tv [untitled] August 1, 2011 11:24pm-11:54pm EDT
as these economies grow. to be successful in any market, businesses need fertile ground to grow. that includes access to skilled employees, reliable availability of energy and other essential resources, and a competitive, stable, and predictable tax and regulatory environment. i'd like to now address the three key ways the tax system could improve the further l ground in the united states and lead to more up vestment, job creation, and economic growth in our country. first, we need a more competitive tax rate. the combined federal and state tax rate averages 39% which significantly exceeds the rates in most other countries. the average combined tax rate of the oecd is now 25% and is expected to decline further. in the competitive global market, u.s. companies are at a significant disadvantage versus non-u.s. companies benefits from
lower tax rates in their countries. 39% here, 25% else elsewhere. when a u.s. companiments to grow outside the country, we're way behind before we even get started. in addition to the high tax rate, the u.s. tax worldwide earnings and most developed countries don't tax companies in a similar manner. under the current u.s. system, all income is subject to u.s. tax creating an incentive for companies to leave the cash outside the u.s.. if we were able to freely bring our foreign income back home to the u.s., we'd have the freedom to invest earnings in product development, new capital spending, or return them to the shareholders who can invest in the u.s. economy. outside the u.s. is most likely invested overseas creating foreign rather than american jobs. this causes the nument nationals to delay to bring their earnings
back home. rather than restrict the free flowing capital, we need to deploy capital supporting the needs of businesses and creating jobs. third, we need a simplify the tax rules. that's no secret that our u.s. international tax system is highly complex. you may not know i was a cpa once and completed corporate income tax returns early in my career. now, the complexity of the current tax code is understood by only a handful of tax experts. this requires u.s. companies to vote significant resources just to try to comply with the rules. the time and money spent on these activities takes away resources that could be spent on product innovation and market growth. we need a system of international taxation that reduces the cost of administration, reduces the risk of error, and is easier to monitor. now, i don't know if we'll ever have a system that's so simple that even i could fill out
kimberly clark's tax return in the future, but that's a worthy goal. american companies have a terrific base of talent, unrivaled track record of innovation, and some of the greatest products and brands in the world. we are # disadvantaged against other competitors as a result of the u.s. tax system. to continue to prosper and deliver the essentials for a better life for another 140 years, we have to grow at home and around the world. we are committed to creating jobs, developing new innovation, and reinvesting in future growth everywhere we do business. we need a tax system consistent with our competitors, one that's less complex, and a tax system that doesn't penalize us from earning money outside the u.s., but can deploy it for future growth. mr. chairman, this is an important debate. many businesses today face critical decisions about future investment and growth. you and the colleagues have the
opportunity to create a level playing field for u.s. businesses to compete and win on a global basis. thank you for giving me the opportunity to share my views on creating a tax system that supports the growth of american companies and enables the growth of the american economy. pleased 20 -- to take any questions you may have. thank you very much. mr. lang, you're next. >> chairman baa cause, senator hatch, i'm the president of ppcro and the leading semiconductor innovative network that connect, move, and store digital content. i'm a member of the semiconductor industry association, board of directors, chair of the isa's tax reform working group. i can offer a perspective on the industry as well as mid-sized technology company. i'd like to thank the committee for the opportunity to share views on how the tax code promotes job creation and sustain economic growth for the country.
before summarizing tax reform, i wanted to emphasize the importance of this industry to the nation and the reasons why corporate tax reform is essential to the continued growth and leadership in this critical industry. first, semiconductors are essential for innovations in every aspect of the modern economy and national security. they are the enabling technology for advanced communications, manufacturing, health care, information technology, as well as national defense and homeland security. we are fundamental building block of the broader $1.1 trillion industry supporting 6 million jobs. studies show that semiconductors and the information technologies they enable represent 3% of the economy, but drive 25% of the economic growth. third, semiconductors are a global industry with capable competitors around the world. today, the u.s. industry holds 50% share of a $300 billion
worldwide market representing america's largest export industry. in fact, semiconductor industry as a whole in the u.s. exports approximately 80% of the revenue today as export revenue. it's a key driver of u.s. innovation. the industry invests 17% of research and development and an amount higher than any other sector. chip companies account for seven of the top 15 companies in the u.s.. in short, maintaining leadership is in the national interest and should be made a top priority of the congress. tax reform is one part of an ajoan da to ensure that the u.s. is a leader in innovation and economic growth. given the that treejic -- strategic nature, others are targeting the sector with credits, grants, and reduced tax rates. in fact, china included our industry in their latest five year plan. with a number of incentives on
drawing more investment in china to maintain u.s. leadership, our country must have a more competitive global tax structure. for example, it costs approximately a billion dollars more to build and operate a semiconductor manufacturing facility in the u.s. compared with other countries. now, despite the perception they may be due to labor difference between the high and the low labor rate country. in fact, the main cost differences are in tax benefits and other incentives. to achieve a more competitive tax environment for the u.s., fundamental reform is necessary and must focus on three key elements. first, the u.s. should adopt a globally competitive tax rate. the average rate is approximately 25%. for pmc, the emerging competition is in china with a rate of 15%. for new technology businesses, and in contrast, the come pined federal and state corporate tax rate is approximately 39%.
