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tv   Politics Public Policy Today  CSPAN  January 27, 2015 2:30pm-4:31pm EST

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so, i just wanted to make a few kind of broad points to start off with. we often get disagreements between people and disagreements stem from unacknowledged and assumptions of what we take as given in the tax system. are we taking as given the rest of the u.s. tax system or not. how broad are we talking about? quite a lot of disagreements stems from actually people starting from different points. exactly where we're starting from here. to try to make explicit as we take what's given or what we don't. second point, there are lots of problems. taxes cause lots of problems and governments address those
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problems in a number of ways. but quite often address them in ways -- they don't address the underlying problem itself but deal with the symptoms. and i think there are many examples of that. there are many i think if we think about international tax broadly. what does the international tax do. we go back to the 1920s compromise. dividends, royalties, interests now that might seem like a good idea in the 1920s but causes problems. we have to figure out what royalties and dividends. and many of the problems of trying to allocate profits between different jurisdictions combined to those kind of problems. we've already talked, for example, about how we -- is it
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corporations that plays effective management control and those kind of issues. so actually, as an aside an aside in five minutes, be quick, but the oecd, for example, is taking the existing system as a given. started off by saying we're going to have a fundamental review, but it's taking those principles and trying to fix some of the problems it observes there. trying to fix it in ways that may be introducing more problems down the road. one of the things seems to be doing is we ought to be looking for economic substance. that may or may not be a good idea but it's not actually part of what the original system is trying to do. say what is it we're trying to tax and figure out how the tax system should address that. coming to inversions. why is it that u.s. companies want to invert.
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we've heard about that this morning. one is that foreign companies find it easier to strip income out of the uk than u.s. companies because of ufcf rules. and the tax system in the u.s. doesn't allow multinationals to bring income home without a tax charge. they leave it outside the u.s. are e we happy that foreign companies or foreign owners of u.s. subsidiaryies can strip income out of the u.s. through use of debt? and if we are there's no problem. if we are worried about that, then we should do something about that. have rules which address that particular problem. what the antiinversion rules say, we observe foreign owners of u.s. companies out of the u.s. we better stop them from becoming foreign, otherwise they'll be allowed to do it as
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well. it seems like an indirect route to fixing this problem. under the second problem, you know, the -- well, it's what ed called the air sats system. the main effect is to keep the money offshore. do we think that's a problem? i think we probably do. that's bad for u.s. multinationals, but it's bad for u.s., as well. that money's not coming back and being reinvested in the u.s. so that seems to me that, you know, that's -- this is a broad question about u.s. tax system. how should we try and address those kind of questions. anti-inversion rules, are they addressing those problems? they don't seem to be addressing those problems. what they're doing is designed to kind of prop up the existing system with all of these problems inherent in it. and it's a tax on old capital. if you're already a u.s.
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company. and you've already got foreign activities, then the u.s. anti-inversion rules are trying to stop you from going somewhere else. if you're starting up a new company. if you get well advised you wouldn't set up as a u.s. company in the first place. you would just kind of set up as a foreign company and have a subsidiary in the u.s. doing that. this is also trying to ineffectively tax on old capital rather than new capital. >> you kept to your five minutes. >> that's what i was told to do. >> that proves that you're from the uk. >> no tax code sections if i can get away with it. and i'm going to follow mike's advice, actually. i'm going to end up making three points about corporate inversions and tax policy. but before doing that, i'm going to start with what you might
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think of as my assumptions or level setting. first, the united states along with most of the rest of the world will continue to have a separate corporate income tax as an integral part of the overall income tax system. one theme you'll hear me come to is how wholistic it has to be to work. second, the united states will continue to rely on the tax for a small, but material portion or fraction of the income tax revenue. three, a critical role of the corporate tax is to maintain the integrity of the overall income tax business and individual through the use of corporate entities. while the economists continue to debate the incidence, but no one questions -- while there's debate about the exact extent, the data are reasonably clear that the american companies, unlike what we're hearing from
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the uk are very largely owned by americans. u.s. residents, taxpayers. for this reason the taxation of international income of u.s. multinationals is integrally related to the individual income tax. next point, level setting. i spent decades advising clients how to minimize taxes. and that experience taught me that a tax system that purports to put income in neat separate categories is exploited. something actually ed could speak to more fully, i think. wherever there is a boundary, it will be tested. anyone who advises clients knows that the line between personal and business is porous. just released national pair advocate report i think again, lists trader business expenses as one of the most litigated issues. the line between compensation and return to capital is abused by carried interests. i could go on. but my point is it's full
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hearty to put weight on a distinction, and equally mistaken to treat business taxation as fundamentally distinct from income tax. wholistic in nature motivates my view that treating foreign income as somehow distinct from domestic income is a fundamental mistake that should not be exacerbated in any tax reform. where i agree with john samuels. the pressure for inversions is not going to go away as a result of shifting to a territorial or dividend exemption system any version proposed by the united states to date or that i think plausibly could be adopted. the experience of the united kingdom, i think has shown that robust control foreign company rules triggered corporation expatriations.
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and the reason i say that is because prior to that time they were able to use their foreign earnings with the loans that michael referred to. so their driver wasn't what seems to be the driver here which is so-called trapped offshore earnings. their driver in terms of expatriations had much more to do with cfc rules and all of the proposals in the u.s. are increasing the strength of one form of cfc rule or another. that's my point of agreement. my second i think possibly most important point is that the taxation of multinational business income raises important issues of economic justice. but that concept, i think, was put squarely on the table by the president's state of the union speech. and i think i don't think there has been a reset in the thinking thinking. the framework for business tax reform was put out in early 2013 2013 it seems clear to me that after that speech a lot of
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things have changed, and i haven't seen it filter back into the rest of the administration's proposals. economic justice requires that the owners of capital pay their share of the overall tax that allocates the burden on an ability to pay basis. as i and i had my two co-authors observe in a 2001 tax review article, it is unfair to the rest of us to give an unjustified special tax break for foreign corporate income. one of the issues is unjustified, that's a reform issue, or is it justified? that's the source of the research that needs to be done that john was referring to. that is -- most troubling that -- it seems to me economic is most troubling, most clearly on the table. when we take income, that was earned under the privilege of
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deferral, not -- earned under the privilege of deferral. and if we allow that income to be taxed. a lower rate or to be exempted, that seems to me to raise fundamental economic justice issues if you're going to have to increase tax somewhere else. so where does all that point me? where does that take me? and this is my third second points. as we learn from an earlier panel, inversions seek to exploit when it's a u.s. corporation or a foreign corporation. it's an attempt to gain the advantage of being a foreign corporation. and there are three tax objectives. reduce the u.s. tax through use of earnings stripping interest royalties and other deductible payments. to avoid u.s. tax on past foreign earnings, and to avoid u.s. tax on future foreign earnings. so i would favor an approach that addresses all three problems.
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the presentation, it seems to me showed that foreign acquirers are at an advantage. and those advantages are there for foreign-owned u.s. affiliates. that should be reduced by enhancing earnings, and in my view already sufficiently an issue and problem that i do think the treasury should move forward on the second step and more stringent earnings stripping rules until fundamental reform is revisited. second second, that accrued under rules that clearly provided for deferral. and my view is with respect to those earnings, the time to pick up the u.s. tax has been deferred should be when there's de-control. now, we can discuss whether
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there should be a lower rate. there are arguments for and against that. >> everything should be up for discussion. >> to take account for u.s. shareholder competition. and that is something my co-authors and i discuss in an article, a michigan journal of international law that's really a side discussion in that article, which is labeled formulary apportionment. we need to start thinking about that. we've learned that place of effective management doesn't work. and yet, we have a strong intuition from our current anti-inversion rules that we care about where the shareholders are, as we should
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if a corporation is owned largely by u.s. residence. the second area that has not been talked about is the taxation of u.s. portfolio shareholders and foreign corporations. to take into account the fact that there is often a reduced corporate level tax on those holdings that does not apply is not the case when they hold u.s. equities. so we need to fundamentally revisit the portfolio taxation of u.s. shareholders of foreign equities and relation to u.s. educates. if a corporation is going to invert and simply become foreign parent instead of u.s. parent, why should a u.s. shareholder get advantages with respect to holding a new foreign parent when the corporate tax, the u.s. corporate tax isn't being paid on a large swath of its earnings. whereas in a u.s. parent, it will be taxed. under whatever system we decide to adopt. stopping there.
