiaries of parent companies headquartered elsewhere. 

The critical distinction here is that, under the tax systems of most countries, the 
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local country tax imposed upon the active earnings of a competitor, or the foreign 

subsidiary of a competitor, is the final tax cost imposed on the entity's earnings. 

In contrast, the active earnings of our subsidiaries are potentially subject to a 

second level of tax, i.e., U.S. tax, depending on whether those earnings are 

repatriated to the U.S. The current system also provides a foreign tax credit up to 

the U.S. corporate rate, for foreign taxes paid. This "world-wide" tax system has 

been in existence for decades and is inefficient in today's global economy. 

The competitive disadvantage of this system lies with the fact that potential 

foreign earnings are "locked out" of the U.S. economy because they are taxed on 

repatriation, albeit with a foreign tax credit for taxes paid. The competitive 

disadvantage of the current world-wide system would be worsened under an 

overly broad base erosion or a minimum tax proposal that would impose a new 

category of Subpart F income on the active earnings of our subsidiaries. Again, 

we urge the Committee to consider the effect of any tax reform proposal in the 

context of the competitive position of one of our foreign subsidiaries compared to 

that of a competitor in the same country, just across the street and engaged in the 

same business functions. 

And we also submit to the Committee that this "company across the street" 

analogy is also relevant to the competitiveness of the U.S. as a manufacturing 

location for our industry, because of the importance of having a cost effective 

supply chain to customers. For example, in a typical product fiow, the wafers 

produced from a U.S. fabrication facility may be destined for sale as finished 

semiconductor devices to customers in Asia. Those wafers may be shipped to an 

Asian subsidiary that completes assembly and testing processes, which yield 

marketable devices. Those devices may be shipped to another subsidiary to be 

held in inventory in a regional product distribution center that it operates. Other 

subsidiaries are based in the customers' countries and will assist customers with 

their product deSigns, engage in marketing and arrange logistics. They will obtain 

sales orders which ultimately result in shipments from the product distribution 

center to the customers. In this example, foreign subsidiaries have performed 

three critical downstream functions for the U.S. wafer fabrication facility. To the 

extent that the cost of these functions is higher than the cost experienced by 

peers who perform the same functions in the same countries, and that cost 

differential exists only because the parent company is headquartered in the U.S., 

the U.S. becomes a less attractive location for the wafer fabrication facility. The 
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higher downstream costs produce a drag on the earnings from the wafer 

fabrication facility. 

How Tax Reform Can Improve the U.S. Manufacturing Environment 

SIA supports tax reform that places our operations in a more competitive position 

both domestically and globally. We believe that advancing the competitiveness of 

U.S. companies should be the overriding goal of tax reform. There are probably 

several ways to achieve this goal. For example, there are advocates of the 

principle that the corporate rate should be as low as possible, and that special 

provisions of the Code that confer tax benefits on specific classes of taxpayers or 

activities should be eliminated, i.e., the Code should not be used as a means to 

pick winners and losers in our economy, On the other hand, there are advocates 

for using the Code to incentivize selected behaviors such as, for example, 

engaging in research or hiring employees, or for penalizing behaviors such as 

using debt instead of equity for financing, or developing intellectual property 

offshore. SIA sees some potential benefits to the U,S. manufacturing sector from 

either approach, so long as the end result advances the primary goal of creating a 

competitive tax cost environment for U.S. companies. 

With that goal in mind, we offer our three priorities for fundamental tax reform. 

These priorities are: 

1. a significantly lower and globally competitive corporate tax rate; 

2. a competitive territorial tax system, and 

3. incentives for research and innovation which are competitive with 

incentives in other countries. 

We believe that the Committee's corporate tax refomn discussion draft of October 

26, 2011 is a step in the right direction. The proposed 25% corporate rate would 

clearly be a positive move toward making the U.S. more attractive for 

manufacturing. However, we offer two comments on this proposed rate. First, as 

outlined above, other countries which have a developed semiconductor industry 

and infrastructure currently offer substantial tax and other incentives for new wafer 

fabrication facilities. They would tax the profits from a new facility at close to a 

zero rate for several years, and then tax at a rate materially below a 25% rate 

thereafter.'" Second, a 25% rate might be less attractive if it is effectively offset by 
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changes to other provisions in the Code that affect manufacturers. Here, we 

again point to the example above of downstream business functions performed in 

foreign subsidiaries in support of a U.S. wafer fabrication facility. 

Likewise, we believe that the draft's basic structure for a territorial tax system 

would appear to put U.S. companies on a level playing field with foreign 

competitors. This is significant to U.S.-based manufacturing because it would 

eliminate the "lock-out" effect under current law and free up capital for 

repatriation. However, we repeat once more our concerns that base erosion or 

minimum tax proposals might impose an additional tax cost on the earnings of 

our foreign subsidiaries that would not apply to "the competitor across the street." 

And in particular we are concerned that some of the base erosion proposals 

single out foreign subsidiaries that own intellectual property and/or have low 

foreign tax rates. These proposals are troubling because the semiconductor 

industry is rich in valuable intellectual property," we derive substantial income 

from the property, and because it is common that. as a result of the tax policies of 

other countries, foreign semiconductor manufacturing and R&D operations have 

low effective tax rates. Low tax cost is part of the semiconductor industry's 

competitive landscape outside of the U.S., and it extends to all companies, not 

just U.S. owned subsidiaries. Therefore, depending on facts and circumstances, 

it is possible for a base erosion provision to place a semiconductor company in a 

worse competitive position than one under which tax reform never occurred. 

Our third priority for tax reform is a call for incentives for research and innovation 

which are competitive with incentives in other countries. As noted above, the 

semiconductor industry is a research intensive industry. R&D for both products 

and manufacturing processes is the lifeline for maintaining the leading edge that 

U.S. companies occupy in our industry. Today, most of our R&D is conducted in 

the U.S., and that is healthy for the U.S. economy, its technology infrastructure 

and its manufacturing. There is a natural linkage between R&D operations and 

manufacturing operations, and companies find advantages in the two being 

located in close proximity. And, just as with wafer fabrication operations, other 

countries have also established attractive and effective incentives for R&D. The 

Committee is aware that the U.S. credit for research and experimentation has, 

once again, expired, and even when it has been in effect, it has over the years 

become mediocre when compared to R&D incentives offered in other countries.' 

We urge the committee to extend the credit as soon as possible and not wait to 
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include it as a part of fundamental tax reform. Moreover, as a part of tax reform, 

we urge the Committee to consider expanding the credit to include other 

significant costs that companies routinely incur as a part of their R&D, for 

example, depreciation expense." 

