tv Politics and Public Policy Today CSPAN April 29, 2016 3:30pm-5:31pm EDT
right now they're exclusive. we do not participate in the bundles, so ih is a stand alone program. that's how it is now. >> we have the alliance and we will continue to work on those you issues. >> what we will find is the financial mechanisms that are working and become how they're paid for and organized. we're going to have to work through the the issues. we did this a few years ago and then bundled together. >> we think that there's a hope for consumers and the whole idea and that's why it's important. and there's the type of lung term and so in event it's going
to be good for the medicare to do over time and to provide some kind of services and they're in fact one of the things that would be good for medicare to be able to do over time is to provide not om some of those ombudsman kinds of services but potentially even a structure to help people manage the long term services. that might be an add-on program that people would enroll in and pay a modest income related payment for in which they could get additional help in managing that system. but i think the whole idea of managing it and to the family
members and then the area that's that and maybe even a model on to itself in terms of an innovation. >> i think that we're wrapping up because while we do have more questions, i don't think that we can get to all of our questions. i want to thank the alliance for this interesting discussion and the panelists. i want to give a plug for our primmer which two of our panelists worked on. if you haven't learned everything you need to know about payment delivery system reform under medicare, here's your cheat sheet right here. >> for those in the room within you have that in your packet. for those not in the room, find that at our website. please join me in thanking or panelists for a really exciting conversation. and one more plug to please fill
out the shortened stream lined evaluation form. thank you very much. the white house correspondents association is hosting its annual dinner this weekend with speeches from president obama and this year's host median larry will more. the event will include the u.s. marine band. here's more on their role in the dinner with this band's directioner and drum major. ♪ and now we want to introduce you to lieutenant colonel jason feddic. he's the director of the marine band. what is your job, lieutenant colonel? >> i'm the 28th director of the
united states marine band. so my job is to lead the band in performances. i'm also the commander officer of this unit as well. >> how big is this unit? >> we have 154 dedicated members of the marine band and it's designed to be able to cover multiple commitments at the same time and to cover a wide span of different types of performances that we are required to do, both for the white house and across the national capitol region. >> in the practice that we saw for the white house correspondents' dinner we saw 50 members. the band is 154 people? >> we also have a chamber orchestra and a number of musicians who double on jazz instruments and different styles that may be required at any time and we also have a professional support staff that supports our operations throughout the year. >> so when you perform at the white house, when you perform on the south lawn, when you're performing at the white house
correspondents' dinner, how do you choose in. >> it depends on what the needs of the commitment are. it could be one single musician anywhere up to more than 100 that might perform together like for inaugurations. >> what's your favorite event in. >> there's so many to choose from. one of the things i love is the great variety of what we have opportunity to do throughout the year. certainly we appear other 200 times on average at the white house. but also performances we do on national tours across this great country and ceremonies that we perform across washington, d.c. every single one of them has a special meaning to me and i love the diversity. >> does the band -- does what the band does change with each president? >> a little bit. you know, there is a tremendous history to what we do. we've been doing this for more than two centuries. the band was founded by an act
of congress in 1978. a lot of what we do does have a foundation of tradition. but we try really hard to tater what we do to each presidency, not only the musical tastes of each president and first lady but also the needs of specific events. every event is different. and the marine band has evolved over the years as well as our national culture has evolved as to what it means to perform american music has evolved. the band has followed suit. our capabilities and our tastes and the kinds of things we do has expanded in range along with that. >> what's your background? how did you get involved in this? >> i came into the band as a clarinet player. i didn't have aspirations to be the director of the band. i was really so fortunate to win a position as an instrumentalist here and i enjoyed three and a half to four years play in the band before an opportunity arose for me to move over and become one of the officers and an assistant director. i have a background in music
performance and music education and a little bit of conducting. when that opportunity arose in 2001 it was kind of the chance of a lifetime and i jumped at it not knowing how competitive i might be. and was fortunate to be given that position and here i am 18 years later as the director of the band. it's incredible. >> did you have to go through marine corps basic training? >> we don't go through basic training. we have such a specialized mission, to perform music for the president of the united states and as direct ud by the marine corps. there's a certain amount of education and experience that's required to perform at the level that our musicians perform at and the expectation is that training and experience would happen before we join the marine corps. we have a rigorous and competitive audition process. those marines are fully trained to do their job when they come into the marine corps. basic training is an important right of passage but i think the measure of a marine is what that marine does through the duration
of their career. the level of commitment and attention to dowty that they have and their commitment to serving the marine corps in whatever their particular job is. by that measure or marines are as dedicated to their specialized mission as all of our brothers and sisters are. >> you will not be directing at the white house correspondents' dinner. why not? >> i won't. i have my share of leading the band at the white house on a regular basis and around town for a number of special events that we have an association with. we have a history with a lot of events outside of the white house that have some sort of presidential affiliation. we perform regularly at the gridiron club dinner and of course the white house correspondents' dinner. there's a strong ceremonial component to what we have traditionally done for the white house correspondents' dinner. so it is led by our senior enlisteds and ceremonial leader, the drum major of the marine band. it's the great opportunity for
the drum major to conduct the performance and have some involvement in a presidential support event as well. >> often the band is performing while something is going on at the white house, some ceremony. and how do you keep your eye on what's going on and on the band because you're kind of the conduit, aren't you, the link between stopping and starting? >> there is a real challenge to the operation and logistics of any event, especially at the white house. we're trying to make music. we're responsible for providing the soun track for an event to make that event even more special. but there are a number of moving parts at any given commitment we have at the executive mansion. so you always have to be ready to change on a moment's notice and to be prepared for surprises. that takes a little getting used to. that's the part they don't train you to do when you're training to be a professional musician. that kind of thinking on your feet. luckily i was an assistant director for 13 years.
had a lot of opportunity to get used to that kind of environment. so i was perfectly ready to deal with that when i became director in 2014. but you know it's become one of the most exciting parts of my job, to see music that -- to make music that can start out being in the background, kind of creating the tap pes trifor and event. but then at any given time it can become the feature. there are so many moments a the the white house where the music that started out as background becomes the central entertainment for any given moment at the white house. >> have you ever had a president walk up and decide to conduct? >> we haven't had a president that i know of walk up and decide to conduct in the white house. we did have a president in president george w. bush conduct the band actually at a white house correspondents' dinner in 2008. we found out that he had a little bit of conducting experience and so we were looking for an opportunity where he might want to conduct the band and it was decided that the white house correspondents' dinner might be a great opportunity for that. to our knowledge that is the
only time that a sitting president has conducted the marine band. >> that was planned in advance? >> it was but it was a surprise. we tried to keep it under wraps as long as possible. the band went oef to the white house to reverse with the president. he practiced on his own. he did a remarkable job for a nontrained musician. then the curtain opened after his remarks and he led the band in a performance of stars and stripes. >> what kind of music have you chosen? and i presume you consult with the white house on any event. what music have you chosen for this dinner? >> we consult with the white house and the social events office to make sure that the music we've chosen be enhance the event. we'll try to program special things for each event. much of what we do at the white house correspondents' dinner happens before the president takes the stage. we play a lot of patriotic music to set the tone for the evening,
get everybody in the mood. on this particular event we'll throw in some marchs that have to do with chicago as a nod to the president's background. and then when the president is ready to take the stage we play the traditional song and he's announced. with president obama and mrs. obama, one of the things that's so special to them is the service of our members of the armed forces. they've gone out of their way on so many occasions to acknowledge the service of the men and women in uniform and we often play a medley of our armed services songs and we do as a tradition at the white house correspondents' dinner. and i know that's very special to this president and first lady. and it's also an opportunity for anybody who has had service or current service to stand and be recognized when their service song is played. it's one of those moments that absolutely brings the room together and i know it's very special to this president. >> is your unit responsible for the color guard that comes into the white house? or comes into the white house
correspondents' dinner? >> we coordinate with the color guard. we work with the color guard on a regular time. sometimes a joint collar guard. we work with them for a number of different events. we're coordinating with them but that does come from a different section of the armed forces. there's always coordination because the music dictates what the color guard does and how they move in any given ceremony. >> how so? >> we have a set of music that we play to march on the colors and the color guard does a special many march when we do the anthem. that's coordinated that way. >> master sergeant dewayne king, what is your job here with the marine band? >> i'm the senior enlisted leader and drum major for the united states marine band. >> being the drum major means what? >> i lead the band in all ceremonies and parades. responsible for discipline, uniform appearance, decorum, training.