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>> and i saw john samuels nodding in agreement with you. and i think every single word you uttered. that at least he was nod ingding. jim hinds is next. >> i'll have to disagree with john samuels then. i urge us to think about it from a worldwide perspective. most of the advanced world has territorial tax systems, the united states does not. interestingly many american policy makers agree in one form or another that we need to move our system to make it more similar to the rest of the world. obviously, there are many different ways of trying to do that you know, people talk about tough territorial versus other territorial and that kind of thing. but i think there's general agreement that your tax system winds up in trouble when it differs so much from the tax systems of countries like
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canada, japan, uk germany and so forth. if we think that a movement in the direction of a territorial system is good then we can pose a question why are so many people concerned about corporate inversions? what happens in a corporate inversion is in essence one company at a time, they take themselves out of a worldwide tax system and into a territorial system. if that's what we want for the whole, you know, suppose that's what you want for the whole economy, then why are you upset when it happens one company at a time? indeed the companies that inverted not only put themselves into territorial tax systems but paid for the privilege. because when you invert you have to recognize the capital gains of the shareholders. whereas some of the proposed reforms to give the u.s. a territorial system would impose that large of a tax on the transaction. again, the proposals, of course, differ in their details. there is a reason to be concerned about one at a time tax reform of that type.
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it is less efficient than having a broad playing field for the whole economy of firms. and it sort of makes more sense if you're going to do. if your companies are going to invert one at a time, you may as well adopt a territorial system in the first place and there are many proposals to do that. as the session noted, too, one of the things you worry about is because of the current difficult, you know, the costs imposed on firms that invert, obviously it's only a portion of companies that do that, rather small portion. and so it creates incentives for foreign takeovers for those who don't invert. and if you have excessive incentive for foreign takeovers relative to domestic ownership of these companies that could cause problems because then you have inefficient ownership of business assets and you've got other issues associated with having foreign owners relative
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to domestic owners. so how should we think about inversions generally? here's the reality. it's still only a portion of the corporate sector and a relatively small portion. the issue with corporate inversions is what is it telling you about our tax system? it is also partly what is happening to the resources of these inverted companies. one way to think about -- what do inversions do? they take assets that would have been owned by a u.s. entity and make them owned by a foreign entity. in this case by changing the residence of the ownership entity. if that's our notion of what an inversion is. inversions are happening every day. and some days, every hour. when are they happening? in the world around us. probably next week there will be a company that is acquired in singapore and the acquirer might be a german firm or american firm. singapore is a low-tax country, germany has a territorial tax system. it's generally more beneficial
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for a -- from a tax standpoint for a german owner to own a singapore company than an american owner to own a singapore company because with the low tax rate there's a residual u.s. tax due ultimate on the singapore income. whereas for the german owner there is not a residual tax due. and so in the bidding for that singapore company, the germany firm has a tax incentive to bid a bit more than an american firm does. and over time, there are going to be more german acquirers of singapore firms than there will be american acquirers, and those assets will not be owned by an american company, they'll be owned by somebody else. we don't call that an inversion. but that's the use of our language. caused an asset that would have been owned and controlled by the united states to be owned and controlled by a firm from a
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different country. that's what happens in an inversion, but that's what happens every day. in the business world because of the u.s. tax system so if we're concerned about what happens every day, which is we have this erosion of ownership of assets by american companies due to the action of the u.s. tax system compared to the actions of the tax systems of all the other countries that look very different than the united states. in addition, you know, it goes on. the companies from countries other than the united states those who have territorial tax systems, generally speaking have less fettered operations, domestic and foreign with american firms as we know famously. it's hard to transfer resources back and forth because can you trigger taxes. the u.s. tax system, succeed
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other american firm operations that would not bear on firms from countries that have other rules. so, what should we want at the end of all this? look it's complicated. people get emotional about these issues. and we're all concerned about tax revenue and for good reason. because the country needs tax revenue. but the country needs tax revenue and it needs economic prosperity. and actually these two go hand in glove together. the more prosperity you have, the easier to raise tax revenue. revenue,.revenue. duh. if you have the most efficient and productive businesses, then you will have higher worker productivity, higher wages and greater tax capacity. it's not really very complicated.o so our discussion should be about what is the most efficient configuration.
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specifically when it comes to inversion then. it is more efficient to put on rules like 7874. there, i said the section number. and the regulations that were recently -- of which we recently got noticed and other rules trying to prevent corporate inversion? is that the efficient thing? or is the efficient thing to use -- to learn from the corporate inversion experience that we don't have a very efficient tax system relative to the rest of the world but we are distorting the asset ownership of american companies and encouraging foreign takeovers and encouraging foreign expansion at the expense of u.s. firms. you said as a impetus to get a more efficient tax system. obviously, i'm in favor of having a tax reform which would created a more efficient system and, thereby, enhance u.s. productive. steve shea raised the issue of economic justice.
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that always has to be part of our tax discussion. how should we think about economic justice in this context? i urge you again to take a worldwide perspective on that. is it just to have an american tax system that looks so different from other countries similar to united states like canada, britain, like germany. in order to have -- if we wanted to help american individuals the way to help american individuals is to have an economy that makes them productive. there are a lot of ways to do that. but you cannot be productive unless you work for firms that themselves, are productive. and our tax system is impeding the productivity of american firms and, thereby, hurting american worker. you'll help american workers if you make them more productive. the way to make them more
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productive is to remove some tax impediments to efficient business operation. >> thank you, jim. i was waiting for him to take a breath in order to -- in order to thank him. but it took a little time. ed. >> thank you. so i had a little bike crash and a small concussion. as a result, i was warned by my internist that a concussion can have emotional ripple effects. it was true. i found myself to be uncharacteristically nice. but the effect was -- what we
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want to end up with an international view is either a territorial system that works or worldwide tax consolidation because both of those solve lockout. and it's important to therefore, keep in mind that we have a solution other than territorial which needs to be fairly considered. there is at the same time a fundamental problem that we have in the united states and that the rest of the developed world has which is stateless income. u.s. firms have been the world
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leaders in tax avoidance technology but they've taught others well. and the result is extraordinarily low effective tax rates on foreign income of u.s. firms, operating outside the united states and nonu.s. firms operating outside of their home jurisdictions. in the case of the united states, just to be clear we have about $2 trillion of offshore permanently reinvested earnings. about a trillion in cash. just to correct what mike said, it's in the u.s. economy because that cash is invested in u.s. dollar assets but it's not in the right place. i agree those are economic inefficiencies. what do we do about stateless income? we can see the example just the other day in amazon, with a structure that is laughable on its face as a matter of economic reality, as a result amazon pays
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essentially no income tax with respect to their european operations. this is not a problem with the united states in it alone. every developed country goes through. of each entity, every little subsetsub subsubsidiary with a capital taker. if we have this problem of u.s. firms reporting single digit effective tax rates we don't have a competitiveness problem. they enjoy single digit in respect of their cash liabilities and with respect to their gas liabilities. butter we do have fundamental distortions that come from
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essentially a unpoliced territorial tax system today. and on top of, that the bizarre distortion of lockout. for example, in jim's discussion of the singapore case right now u.s. firms buy other foreign firms relative to their opportunity because of the lockout effect. we're incentivizeing u.s. firms to buy the singapore company, want the other way around. inversion in 2014 are, of course, are the canary in the coal mine. they are a sign that the system is fundamentally broken. but they don't by themselves tell us what the new system ought to be. the wave of 2014 -- i confess i have closely followed the filings of the number of firms. in fact, it's driven by three
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things. first is repatriation game that the september regulations put a stop to to get the effective repatriation largely tax-free. the second is earnings stripping. earnings stripping is a polite term for eroding the u.s. domestic tax base in ways that are fundamentally unfair to positions faced by wholly domestic firms that are direct competitors. i'm all for efficient tax systems. jim and i agree on that. i think the place you start is at home. right now the question is do we have a -- consistently applied tax rates to different firms conducting business in the united states. the three reasons for inversion repatriation. the second is the earnings stripping. and the third was financial accounting anxiety.