The Committee is probably also aware that nine other countries have enacted a 

patent box'" incentive for R&D. A well constructed patent or innovation box could 

serve as an additional incentive for R&D and manufacturing in the U.S. 

Lastly, as mentioned previously, we believe it is possible for the U.S. to establish 

a more attractive framework for domestic manufacturing under either a low 

rate/broad base approach to tax reform or an approach that offers targeted 

incentives for manufacturing. It is of course possible that tax reform will consist of 

a combination of a somewhat lower rate and incentives:'; If policymakers prefer 

to explore the latter approach, there are probably several effective ways to 

enhance section 199 to make the U.S. more attractive for manufacturing. 

+ + + 

We appreciate this opportunity to provide the Committee with these comments. 

We hope they are useful. Our member companies have extensive experience in 

how other countries frame their tax systems to attract manufacturing. We offer 

ourselves as a resource for Committee staff to explore any aspect of these 

comments further. 

'The analysis was included in a March 14, 2012 letter from S!A to the Subcommittee on Select Revenue 

Measures. The letter provided SIA's comments on the November 17, 2011 hearing by the Subcommittee 
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on the Ways and Means discussion draft for tax reform. An excerpt from that letter which illustrates the 

$1 billion cost differential is as follows: 

An example of this advantage is in Exhibit I below. It is an analysis prepared several years ago 

that illustrates the cost differential of a wafer fabrication operation located in the U.S. vs. one 

located in a country that offers a tax holiday 

E~~lb~§ t·" A!m~~t t $iru@:~n (~~M& U*~~~m¢.~ ~t 

~~w (4~~,**~)$ A W~~~' f~~~ ki: TtN ~,1,~, "%-f.:§;, 

.:. Wafer Cost model compares 

alternatives based on a 10 year Net 

present Cost Percentage of10 year NPC 

Production starting in year 3 

Ramp with "current generation" 

technology products and transition to 

next gen products after 5 years 

100% 

~:. What factors drive the analysis 7 40% 

Cost differences driven by tax 

treatment, capital grants, other local 

factors 

Other local factors: utilities, labor, 

logistics 

COrIceptual300mmFAB10yrNPC 

~5.6B-$6.1B 

0% 

us Int'! 

This analysis shows that there is almost a one billion dollar cost advantage in operating the 

facility in the foreign location. It is based a 10 year net present cost; it assumes production 

starting in the third year with "current generation" technology products and a transition to the next 

generation of products after five years. The cost differences result from tax savings, capital 

grants and other factors such as labor, utilities and logistics. Note, however, that the 

overwhelming cost advantage is the tax savings. 

These are the statutory rates in some of the countries with significant semiconductor operations. 

Severa! of these countries would also offer tax holidays or other significant tax incentives for investing in a 

wafer fabrication facility. 
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233 

Society of Chemical Manufacturers & Affiliates 

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234 

Stephen Entin IRET 1 


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Written Submission of Stephen J. Entin 

for the record of the 

House Ways and Means Committee Hearing on 

Tax Reform and the u.S. Mannfacturing Sector 

Jnly 19,2012 

Mr. Chairman and Memhers of the Committee: 

J am currently President and Executive Director of the Institute for Research on the Economics 

of Taxation. I served as Deputy Assistant Secretary lor Economic Policy in the Treasury 

Deparlment lor eight years during the Reagan Administration. 

The Committee is considering: tht! state of U.S. mallut1l.cturing, and changes to the tax treatment 

of manufacturing under a possible tax reform enOrl. Taxes have a major effect on the 

profitability and competitiveness of U.S.-based manufacturing and U.S.-headquartered finns. 

There arc two hroad i~sue aress to consider - tax rates and tax basco By tax rates, I mean the 

schedule of marginal tax rates applied to taxable income. The tax base is what is considered 

income subject to tax. Income as defined for tax purposes is often signific<lntly different from 

the true income of the taxpaying business, making the elTective tax rate quite different limn the 

apparent statutory rate. As the Committee considers tax reform, it should give some very serious 

study to the combined effect of changes in tax rates and the tax base on the ahility and incentive 

to invest and employ capita! in the United States. Rate and base considerations are equally 

impOltant, and they may affect ditferent businesses and industries very different1y. A "one-sizetits-all" reform could be very disrupti ve and damaging. 

Tax rates. For Schedule C corporations, tax rates include the statutory tax rate of up to 35':;', at 

the corporate level, and the tax rates applied to corporate shareholders on dividends and capital 

gains. For non-corpomtc business owners and participants in pass-through entities, the key rates 

are the top rates on the taxpayers' personal income. 

Tax hase. The current definition of taxable income (the tax base) needs at ieal;)t two major 

refonTIs. The onc I shall discuss here is the capital cost recovery system, \vhich dictates ho\v 

rapidly a business ean deduct the cost of plant, equipment. structures. and inventory as business 

expenses, The other key decision is whether the tax is to be imposed on <lctivity within the 

United States (territorial taxation) or on the world-wide eamings of U.S.-based husinesses 

(global taxation). I will not address the global versus territorial isslles except to say that adopting 

territorial taxation would aid U.S. competitiveness, increase U.S. as well as foreign hiring hy 

U.S. multinationals, and greatly simplify the tax system. 

Institute for Research on ttle Economics of Taxation (!RET) 

529 14tl1 Street, N.W., Suite 420. Washington. D.C. 20045 

Phone: (202) 464-5113 Internet: www.ireLorg Email: sentin@ireLorg 
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Key points to guide reform. 

TIlt: income tax is heavily biased against saving and investment, hwting investment and 

lowering productivity and wages. All would gain by l1xing the biases. 

[ncrcasing th~ doubk taxation of corporate income by raising tax rates on capita! gains 

and dividends would dramatically reduce capital t()fmation and wages. and would not 

raise the expected revenue. 

Keeping the current treatment of capital gains and dividends while cutting the corporate 

tax rate would raise GDP, employment, and wages. It would increase, not decrease, 

federal revenue over time. 

The definition of the tax base (taxable income) is at least as important as the tax rate. 

Overstating business income by undercounting investment expenses (requiring 

depreciation instead of expensing) leads to less investment and lower wages. Expensing 

(immediately deducting the cost of the asset for tax purposes) is the right approach, and 

gains revenue over time. 

We should not repeat the Tax Reform Act of 1986, which tried to perfect the "broadbased income tax!!; rather, W~ should adopt a different tax base that is more neutral in its 

treatment of saving and investment relative to consumption, 

Do not trade expensing for a corporate tax rate reduction, Do both. That is the only \vay 

to measure income correctly across businesses and impose a ullif<-mn, neutral tax. The 

combination 'would obviate the need for the manufacturers' credit. Both provisions are 

affordab1e on a dynamic basis, taking added gro\vth into account. Use dynamic scoring. 