>> you will actually be conducting the band as well at the white house correspondents' dinner, correct? >> yes, sir, that's correct. >> why have you been choosen for that? >> the drum major typically takes this performance because of the ceremonial nature, working with the color guard and the music that we do at the correspondents' dinner. >> how many bad members and what dress uniforms will you will wearing? >> we wear what's called the ceremonial full uniform, traditional red coat with blue pants. >> how many members will be there? >> i believe we typically take 40 members for this. >> and where on the stage or where in the -- where at the hilton will you be settled? >> we'll be on the stage behind the head table performing for the guests as they arrive and then for the ceremonial portion in the beginning. >> and is this the first time that you've conducted at the white house correspondents' association dinner? >> no, sir. this is my third time, i
believe. >> what's a particular challenge to this dinner, to this event? >> one of the challenges is getting the band actually -- fitting the band on the stage because it's very narrow area that we have to work with. the band gets spread out, and then being able to see being spread out left to right. >> so your back is to the dinner most of the night, correct? >> yes, sir, it is. >> how do you -- are you listening in your ear to anyone say okay, we're about to begin or anything like that? >> yes, sir. the drum major will actually wear a head set that's looped in with the rest of the event staff to get cues when the president arrives and when he's ready to come on stage. >> when the color guard marches in, what are they carrying? who are they representing? >> the color guard, typically it's a joint color guard representative of all services. so you'll have the american flag and then the organizational flags from each service.
and then additionally you have two rifle bearers on each side. >> there's a lot of ribbons on top of the flags. what are those? >> those are streamers, battle streamers. they represent each battle that that particular service has taken part in. >> so we're talking perhaps hundreds? >> yes, sir. >> in some cases. >> yes, sir. >> up there at the top. how did you get into this business? >> was lucky enough to be tall. actually i started as a trumpet player. coming out of high school i joined the marine corps and was a trumpet player for the first 15 years of any career. due to my height most people said you would look good in front of a band, everybody would be able to see you easy. some leaders i had started to train me on how to be a drum major and here i am. >> so you went through basic training, master sergeant, as a regular marine, correct? >> yes, sir, that is correct. >> but you knew at that point that you were going to be in the band? >> i was.
we have ten fleet bands and i actually joined the marine corps to be a trumpet player in one of the fleet bands. >> what's a fleet bands? >> local bands that are stationed at different commands throughout the marine corps. we have camp lejeune, north carolina, parris island, new orleans, three in southern california, hawaii, okinawa japan. >> how did this get to become the president's own band? >> this became the president's own band -- thomas jefferson gave us that name after the band a couple of years after the band was formed. the band started performing at the white house regularly and he was very fond of the band and gave us, you know, kind of took us on as his own. >> do you ever hear john phillip sue so in your dreams? >> no, sir i don't. i sleep pretty well at this job. i work with great people and they make it easy. >> will the band get to eat at the dinner? >> yes, sir. we get fed ahead of time in our
holding area beforehand. >> at what point is your evening done in. >> we finish as far as the event time line, we finish fairly early. once the president comes on and we bring in the colors, play the national anthem and our armed forces medley, we're typically done shortly after that. we'll goes the curtains and begin the speeches. >> are you packing up during the speeches? >> we actually are. we get out of there pretty quick. once the curtain closes we grab everything and silently make our way out. >> two notes in the low brass, really punch those with a good sound but kind of aggressive. we want a real contrast to the trio here. pickups to that. one, two, one. ♪ >> our records indicate that our first performance at the white house correspondents' dinner was
1931. and we have a log in our leaders log that said we performed at the dinner in 1931. we performed relatively sporadically after that. and then for the last 30 years or so we've hads a regular appearance at the correspondents' dinner each and every year. music has always played a really important role at the correspondents' dinner. there have been a number of guest artists and singer musicians who performed. prior to there being a regular comedian as a host, music was the central entertainment. people like aretha franklin, barbara streisand, all featured performers at the correspondents' dinner. and there's always been a strong military component to the dinner as well. several other service bands in washington have performed at the dinner. it's always been a central part of the musical tradition of the dinner to have military music as well. ♪
>> beautiful. just like that. our coverage of the white house correspondents' dinner begins tomorrow at 6:00 p.m. eastern with red carpet arrivals followed later in the evening b carpet arrivals. you can see the entire event live on c-span. business owners, policy writers and an accountant testify before the senate financial committee on the future of , they talked about the latest research into ways that the united states tax law could be changed to be more competitive in the global economy. this is just over an hour, 45 minutes. good morning. it's a pleasure to welcome everyone to today's hearing,
which we have entitled "navigating business tax reform." it's a big title. i think this title accurately describes the challenges we have before us, and moving forward on business tax reform specifically and on comprehensive tax more generally. in the recent past, identifying and developing certain bipartisan policy proposals and moving them through the legislative process has been proven eye specially different, but i'm an optimist and i believe we can and should find common ground on a path forward for comprehensive tax reform. the courses -- will take a president who truly makes it a priors and work closely with congress to get it over the finish line. currently i think it's safe to say we went met that rereq we sis which most acknowledged which means for now we have to wait, but in the interim this committee will continue to lay
the foundation and develop pro-growth proposals for when the appropriate opportunity arises. that's why last year senator wyden and i ask varsius members of the committee to work and develop consensus if possible around tax policy proposals. today we will focus our attention on business tax reform issues, including topics that were covered in the report issued by the bipartisan business income tax working group. i want to thank the cochairs, senators sun and cardin, and senators roberts, burr, isaacson, burr, carson, casey warner, menendez and nelson and others. a lot of time and effort went into examining they issues. i appreciate everyone's willingness to help advance this cause. tom bartell, the chief of staff for the join committee on taxation is with us today to
provide backs ground on business tax reform issues and highlight some of major topics reviewed. we appreciate his work and appreciate him being with us. we have a great group of additional witnesses here today. they'll provide important insights on brought design issues, and practical on the ground issues that are important for us to keep in mind as we further develop and refine proposals in the business tax space. i want to take a minute to discuss one particular business tax issue that was discussed in the working group report that i believe warrants real consideration by everyone here today. corporate integration. in very general terms, corporate integration means eliminating double taxation of certainly corporate business earnings. under current law, corporations earnings are taxed once at the corporate -- entity level, and then again at the shareholder level when those earnings are
distributed to the shareholders as dividends in other words, we tax the earns as the corporation itself and those same earns when paid out to the -- this creates a number of netities and distortions, and my staff and i have been working for a few years to develop a proposal. i was glass to see they addressed corporate integration in its report noting that, quote, eliminating the double-tack would be reduce or eliminate four distortions built into the current tax code. one, the incentive to invest in noncorporate businesses rather than corporate businesses. two, the incentive to finance corporations with debt rather than equity. three, the incentive to retain rather than distribute, and four to distribute earnings in a manner that avoids or significantly reduces of second
layer of tax. corporate integration could have the effect of reducing the effective tax rate and help address some of the strong incent i was we've been seeing today. in fact, i think it would make a big dent in the reversions of companies that are even consideration that in and out. to invest and do business. now, i have much more to say on this topic in the coming weeks and months, but i plan to raise this issue? several terms -- in general terms here today. once again, i want to welcome our witnesses. i look forward to a robust and inform atiff discussion. with that, i'm glad to turn the time over to senator wyden for his opening remarks, and then we'll hear from the two cochairs of the business tax working groups, with brief opening
remarks. senator thune and then senator cardin after senator wyden completes his remarks. >> thank you very much, mr. chairman. i very much look forward to working with you and our colleagues, and i too want to commend senator thune and senator cardin for their outstanding work. we just have the right people heading that part of the working group, and i appreciate it. colleagues, if you own a small business in america today, often you go to bed at night believing that you are in danger of being ensnared by an outdated, overgrown tax code that americans spend 6.1 billion hours and more than $100 billion complying with each year. that tax system is punishing to those who don't have a fleet of accountants and the luxury of time to plan investments around taxes.