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on information, financial accountants are getting a little fed up with the representations being made to them of firms with tens or even $100 billion in offshore earnings. not to worry one was those days they'll come up with a plan to really do something with all that cash. the and financial act antscountants are putting pressure on themselves. is this problematic? of course it is. jim and i agree there are distortions all over the place and we both agree we can do better. but the answer is not to endorse inversions as simply heroic first movers to a new territorial regime. but to have temporary legislation so everybody is in the same soup rather than encourage a pellnell rush to the exit from which revenues inevitably would suffer. finally, you need to take a step back and say, what is corporate
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income tax? it's a tax on capital income. how are we doing in general at taxing capital income? we're doing a piss-poor job. >> is that a technical term? >> it is. 7875. we have negative effective tax rates in america on debt financed corporate finance. that means we all in this room are paying firms to make those investments. that's insane. we have super low effective tax rates on foreign earnings of large successful multinational whether it's amazon, google, microsoft, there's a dozen other examples the pharma industry dozens of other examples. again, that's crazy because if we want the territorial system, great but a territorial system
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implies is that taxes are actually being collected in the countries where business is being done. there's a strict connection, a geographic nextus. that is the intellectual predicate and the only problem is it's impossible in fact, to do that's why we talk about territorial system with keith having a minimum tax, for example, over the territorial system. what that really is a territorial system and a resident -- resident system at the bottom to assure minimum level. what i want is a territorial system where the minimum tax happens to be the same as u.s. domestic rate, which is another way of saying, genuine worldwide tax consolidation. we have way too high tax rate on equity financed domestic investment. all of this leads to lower
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corporate rates and it points, i believe, to tactical matter. not because it's the best idea in theory but because we face a choice between two disagreeable alternatives. as between the two, in effect, putting a floor on -- it will collect some tax and provide a happier domestic environment. to get to there the critical piece, to supply the revenue we all have to suck it up and start to think about is that we're going to face domestic syntax rules. we can no longer go on with zero tax on kormentcorporate tax.
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>> thank you, ed. michael, i want to congratulate you on the five-minute rule. i want to see you've raised every issue of international taxation, which makes it seem to me that we all agree that inversions are a symptom and not the underlying problem. that is, they are a symptom of other structural difficulties that there are differences about how they might be resolved. but they can only be changed
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through fundamental change in the tax system. that i see everybody nodding their head about. there are two other points at least i want to raise. i sit here and i've been sitting here all day looking at how the u.s. has evolved in its treatment of inversions. and i remember jim's early paper about people moving paper to bermuda and getting these tax benefits. and my thought was, we were better off when all they were moving was paper to bermuda than we are today when they're moving people to switzerland who don't like the swiss alps and move back and the swiss people take over the country. the more you tie up economic substance to the tax rules the more risk there is of moving real activities, and it seems to
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me we need to think about that rather carefully as we build these rules. two other points. one is residents and source are both hard concepts to live with in the modern world, even in the '20s and even in the '60s. they were reasonable. now they've become less reasonable. the foreign income is foreign income of countries. this, to me s a constraint on some of the notions to are floating around here. that is if you are going to
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take the position you can't tax the foreign income of foreign companies and you're not going to bar foreign ownership of u.s. operations, and all you can tax then is the u.s. income of foreign-owned businesses you've got a bit of a conundrum. it seems to me you then have to ask yourself two questions. one is -- and this i'd like to get everybody's response to. these are genuine questions and see if there's agreement. does it matter to u.s. -- i care about u.s. welfare. i know jim cares about worldwide welfare but i'm just a nativist. i care about u.s. welfare. if we want to give money to others, we'll do that. i don't mean that literally but that's my starting point in thinking about u.s. tax
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policies. that's the starting point of thinking about u.s. policy generally. so the question is, does it matter to u.s. residents whether domestic operations are u.s. owned or foreign owned? does it make a difference? that's question number one. question number two is does u.s. ownership of foreign operations make a difference? that was the example jim gave where the german and u.s. companies were buying the singaporean company, do we care about that? and if so why? so, i would really just like to see first whether we agree on those two principles. if we disagree then i do want to hear more about it.
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i think they're fundamental questions in how one thinks about the basic problems each of you in your own way has raised. if you could for a moment put yourself in the mind set of an american and ask yourself would u.s. take these confess the way i put them. i gather the uk has made a decision that u.s. headquarters matter to the uk and that u.s. operation -- uk operations may matter to the uk but you can -- we just go down the panel and see how people react to this because i think these -- i think the answer to these questions are important in trying to sort out what it is you can do here. >> you first. >> how long do i have? >> a minute and a half. does it matter whether they're domestic or foreign owned? the media addressed this a bit this morning.
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i guess there are two aspects to that. one is, you want it to be owned by the people who are going to run it most efficiently because that will be good for all the business and employers pb if the most efficient people to run it are american, then that would be good for america. there may be another aspect that means profits are going back to britain and u.s. to some extent, it would be better for americans to run less productive firms in the u.s. because more money stays here -- >> and the management and control, as i pointed out earlier this morning would be in britain and not in the u.s. and there's at least some literature that suggests having
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management domestically, headquarters doe domestically has some benefit, yes? >> yes. does foreign activity make a difference. well, if the u.s. is kind of losing opportunities because of the tax system you know, if the u.s. people want to invest in singapore and they're not able to do it because german firms are buying up all the singaporean companies, then there's a loss for the u.s., yes. >> so does everybody agree with michael on these issues or do we -- does anybody want to say any more? >> no no. >> no, you don't agree or -- >> the part i agree with is the best effect is having people run an operation who will run it most efficiently. i think the problem with the
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question is, when you ask u.s. owned versus foreign owned. we're disregarding the corporation. what we have to start recognizing is the other things that will change this 3060 -- whatever. the corporate form is losing its viability. we check the box. inversions don't care if it is foreign. self-inversions, nothing changes an inversion. i've worked on inversion. it's been in the public domain. the biggest question is where is the box going to be? u.s. ireland or uk? investors come up with enormous array, and second biggest question was, do we have to fly
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there? 4 and paul can tell me in his much broader experience. basically, management wants to know how often they have to leave their headquarters. >> i just want to understand what i think to be the fundamental point you're making. which is in the current world we ought to be looking to owners of the capital and taxing the shareholders and whether their income is coming from a foreign corporation or from a domestic corporation and that in some sense we're starting from the wrong place. and the treasury department in 1992, when it proposed a dividend exclusion system, which was then enacted in 2003, got it exactly backwards. and that is my view today
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although i was an active participant in the 1992 treasury department study. i like to say if it was right then, it's wrong now. but the truth is, it was probably always wrong. and we ought to be thinking about how we're going to collect tax on the owners because they're much more mobile and there are a number of ways of doing that, ranging from variation forms of integration and so forth. the -- that point goes to your justice point and your economic efficiency point is fundamental and so far has not gotten into the tax reform discussion. >> well, except for the senate. i see -- >> the senate staff report has talked about it a good bit, so it may get into the domain. >> i don't think you have to go
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to integration. you have less pressure on -- just to tie it back to what i was raising before. so my sprrs indicated we should open this up to the audience for questions. which i'm happy to do. yes, over in the corner. >> i get the benefit. . first for ed. i would like to square your depiction of tax status of u.s. multinational firms with inversion, how do you square that as tra zen ka and they say i want to be a uk firm? i never want to be a u.s. foirm. i want to understand that. and i appreciate the appeal to justice. it's moving in many ways.