Current tax system is biased against saving and investment. 

Federal and state tax systems hit income that is saved harder than income used for consumption. 

The federal system has at least four layers of possible tax on income that is saved. 

I) 1neome is taxed when tirst earned (the initial layer of tax). 11' one uses the after-tax 

income to buy food, clothing, or a television, one can generally eat, stay waTIn, and enjoy the 

entertainment \vith no additional federal tax (except for a few federal excise taxes). 

2) But if one buys a bond or stock or invests in a small business with that after-tax income 

there is another layer of personal income tax on the stream of interest, dividends, profits or 

capital gains received on the saving (which is a tax on the "enjoyment" that one "buys" when one 

saves). The added layer of tax 011 these purchased income slre<'lm~ is the hash: incnme tax hias 

against saving. 

3) If the saving is in coqJorate stock, there is also the corporate tax to be paid belore any 

distribution to the shareholder, or any reinvestment of retained after-tax earnings to increase the 

value of the business. (Whether the after-Lux corporate income is paid as a dividend, or 

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reinvested to raise the value of the business, which creates a capital gain, corporate income is 

taxed twice - the double taxation qf corporate income.) 

4) If a modest amount is left at death (beyond an exempt amount barely big enough to keep a 

couple in an assisted living facility for a decade), it is taxed again by the estate andgtfi tax. 

An additional problem is that business income is often overstated, raising the effective tax rate. 

in particular, employing depreciation to define capital cost recovery allowances understates 

costs, overstates income, and effectively raises the tax rate on investment returns. Depreciation 

makcs businesses wait to claim part of the east oC their investment. The delay reduces the value 

of the write-olfs due to the time value of money and inllation. 

Real tax reform would end the biases. 

Real tax refonn \vould end these biases and over-statements or double counting 01' capital income 

by taking a few key steps. They would fundamentally shitt the tax base from "broad-based 

income" to "consumed incomeH

, "personal expenditures", or !teash flown. 

Step 1: Give all saving the same treatment received by pensions; either defer tax on 

saving and its returns until the money is withdra\\'n for consumption, or tax the saving up 

front and do not tax the earnings. 

Step 2: Adopt expensing instead of depreciation; altematively, adjust the depreciation 

allowances for the time value of money (index unused portions by an appropriate 

discount rate) to preserve thdr present value. 

Step 3: Tax income in the corporate sedor either at the level of the firm or at the level of 

the shareholder, but not both; that is, integrate the corporate and personal income taxes. 

Step 4: Eliminate the estate tax. 

Step 5: Move to a territorial tax system. 

Corporate reform: expensing, rate reduction, and the cost of capital. 

It is impossible to create a good pro-growth reform by tinkering with the corporate tax system in 

isolation and clinging to ""static revenue neutrality." Growth requires a net reduction in the tax 

on additions to the capital stock. Except for some blatant tax subsidies to uneconomical 

activities. as with alternative energy credits, there are no large anomalies in the corporate tax 

system that are not reductions in the marginal tax on capital. Many so~called tax expenditures 

are the proper tax treatment under a non-distorting, saving-consumption neutral tax. This 

includes expensing or accelerated depreciation, and other offsets to production costs. Ending 

these provisions would mismeasure income and offset the benefits oflower tax rates. 

A good tax reform would adopt a system that measures income correctly, and then decide what 

rate to impose to meet the desired revenue target. It should not pre-select a set of tax rates and 
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then distort the tax base and the definition of income to accommodate the revenue target. Tax 

reform should not become a process for devising a politically acceptable tax hike. It should be a 

move toward a more economically efficient tax system that allows the government to collect 

revenue with less collateral damage to economic activity, income, and employment. 

A good lax reform should ~pur growth, The Committee must be given information on what the 

proposed tax changes would do the economy. That requires a calculation ofthe impact of the tax 

changes on the required return, or "service price" of capitaL The service price is the pre-tax 

return on capital needed for it to be proLitablc and worth creating. If the service price is 

increased by the tax rei()fm, the capital stock will be depressed. along with jobs, wages, and 

other tax revenue. If the service price is reduced by the tax reform, the capital stock will expand, 

along with johs, wages, and revcnue from other taxcs. These eflccts will ICed back into the 

federal revenue stream. The Committee is not receiving this information under current 

procedures, either from the Joint Tax Committee, the CBO, or the Treasury. 

Don't trade e>.pensing for a corporate rate cut. Do both, 

Some reform plans, and some business representatives, would trade expensing for corporate rate 

cuts. This is a bad and unnecessary trade. Reduction or elimination of expensing, or lengthening 

of asset lives by other means, would raise the service price. Reduction of the corporate tax rate 

(and, for non-corporate businesses or pass-through entities, reduction of the top individual 

income tax rates) would [eduel': the service price. Also, increases in the tax rateB on capital gains 

and dividends would raise the service price, directly offsetting the economic benetlts of 

reduction in the corporate tax rate. Do not sell out the shareholders to please the executives. 

The Bowles-Simpson plan, and the Wyden-Coats bill would end bonus expcnsing and shrply 

increase asset lives in exchange for a lower corporate tax rate. At the rates being offered, the 

trade would raise the cost of capital, depress investment, and reduce employment. The expected 

net revenue gain in Bowles Simpson would never happen. Restrietiing the deductibility of 

interest by corporate borrowers has also been suggested. For example, the Wyden-Coats bill 

would disallO\\i the deduction of thl.: inllation component of the interest rate and interest 

payments, while continuing to tax the innation-felated portion of interest to the lender. These 

ideas would harm the economy. 

J~~m~n~hIK_~_n~Lt1~_lJJg1:1hy. Expensing of equipment is akin to the nelllral tax treatment of saving 

in pensions and IRAs. Tax neutrality between saving and consumption requires that we tax 

either the income that is saved or the retwl1s on the saving, but not both. Income put into a 

regubr 1RA or pension is tax deferred (expensed) and the subsequent returns (principal and 

earnings) are taxed on withdrawal. (In a Roth IRA, the saving is taxed before it is put into the 

account, and the earnings arc not taxed.) Fully expensing investment and taxing the returns (any 

earnings and residual scrap value) is neutral. Depreciation, which allows a deduclion or only a 

portion of the full present value of the investment, results in a partial double tax on the returns on 

the income invested. Depreciation makes it Jess attractive to usc income for invcstment than for 

consumption, distorting economic behavior and reducing capital formation and income. 