the american tax code tells small businesses that their dollar is worth less compared to sophisticated firms that can afford to make the rules work for them. that's why today i have released the cost recovery reform and simplification act of 2016. this proposal is all about making the tax code more attractive for the risk takers who go out and start a small business. people who are more often than ever before going to be minorities or women. so this proposal would modernize the tax code and strip away much of the unfairness to small business by radically simplifying our system of depreciation. for the small cash-strapped firms to grow and create jobs,
they need to invest in basic priorities like a new cash register, office furniture or farm equipment, when it makes business sense, not when it makes tax sense, today to figure out the tax deductions on these investments, a small business person has to navigate more than 100 sets the tax rules. my proposal dumps that headache and lays out six categories for depreciation that are far easier for a small business person to work with. for each and every assets. my proposal says one round of math is enough. small businesses shouldn't have to do individual calculations for every car on the lot, every
computer in the lab, or every machine in the shop. today's rules come from yesteryear, from the last century. they're stuck in an era of fax machines and vcrs that predates the technology boom that has transformed the way in which americans live and work. my proposal sis our business tax rules should reflect a 21st century economy, and help our cutting-edge entrepreneurs thrive, not hold them back. it makes no sentence to cling to an outdated sism that taxes high-tech investments such as computer services and mri machines at more than did double the rate of our investments. a start-up shouldn't be told that they're not allowed to use a work laptop in a coffee shop or otherwise they're going to
face a big financial hit on their taxes. in my view, the tax code shouldn't get in the way of public/private partnerships that want to build new roads, bridges and highways across the country. nigh proposals would fix these issues with new rules grounded in common sense and realistic appreciation of how or businesses, particularly the small businesses operate today. it's my hope we're going to be able to look at these proposals and more as our committee considers again on a bipartisan basis how to bring or tax code up to date. i very much look forward to today's hearings, and i'm especially pleased that gail goshy farms of from silverton, oregon is with us today.
the hundreds of acres of hops they grow at gauchy farms are a big part of what makes oregon beer the best that money can buy. and just for those kind of historians in the room. goschie farms just celebrated their 112th hop harvest. we couldn't have a better witness. and mr. chairman, again, like you i'd like to show our appreciation to senator thune and cardin. >> senator, we'll hear your remarks. >> thank you for the opportunity to make an opening statement today and for the opportunity to cochair the business income tax reform working group with you see senator cardin last year. while there are undoubtedly differences between the political parties, i believe that our working group demonstrated that there's bipartisan agreement in a number of areas. the bipartisan report we issued last july underscores that senators in both parties understand the importance of
reforming our tax system and how we face the most vexing challenges of business tax reform. our report considered a wide range of issues from tax policies, to dimp lisk reforms to biases in the tax code. however, given that my time is limited this morning, i want to briefly discuss two areas that our report described as threshold issues, means that any will resolve these challenges. >> senator, could i interrupt you for a second. i have to go open up the senate, i'd like you to continue chairing this until i get back. is that okay? >> yes, i would be happy to. thank you, mr. chairman. >> i appreciate it. >> first, our working group recognized a more competitive u.s. corporate tax rate is going to be integral. to any effort to modernize our tax system. america is losing ground as other nations continue to lower their corporate tax rates, over 39% is the highest tax rate in
the developed world. this is not sustainable if we want our country to continue to compete and win in the global economy, and want our country to continue to be an attractive location for foreign investors. a number of you are competitors have democrat traited? recent years that lowering the corporate tax rate is achievable. our working group reinforces the notion that while there are difference approaching to get there, a lower corporate tax rate remains at the center of any bipartisan approach to tax reform. and secondly, our group expressed the reform that it needs to be about all businesses, both large and small. the reality is those businesses taxed at the individual tax rates earn more than 60% of all net business income. if you include sole proprietorships, more than 90% of all businesses in america.
as such, our report found and i quote clearly business tax reform needs to insure that these businesses are not ignored in an effort to reduce the corporate tax rate. they need to benefit for any such effort to be consider a success. i believe we need to keep this perspective foremost in mind as we move forward. so, i would say our working group found that a modern, more efficient system is critical to boost economic growth, raise incomes and increase wages we recognized that achieving this will require different decides, and require leadership both in congress and from the white house. but i believe that we should remain optimistic because with each passing day it becomes more a question of when and how.
our outdated tax code is without question holding america back. and that's one of the most important elements to come out of last year's working group progress. i want to thank senator cardin for his leadership and the opportunity to work with him and all the members of our working group and their staffs for their input and for helping us lay the ground work. i look forward for the continuation of the robust debate on how best to reform our business tax system. with that i would recognize the senator from maryland, senator cardin. >> senator thune, thank you so much for your leadership in the working group. and i want to join you in thanking senator hatch and establishing the working groups our working group produced a report of 140 pages. i particularly want to thank mr.