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what i don't understand is how -- in what world does international tax policy become the preferred instrument for income redistribution? i just don't get it. i'm all for justice. hing you meant justice not in the way ed meant it but i think in terms of income equality. i have to get convinced that tax policy is the effective way for income redistribution. >> i'll answer it. you want ed to go first? >> ed -- >> i don't have any interest in justice. like jirnlgs i only care about efficiency. i just get there in a more practical vein. >> your concussion is wearing off.
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but the answer is, with access to the stash -- i'm not talking pfizer specifically but access to the offshore cash and the creation of a brand new ability to opt in, to self-help, to lower domestic u.s. effective tax rates by virtue of loading up the -- what will then be the subsidiary with interest expense that has no significance from the point of view from public investors but that just reduces the u.s. tax bill. those are the principle drivers. >> can i just ask a quick question of the panel? is is there anybody up here who doesn't think that we need to tighten our rules about earning stripping? certainly with interest inspect in some sense -- you mentioned royalty, but in some sense you
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mentioned intellectual property. it seems to me you think we should not? >> should not. >> well, now, that's an interesting response. >> he's written a paper. you wrote a paper about it. >> i answered. >> he has a good paper about it. >> i know that paper. that paper is a friend of mine. it's not a good paper. >> are you finished with the first question? michael, should i take mehare's question? >> yes. i knew it was going to get unruely. the first question he asked is, is it your preferred instrument? my response is motivated by how difficult it is to address inequality. when is the best socially
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productive and fairest system that will help our -- the country be best off? and so david came and had this nice piece in tax law review and pointed out if we took all the income tax top 20% of the -- top quuchlt intile, we would not move the genie co-efficient. you say, why use tax at all? it's hopeless? the fact is, is it such a difficult issue that you -- my observation from having been in government is we really don't know what we're doing in large measure. when government tries to make fine distinctions between foreign income we get it wrong just as often as we get it right. the broader the base, the better
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off we are. crime income there's really no excuse to privilege foreign income unless we can justify it with the headquarters argument or with some other reasonably evidence based, database support for it. i have not been over womened with the support, partly like ed, i haven't seen in any evidence that we're so disadvantaged within our corporate world that we need to give that group a break and then tax everybody else more in order to fund i think, our very beneficial spending, which is beneficial because it finances mega care. it finances all kinds of good social spending. and as well as defense. and as jim points out, we need the revenue. so, i'm very -- >> michael wants to also say a word. >> i think he goes to the hard of what he's saying about the nature of the tax, which is,
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this is, i think as steve is saying income tax. you want a fair system for income tax for u.s. residents. the question is does that work? does corporate tax actually fill that goal? it seems to me it doesn't at the moment. it may if we change the system perhaps. one thing you mentioned yourself is foreign investment. if u.s. individuals want to buy british companies, then they're not taxed on corporation tax. and the uk decides not to have a corporation tax, then they wouldn't be taxed at all. so, u.s. income tax, a not an expert on u.s. income tax but certainly in the uk and certainly in the u.s., there's all kinds of forms of income that are not taxed. >> we have time for one more question. mr. berman would like to get in. since he owns the tax policy center, we ought to let him in. >> i'm just thinking about all my untaxed capital gains.
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so suppose we were convinced we wanted a well-designed territorial system. concern is that whenever you have a source of income that's exempt it's really hard to police that boundary. we kind of imply, well, we had these boundary problems now but we could make them go away by i guess foreing the foreign income. i would like to you to comment on that. >> i think it's to jim, right? >> i'll start. is there an issue about policing the difference between foreign versus domestic? absolutely. there is now. to lynn's point and it's right, that would be even more important if you had a territorial system. that's absolutely right. you're not the first to voice concern about that problem. and there's a lot of concern in the united states about if we had a territorial system then american firms would take profits that were really earned in the united states and somehow attribute them to a foreign jurisdiction and even though we're concerned about that currently, it would be more of a
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concern under a territorial system. the united states is not unique, but close to unique in the system we have. the other countries have already encountered this problem. canada's had a territorial system since roughly 1965. canada still collects loads of corporate tax revenue. the uk is collecting dorpt tax revenue and japan and germany and france and a lot of other countries have encountered the exact same set of issues. now, does it work perfectly in canada? of course not. no tax system is perfectly enforced for the same reason no laws are 100% complied with. on the other hand, is it a workable system? absolutely. if it weren't workable canada sometime in the last 40 years would have changed their system. and so i think that yes we should be concerned about compliance. yes, we should -- you know if we have a reform, we need to
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think hard about how it's going on work in practice. do we have enough resources for the irs and so on? of course we have to think about all of that hysteria lynn was not voicing but others have about this i think it's misplaced given the international experience we've got. i speak for the -- >> speak for the voice of hysteria? you always do. >> by all means. >> i think that lynn's point goes to the insolubility of a territorial tax system. that's why dave camp's proposal candy -- any territorial system that will come out will have anti-abuse rules. we see in the urgency with which the entire oecd is approaching this issue that all countries have become fed up with what
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they see as a generation of unconscionable amounts by multinational firms headquartered in every country. the question is not that canada canada -- on canadian firms. that's the relevant question if we're responding to lynn who said, can we get a well designed territorial system. i would love to have a well designed territorial system. it would be the simplest thing to do, but i believe that we are confronted by a hubson's choice. and as a practical matter a low tax, corporate tax system of the united states with worldwide tax consolidation so there are rates conveyorly in the middle of the other herd of ga sells is a
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system that removes gaming and enabled u.s. domestic industry to enjoy a more appropriate burden on its capital income. >> we're being told affirmly -- >> so in conclusion. >> -- that it is time for us to leave. i'm glad that senator hatch was not here for this discussion but i think if he wanted to walk away with clear guidance on international tax policy, he would have been disappointed. but for the young people in the room who want to continue having this discussion over the next generation, you can leave with great optimism from this panel. thank you. new tomorrow live coverage of the confirmation hearing for president obama's nominee to be the next attorney general. loretta lynch. she's scheduled to testify before the senate judiciary
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committee at 10 a.m. eastern. and on thursday also on c-span3, the senate banking committee meets to consider legislation to impose further sanctions on iran. penning outcome of sanctions on iran nuclear program. we'll have coverage starting at 10 a.m. eastern time. more now from the conference on corporate tax inversions with remarks by senate finance committee chair orrin hatch. he says working groups from this can committee will be looking at tax issues and should have recommendations by the spring.
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if i could ask you to please take your seats. our luncheon speaker is here. it's my pleasure to introduce senator orrin hatch, the senior senator from utah and chairman of the finance committee. senator hatch is in his seventh term in the senate and he's now the most senior republican in the senate, which makes him the president pro tem of the senate which puts him third in line for the presidency of the united states. it also means he signs legislation, which this year will hopefully include a major tax reform bill.
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senator hatch was the first member of his family to attend college. he then went on to law school. while in law school, he worked as a construction worker, a januarier to and dormitory attendant but he's not just a hard worker. he knows how to play, too. he's an accomplished poet, songwriter and musician. he plays the violin organ and pea yan foe. piano. he's also actually had a brief career in the movie industry where he had a cameo role in a film that won four oscars. i don't think he won one of the oscars -- >> i should have. >> he should have. i left that out. more importantly, he's here today as a long-standing champion and steadfast supporter of pro-growth tax reform. something he's made clear he intends to try to accomplish in his new job as chairman of the finance committee.