many countries offer substantial tax holiday incentives for new technology investmentings lowering the rate to 0 or single digits. while the u.s. need not match this, tax reform must be competitive with rates of competing countries. second, our worldwide tax system creates an additional tax incentive for countries. move to a territorial approach. this system would enable companies to repay treeuate their profits and invest and create jobs in the u.s.. it's the only major oecd country with a global tax system come bined with the highest tax rates, this is a penalty for those on a global scale. finally, comprehensive tax reform should provide strong incentives to encourage research and development in the u.s.. research and development is the life blood of the semiconductor industry, but the credit in the
u.s. is weak compared to the global competition and lapsed 13 times in the last three decades. the current research and development credit is complex and unreliable. ghin the exe -- competition, it's insufficient to promote research and development growth at home. it was invented here and can be the leader. industry leadership is not an entitlement or guaranteed. we must compete day in and out, and we have proven that we can compete and win on a level playing field. just as government's policy supported this critical industry in the 1980s when the semiconductor market was targeted through harsh trade practices by foreign governments, other tax reforms and policies can maintain the future and pace of enterprise and innovation. happy to answer questions. >> thank you. >> good marng, chairman baucus,
ranking member hatch, and members of the committee, thank you for holding this hearing today and the opportunity to share our views. the corporation is the leading pharmacy care provider in the u.s. in rhode island and are dedicated to helping americans achieve they're best health outcomes at lower costs. we employee over 2 million people in the u.s. including more pharmacists and nurse practitioners than anyone else in the nation. we have a higher tax rate at 39%. some think of us as the nation's leading drugstore chain because we operate more than 3200cvs stores here in the united states, the district, and puerto rico. 75% of all americans live within three miles of our stores. a leading pharmacy manager or pbm. as you know, they assist health plans, unions, and governments
to design benefit options that meet their members needs and help drive down costs. that being said, we think that cvs is more than just a pbm and drugstore chape. we consider ourselves a part of the fabric of american society working to improve the lives and health of our customers and to provide those services at the lowest possible cost. because of that thinking, we have made significant investments in our people and in our infrastructure here in the u.s.. we believe that's our only gailings as part of the -- obligation as part of the american business community. now, over the past five years, we have reinvested more than $10 billion of our earnings in the domestic operations and our employees, but we do believe that we can do more. our company is committed to making significant future investments in our service officerrings, our technology, our people, and other improvements to our infrastructure and operations.
tax reform is important to cvs care mark because it lowers the cost of capital and enables us to make greater investments in our business. for cvs, the key component of any tax reform is a reduction in the maximum tax rate. such reform would specifically allow us to accelerate our investments in jobs and in our infrastructure. the return on those investments leads to lower health care costs and better health outcomes for consumers. the federal effective tax rate is approximately 35%, and our combined federal and state effective tax rate is approximately 39%. together with our more than 200,000 employees, we generate federal payroll and corporate income tax rev miewfs of $3.7 billion annually and more than
$3.4 billion when similar state and local payroll taxes are considered. we have a high effective tax rate for two principle reasons. first being that many of the tax policies that help industry have limited application to care mark, and secondly, we have chosen to reinvest earnings to create jobs here in the u.s.. in order to continue to be successful in an increasingly global marketplace, we have to control costs, raise capital, and we must sufficiently reinvest our earnings. although we have worked hard managing operations and controlling costs to provide capital for the business and returns for our shareholders, our high effective tax rate not only limits the amount of earnings available for reinvestment, but also makes cvs caremark less attractive to global investors. reducing the rate to create a more competitive tax structure for u.s. corporations so we can