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Stephen Entin IRET 2 

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Stephen Entin IRET 3 


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Expensing is more cost-effective, in terms of both static and dynamic government revenue 

effects, because it focuses on new investment. Both expensing and a reduction in the corporate 

tax rate reduce the cost of capital and lead to more capital fomlation. However. some of the 

corporate rate reduction applies to current income fTom past investment. Expensing is 

concentratcd on reducing the cost of investment going f()rward. Expensing docs morc to 

increase the capital stock. sooner, than a corporate rate cut of equal "static" revenue cost to the 

government. Because expensing is a more powerful reduction in the cost of capital than 

corporate tax rate reduction, per dollar of static revenue loss. a revenue neutral trade of CUITent 

expensing fiJr a rate cut would raise the cost of capital and \vould lower capital formation. GDP, 

employment, and wages. 

A switch to expensing has mainly a temporary effect on the federal budget while some old 

investment is being depreciated along with the outlays for new investment now being expensed. 

After old investment has been written off: write-otfs decline to about the same amount as under a 

depreciation system with picces of several years' past investments being deducted in any given 

year. Even in static terms. the annual cost of expensing largely disappears over a few years. 

Most is gone within a decade as old 3, 5, 7, and 10 year assets complete their tax lives. Only 

small amounts of residual write-oils for 15 and 20 year structures linger beyond the budget 

window. There is a modest residual static tax reduction of about 5% or 10% of corporate tax 

revenue going torward because the quantity of investment is rising over time. Howevcr, in 

dynamic terms, expensing raises revenues in the out years due to additional gro\\th. 

One way to lower the initial cost of cutting the corporate tax rate while extending. expensing 

would be to implement 50% expensing on a permanent basis, and phase in a ten point cut in the 

corporate tax rate one point per year f{Jr tcn years. That would slow the GOP gains, but wc 

would get the full benefit eventually. However, the slO\ver rise in GOP \\iould be lost income faT 

the public during the transition, about ten times the amount of tax revenue saved by the 

government. It is not worth the budget savings. 

Corporate rate cuts needed too. Many typical linns in modest-protit industries that employ a 

typical mix of equipment and structures would benefit greatly from expensing. Some businesses. 

however, would prefer a corporate tax rate reduction, for several reasons. Some businesses have 

few assets to depreciate. Think of engineering. software. or architectural tirms. All their work 

involves hUmatl capital. and salaries are naturally expensed. Others do not care because they 

have abnormal profits that dwarf the nomlal return (patents, market powa). Those "economic 

profits" are taxed even under expensing. Those finns may prefer a lower corporate tax rate on 

these higher profits. A lower corporate tax rate ""ould boost the competitiveness of such firms in 

the world economy and increase their hiring and output in the United States. 

Accounting quirks cloud the issue. Other linns may Javor rate cuts over expensing for less 

savory reasons. Old firms gro\ving slowly may be jealous of new Jirms growing t~lst, with morc 

new investment to write off. Some executives may be marc concerned with the appearance of 

the bollom lines in their financial statements than with the real tax burden 011 their companies. 

Accounting conventions do not show accelerated depreciation as a tax reduction and a profit 

increase, even though it is both. The convention does show a tax rate cut as a profit increase. 

This quirk in the accounting may cause some business managers to recommend trading a bigger 
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real ta'\( saving from expensing for a smaller tax saving from a rate cut because it makes their 

annual reports look better. Congress may be talked into making a trade that reduces investment 

even though it seems to boost reported profits. 

The Financial Accounting Standards Board·s Accounting Stardards Codification of 

Generally Accepted Accounting Principles asstunes a slow pattern of '·economic 

depreciation·' as the norm. Any taxes saved by more accelerated recovery allowances 

arc reported as creating a future "ddcn'cd tax liability" of equal size, offsetting the 

current tax saving. The delay in the tax payment is not discounted to renect the value of 

paying later, so the value to the tlrm is never show-no 

°111is is bad accounting, and contrary to "\.\hat business school students are taught in 

deciding whether to invest or not. MBA candidates are correctly taught to ignore 

depreciation, and lo evaluate an investmenl by looking at discounted cash flow. 

Similarly, stock analysts arc trained in business school to back out expensing and value 

stocks on a cash Ilow basis. This is reflccted in their repOlis, so the shareholders and the 

stock market are not fooled. 

Lessons from past tax reforms. 

Several major tax refonns in the past have altered the treatment of capital cost recovery as \vell 

as the corporate tax. ratc, capital gains, and dividends. After reductions in the tax on L:apital, the 

economy has donc \velL After increases, it has faltcred. New proposals should bear these 

lessons in mind. 

Camtal taxes under Kennedy. The Kennedy tax reductions of 1962 reduced asset lives by 

moving from the Bulletin F lives to the Guidelines, and by introducing an investment tax credit. 

Combined. the efleet was similar to expensing. In 1963, Kennedy and Congress also enacted a 

phased cut in the corporate tax rate from 52 percent to 48 percent. and reduced individual tax 

rates. The cuts in the business taxes provided about 55 percent of the economic kick from the 

Kennedy tax packages. The 1962 elements provided roughly two-thirds of the business tax cut 

contribution, about twice the effect of the corporate rate cuts of the 1963 Act. Thc Kennedy cuts 

spurred several years of above normal economic growth, until the Johnson Vietnam surtax 

reversed the eflect.' 

APR.~ In 1971, the Treasury encouraged investment by modernizing the recovery allowances 

with the introduction of the asset depreciation range (ADR) and expanding the ITC'. These 

changes had a slightly larger impact on the service price than the subsequent two point reduction 

in the corporate tax rate in the 1976 Act from 48~'o to 46%.2 

) Stcphen J. Entin. "Economic Consequcnces Of The Tax Policies Of The Kennedy And Johnson Aumini"trations." 

!RET Policy Bulletin. No. 99. September 6. 20! 1, IHlr;/!i[:~J.:"s~r12-,>qh03JTb~_i~~U~Pt 

~ Stephen.l. Entin, "The Nixon, Ford. And Carler Era Tu:-\ Policies," lRET Policy Bulletin, No. 102. November 1, 

2011. [;gp_~,/i!:~~:\:)_!g~·.rl_~!?::~~LIf{~ LQ L·FP~· 
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U.S. Chamber of Commerce 


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in the Eisenhower Administration. Capital gains and dividends would be taxed at rates up to 

22.75%. In spite of retaining the top business tax rates of 35% for individuals, alld cutting the 

top corporate tax rate to 24% for corporations, \\lyden-Coats would raise the service price of 

capital and depress the growth of GDP. I estimate that Wyden-Coats would reduce GDP over 

time by 4.3%, with 3.2% due to the change in depreciation alone. The adverse shift in the tax 

treatment of dividends and capital gains \\'ould more than cancel out the bcnefils of the proposed 

cut ill the corporate tax rate. Although the bill is scored to be about revenue neutral, it would 

lose substantial revenue due to the drop in GDP.' 