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by reaching across the aisle and working with democrats to produce a broad bipartisan tax reform bill that will help grow our economy, jobs and wages. i've left senator hatch's most important accomplishment until last. which is that he has six children, 23 grandchildren and 14 great grandchildren. so he has a very good reason -- or maybe 43 reasons to care about the future of our country. and i think the future of our country could not be in better hands than in the hands of senator hatch. please join me in welcoming him and thaking him for coming. [ applause ] >> i'm very honored to be with all of you here today. 15 great grandchildren. i'm grateful to be with you. this is a very important
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institution as far as i'm concerned. i read everything i get my hands on. well, almost everything. there are some things i don't waste time on. i appreciate that kind introduction. i would like to start with a short story. a member of congress is walking along the beach and he find an old lamp. he picks it up, rubs it and of course a genie appears. the genie says i am the most powerful genie in the world who has every lived. i can do great and wonderful things and i can grant you your dearest wish. but only one. this member of congress is well attuned to international affairs so he pulls out a map of the middle east. he says my dearest wish is you solve the palestinian/israeli conflict. the genie strokes his beard and he says, staring at the map, that's a tough one. you should probably make another wish. the congressman is disapointed
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but he ntdz. he says, how about this, i want i want you to rewrite the american tax code so everyone can understand it. the genie has a long pause and then says let's have another look at this map. i know that's a bit of humor but doesn't it feel true sometimes? i'm happy to be here today today to talk about a problem of inversions and what i believe is the basics. i don't believe the best solution to the inversion problem is government regulation. the solution is not building a wall around u.s. companies to keep them from moving offshore. the west solution to this problem is in my view, tax reform. tax reform if it's done right will help grow our economy, grait create jobs in the united states and discourage businesses from leaving our shores and invite businesses to set up and
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locate here. there though there are disagreements on the details, efforts in a few minutes but first i want to lay some groundwork. i want to make the case for tax reform and why tax reform is the only real lasting solution to the inversion problem. when we talk about inversions tarlly in recent decades,
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history seems to repeat itself over and over. there's a cycle when it comes to inversions and it usually happens in four steps. step one, a few high profile inversions take place and people become concerned about the possibility of a trend. number two the government takes steps to shuts these inversions down. step three inversions are temporarily halted but the underlying economic conditions remain the same. step four, company find ways around whatever solution the company puts in place and another wave of inversions takes place. now, we need to learn from this history. let me give you a few examples. in 1994, a u.s. corporation called helen of troy, a company that sold health care and beauty products, inverted. maybe helen of troy was the corporation that eventually launched 1,000 inversions.
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the u.s. treasury reacted by issuing regulations making it clear that a u.s. company inverts -- when a u.s. corporation inverts, it triggers a shareholder level capital gains tax. given the increase in stock prices in the mid to late 1990s attributable largely to the dotcom boom many shareholders had a low basis in their shares but yet these shares had a high value. so at that time the idea of an inversion tripping a significant capital gains tax on this built-in gain was a serious deter rent against the company inverting in the first place. i wish we could say that about all companies. but then in the early 2000s the dotcom bubble burst. at that point shareholders didn't have nearly the built-in gains that had been so typical just a couple of years earlier. with share mriss depressed u.s. corporations realized it was once again a good time to
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invert. so in the early 2000s there was another wave of inversions. this time congress worked to stem the tide to establish section 7874 of the u.s. tax code which imposed another significant hurdle for inversions. under section 7874 a u.s. corporation cannot engage in what is called a, quote, naked inversion, end quote, without being considered a u.s. corporation for tax purposes. and with the enactment of this provision, inversion slowed down once again. obviously, that decline was not permanent. if it had been, none of you would be attending this conference to talk about inversions. there were a number of factors that led to the most recent wave of invergs which recently peaked last year. one of these factors was likely the collapse in stock prices in
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2008 and 2009. with this collapse in share prices there was a decline in the built-in gains inherent in an inversion transaction and, therefore, a decline in the tax penalties associated with them. this may have reinvin rated -- u.s. multinationals had increasing amounts of offshore earnings resulting in significant amounts of trapped cash. this also reinvigorated interest in inversions. highly intelligent international tax planners like people in this room right now gave yet more thoughts about ways around section 7874. i don't know exactly how it happened but this is how i picture it. there was a conversation some time around 2010. with some clever tax lawyers
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relaxing in the south of france over boelgtss of mordet i think some of you understand this, conceived of a new way of con vergs. conversions. as a mormon i don't drink. i can see that didn't go over very well. in this bordeaux infused brain storms session, they -- in order to get around section 7874 lulz. prodded on by these very clever warriors, global investment banks took on the rule of match maker, setting up u.s. corporations with foreign corporations. and the rest, as they say, is history. the last factor in this wave of inversions that i will mention
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today and the one most relevant to my job was likely the realization that u.s. international tax reform was not going to happen soon enough. shr, there were members of congress committed to the job. even some who were putting out their own tax reform proposals and frameworks. but there was not any presidential leadership or engagement, nor is there today. as a result, the failures of our tax system seemed more and more permanent. it appears all these pressures reached the tipping point with the wave of 014 inversions. this led to the september 2014 treasury notice. the notice was -- has stymie inversions but if history tells us anything, it will occur again.
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if we're unable to fix our code once and for all, it most certainly will. those who believe in a worldwide tax system, you probably saw the september 2014 treasury notice as a good thing. that notice certainly made it harder to escape the worldwide tax net. for my pashgts i don't believe in a worldwide tax system. i think it needs to go a different directions and move from our worldwide-leaning international tax system towards more territoriality. if we're serious about preventing inversions and preventing american companies from picking up their headquarters and moving elsewhere, we need to get to the root of the problem. anything else we do any tinkering along the regulatory edges will only address the symptoms and in the end it will be like using a band-aid to treat a broken arm. despite what some, including the president and high-ranking officials in the administration have claimed companies were not
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leaving the u.s. because of the lack of, quote, economic patriotism, unquote. for the record i'm no fan of invergin inversions but i'm even less of a fan of the rhetorics and attacks that surrounded this issue in the last year. if you ask me it is the national leaders that use their position to demonize their companies that are lacking in quote, economic patriotism. not the companies who are simply trying to do right by their shareholders and firms trying to compete, produce and hire workers to tap into markets and customers in growing economies. but i digress. i see these inversions symptomatic of a dysfunctional tax code that is taxing although too high a rate. what we need is a tax system that will encourage investment and growth within the united states.
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for that we need tax reform. if you've been around washington over the past few years, chances are, you've already heard me talk about tax reform. i've been making the case for why tax reform on the senate floor, in the finance committee public appearances, written materials and in private conversations. and i'm going to continue to do so. i want to pose a question to the audience. raise your hand if you heard about the tax reform book that i released in december. how many of you have heard about it? quite a few. quite a few in this minority who have heard about. now, raise your hand if you read the whole thing. my goodness gracious. and this is a tax group? you should read it. it look like some of you have more homework to do. and you should read it. it's very interesting. even i thought it interesting. and that's a big confession by a member of congress.