compete is both a thoughtful and responsible policy move. as i stated, we are dedicated to improving care and lowing costs for millions of americans. lowering the tax rate accelerates our investment in u.s. jobs and struck, all of which will ultimately help us lower overall health care costs and grow our economy. i'd like to thank the distinguished members of the committee for your attention and happy to answer questions you might have. >> thank you very much, mr. merlo. i get the general feeling here in the congress that we clearly need to reform the corporate tax code and siege as well -- individual as well. on the individual side because there's so many compared to many years ago, and the reform generally today, you know, is lower the rate, broaden the base, move to territorial, and
so forth. that's about as sort of the abstract of what needs to be done. the next level of questions though is if that's all pursued, to what level does that encourage more job growth in the u.s. rather than more job growth overseas. if the corporate rate is lower and the base is broadened, a lot of tax expenditures are eliminated, presumably profits are higher, and you can get more flexibility where you locate the plants and operations ect.. i think a lot of americans are thinking particularly with the unemployment rate so high, gee, that sounds nice, but what assurance do we have for the americans that as a consequence of it being changed, that more jobs are to be in the u.s. rather than jobs overseas. let me start with you, mr. duke, and all four of you, just
briefly touch on that. >> thanks, mr. chairman, and first i would say that in the growth overseas, when wal-mart grows overseas, we bring american companies with us, and i would welcome any members of the committee and travel to other markets to let us show you a wal-mart store and the products that are in a wal-mart store in countries outside the united states, so not only whether it's the agricultural products that come from the u.s. or u.s. beef that we export to markets around the world, but to those products that are on the shelfs that are produced by american companies would be an example. the other would be even here in the united states and the growth and opportunity here in the u.s., since we operate and build retail stores, our employment is at store level. we're not manufacturing the
product, but we deliver directory to the consumer, and in that relationship can the consumer, we certainly have more opportunity for growth for more consumers here in the u.s.. >> so essentially you say more jobs created in the u.s. than created overseas? >> absolutely. >> with these changes? >> we would do both. >> more than the u.s -- that's my question. >> now, for a store open overseas, clearly, it's some of both, and i'm not able to quantity my one -- quantify one next to the other because we open stores here in the united states to support stores open outside the united states. >> my time is pretty limited. >> i'll build on where mike took off. you want u.s. business to be competitive in a global market. you can take the opposite approach and say what happens if we do nothing and the rate continues to wyden, that means american business is less
competitive and we see jobs lost overtime. getting back to a level playing field is important. we do all research and development in the u.s., and so we've got as we grow overseas, more research and development here and bring back approximately $350 million a year on intellectual properties. as we grow, we do more research and development and have more staff and support for that here in the u.s.. >> to build on the r and d perspective, in 1990, u.s. had the number one research and development tax credit in the world. now it's number 24 research and development tax credit around the world, and this is an area where having the up sentives -- inverettives to develop in the u.s. has a real impact on decision making. one small company example which is my own. we, in the last year, 2010, added about 20% to our employee
base, about 20% hires, which is good given the economic climate, but only -- that's the good news. the bad news is only about 15% of those were in the u.s., and a lot of folks might immediately conclude the jobs were sent to india or china, but they actually went to canada where they have the most aggressive research and development tax credits. we can learn from them. it's not the only changes, but they do a effective job of making it an incentive to invest in the local market. >> mr. merlo? >> we are a domestic company, and i'll just talk about the u.s.. i'll cite two examples in the remarks in accelerating investments in the infrastructure and creating jobs.
looking across the health care space, we have a problem with the health care system. there's about $300 billion spent annually on unnecessary medical costs as a result of, you know, poor come plieps and adherence of prescription drugs. we can accelerate by bringing products and services that are solutions to the problem and improve the health of those we serve and lower health care across the country. second example, i think many of you know, we operate the largest number of in-store retail clinics. today, we have 600 of them. we have plans to double the number of clinics in the next five years. we believe that, you know, provides an important source of primary care, acknowledges there is a shortage of primary care physicians across the country, and that's expected to get worse over time. we believe, again, another example we can accelerate the investments in the growth of retail clinics and provide a service to americans across the country.