Tax treatment of interest. 

Another tax change sometimes mentioned as a partial "pay-for" for a corporate tax rate reduction 

is the restriction of the interest deduction. (For example, the Wyden Coats bill curbs interest 

deductions for corporations by disallowing a deduction of the inflation portion of the interest 

rate. while continuing to tax lenders on the lnflation portion.) Restricting the deduction of 

interest by borrowers, while continuing to tax lenders, is honible tax policy. It exaggerates the 

tax base. It is not a tit response to the higher taxation of equity compared to debt tinanee. That 

problem arises from the double taxation of corporations and shareholders on the same income, 

That should be ended by one of the many methods of integrating the corporate and individual 

tax, or making all corporations pass-through entities. The double taxation should not be 

extended to debt finance to even out the differential. (Nor should pass-through entities be 

attacked in the process of tax reform. They are being taxed in a more nearJy correct, more 

saving-consumption neutral manner than C-corporations.) 

Financing a purchase is not additional GDP over and above the production of the machine or 

building or consumption item or service (except for the small amount of intermediation services 

provided by the bank or broker) tbat is part of national output and income. Taxes on financing 

flows should be a wash to the Treasury, as when you deduct the interest you owe me and I pay 

tax on it. Not allowing the deduction is wrong. Either interest should be deductible by the 

borrower and taxable to the lender, or non-deductible and non-taxable. 

Rut arcn't some savers/lenders tax exempt? Yes, but that is because Congress created a tax 

break for charities, presumably because it furthers importam public policy goals. It is senseless 

to create an incentive at one end of a transaction only to take it back at the other end. In 

pmiicular, it is ""Tong to punish all borro\vers if some lenders are tax exempt. Note that tax 

exempt entities are not the marginal sources of !ending, because they arc limited as suppliers of 

funds by the amount of their grants and contributions, and by the distributions they are required 

by Ja\'·,r to make. At the margin (where it matters), when people \vant to e.xpand the capital stock, 

the lenders who provide the saving are taxable. 

Conclusion. Expensing and corporate rate reductions are both powerful spurs to inveslment. 

Expensing is less costly in a static revenue sense, and its cost diminishes with time. In a 

dynamic sense, both would eventually return their costs to the Treasury by increasing revenues 

from other taxes due to added growth ofGDP. Both should be part of a pro-growth tax reform. 

5 Stephen.l. Entin and Michael Of The Wyuen-Couts T<:!x Plan," JRET Policy 

Bulletin, No.1 00, October 28, 2011, """,""'''','V'''''''''''''''',' .. '''.' 

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u.s, CHAMBER OF COMMERCE 

Statement 

of the 

U"S" Chaluber 

of COn1.111erCe 

ON: Hearing on Tax Reform and the U.S. Manufacturing Sector 

TO: House Committee on Ways and Means 

DATE: July 19, 2012 
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The U.S. Chamber of Commerce is the world's largest business federation, 

repre~enting the interests of more than 3 mil1ion businesses of all sizes. sectors, and 

regions. as wel! as state and local chambers and industry associations. 

More than 96 percent of the Chamber's members are small businesses with 

100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, virtually 

all of the nation's largest companies are also active members. We are particularly 

cogniLant of the problems of smaller businesses, as well as issues lacing the business 

community at large. 

Besides representing a cross-section of the American business community in 

terms of number of employees, the Chamber represents a wide management spectrum by 

type of business and location. Each major classification of American business --

manufacturing, retailing, services, construction, wholesaling, and finance - is 

represented. Also, the Chamber has substantial membership in all 50 states. 

The Chamber's international reach is substantial as well. It believes that global 

interdependence provides an opportunity, flot a threat. In addition to the 

U.S. Chamber ofColllmerce's 115 American Chambers of Commerce abroad, an 

increasing number of members are engaged in the export and import of both goods and 

services and ha\·e ongoing investment activities. The Chamber favors strengthened 

international competitiveness and opposes artificial U.S. and foreign barriers to 

international business. 

Positions on national issues arc developed by a cross-section ofChambcr 

members serving on committees. subcommittees, and task forces. More than 1,000 

business p~oplc participate in this process. 
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INTRODUCTION 

The Chamber thanks Chain"an Camp and Ranking Member Levin tflf the opportunity 

to comment on how comprehensive tax reform could improve the ability ofU,S. manufactur~rs to 

contribute to job creation and economic grmvth. 

The Chamber commends this Committee for its continuing work on fundamental tax 

refonn £Ind ~trong!y supports these cITorls. However, we believe th<lt trut: fundamental tax 

refolll1 wmllot take place before year end. The Chamber therefore urges the Committee and 

Congress to act immediately to extend all expiring 2001 and 2003 tax rates (including current 

marginal rates, dividend and capital gains rates, and estate tax relief), to extend vital expired and 

expiring business tax provisions, and to provide alternative minimum tax (AMT) relief Extending 

al1these provisions now will help to prevent the negative impact on jobs and the tragile economy 

that is likely to result from inaction. Simult<lncously, the Chumber urges this Committee and 

Congress to continue to \vork toward comprehensive tax reform. 

THE NEED FOR IMMEDIATE ACTIO"! 

Unless Congress and the President act, the 2001 and 2003 tax rates will expire on January 

1,2013. In addition, many traditional business "extenders" expired at the end of2011, and 

otbers will expire at the end 01'2012. 

Failure to act on these rates and these expired and expiring provisions could be 

particularly hard for domestic manufacturers. Recent estimates suggest that between 70 percent 

and 8l percent of domestic manufacturers are organized as pass-through entities, meaning they 

pay their taxes under the individual tax code and will be subject to the higher marginal rates. 

Further, the traditional business extenders, such as the research and development (R&D) tax 

credit. help manufacturers innovate and compete in the global marketplace and contribute to 

economic growth and job creation in the United States. 

The ramifications of failing to extend current tax rates and expired and expiring 

provisions are further compounded by the draconian, ill-designed, across-the-board discretionary 

spending cuts that are scheduled to begin on January I. The Congressional Budget Office 

("CBO") estimates that failure to address the expired and expiring provisions, combined with 

these looming spending cuts, will result in an estimated $600 billion fiscal policy reduction in 

2013.' 

The impact or inaction on the weak economy could be devastating. CBO estimates that 

growth is expected to slow trom 2.2 percent in 2012 to only 0.5 percent in 2013 and to remain 

below its potential rate untilthc Jirst half of 2018. CBO further projects that unemployment will 

increase by 2.0 million, raising the unemployment rate by about 1.0 percentage points.' 