barthold and the joint committee on tax for their extraordinary work. i said at the conclusion that i learned a lot. i thought we were gaining senate continuing education credits and didn't have to pay any tuition for it. it was a great learning experience for all of us. i thank you for that. i agree with senator thune in that our high tax rates on businesses in america is making america not competitive. we are definitely at a disadvantage in international competition because of the high business tax rates and that i think democrats and republicans agree we got to do something about it. the c-corporation rate at 35% is not competitive. compounded by the fact of double taxation and senator thune, senator hatch and others have brought forward proposals in this regard and the chairman just commented about it, and it's an area that we certainly need to take a
look at so that the business entity form doesn't discriminate against a business and that's clear lee an issue we need to deal with. but 90% of american businesses don't pay the c rate. we need to deal with the realities of both the c rate and the individual rate in dealing with business taxes in our country. although, we want to talk about major tax reform, we shouldn't lose sight that there are so-called smaller reform issues that we should do and we should try to get that done as quickly as possible to help america's businesses. the challenges in dealing with the high rates are incredible. i want to put this on the table so our colleagues understand if we're going to do a major are
reform for business taxes in america. first, it's a huge revenue issue. if we use the existing structure, for every 1% point reduction in the c rate, joint tax has estimated it would cost $100 billion over 10 years. you can do the math. most people want to reduce it by ten percentage points. that's a trillion dollars. and that doesn't deal with the individual rate. and we need to understand that there's need for help on the individual rate with business income and that could add anywhere between 60 to 80% more to the cost of any proposal that deals with reducing the rates. so, if we say let's do what we did in 1986, that lasted until 1987. politically, i'm not sure that's possible for us to leave the tax code alone for any significant
length of time. i just want to challenge the committee with something that is somewhat counter-intuitive. that is, the united states, among is one of the lowest on its reliance on the governmental sector for its services. so, why should we have the highest marginal rates, we should have the lowest in the oecd countries. and the reason is we're the only country that doesn't have a national consumption tax. there are about 150 countries globally that have a national consumption tax. it dramatically simplifies our tax code, particularly on personal income, by simplifying it and starting it at $100,000
ant taxable income with the highest rate being 28% for the taxable income for families over $500 thousand. and reduce the corporate tax rate to 17%, giving us a significantly lower corporate tax rate, and would establish a national consumption tax at 10% using the credit invoicing system. we think that's the most efficient way to do it. it's progressive. starting at $100,000 and and cashing out the earned income tax credit are crashed out. in order to keep it progressive. and it's revenue neutral and contains a circuit breaker that in the event the tax numbers aren't accurate and we if we produce more revenue, there would be a trigger system to return the excess to the taxpayers. we would have on average five percentage points lower than the
oecd countries, giving up a competitive advantage rather than competitive disadvantage on international issues. mr. chairman, i want to make this point. i think we can be in the leadership of tax reform and i think we can be. and i think the work that was done by the working groups we have become, i think, understanding of the challenges we have and i urge us to work together so america, in fact, can have a tax code that's a lot easier and simpler and efficient on capital and growth than our current tax code. >> thank you, senator carden. if i take a couple of minutes and introduce our panel of if i ever witnesses. the chief of staff for the joint committee on taxation. tom is no stranger here and shouldn't need much of an
introduction. he's worked since 1987 when he started as a staff economist and worked his way to become acting chief of staff before being named in his current position in 2009. prior, he was a member of the economics faculty at dartmouth college and later received his doctorate in economics from harvard, and i would add indispensable in terms of providing insight and counsel in the working groups. so, good having you here, tom. and second, the musgrave professor and currently serves as the research director at the office of tax policy research at the university of michigan. he is a research associate of research director of the international tax forum. former coed tore of the journal of economic perspectives, and once long ago was an economist in the u.s. department of commerce. dr. heinz has hell visiting appointments at columbia,
london school of berkley and graduated from yale and a ph.d. from harvard, all in economics. third, dr. erick toter. an institute fellow at the urban institute and codirector of the urban brookings tax. his recent work includes papers on what the u.s. can learn from u.s. territorial tax systems corporate tax reform, net benefits of expenditures and many other issues. he had previously held a number of issues in overseas, including service as a deputy assistant deputy at the treasury department. director of research at the i.r.s., deputy assistant director at the national national budget office. he received his ph.d. of economics from the university of rochester. our next witness is zenman in he is learneded in new york,
florida, connecticut and hats worked in public accounting for more than 30 years. his diversified clientele inclusion authors, child care. providers, real estate, medical professionals and retail operations. he provides tax services for businesses and individuals. a member of the national conference of cpa practitioners. where he serves as vice chair. he's also a member of the american ser filled institute of certified public accountants. in other words, he hangs out with a lot of accountants. he graduated with an mba in public accountant from loyola. and next ms. goeschie is works fourth-generation farmer in silverton, oregon. she works with the two brothers to manage the operation of the family farm that specializes in hops and grapes and the farm grows wine,
grapes and more, grass, seed, corn, and wheat. they've been an innovator in sustainable farming techniques . including power a portion of its operations by solar centering. she was the first hop woman to be named the order of the hop in 2009. i want to thank all of you for coming. i know this is and we're grateful to have your expertise to inform us on business tax issues and we will look forward to hearing from all of you and hopefully you can come up with a way to make this all a little bit more understandable and hopefully easier. no, i don't think it's going to be easier for us to get this done. there's very complex issues, as we found in our business tax working group, but it's a -- it's a subject we need to tackle, and was noted earlier, the it sooner the better.
so, we'll proceed from left to right. my left and your right, starting with mr. barthold. tom, please proceed. >> thank you, members of the committee for today's hearing, chairman hatch and senator wyden have asked me to briefly review some of the tax revoou issues. my colleagues prepared for you more detailed background information that was released last friday in our joint committee document. it's important to remember that in assessing any tax system or reform, there's four key dimensions. that we always look at. first, does the tax system promote economic efficiency? does the tax system promote economic growth? is the tax system fair? anded a min strbl both for the
taxpayer and the internal revenue service? there may be other policy occurs where we fit in the picture, but invariably, it's the case that these different policy goals are in conflict. policy designed to promote economic neutrality, may conflict with fairness. and so, those were issues that the business working group was always grappling with when thinking about the issues before them. some of the proposals undertake comprehensive tax reform be broadening the base and lowering rates. to lower the top rate of the corporate income tax by one percentage point from 35 to 34%, we have estimated against the current policy baseline would cost $100 billion over the
10-year period. by comparison, by our staff estimates of the largest corporate tax expenditures, only a handful exceed $50 billion. so, if we broaden the base, it takes elimination of a lot of other ideas. this was an approach taken by former house ways and means committee dave camp in his hr 1. which reduced the corporate income tax rate for 25%, but did so by generally reducing appreciation. and repealed lower cost or market methods of accounting, phased out section 199 deduction for manufacturing activities. and a number of other base broadners.
i think it's also important when we talk about conflicting goals to recognize that some of the tradeoffs that can arise are exhibited in hr-1. if we lower corporate tax rates, that's good for investment but if we slow depression, slow cost recovery of investment, that's bad for investment. so, there's inherently always a trade-off. other issues that the working group looked at as noted in your opening statements were the differences between entities and the united states as a business form and c-corporations. as the next slide notes, a substantial amount of net business income in the united states is earned by enterprises that are not c-corporations, so, some have been proposed with maintaining a sense of parity through pass-through entities. however, the working group found it's not clear what parity should mean.
c generally bare two levels of tax that can exceed 52%. and if you look at earnings not distributed, the current tax burden is 35%. on the other hand, owners of pass through entities generally do not bear a tax rate greater than 34% but that may apply regardless of whether the earnings are distributed or retained. the slide before you gives you a more detailed analysis. it's not a simple comparison, a consequence of some of the other complexities for business taxation. recognition of two levels of tax has led some to propose what's called corporate integration. the chairman described this. there's basically two approaches.