>> thank you. my time expired. senator hatch? >> thank you, mr. chairman. this question is for the entire panel. ideally, tax policies should not distort business decisions, but unfortunately, the u.s. tax code does exactly that. it is highly distorted. it is characterized by a high statutory rate, lopsided incentives and encourages the use of debt instead of equity. as i said in my opening remarks, and it discourages or penalizing you as multinationals from repatriation of foreign earnings back to the united states to be invested and create u.s. jobs. my question of the panel is isn't it true lower corporate taxes create more investment opportunity in the united states? i mean, it would seem to me that a lower u.s. corporate tax rate makes it more likely that proposals for inestment in the u.s. meet your targeted rate of
return and that makes it more likely that investment will be made here that in turn supports the growth of u.s. jobs. am i wrong about all of this? >> senator hatch, you are absolutely correct. comprehensive tax reform and a lower overall rate would create more incentive and more desire to invest, and i think that's what we're about is the creation of jobs and opportunity and competitiveness for u.s. companies. we agree. >> okay. >> yeah, build on mr. duke's comments that a lower tax rate lowers the cost of capital and that makes more projects attractive and as we go through how to aloe kate or resources, more development in the u.s. makes our projects attractive to the u.s.. >> i think lowering the effective tax rate allows us to invest in the u.s. without being
penalized, and today, it's a penalty. >> again, acknowledges we are a domestic economy, you know, this helps us accelerate investments in terms of bringing products and services to market faster in a more robust fashion. >> thank you. a quick follow-up question. mr. falk, you noted in your testimony there's proposals recently to move the tax away from -- by ending deferral of u.s. tax on a u.s. company's foreign earnings. that's a suggestion by some this this at mrgs. this burdens u.s. companies with an even higher tax rate. now, it seems to me that we can't create the types of jobs we desperately need if the tax code punishes companies head quartered here. would you comment further on the effect this would have on your
company and the u.s. economy? if there was a reduction significant enough, would that make the repeal of deferral acceptable? >> well, senator, you're certainly right ending deferral adds more complexity to the tax code and drives up the cost for multinational companies and would be viewed as anti-business by the large multinationals, and so i think, you know, the challenge would be to say how do we get a competitive global tax system with a competitive rate applied to a competitive base to be more of a territorial system, and that would set american companies up to compete at an even keel with other multinationals around the world. >> thank you. let me ask one other question, and this can be a question for the entire panel. the grand view i hear being proposed by all of you gentlemen is you are willing to have a broader tax base meaning getting rid of a lot of tax expenditures, deductions, credits, ect., in turn for a
lower corporate tax rate? that's a grand deal that interests me a great deal. i want to help you with that, however, i want to see if there's similar concerns. to what degree to get rid of tax expenditures and corporate rates down to 25% or even lower for the first year of tax reform, but what it congress over the course of the next few years increases the corporate tax rate back up again to 30% or all the way back to 35% without the various tax expenditures. does that concern you? are you concerned that a good part of the deal might only be temporary, but the bad part could be permanent. how do you get past that concern? mr. duke? >> sir, we are not competitive today. americans are at a disadvantage today, and we do believe we need to move ahead with the comprehensive tax reform. clearly, i believe that it would be important to remain competitive, and it would be
very, very important to measure over time the competitive and ensure that american companies stay competitive. it would clearly not be in the interest of american jobs to then increase that time, and we would clearly not want to see that. >> yeah, just build on mr. duke's answer, one of the challenges of running a business today is the level of uncertainty out there. it doesn't help. we hope comprehensive corporate tax reform is coupled with a apology sigh decision that makes american businesses competitive in the global marketplace and keep it that way for a long, long time. >> okay. mr. lang? mr. lang? >> yeah, i think that's similar to the example i gave earlier on the research and development credit expireing 13 times in three decades. it's a question mark. >> i empathize with you there.
>> you know, having certainty and predictability is one of the key elements of overall tax reform and would certainly, you know, encourage that. >> mr. chairman? >> thank you very much. senator stabenow. >> thank you. thank you to each of you. i want to talk about research and development tax credit. it should be permanent. we worked on that, a number of us trying to make that happen, but when we talk about the three prongs that each of you talk about in terms of tax reform, one of those is eliminating tax expenditures or spending through the tax code, and so i guess my question would be as we look at this, how would you recommend that we evaluate tax expenditures, research and development, tax credits, tax expendtures, and it's a very important one, i believe, and certainly wouldn't want to
eliminate it, but when we evaluate all of this, to me, it is very much about focusing on incentivizing innovation, research and development, and i also think incentivizing manufacturing in the country, coming from a state that makes things, and in the recovery act, i helped champion the advanced manufacturing tax credit to incentivize 30% tax cut for making things here for clean energy, and so i wonder if you might just speak as reforming tax expenditures and looking at all of this, you know, how should we decide which ones to keep and which ones to eliminate because i'm assuming you would not want to eliminate all of them. >> yes. thank you for your support and recognizing the importance of this part of our tax code, but i believe the challenge on the tax code in general is a
multifaceted challenge as you're well aware. >> right. >> our basis and our interest is getting to a point where the package, the overall system is something that allows us to compete globally, and so when we're talking about research and development incentives as well as the corporate rate and territorial system, we need to look at how do we as a country enable our companies to compete most effectively? that's in the form of many dimensions, but i think very clearly research and development incentives are targeted very aggressively by countries who want our research and development jobs relocated to their countries. it's imperative for us not to stand by and that happen, but have a system in place to invest at home and not be penalized for it. >> so how do you do that, sorry, but how do you do that? >> yeah, mr. chairman, thinking on