According to CBO, "given the pattern of past recessions as idcntitlcd by the National Bureau of 

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Economic Research, such a contraction in output in the first half of 20 13 would probably be 

judged a recession.'" 

Similarly, Mark Zandi, from Moody' s Analytics, estimates that without changes to liscal 

policy, the liscal drag will subtract more than 3.0 percentage points Irom GDP in 2013 while 

former Federal Reserve Vice Chairman Alan Blinder believes the "wsulting fiscal contractionconsisting of both tax increases and spending cuts ... would be about 3.5 percent of gross 

domestic product" and would be a "disaster I,,, the United States." 

Congress and the President need to act immediately to prevent the negative impact on 

jobs and the tragile economy that is likely to result /i'om failure to extend the expired and 

expiring tax provisions, The best way to get the economy growing fast enough to create jobs and 

drive the unemployment rate down is to ensure that taxes do not increase for consumers and 

businesses. 

The Chamber appreciates that all tax policies must bc carefully examined in the context 

of fundamental tax refonn. However, as we \\'ork towards that fundamental, comprehensive tax 

reform, we must not delay extending the 2001 and 2003 tax rates and expired and explring 

provisions, 

GlobaICompetitiveness 

For American \A:orldwide companies to compete in global markets, they need a level 

playing field. The United States currently has the highest corporate tax rate in the world. 

Moreover. the United States is the only major industrialized Organisation for Economic 

Cooperation and Development "OECD") country that continues to employ a worldwide system 

of taxation, This high tax rate and possibility ofdoub1c taxation. while mitigated by provisions 

such as deferral and the foreign tax credit, harms the ability of American worldwide companies 

to compete against toreign companies who face little or no home country tax on their foreign 

earnings, 

As noted, the U.S. tax code is lagging sadly behind its worldwide competitors. First, the 

U.S. marginal corporate tax rate, at 35 pereent, is completely out of step with other major 

industrialized OECD nations. As noted by the Tax Foundation,4 a nonpmtisan organization, 

"2012 marks the 21st year in which the U.S. corporate tax rate has been above the simple 

average of GEeD nations, Even if we accowlt for country sizes, the weighted average of OECD 

nations fell below the U,S. rate in 1998 and has been getting lmver ever since." 

Further, we not only shackle our businesses with high rates, but we have taken no action 

to lower our rate as other countries have acted, As the Tax Foundation notes, ·'there have been 

) See id . 

.. See I-Todge, "The Countdov."n is Over. \Ve're #1." Tax Foundation. ami/able at 

http://ta-xti:1undation.orglartic]elcountdowl1 w ovcrw wen>l. 

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133 major corporate tax cuts globally since 2006. Indeed, between 2006 and 20 I 0 alone, morc 

than 75 countries cut their corporate tax rates - some more than once." OUf major trading 

pmincrs- Canada and Great Britain - have already taken steps to make themselves more 

competitive by dropping their corporate tax rates, while the United States has done nothing to 

reduce rates. 5 

In addition to our high rates, we remain the last major industrialized aEeD country with 

a worldwide system of taxation. As countries like Great Britain not only lower rates but shift to 

quusi-tcrritorial systems of taxation, the United Stales continues to overburden American 

businesses. Other countries are shifting to more efficient and globally conducive systems of 

taxation, while we are standing by and doing little to help American companies compete, let 

alone \",in. 

We must act to address our high corporate tax rates and antiquated system of taxing 

foreign somcc incomc to allow American worldwid0 companies, including U.S. manufacturers, 

to compete globally. Tax reform legislation should lower the corporate tax rate to a level that 

will enable all Am~rican worldwide companies, including U,S. manllf~lclurers. to compete 

successfully in the global economy. further, the current worldwide tax system should be 

replaced with a telTitorial system for the taxation of foreign source income, 

Pass,Through Entity Considerations 

As mentioned above, between 70% and 81 % of domestic manufllcturers are organized as 

pass-through entities. These pass-through businesses are a critical source of job creation and 

innovation in the United States. 

Further. according to a study by Ernst & Young, more than 90 percent of businesses in 

the United States arc organized as pass-through entities. That study also found that individual 

O\\Tlers of pass-through entities paid 44 percent of all federal business income taxes between 

2004 and 2008 and, moreover, that pass-through businesses employ 54 percent of the private 

sector work force in the United States.' Pass-through businesses are a critical source of job 

creation and innovation in the United States that cannot be ignored in fundamental tax reform. 

Under current law, the same top marginal incomc lax ratc of35% applies both to 

corporations and p<tss-through entities. 1n addition, business tax expenditures included in the 

code apply to both corporations and pass-through businesses. If corporate tax reform takes place 

separate from individual tax reform, pursuant to which the corporate rate is lowered in exchange 

for the elimination or reduction oCbusiness tax expenditures, pass-through entities, including 

manufacturers, will lose the benefit of business tax expenditures without a corresponding rate 

reduction. Tax rd()rm therefore should lower both the corporate and individual rates and keep 

them synchronized. 

"See ill. 

(, Ctrroll ,H1J Pntntc, '"The HO\,\7-Through Hl\Sl11CS~ Sector ;tlld Tax Reform," .\pn12l11 L (Il '(/d,;hk at htrpI/\\'\\'\\'.~Cotr 

nrg/\\p-col1tt'm/upl(lads/2011 /04/How 'l'hrough-Rep()ft-hnal':2011-0-l--UR.pdf. 

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R&D Incentives 

The Chamber has long advocated that R&D expenses, an integral component oj' 

manufacturing bllsine~ses. should be deductible in the year incurred, and a larger credit for 

increases in research expenditures should be allowed and made permanent. 

The United States was the first country to introduce a tax credit to support business R&D. 

In the 1980's, the United States had the most generous tax treatment of R&D of all OECD 

countries. Since then, morc and more countries have recognized the importance of research and 

innovation for economic growth, and they arc aggressively pursuing R&D activity. 

A recent Information Technology and Innovation Foundation paper7 notes that many 

studies by independent academics have f()Und that the R&D incentive has a positive impact on 

economic growth and that, as a result, other countries are outcompeting the United States for 

R&D investments, and the accompanying jobs and economic activity. Examining our position 

globally, the paper concludes: 

By 1996 the United States had fallen to seventh in R&D tax generosity among the 30 

OECD nations, behind Spain, Australia, Canada, Denmark. the Netherlands, and France. 

And the slide continued. By 2004 we had fallen to 1 tho Even \vith the recent expansion 

of the ASC tram 12 to 14 percent the United States was only able to hold position at 17'h 

(and 19th for small businesses R&D incenLives), as other nations also expanded their 

R&D tax incentives. Ho\vever, it is not just OEeD nations that have overtaken the United 

States. A number of other nations, including China, India, Brazil, and Singapore, provide 

more generous lax treatment of R&D expenditures. 