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in that book and elsewhere i've laid out seven principles that i believe should guide our tax reform efforts. i won't go into detail on each principle today. instead, i'll just list them and encourage you all once again to read the book. don't wait to see the movie. i don't think there will be a movie from that. you never know. we're so screwballed up there it could be a very comical movie. the seven principles are, one, economic growth, two fairness, three, simplicity four, permanent permanence, five, american competitiveness, six promoting savings and investment and, seven, revenue neutrality. not all of these principles directly relate to the problem of inversion. put simple y we need to make america a better place to do business and put our job
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creators on an equal footing with their foreign competitors. to do that we need to lower our korment tax rates and transition toward a territorial system. our president wants to lower the corporate tax rates under certain circumstances. and i believe jack lew does swl as well the secretary of treasury. that is what is being done in the rest of the industrialized world. that more than anything else is what make some of these foreign countries, particularly countries like ireland and uk more attractive for u.s. companies seeking to invert. there's a lot of agreement on bringing down the corporate rate. both republicans and democrats have endorsed that general idea as the basis for reforming our business tax system. unfortunately, there continues to be widespread disagreement on
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getting rid of our current world wide tax system. most of my republican colleagues want a territorial tax system. some republicans are sympathetic to it especially if they really want to stem the pressure to invert. as of yet, we have not gotten significant buy-in from a large number of democrats on this idea. you hope that will change. i'm going to try to get it to change. i think it will. after all, it only makings sense. like i said, the rest of the world is already moving in that direction. if we want to keep up or compete, we're going to have to follow suit. well, what we mean by territorial tax system is not faxing foreign source business income but making at the same time -- but at the same time making sure whoa do tax u.s. source income accurately measured. under such a system we would continue to tax domestic source income of u.s. multinationals
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but the earnings they make offshore would not be sublg to u.s. attack. of course, i don't believe a territorial system would be a magic elixir. there will likely still be pressure to invert, even if we make that change. but this much needed transition is the first and very important step we can take to stem the future of inversion waves. once we have agreement of a territorial system, we can talk about other ideas that will further prevent erosion of our tax base. in all discussions we must be looking at our international taxing system with an eye toward improving our competitiveness. we cannot be competitive with foreign source business income and our current tax rates as well. our corporate tax rate, as you know, is the highest in the industrialized world. and proposals for reform have
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inversion rates that are not even at or below the average of oecd countries. maybe we won't have the lowest rates in the world but we should at least be able to not have the highest. as most of you know the senate finance committee is engaged in a senate tax reform effort. we've created five working groups, senator wide and i have that will look at all tax systems that will -- for a comprehensive tax reform bill. my goal is to introduce such a bill and mark it up in committee later this year. as i said earlier this week, this is not an exercise. this isn't just for show. i'm not in this just to introduce a proposal or two and move on. my only goal when it comes to tax reform is to make new law. and with the help of all my great colleagues on the finance committee, ranking member widen in particular, that's just what we're going to do.
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i hope we can learn from our history of inversions. i hope we can go after the root causes of this problem rather than merely treating the symptoms. once again, the solution to this problem is tax reform. once again, i want to thank brookings for having me here today. i want to thank all of you for taking the time to listen. god bless you all. [ applause ] >> so, the senator is on a very tight time schedule but he's agreed to answer one question, which i have the privilege of asking him, which is i would like to follow occupy these working groups that you mentioned. what are you expecting them to produce? do you know -- do you have a timeline? when are you expecting them to deliver something? and is there a way the business
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and broader tax policy group can help this process? >> well, thank you. that's a good question. i anticipated that. so, let me answer it this way. the plan is for all of these groups to study these issues in various areas and come up with a list of policy proposals. we have five working groups. number one, individual income tax. two, business income tax. three, savings and voechlt. four, international. and five, community development and infrastructure. we're engaged in that as we speak. senator widen and i do not want be to too prescriptive on the form of their recommendations. we just need them to be useful in the development of eventual tax reform bill. and detailed proposals. and it would be best if they can produce legislative text. i don't fully expect them to do that.
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if they do if they really take it seriously -- as seriously as i would like them to, they may do that. jct, the joint committee on taxation, will also play a key role in the development of the of the groups and as for the timeline, my hope and i think senator avoideden's, as well, is to have all their products back to us later in this spring. as always we would expect the business community's feedback on their preferences to go into the various proposals. of course, there will be some trade-offs. we won't be able to use or follow every recommendation but i find input from the business community is very, very helpful and i you all will participate with us in this. now, you will notice that's tilted heavily towards business tax reform. and there's a reason for that. because the president seems to -- he seems to want to do business tax reform solely. i would like him to go further
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than that. but if that's all we can do, we certainly got a lot of ideas from these working groups that will hopefully help us come up with business tax reform to help our economy, our country and to help us go forward in a very progressive way to -- and i don't mean progressive taxation way but in a progressive way. and i do mean that to a degree. to get this done and done well for our country. let me just say that it's an interesting committee. we have some very, very good people on that committee. in fact i think everyone on that committee is a superior senator. and i'm very grateful very, very grateful to be able to chair the committee. and i've enjoyed it when senator backus chaired it and when senator widen chaired it. we get alloyening i think pretty darn well and i hope that will continue now that i'm chairman. i will certainly do everything in my power to see that it
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continues and we won't ignore great ideas of democrats or liberal republicans or whoever. i think -- i think it's a big undertaking. it's a big undertaking just to do -- if we did full reform. i was here, took three years. to do that. and we were lucky to get that done and in the intervening years, we have clobbered the code for almost every unseamly thing we can possibly put in it. and i'd like to see that change. i'd like to see us come up with a way that we could simplify this code to a degree that everybody can understand it in their economic strata. so hopefully these working groups will get some help from brookings and from all of you. we hope you'll weigh in. we don't think that members of congress are the only people with ideas. we get most of our ideas from
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outside congress and we certainly pay attention to all of you. makes no difference to me whether you're a conservative liberal or moderate. i just like good ideas from wherever they come and we'll do our best to do that. i just maybe on one little story. this fellow who died and he went up to the pearly gates and he said, where do i go from here? peter said well he said, you have your choice. he said you can go to heaven or down below. he said, of course, we know which one you're going to choose. he said, don't be so sure. how about telling me the differences between the two. peter said well, heaven that's a land of green forests and pastureland and hell all that is one hot vast dry desert. the guy said well, that sounds
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pretty good to me. peter thought, oh gosh. on the way down to the gates of hell peter explained the differences again. he wanted to go to hell. peter said, look, fellow the joke has gone far enough. heaven is green forests and pastureland, good companionship. this is one vast hot dry desert. the fellow said well, i like the heat. peter said okay. buster, you have had your -- he opens the gate and looks in there and there's pastures and pastureland and good companionship and peter said, oh those damn mormons. they've been irrigating again. hang in there. good to see you. tomorrow live coverage of
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the confirmation hearing for president obama's nominee to be the next attorney general. loretta lynch. she's scheduled to testify before the senate judiciary committee at 10:00 a.m. eastern. earlier today in poland european leaders and survivors of the auschwitz concentration camp gathered to commemorate the 70th anniversary of the liberation by russian troops. we heard from one of the survivors, roman kent. >> we do not want our past to be our children's future. [ applause ] i really wanted to repeat it but you interrupted it by the
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applause. but i will still repeat it. because that's the key to my existence. we survivors do not want our past to be our children's future. i hope -- i hope and believe that this generation will build on mankind's great traditions tempered by understanding that these traditions must embrace pluralism and tolerance. human rights for all people. and must include opposition to anti-semitism and to racism of any sort.
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it should be commonplace rather than exceptions. unfortunately, the passage of time makes it more and more apparent that there is an effort by the ideological successors of the perpetrators as well as the deniers and the ignorant abetted by much of the media. i can repeat it. that it was a -- it is abetted by much of the media. to sanitize, to sanitize this, they employ language to describe the holocaust so that it appears less wicked and brutal. their efforts onbscures the truth
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of what actually happened. for example, it has been become routine to use the word lost when referring to relatives and loved ones who were brutally murdered during the holocaust. but the term lost does not accurately describe what happened. lost referred to something that has been misplaced or has gone astray. 11 million people including 6 million jews and 1 1/2 million jewish children were not lost. or misplaced. these children were murdered as were generations that would have followed them.