one approach is complete integration and partial. you eliminate double taxation by including in shareholder income the distributed and undistributed earnings. this is how we tax s-corporation under present law. other than the, partial integration is generally a form of dividend relief, reducing double taxation on distributed earnings only with no change in tax on retained earnings. you may characterize our lower rate of tax on qualified divdends as a form of partial integration. i know i'm exceeding my time here and that you want to hear from your other experts. but let me just make a brief note of one other important area that the working group looked at and that was the role of inovation.
and they have established patent boxes as they call which offer -- the goal here has been to increase domestic investment in research and development or encourage business enterprises to locate the ownership of that intellectual property in that particular company. in the united states we do have incentives and significant incentives for research and development. the path act modified and made permanent, our section 31 research effort. the working group explored the notion of creating a patent-box time system for the united states, and this presents some unique policy design anded a ministrative issues for the members to consider, including what is in the box?
is it just patents? is it a broader range of intellectual property? including trade secret? and how do we define those in terms of applying this system administratively. other questions are what's the role of nexus, which has been important in terms of the important in term oz of the european consideration of these patent box proposals and how would the income be taxed? well, the working group did review a number of other proposals, including some offered by this committee. but i know you want to take more time to deal with the distinguished witnesses you have to your left and i'll conclude and i'm happy to answer any questions that the members might have. >> good morning. it's terrific that the committee is looking into business tax
issues. these tax burdens depress business activity and create fewer economic opportunities for americans, especially american workers. the challenge you face is the following if you want it to be neutral, it's going to be impossible to lower business tax burdens very much. if you retain -- if you implement a reform that is revenue neutral, it will not greatly change the average tax rate that businesses face. so, there is good that can be done by revenue neutral reform but let's be clear that there's a limit to how effective that is going to be in addressing the problems of heavy tax burdens on u.s. businesses. because any reform that's revenue neutral will lower the tax on some activities and raise the tax on others and as a
result doesn't that greatly change the burdens. now, within the constraints of revenue neutrality, or for any business taxes set up, there are smarter ways to tax business income. those efforts should be guided by principles, and economic theory says there are two principles we should apply. one, we want lighter tax burdens on activities that generate positive economic spillovers, and and lighter tax burdens on things responsible for taxation. when you tax income, you discourage the production of income and our goal should be to try to do the least damage to the economy we can while raising the tax revenue we need to fund government. so what does that mean in practice? on the spillovers question, some of this has already been discussed this morning.
there are very strong reasons to have a favorable tax treatment of research expenditures because it contributes to economic growth. low incoming housing and to other activities that generate positive benefits that are not entirely captured by the people who undertake the activities. the second principle is that want lower tax rates on activities that there highly responsive to taxation. an example might be domestic manufacturing. we currently have the deduction that offer as favorable tax treatment of qualifying activities. there's pretty good evidence that has been successful in stimulating more manufacturing investment than we otherwise would have had, and further evidence that
it's further effective to its tax treatment than investment in other industries. as a result, tax reform that would would be directed at lowering statutory tax rate and financing some of that reduction by eliminating the section 199 deduction, based on the evidence we have, probably would have the effect of reducing overall investment in the economy. it's true that the statutory rate lowers investment. but the problems is if you finance it by removing the deduction then on net you discourage so much manufacturing investment by removing the deduction that you don't make it entirely back with the lower statutory rate. the issue of corporate integration has come up again as well. economic theory does not actually say that we want equal tax treatment of debt-financed and equity-financed investment,
but it says that the difference in the taxation of these two forms of investment should be related to the responsives in of this activity to taxation. we currently have a quite different treatment of tax debt. it's taxed much more heavily. efforts to integrate the corporate and personal tax systems and thereby reduce the heavy burden would surely be a movement in the direction of economic efficiency. the general implication of economic theory is that you do not actually want equal taxation of every economic activity and the reason is that our tax system will discourage economic activity. that's part of the cost of
government. that's the way it goes. we want to discourage it as little as possible while raising the revenue as often as we can. so, we should decide to design theistsome with responsive activities in mind. it will be a system with differences, but if we do it right, we will preserve as much as possible of the economic vibrancy of the country and the whole country will benefit and in particular american workers. >> chairman's back. thank you, dr. hines. >> chairman hatch, ranking member widen and members of the committee, thank you for inviting me to appear today for business tax reform.
the views are my own and should they discourage domestic investment, place u.s.-based firm at a competitive disadvantage and have encouraged them to accrue over $2 trillion in overseas assets. and pass through businesses over companies that must pay corporate income tax. the corporate rate needs to be cut. there is less agreement on how to pay for rate reduction and 1986-style tax reform that pays for lower rates by eliminating business preferences is not sufficient to pay for the needed rates in the long run. and some of the broader considerations are would not necessarily make them more productive or efficient.
i suggest, therefore, that congress look beyond business-only tax reforms to other revenue sources to pay for corporate rate cuts. one approach would raise taxes on share holders to help pay for corporate rates. better in today's global economy than those based on corporate income. a corporation's tax residence may bear little relationship to the location of its production, sales, shareholders or even top management and the source of its income is difficult to determine when an increasing share of profits reflects returns to intangible assets not tied to a fixed location. in contrast because the share holder level tax only depends on the residence hof share holder,
neither the residence of the corporation or the source of its income would effect tax liabilities. alternatives are to rate tax rates, shift the taxation of shareholders or integrate the corporate and personal income taxes. i discussed the advantages and disadvantages of each of these approaches. another approach would replace the corporate or individual income tax with a new consumption tax. such as the destination-based in use in over 150 countries around the world. unlike the corporate income tax, a v.a.t. would not discourages saving, and would not affect a firm's choice of tax residence or location of production. a final alternative would introduce a carbon tax and use a large. share of the new revenue for corporate rate reduction. this approach, though controversial, could appeal to both
business and environmental groups. all of these options can be designed to raise the same revenue as under current law, and make the tax burden as progressive or more progressive as than it is now. i conclude that paying for the major corporate rate cut, we look to the tax base for additional are revenues. i am encouraged that this committee is open to broader approaches. >> chairman hatch, ranking member widen, members of the committee, thank you for inviting me to discuss this topic. i'm the vice president of the cpa of practitioners. served more than $1 million business clients and has long advocated for tax equality and simplification. when taxpayers understand the
laws, they're more accepting of the rules. i'll address the current and its impact on the microbusinesses. my 35 years as a cpa, sole practitioners involves working with and advising a variety of these businesses. what's already known is that small businesses make up an overwhelming majority of the the number of businesses in our country. according to a report published in june 2015, small businesses, as defined by less than $10 million in total revenue make up roughly 99% of all businesses. that same report states that 69% of those small businesses are individual taxpayers while 31% come from partnerships and corporations. the report also indicates that 20% of small business populations hire at least one employee and produce about 71%
of total small business income. the small business community is vital to america. many mom and pop businesses, which i call microbusinesses operate the same way they did 50 years ago. many are sole proprietors or s-corporations. to start a business, the owner often seeks advise from his or her attorney and just as often gets the opinion of a qualified tax advisor, usually a cpa. the form of organization is often irrelevant to the business
owners. they just want to make some money. these microbusiness owners want to bz better their lives and keep as much of their profits as much as they can. the first thing they want to know is what is the simplest business they can open? of course, this is never a standard c corporation. life was simpler 50 or 60 years ago but we're not there anymore. each one as potential benefits and pitfalls. the cpa will explain the nuance differences between an llc, a an s-corporation, a partnership. ultimately the differences are not extremitily significant in the big picture however, these differences can cause unnecessary complications in the decision-making process. in the interview process, the
cpa tries to determine the business owner's understanding of the business law and tax regulations and only after a conversation can a cpa provide meaningful guidance. yet, issues don't help in achieving the true objective, putting food on the table. although it may meet the current needs of the owner, these needs may change over time. then the original structure may not be correct anymore. there should be a simpler common approach to taxation of various business entities. thank you again for allowing me to address the committee today. we know congress can't stop people of coming up with clever
new forms of business organizations but they can insure a level playing field. there are complexities which effect all businesses both small and large. a simpler equitable tax structure would allow business owners to better understand tax liabilities and make better business decisions. allowing for a single level of tax will provide an understandable equity. thank you again for the opportunity to present today and i welcome your questions. >> thank you, mr. zenman. >> ms. goeschie, i'll geto you we'll turn to you now. >> co chairs of the income bipartisan tax working group. i would like to thank you all for giving me the opportunity to testify today. i'm a fourth generation farmer. i'm here today to represent goschie farms incorporated.