Because innovation is such a cnlciai long-term driver of growth and jobs, any reform to 

the tax code should contain incentives for companies to conduct research and development 

activities in the United States and locate the resulting intellectual property within U.S. borders. 

Any changes to the tax code should be permanent to cnsme celtainty for manufacturers 

and other business sectors that are striving to expand, create jobs, and remain competitive. U.S. 

businesses are disadvantaged by the uncertainty that results fTom the temporary nature of so 

many crucial business tax provisions. 

Simplification 

Tax reform also should ensure that the tax code contains simple, predictable and easy to 

understand tax rules to improve compliance and reduce the cost oftax administration. All 

businesses must grapple '\vhh the tremendous complexity of the cutTent tax code. The Natjonal 

See Information Tcdmology and Innm·ation Foundation, "I i j:, Not Enough: The Case for a More Robust R&D 

rax Credit," availahll! al hHp:/J\\-\\,w.itif.orgitile..,/20 ll~ !7~i~·not-cnough.pdr. 

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U.S. Steel Corporation 


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DATE: 

TO: 

FROM: 

SUBJECT: 

Tran~rnitt(lISupplem~nt 

August 2, 2012 

The Committee on Ways and Means 

U.S. House of Representatives 

Scott Salmon 

General Manager, Governmental Affairs 

United States Steel Corporation 

901 K Street, NW, Suite 1250 

Washington, DC 20001 

(202) 783-6797 

SRSalmon@uss.com 

Hearing on Tax Reform and the U.S. Manufacturing Sector 

Attached please find a written statement to be included in the official record of the full committee 

hearing held on July 19, 2012 on Tax Reform and the U,S. Manufacturing Sector. Please direct 

questions concerning this statement to the name and address listed above. 
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WRITTEN STATEMENT SUBMITTED FOR CONSIDERATION TO: 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRES.ENTA TlVES 

HEARING ON TAX REFORM A:'IID 

THE U.S. MANUFACTURING SECTOR 

HEARING DATE: JULY 19, 2012 

SUBMITTED BY JOHN P. SURMA 

CHAIRMAN OF THE BOARD OF DIRECTORS and 

CHIEF EXECUTIVE OFFICER 

ON BEHALF OF 

UNITED STATES STEEL CORPORATION 

600 Grant Street 

Pittsburgh. PA 15219 

AUGUST 2, 2012 

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JOHN P. SURMA 

UNITED STATES STEEL CORPORATION 

WRITTEN STATEMENT SUBM ITTED FOR CONSIDERA TION TO: 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

HEARING 0'1 TAX REFORM AND THE U.S. MANUFACTURING SECTOR 

Hearing Date: July 19, 2012 

United States Steel Corporation ("U. S. Steel"), a FortUne 500 company, is an 

integrated stecl producer of Ilat-rolled and tubular steel products with major production 

operations in North America and Europe. An integrated sleel producer uses iron are and 

coke as primary raw materials [or steel production. According to World Steel 

Association's latest published statistics, we were the thirteenth largest steel producer in 

the world in 20 II. U. S. Steel is also engaged in other business activities consisting 

primarily of iron ore mining, railroad transportation services, and real estate operations. 

U. S. Steel appreciates the opportunity to contribute to Il,e discussion that 

OCCUlTed during the Hearing on Tax Refonn and thc U.S. Manufacturing Sector (July 19, 

2012). Our company also previously submitted a \vritten statement in connection with 

the Hearing on the [nteraction of Tax and Financial Accounting on Tax Reform 

(Februmy 8, 2012). 

My vlrittcn testimony is based on my experience as the Chainnan of the Board of 

Directors and Chief Executive Officer ofU. S. Steel. One of the key goals of my job, 

simply put, is to guide our company's business decisions to ensure that shareholder 

capital is invested where it ean produce the greatest rdurn. Leading an enterprise as 

complex as U. S. Steel, of course, involves many other considerations that also determine 

our success, but return on capital is ho\v the markets view and reward performance. 

The riseal situation our country presently faces requires pragmatic leadership and 

vision. There is a growing awareness that the U.s. is falling behind in the global competition 

for capital investment. Our mallufacturing sector has been neglected for too long alld our 

society and its citizens arc \\forse for it. As tbis Committee recommends policies to revive 

economic growth, address fiscal imbalance, and increase revellues to fund government, I 
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urge you to recognize that not all taxable income provides the same impact to our economy 

and that overly simplistic policies wi11 not deliver optimal results. 

1 filmly believe 1n the role capital-intensive manufacturing must play in any large, 

healthy economy. Ours is an industry that creates value from the most hasic ofemth's 

elements, The transformations we effect create advanced materials that preserve and expand 

oW" food supply and that cml be used to build our homes, our cars, our roads, bridges and 

other inirastructurc. Manufacturing is an industry that supports good-paying jobs. Steel is an 

industry \vhere, for every direct job, there exist another seven else\vhere in the economy. 

Similarly, for eve,)' $1 increase in sales of iron and steel mill products, total output in the 

U.S. economy increases by $2.66. Few other industries even come close. I submit that a 

"italmunufacturing sector is something this Government should strivc to encourage and 

preserve because it is a proven source of employment and an engine of economic grovvth and 

prosperity. 

The main goal of business tax reform, \\'hile being mindful of current and projected 

fiscal considerations, should be to make the United States or America a more attractive venue 

for investment, especially in manut:lchlring, in order to promote economic growth and job 

creation. While we an~ encouraged by proposals for a reduction in the corporate tax rate to 

induce ncw capital invcstmcnt, we continue to be extrcmcly conccnlcd that too narrow a 

focus on rates alone could lead to reduced economic growth. Specitlcally, the retention and 

even the enhancement of al"celerated depreciation, the retention of the last-in, first-out 

(LIFO) inventory method, the ability to use exisling minimum tax credit (MTC) 

carryfc)wards, and a significant reduction in thc corporale tax rate would be powerful tools to 

promote new investment in the United States. 

For U. S. Steel, and we would expect t')f most manufacturers, the availability of 

cash is extremely important in making: investment decisions, Cash Dow and liquidity 

considerations are major components of investment decisions and provide businesses 

with the conlidence to continue 10 invest in projects that will grow America's 

manuJ~ll"tilling base, Cash Jlow is as important as book eal1lings, and companies that 

emphasize book earnings over cash flow may find themselves investing in projects that 

over the long term result in lower economic value and less job growth. 