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similarly, we often hear that millions perished during the holocaust. let me make clear those died in auschwitz, they did not perish in the normal sense of the word. they were viciously killed, murdered burned in the crematorium. for all intents and purposes by not telling it as it actually was, clearly and without qualification or hedging we offensively diminish our outrage that should exist. in effort we protect the perpetrators who performed these reprehencible deeds. by using sanitized words by cleaning up what happened, we are knowingly helped the deniers. they lessen the atrocities of
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the perpetrators. and yet, and yet in view of the killing participation anywhere of so many world's leaders there is visible sign of compassion and improvement instead of indifference. this is progress. it is now up to the leaders of tomorrow but there she mains so much more to be done. we all must be involved and stay involved. no one no one should ever be a spectator. i feel so strongly about this point that if i had the power i would add a 11th commandment to the universally accepted 10 commandments. you should never, never be a bystander.
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tomorrow, live coverage of the confirmation for president obama's nominee to be the next attorney general. loretta lynch. she's scheduled to testify before the senate judiciary committee at 10:00 a.m. eastern. with live coverage of the u.s. house on c-span and the senate on c-span2 here on c-span3 we compliment that coverage with the most relevant congressional hearings and public affairs events and weekends the home to american history tv with programs that tell our nation's story including six unique series. the civil wars 150th anniversary, visiting battlefields and key events. american artifacts discovering what artifacts reveal about america's past. history bookshelf with the best known american history writers. the presidency looking at legacies of commanders and chief.
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lectures in history. and our new series reel america with the government and educational films of the 1930s through the '70s. c-span3, created by the cable tv industry and funded by your local cable or satellite provider. in his first state of the state address alaska governor bill walker talked about the need to address the state's financial shortfalls and promised to build a natural gas pipeline. governor walker is an independent. he defeated republican incumbent sean parnell in november. this is courtesy of ktoo.
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>> thank you. thank you very much. president kevin meyer, speaker mike chanault lieutenant governor, members of the legislature, members of the cabinet, and my fellow alaskans it is an honor to stand before you. i'm humbled to serve alaska as your governor. and you have my pledge that i will always put alaska first. i will forever be ready to work with anyone who shares this value. tonight, i deliver the state of the state address. this is a rare privilege to which i owe so much to my family. i want to begin by recognizing my first lady of 37 years and now alaska's first lady, donna walker.
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as all of you who have met her know, she is one amazing, smart lady who truly has a servant's heart. i also want to introduce two of our four children. our daughter lindsay and son jordan. next, i want to recognize my friend and alaska's lieutenant governor byron mallot.
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i also want to recognize his bride of when 42 years, toni mallot. donna and i treasure our friendship with you both and with your entire, large family. i also want to thank the cochairs of our transition team anna and rick. i want to thank them for all of their hard work. hundreds of alaskans contributed to our administration transition process. alaska is better for it. lieutenant governor mallot an i express our profound gratitude.
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thank you, thank you, thank you. i am committed to carrying forward the transition team's vision of a more collaborative approach to solving alaska's problems. now that we're in office, byron and i have made a few changes. traditionally, the lieutenant governor's office is at the far end of the third floor. and now he has an office right next to mine about six feet from my office. and he has a standing invitation, my calendar is open to lieutenant governor and he has a standing invitation to attend every meeting that i have. and i have a better meeting because of that. so i thank you very much for that byron. alaska is a resource development state. our economy rises and falls on the tide. yet, we remain prosperous and blessed in so many ways. we're forged in adversity, tempered by the elements.
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and bound by the faith that when we hold threw to our values alaskans emerge stronger and ready to seize the best for our future. as owners of alaska's resources we must make decisions based on our long-term fiduciary responsibility, not on short-term political expedience. it is our obligation to make sure all alaskans experience the bounty and opportunity this state provides. our challenges mean we cannot afford zero sum zero results politics. this administration has put a premium on solutions and strong ideas. regardless of where or from whom they come. being an alaskan transcends party affiliation. as my friend senator lisa murkowski often says no one political party has a monopoly on good ideas.
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i know i speak for everyone in this room when i say we look forward to working together with alaska's federal delegation. donna and i were honored to attend the swearing in of senator dan sullivan earlier this month. i've always spoken with senator murkowski and congressman don young. we pledge to work together to make the most of our god-given resources. and, yes, this means that long last responsibly accessing the vast oil reserves under anwar. we can we must, we will. it's beyond time. members of this legislature, i am so honored to stand before you. i look forward to working together to overcome the challenges before us. the men and women in this room
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are no strangers to adversity. some of you have beaten cancer. others have known childhood poverty and overcome tremendous challenges in life. you are fishermen, educators, lawyers, farmers and veterans, contractors, health care providers, pilots engineers, account abouts, a miner and yes, even a reindeer herder to list just a few. uniting us all is a shared love for our state and our people. and a desire to serve to give back and to make a difference. the opportunity and sacred obligation we have over the next four years is to leave alaska better than when we received and to secure blessings for future generations. opportunity is what inspires and motivates alaskans.
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the desire to get up nut a good day's work and build a better future. there are those of us here by birth. and many of us who are here by choice. but whether your family has been here for five years five generations or five millennium, we are all alas canals. and we are descendants of adventure earls. of dreamers. the restless and survivors. those who refuse to accept no for an answer. those who saw opportunity when others simply saw cold temperatures and impossibly high peaks. some of us are descendants of alaska's first people. resourceful, resilient, deeply rooted in the land. alaska continues to prove its bounty to those who feed a village with a whale. a family with a moose. turn logs into a house. bones into art.
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and wind and rushing water into electricity. this is who we are alaskans. and there is power in who we are and where we live. and that's what gives me and those in this room great hope for the future despite the challenges at hand. tomorrow, i will present to this body the state of the budget. we know that alaska's experiencing a significant drop in revenue. the price of oil has dropped by more than 50% over the past six months. this has moved us from a $7 million per day 6 months ago to a $10 per day deficit today. this is unsustainable. it's unacceptable. we can and will do better. as we know, this isn't the first time our young state has been through these times. many of you in this room served during the days of $9 a barrel oil during the recessions of the
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1980s. today, we have fewer than 500,000 barrels per day flowing through the pipeline. the impact of low oil prices is intensified by low production. today, we're faced with a $3.5 billion deficit. as i said $10 million every day from our savings. some might call this a crisis. i call this a challenge and an opportunity. we have an opportunity to make impactful and constructive changes, to challenge the traditional ways of doing business. prior to the '64 earthquake, my family had the only building company in valdez. we had to relocate the entire town. as a result of the quake not only lose the materials and tools, we lost our livelihoods. we faced a down period. with few assets. we could not practice our trade since new homes could not be built in the new town and the
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new town site was not ready for construction. but we never stopped looking forward. our focus was fixed on rebuilding an aspiring to future prosperity. we had to continue on. we knew we had to do things differently. we had to be creative. we had to pull together as a family. and we made sacrifices. lots of sacrifices. while there are no houses to be built, the school and post office were open and needed to be cleaned. to financially survive we seized the opportunity and the walker family became janitors. our hard work paid off. whether the new town site was ready some years later, we were able to invest and buy houses in the old town have them moved on to foundations in the new town and resold. however, when the house mover from anchorage left valdez without moving any of the houses we purchased we once again had to adjust. we became house movers.
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this is what i learned from my parents. don't panic. when times are tough. make a plan. stick to it. stay focused. stay positive. and get to work. now is not the time to sound the alarm, my fellow alaskans. now's the time to pull together. to make a plan. sharpen our focus. and get to work. we have the tools. we have the ingenuity. we have the team. and we will work a way out and build an even stronger alaska. on december 26th, i took immediate action. i issued an administrative order directing that all mega projects stand down until we can assess their overall cost and benefit to the state. i thank the leadership of both
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bodies here tonight for your offers to assist and for your helpful suggestions regarding our state's financial situation. we have reached out to all alaskans to solicit their input on the budget situation, as well. my website has a form for anyone to use and we have received thousands of responses. we have asked students at three of the university of alaska campuses to sort and analyze the suggestions. my staff tells me this is something called crowd sourcing. i just call it reaching out to alaskans. reducing energy costs across alaska is one of the highest priorities for my administration. we are the most energy rich state in the nation. god has blessed us with almost limitless resources. it is unacceptable that so many of my fellow alaskans wake up each morning in a cold house as
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i did growing up in rural alaska. if alaska was a country we'd be among the top eight energy producers in the world. and yet, we have the highest cost energy in the nation. we can and must do better. this administration has made it a priority to reduce energy consumption at state-owned and public buildings, including schools, increasing energy efficiency will allow state dollars to be better concentrated on the services provided and the public buildings and schools wasted energy is government waste. every growing economy in the world has one thing in common. and that's low-cost energy. this administration will not rest until alaska is squarely on track to become an economic powerhouse thanks to low-cost energy that will bolster and diversify our economy.