our customers include brewries located in multiple states throughout the country, some of which you would be representing here today. and we grow wine grapes for three oregon companies. the business of farming is fraught with uncertainty. a growing season can turn from a economic gain to a loss overnight our customers needs ask have a unforeseen impact on our business. the agriculture industry has many uncertainties, taxes should not be one of them. taxes influence how we invest in our business. tax rates affect the equipment we buy and when we buy it. the types of crops we grow and our hiring and labor decisions. when there is uncertainly with taxes, we're unable to investment with confidence in our business.
fixing the present tax code is one of the ways congress can help insure that farms like mine can be positioned to grow. congress has already enacted sh changes that will have a positive impact on the farming sector. in december 2015, they permanently extended the small business sections of business 179. prior to being made purmnt permanent, the amount was unknown and needed investments were delayed. with inequalities from one industry to the next. a tract depreciated and it would be helpful to have uniform depreciation for similar items and allow them to be pooled together as opposed to being listed separately. expensing also impacts our development costs. there are a number of expenses
that come with the development of a vineyard, including pre-productive costs of land clearing, soil and water conservation, and direct and indirect costs of vine, trellis, and irrigation systems. the preproduction period of vines must be capitalized into the cost of the vines. with perennial crops like wine grapes, they're not depreciated until their first commercial harvest, standard of three years. as you can see, the tax code for small business owners, farmers like me, is complicated. we do not have accountants on staff to analyze every decision as it is made or maneuver each decision to maximize the tax benefits. our time and efforts are needed in the fields to immediate the demands of our customers. the work we do every day as farmsers is a business story about the safe, u.s.-grown,
quality products that are our livelihood. both hop appeared wine grape certification, safe practices, sustainability and energy conservation. with the hope of consistent energy tax incentives, these are just the just the beginning of ongoing environmental investments. another tax issue that would impact farms like ours is the craft beverage modernization and tax reform act, which was introduced by senators wyden and blunt. through this legislation, though this legislation does not directly impact hop and grape growers, it would recalibrate the federal xiz tax for craft beer, wine and spirit products. when the craft beverage industry find relief, the grower will find expanding markets, increased demand and a bolstered confidence in
continuing to work with craft producers. it should come as no surprise that in addition to the majority of the alcohol industry, this bill has the support of farm groups liable the hop growers of america, the oregon wine growers association and the national barley growers association. with this unique example, a simplified tax code could bring relief to breweries, wineries, farmers and the consumer. thank you again for inviting some el to testify today. >> thank you, and we appreciate all of you for being here today. i apologize, i had to go open the senate. i have two articles here by the president of the american council of capital formation. one of the articles is entitled bipartisan tax reform, unquote, you what presented in "wall street journal," and specifically commented on the tax reform working group. i was pleased with that. the other article is was
featured in "fortune" magazine and titled this is the fairest way to tax america. this articles is a broader commentary on the tax reform debate. mr. broomfield is no stranger to the committee. i appreciated his comments in these articles. and ask that they be included in the record at this point. so, without objection, they will be included in the record at this point. okay. let's start over on that time. dr. hines and dr. -- is it toader? am i saying it right? i was very interested in reading both of your testimonies, the caution with which you suggest congress take in addressing revenue neutral business tax reform by lowering tax rates and broadening the tax base.
integration in general can strengthen the competitiveness, encourage more business activity in the united states and go a long way in addressing multiple tax issues that we are certainly going to be faced with and seeing today including inversions and earning stripping and i would like to hear your commen as well. let's start with dr. hines and so i sort of understand the spirit of the question, in that if we had corporate integration along with other beneficial reforms, would it be part of what contributes to the competitiveness and the answer would be yes. >> i don't see any -- i don't see any reason not to. i think they're complementary. both territorial changes and the corporate integration. >> i see it the same way. >> keep going. i'm sorry.
>> so, look, the advantage of corporate integration is it lowers the taxation on equity financed investment and we have a heavy tax burden on that as it currently stands. >> yes, sir. >> well, one of the, i think, advantages of corporate integration are by shifting the burden of if it's designed in a way that it pushes the burden at the individual level. so, individuals are taxed once on their business income, you get less determination of where the corporation earns money or invests, as effecting its tax liability. that depends on the corporation being interested. so, one of the advantages of the
australian system is if they don't pay australian tax, then credits don't go out the share holders when they pay dividends. so, people can see that as one way of reducing some of the income shifting problems while maintaining a territorial system, which is what they have. i think there are several challenges that you have to deal with. one is you're still going to have a high tax on corporate s retained earnings, so those company that is don't distribute profits aren't really going to not necessarily get the benefit of that system and that's going to be a tax at the corporate level, which could raise the cost of capital. a second problem is how to deal with the tax exempts. in the united states, by our calculation, only about a quarter of dividends actually go to taxable u.s. shareholders. the rest go to tax exempts or foreign share holders or pension funds, retirement funds.