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U. S. Steel requires significant capital investments for its steel manufacturing and 

iron ore facilities <lnd we look to the net present value of future cash flmvs as a critical 

factor in making discretionary investments. Taxes arc a major clement or cash tlow for 

any project, and are determined by taking into account both the tax rate and the timing of 

tax depreciation deductions. A lower tax rate will undoubtedly produce a future cash 

lIow benefit, bUlthat benefit may be more than offset by increased cash laxes due to 

delaying depreciation deductions. Accelerated depreciation and bonus depreciation have 

a substantial impact on all ofU. S. Steel's investment decisions and are built into our 

models lor evaluating the viability of capital projects. Eliminating accelerated 

depreciation, LiFO, and MTCs in order to pay lor lower lax rates willlikcly increase 

taxes on capital-intensive manufacturers like U. S. Steel and thereby reduce capital 

invesullent in domestic manufacturing. This is not the direction that business tax refoml 

should take. 

Instead of eliminating accelerated depreciation in order to pay for lower tax rales, 

we respectfully propose the Committee consider a different approach, which is making 

50% bonus depreciation permanent and retaining accelerated depreciation l<)f the 

remaining 50% basis. To mitigate the negative revenue effects. the rate reduction could 

be phased in over time. The end result of rate reduction and accelerated depreciation 

'would encourage ne\v investment and allow American manufacturing to grow. Using 

dynamic scoring, this could even result 1n increa-;ed revenue to the T re-asury. 

Our company is presently undertaking a large capital investment program with 

total spending in 2011 and 2012 exceeding $1 billion. We are currently building a new 

coking facility in Pennsylvania and a coke substitute facility in Indiana, and recently 

completed a $lOO million upgrade to pipe mill facilities in Ohio. A 50% owned joint 

venture is currently building a continuous annealing line in Ohio that will manufacture 

high strength steel Jar the domestic auto industry. We also have several dozen other 

projects underway ror racilities in Alabama, Illinois, Indiana, Michigan, Minnesota, 

Texas and dsewhere. These investments have created thousands of construction jobs and 

will result in hundreds ol"pennanent jobs and billions of dollars in goods and services 

hcing boughtlrom local and national suppliers. However. these and future capital 
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projects wil! not he as viable if accelerated depreciation is changed or eliminated, and 

some may not be economically supportable at all without accelerated depreciation. 

A lower overall tax rate benefits hoth old and new investments-although on a 

present value basis it is more beneticial to existing facilities. To the extent that 

accelerated depreciation is eliminated to reduce the tax rate, new investment is actually 

penalized because it bears the fuH bLlrd~n of reduced depreciation. This combination of 

lower tax rates and reduced depreciation deductions increases the cash flows (:.md 

profitability) of old investments relative to new ones. and ironically reduces the 

likelihood of ncw domestic investments in manufacturing bdng made. In contrast, a 

lower tax rate combined with accelerated depreciation provides a strong incentive for 

American businesses. like U. S. Steel, to invest in new domestic manufacturing projects, 

thus creating new jobs and expanding the U.S. economy. 

Other countries with lower tax rates than the United States still encourage capital 

investment to fuel growth. For example. Canada, \vhere we also have substantial 

operations, has made investment more a((ractive by reducing the corporate tax rate while 

continuing to allow accelerated depreciation. Canada has a lower federal corporate tax 

rate than the U.s. (the Canadian corporate rate in 2012 is 15%, which. when combined 

with provincial rates is approximately 25'010), and it makes accelerated depreciation 

available to encourage investment. Even if the U.S. corporate income tax rate (about 

40% for federal and states) is reduced to be closer to the Canadian rate, if accelerated 

depreciation is eliminated in the U,S. then companies with manufacturing operations in 

both countries will still have a tax incentive to invest in Canada rather than in the U,S, 

Kccping accelerated depreciation in place would bclter position the Unitcd States as a 

desirable location for new manufacturing investment. 

Like the elimination or accelerated depreciation, the elimination of the last-in, 

first-out ("LIFO") method of' inventory accounting would have a detrimental impact on 

U.S. manufacturers. The objectivc of UFO is to permit taxpaycrs to propcrly match 

current revenues with current replacements costs, and thereby pay taxes on income that is 

actually realized. UFO was lirst allowed for lederal income taxes in the 1930s, ,md has 

continued through today without significant modilication. U, S. Steel has consistently 

used the UFO method for valuing inventories since 1941, 

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The elimination of the LIFO method would result in many U.S. manufacturers 

paying a one-time tax on their LIFO reserve for inventory on hand, which is the 

difference bet\vecn current replacement costs compared to its vallie under LlFO. U. S. 

Steel estimates that the repeal of LIFO could cost us over $450 million at elment tax 

rates, reducing our ability to invest 111 our U.S. operations and create new mannfacturing 

jobs. !\1any other domestic manufacturers, including many of ollr customers, also use the 

LfFO inventory method, and jts repeal could also have as significant an impact on them 

as it would on us. As the result of increased taxes Irom the repeal of LIFO, these 

manuf~lcturers would han) less cash available for expansion, fluthcr slO\ving our nation's 

recovery, and reducing flilurejob growlh. Even if this lax increase due to the repeal of 

LIFO is spread over a number of years as has been suggested, the negative impact on 

capital available for ftlture investment in domestic manut:lcturing would be significant. 

Another item that tax rcfoffil should take into account is minimum tax (;redit 

('"MTC") carry forwards generated under the current corporate income tax regime. MTCs 

are generated when corporations have tentative minimum tax ('"TMT') in excess of 

regular tax and arc subject to the alternative minimu111 lax ("AMT"). MTCs can be 

carried forward to later years to reduce reguiur tax down to lhe TMT amount. MTCs 

available for carryover are generally recorded as assets under GAAP. U. S. Steel, like 

many companies in manufacturing and mining, are often subject to the AMT because of 

regular tax deductions for items such as accelerated depreciation, LIFO, and percentage 

depletion, all or a part of which are tax preferences in computing AMT. 

Several tax reform proposals, including the recent.ly proposed "Pathway to Job 

Creation Through a Simpler, Fairer Tax Code Act of20l2 (H.R. (169)," recommend the 

elimination of AMT. While we support this, we are concerned about the treatment of 

unused MTCs irthc AMT is eliminated. Ifc",isting MTCs available for carryover can't 

be used against income laxes generateJ afler lax rdom1, U. S. Steel and many other 

manufacturing and mining companies wil110sc these assets and will have to take a 

financial book charge for MTC carryforwards rdlccted as assets on the financial books, 

impacting earnings and negatively afIecting the ability to raise funds for future capital 

inveslments. We recommend that MTC carryrorwards be retained under tax reform and 

either bc refunded or allowed as a credit against income tax determined under tax reform. 
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William Lee 

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