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this legislature had done good work in this area over the past few years. from wisely incentivizing gas storage to recognizing the importance of a large diameter gas line to investing in renewable energy projects and conservation conservation. your leadership has made a difference. 37 years ago, donna and i cheered and danced in the streets with hundreds of alaskans as the first barrel of oil of pudo bay arrived in valdez. a few short months later, donna and i were married and i began working on a large volume gas line and l & g project. it is time to build the pipeline to provide gas to the alaskans and to the world markets.
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under my administration we will finally begin building the alaska gas line to tidewater. i want to say that one more time because i've waited 37 years to say that. under my administration, this -- we will begin building the gas line to tidewater. it will be done with alaska hire to the maximum extent allowed under the law and it will comply with alaska constitutional mandate that our resources be developed for the maximum use and benefit of alaskans. i was honored to have the president of a major japanese energy consortium travel from tokyo to juneau last month for our inauguration. i met with the japanese delegation the following morning. actually my first official meeting as your governor.
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about ten days latter they returned to juneau with a memorandum of understanding. since signing that mou other significant buyers in asia have contacted me expressing similar interest. in fact, on a way to church on christmas eve, i received such a call from major japanese company. i took the call. the gas is available. the market is responding. and we know alaska is the crossroads of the world. it's time we engage those markets, diversify our economy and create long-term fiscal stability and job growth. and it's beyond time to complete the work those in this room have started on this critical project. and i thank you. it is also long past time for alaska to focus on value added job opportunities with the extraction of our natural
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resources. again, i believe that is also our constitutional mandate. when we export our resources as raw materials and import a finished product, we serve others as a colony. but when we make something from our natural resource and export a finished product that's an economy. l & g is a finished product as is fertilizer. processed fish, produce from the matsu. boat building in catch can. we should be exporting cement given the limestone available and the rail and highway infrastructure available. we should be refining products from our own oil. all we need is affordable energy. really great example of value added industry is right here in juneau. 1986, two local entrepreneurs, marcy and jeff larson convinced 85 people to invest in what's now the larchsest brewery in
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alaska. today the alaskan brewing company employs about 70 full-time workers. in juneau alone. they also load out about four containers a day of finished product bound for destinations across alaska, the lower 48 and beyond. and the alaska brewing company has become a leader in energy efficient commercial brewing by developing and employing innovative technology and reducing their diesel consumption by 70%. we have a duty to future generations to make the most of our resources. we can do this with value added projects. if marcy and jeff can create 70 jobs utilizing alaska's water, just imagine what we can do applying the same ingenuity to our vast fish oil natural gas, timber and mineral resources. and perhaps our greatest renewable source is the majesty and allure of alaska itself which draws nearly 2 million
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visitors a year. our tourism industry creates almost 50,000 jobs and has the direct economic impact of nearly $4 billion each year. this is a healthy and vital industry which i'll showcase a dynamic partnership between private enterprise and state and local government. and industry that has potential of limitless growth and contribution to the economic well-being. this evening there are tens of thousands of alaskans with no health insurance who could be covered at no cost to the state. these are mothers and fathers, sons and daughters, entire families who will go to bed tonight in fear. fear that despite their best efforts they're one injury or one diagnosis away from losing everything. that's wrong. that's unacceptable. and we're going to put an end to that on my watch.
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i began taking steps to accept the 100% federally funded medicaid expansion on my first day in office. many in the faith-based community, the alaska state chamber of commerce and other job creators see it's not just good for the health of the citizens, it is good for the health of our economy. it is estimated this could create as many as 4,000 new health care jobs in alaska. my selection of val davidson as the commissioner of health services was the first step in this objective. we have begun the process of extending federally funded coverage to thousands of our friends, neighbors, co-workers. thank you, commissioner davidson, for all of your hard work in this area.
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the health of our communities and villages is also a top priority of my administration. the epidemics of rape, sexual assault and domestic violence plaguing our state must end. we all know the numbers. but even one case is one too many. often lost in the facts and figures are the victims themselves. these are real lives. women, children, men, families torn apart. and each of us, all of us deserve to feel safe. the well-being of alaska's families, especially our children, is something donna and i and each of you care about deeply. in 2009, donna worked as a caseworker for the office of children services. she saw firsthand the heart breaking neglect and abuse being suffered by our most vulnerable population.
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alaska's children. her first official act as first lady was agreeing to serve as honorary chair of the alaska children's trust an organization that works to provide real solutions to preventing child abuse and neglect. i have asked my commissioners to look to states that lead the pack in fighting these epidemics. i will also ask our state and local officials to help us develop community-based solutions. we will work alongside the agencies doing strong work in these areas as we create a solid action plan. i also ask this legislature, make alaska the next state to pass erin's law. this is the bill that will enable our schools to further implement a proven age-appropriate program to help children identify sexual abuse
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and seek help. members of the legislature, if you send this bill to my desk, i will sign it. and we will take an important step towards protecting the lives of so many young, precious alaskans. we thank the men and women who serve in the alaska national guard with honor and integrity. because of the sacrifices and commitment you have made to our state and nation, we honor your service. tomorrow, the attorney general craig richards will name an independent special investigator to examine what went wrong in the alaska national guard. that investigator will have full access to all paper and electronic evidence to get to the bottom of the allegations of sexual assault misconduct and
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cover-up. as commander in chief of the alaska national guard, let me assure you. the perpetrators will be brought to justice. they will face expulsion, inkargsin incarceration or both. i also want to thank the men and women in the military and law enforcement who put their lives at risk every day to protect us. on may 1st, sergeant patrick scott johnson and trooper gabriel rich were killed in the line of duty. our thoughts and prayers are with their families and those families of other law enforcement officials and service men and women who have made the ultimate sacrifice. please join me in honoring the families of johnson and rich who graciously accepted our invitation to be with us here
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this evening. to our military and law enforcement families i speak for all of alaska and say thank you for your sacrifice you make daily for us. your fathers, husbands, mothers and daughters. these are the heros that protect our freedoms and keep us safe. these are the gallant and brave who help us all sleep a little better at night. please join me once again of thanking and honoring all the men and women in uniform for their sacrifice and service.
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now, i want to turn to education. we are perhaps facing the largest budget deficit in alaska's history. to get on track during critical financial times, we must make difficult decisions. sometimes we have to make sacrifices. we will protect education funding insulated from the state's fiscal situation to the greatest extent possible. we will continue to invest in education and it is one of the highest priorities of this state. but not at the rate we could have when oil was over $100 a barrel. $46 per barrel oil brings about a new day in alaska. we must respond prudently and very carefully.
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so i ask educators to pull together. be resourceful and efficient. i hold our educators in the highest regard. i will do all i can and work with the teachers, principals administrators to assist and provide for the needs of our schools statewide. public education is a constitutionally mandated responsibility. i have not and i will not forget that. the days of exporting our resources with an imported workforce must come to an end. alaskans are some of the hardest working people in the world. let's make sure our youth get the training and skills they need to fill the jobs of today and tomorrow. we do that by being creative. parents stepping up, teachers and

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