so, essentially what you're doing, what you have to do is maintain -- currently you are taxing those funds because they're paying the corporate tax before it comes out. you have to deal with the issue that you might have to make that taxation a little more explicit or face a very large revenue loss, on it would be a matter of communicating with them, look, we're not really raising your taxes but that's an issue you're going to have to wrestle with. >> it's been an excellent panel. i want to start with you, ms. gmt oeschi and mr. zenman, because for me, it's small business. that's where you have the most of the jobs in america. that's the litmus test of real tax reform, and i want to note that "wall street journal"
recently said that the number of businesses owned by asians, hispanics and african american women grew faster than almost any other group during and after the recession. so, what we're talking about is what the american economy is really all about. talking about what the american economy is really all about. that's our priority when we talk about small business. it seems to me there are really two tax codes in america. one is for the large multi-national corporations that have this fleet of tax attorneys and accountants who can figure out a way to manipulate the byzantine rules of the tax system to maximize their tax benefits. the other is what you describe, ms. goshy, this la la land of trying to bess what you're going to owe and make the best decisions for your businesses and the like. and i gather that what you're saying is that small businesses really do not have much
specifics about what the tax consequences are going to be when they go out and invest in new equipment. that's what i read in your testimony, sort of reading between the lines. is that correct? >> exactly. i mean, we don't have those accountants on staff. so it does take a phone call to be able to answer a question, to be able to decipher the consequences of a decisions. and sometimes, business gets in the way. and we just need to make that decision. >> if you make the decision and kind of keep your fingers crossed, like i said in my opening statement, you make the decision, you keep your fingers crossed, and you go to bed apartmeat night on that particular evening saying, i sure hope i don't hear from the irs in the future? >> that's correct. >> all right. mr. zinman, is that a fair assessment, in your view, with regard to what small businesses are dealing with when they're
wrestling with their taxes? >> it's a very fair assessment. there are a number of issues that small businesses deal with. and as mrs. goschie indicated, she's absolutely right, if you don't have a staff of accountants with you -- look, if you had a room of accountants here, and you were asking questions about tax code and depreciation schedules, they would say, well, that's why god made computers and tax software. but the reality is that as a small business, you're trying to wrestle with, do i have enough money today, what taxes will come up? in an s corporation, i constantly have at the end of the year owners who have a successful business. and they pay themselves a reasonable salary. and they're falling within the tax guidelines. yet all of a sudden, their business shows a profit. they have phantom income. they have to pay tax on that income that was unexpected, and
they haven't actually drawn out the money at that moment. and they have to wrestle with understanding the tax code and the complexities of what is supposed to be a simple s corporation and what to do with it. >> so you both have had a cans to look at the proposal that i've released today, the cost recovery simplification and reform discussion draft. and the whole point of this is to end the water torture for small businesses. that's in a nutshell how i think we ought to look at this question. and in particular, to make sure that we end the day when small businesses face a situation where their dollar is worth less compared to the sophisticated firms that can afford to make the rules work for them. i would be interested in your reaction, because i know the staff has talked to both of you, starting with you, ms. goschie,
and you, mr. zinman. in the time remaining, i would like your take on whether the simplification proposal we released today at least begins to respond to your concerns. >> so that you are, absolutely it addresses my concerns. again, it's simplification. it takes out the inequities and it puts us on a fair playing field. >> okay. mr. zheinman? >> years ago i went through hours and hours of training on acres and acres and trying to figure out and trying to explain to people about accelerated depreciation, straight line depreciation, section 179 and how it plays into the tax return. and we wind up as accountants doing a lot of work in the depreciation area and in projections for our clients because of the complexity of this depreciation. any kind of simplification would
be welcome by business owners. the accountants don't mind making a couple of extra bucks by doing projections and doing analysis work. the business owners do want the simplification. >> thank you both. and the point of this really is, i know that you've had multiple generations on the farm in oregon, ms. goschie, and we're so glad you're here. the point of this particular part of the proposal, this is a metaphor for what the debate is going to all about. the big guys are going to have a lot of advocates, the multinational companies, the c corporations. i'm so glad that both of you have focused your remarks on the mall business is people. that will be my top priority in the debate. i thank you for being here. >> thank you, senator. senator carper, you're next. >> thank you, mr. chairman. i want to thank you wyden for pulling this together. i thank our witnesses for joining us from across the country. in the past four years, this committee has attempted not once
but twice to reform our outdated and inefficient settlements. i don't think we should give up. i think we should thank my colleague to my right, senator cardin, and senator thune, for their leadership on the business tax reform initiative for the last year. one thing that this process has made clear is the eenormity and the structural obstacles to reform. if we're going to lower business tax rates, and i think most of us on both sides of the aisle are interested in doing that, then we would need to find enough permanent revenue to offset the cost of permanent rate reduction. that leaves us with the choice between base broadening or identifying an alternative source of revenue such as value added tax. both courses are i believe worth pursuing. neither are easy. even my persistent optimism is
tested when i try to fathom the likelihood of a tax overhaul within the next year. so the question is, what do we do until then? in the meantime, while the business community waits for congress to make the necessary tradeoffs to achieve tax reform, u.s. companies are choosing or in some cases being forced to choose between add versions, offshoring, and profit shifting. these ongoing threats to our international competitiveness are one of the main reasons that i continue to support the efforts of some of our colleagues, particularly senator schumer, senator portman and others, to enact a rifle shot international tax reform. while we wait and look forward to broader reform to occur, i think it makes sense to begin the reform process by first tackling some of our most pressing international tax challenges. i want to direct questions to two of our witnesses. must tax reform be accomplished
in one fell swoop, or given political obstacles to apprehensi comprehensive reform, is it possible to envision a multistage process where we bite off one piece at a time, sort of like we eat an elephant, one bite at a time? i would welcome your comments on that, both of you. >> okay. i guess i have two responses to that. one is, there's a lot of complexity we have in the tax law which unfortunately is going to be there, because the world is complicated. but there's also what i call gratuitous complexity, where you could make things a lot simpler within the framework of current policy. i think of senator wyden's proposal as one that accomplishes that. any place you can do that, you should do that. that do not require a large agreement on broad conceptual reform directions. so i think there's a lot of pieces both in the business code and in the individual tax code where that could be done.
and i've always been encouraging that for years. taxpayer advocate has written a lot about things like that. i think there are a lot of measures. the other area is international reform, where there teams to be at least a conceptual agreement on measures that would accompany eliminating the repatriation tax that is having a one-time tax on having assets abroad and having some minimum tax going forward on foreign profits. i think that would make our current international system a little more efficient than it is, lower the costs, because you wouldn't have this disincentive to repatriate. however, i don't think it solves the fundamental problem of either competitiveness inversions or the shifting of income overseas. so while i encourage doing that, i don't think it's the -- i think you need to go further. >> all right. was your term "gratuitous"? what was that term? >> i used the word "gratuitous.
>> there were two words. >> complexity. >> what would be the opposite of that? >> i would say there's some complexity that we just have to have because the world is complicated. so if you want to have an income tax, and, you know, i use a car in my business, you don't want me to deduct the car for my personal use. you want me to deduct it for my business use. it's a little complicated to do that. >> okay. thank you. dr. hines, staple questiame que please. >> sure. we can do international only reform and we should do international only reform if the alternative is to do nothing. i think everyone in this room agrees it would be nice to do more than that, especially to address the complexity that small business owners face and lots of other ways to improve the efficiency of the tax code. would it be better to -- you know, if the choice was nothing versus moving in the direction of a territorial tax system like every other capital exporting country has? the answer is yes.
again, i'm not sure that everybody agrees on the details such as the need for minimum taxes abroad and things like that. in fact i'm quite sure that they don't agree on that. but this committee, i'm sorry, would do an excellent job of hammering out the details of international reform. >> your confidence in us is appreciated. thank you. >> thank you, senator. >> thank you, mr. chairman. and our group produced this little document here which i recommend for nighttime reading. but actually, staff did a great job of breaking down the issues related to the business part of the tax code. we had a number of overlapping working groups. some of these issues were dealt with on some level in other committees as well. one of the issues that we got at or tried to at least was this tension tradeoff, if you will, when it comes to faster cost
recovery versus lower rate through base broadening. what is the best way to achieve economic growth? there are different proposals out there. some call for full expensing right away. the camp proposal actually last year slowed depreciation in an effort to reduce rates in a revenue neutral manner. i guess my question is, of those two approaches, in your view what's the best way to generate economic growth? if congress could choose a plan that cut the rate or lengthened depreciation schedules or one that cut aggressively but allowed businesses to cut their rates, what would you -- that's hard to answer quickly, but if you give me your best answer on what's the best way to get growth. anybody? >> oh, capital cost recovery, if you have more generous capital cost recovery provisions, you
stimulate investment. lowering the statutory rate also stimulates investment. but on the capital investment side will do so much less dollar for dollar than you get by capital cost recovery. the thing about the lower statutory rate is it hasn all kinds of other effects too. so you sort of have to add them together. i think the thrust of almost all of the economic analysis is that it's not a very cost effective bargain to finance lower statutory rates with reduced capital cost recovery, because you get a lot less investment, and it's true you get benefits on other margins of business decisionmaking, but the cost of that reduced investment is pretty substantial. >> do you have a different view own th on that, or agree generally? >> i agree as far as what jim said but i would actually
caution you about going in the other direction. unless you restrict interest reductions, and then if you move to a consumption tax model at the business level, you have contradictions in how you're treating businesses and how you're treating individuals. i guess i would say there's no simple answer to this. i don't think moving in one direction or another is going to improve matters that much. >> tradeoffs. all right. the other thing i wanted to ask about, because i mentioned in my opening remarks, addressing the challenge of reforming the taxation of pass through businesses is going to be key if they're going to get this done. and it seems to me at least that we want to do everything we can to reduce the top individual tax rate. but it's going to be a very difficult proposition in this environment. so we didn't have jurisdiction over individual tax rates in our working group. but we did examine some potential alternative approaches. one was a business equivalence rate where pass throughs in
corporate income are subject to the same rate. second is a targeted tax benefit approach for pass throughs involving higher expensing limits and cash accounts limits. or third, a flow through business deduction whereby pass through businesses lower their effective tax rate. which of those approaches do you think would be the most equitable for pass through businesses in a business tax reform effort that is also cutting the corporate tax rate? >> all right. i'll try first and let dr. hines correct me. i guess, you know, i'm never a fan of targeted benefits, but i think that's probably the best way, given the alternatives, to approach this situation, meaning more generous expensing and other kinds of capital recovery benefits for small businesses. i think the difficulty with a rate differential is it's very hard to tell what's this difference between a small
business, margin between a small business and an employee when you get to closelily held companies and you'll have a lot of gaming between the rates on compensation and the rates on business profits. and i think that would create some very, very difficult problems. so i would not go in the direction of a special rate. i think also i would point out that there is an advantage to being a small business, or being a pass through, even if you pay a higher rate, because you aren't paying two levels of tax. you're not paying a second tax on distributions. so the real issue has to be with small companies who would try to, if the corporate rate were lowered relative to the pass through rate, would try to incorporate. so you might have to have rules that define what kind of entities would be pass throughs and what could be corporations. >> dr. hines, quickly? >> i agree with dr. toder. the targeted benefits make more sense than the broad rate
differential because of the endogenous formation of small businesses, that people who otherwise would be employees could become self-employed and take advantage of the lower rate if it's available. we should really apply the principles. where you want the more favorable tax treatment is where activities generate economic spillover benefits or where activities are highly responsive to taxation. i think they both point in the direction of more favorable treatment of investments by small businesses. >> thank you, mr. chairman. >> thank you. >> thank you, mr. chairman. i want to thank the panel. i found this extremely helpful. mr. chairman, i appreciate you mentioning mark blumfeld. his organization has worked in a bipartisan manner, bringing together many of us on both sides of the aisle on better ways to do our tax policy. i remember his predecessor charles walker very well as a
person who provided a good deal of information to us. senator carper's point, all of us are interested in making progress wherever we can. we understand that it's unlikely in the next month or two we're going to pass major tax reform proposal. we want to make progress where we can make progress. there's been a lot of information that senator thune and i explored in our worker that can lead i think to some significant improvements in our tax code. i mentioned earlier the reform of the s corp., it's not controversial, it would help, we should get it done. but the fundamental points you're all raising, which is high tax rates on business, which is not competitive. the lack of simplification, so you need to have either an accountant on your fast dollar in order to get information because you just can't figure out this. and i would also add the predictability of our tax code, which effects investor decisions, all were the goals of
the 1986 tax reform. and i remember our predecessor saying we accomplished it, and obviously it did not accomplish it. it led to the tax code we have today. i really want to get to the proposal that i brought forward, that was discussed in our working group, that if we were able to substitute part of our income tax revenues with a national consumption tax that was at at least as progressive as our current tax code, so that middle income families are not going to be more burdened, that gives us rates that are on average 5 percentage points below the oecd countries, as i explained earlier, what impact would that have on the type of questions that we've been raising on americans' competitiveness globally, on the international side, on the challenges of dealing with small businesses, on complexity, and giving predictability for investment in america? dr. hines? >> it would do all of this.
you know, a move like that would reduce the inefficiencies in the current system, stimulate investment in growth and make the system more competitive. >> dr. toder? >> i agree with dr. hines on all of his points. i would add, though, that you are comparing a system that is designed perfectly with no exemptions in the value added tax, and when you get through the process here, you might have some exemptions in the value added tax. it might not look as good. so i think that's just a caution. >> i'm not interested in getting rid of the senate finance committee. i understand the challenges every year that we're going to have to deal with. let me just correct one statement. we use a credit method, not a value added, which is, as you know, a difference. we feel pretty strongly that using a credit method is a better way and a fairer way to
have a national -- >> oh, when i use the term, i mean the credit method. we're in agreement. >> i just want to make sure that that point was -- anyone else want to comment? let me then raise the issue directly dealing with small businesses. small businesses generally use the personal income tax rates. a lot of them are pass throughs. a lot of them use the general income tax for income. if we were to deal with the corporate rate and not the individual rate, what impact would that have if any on small businesses? >> you have to remember that a lot of small businesses are paying a higher rate because of the pass through. and it is important to look at a broad spectrum and keep all businesses competitive. when you've got an individual in an s corporation who is making a reasonable salary, whatever that
may be, and is looking to reduce and stay out of amt, i come from the new york area, and if you look at the new york area, an individual who is running the business, if he owns a house and has two kids ready for college, automatically he's paying amt. so you're looking at a way to provide equity to the small business as well as the big business. the big businesses are hit with the double taxation, and that's absolutely true. and yet the small business owner very often winds up paying as high a rate as some of the top corporate rates. >> thank you. thank you, mr. chairman. >> mr. chairman, thank you. i'm juggling several things this morning so i wasn't able to hear some of the testimony by our witnesses. and i think one of the areas that i would like to talk to
goes to what has already been talked about. so i hope i don't duplicate that effort. as chairman of the joint economic committee, last week we held a hearing. and we were talking essentially about the complexity of the tax code and its impact in particular upon small business. we didn't want to cut down several capital trees, which would have been necessary to provide an example of the number of pieces of paper and the number of pages of the current tax code. so we had empty boxes stacked up in the hearing room. and it was a pyramid of some dimension. we had testimony from a small business owner from indiana that i invited to come. he has a cyber security business, clearly qualifies as a small business. he gave a compelling testimony relative to what he has to go through in order to file his
taxes. he said, you know, and we've all heard this, he said, the large corporations can have stables of tax accountants sitting in the back room to deal with the complexity. he said, but i have to deal with a lot of the same complexity and i can't afford to have a back room of accountants working for me. he said, there was an issue that i needed to make -- i wanted to make an additional investment in a certain business, and so i took it to a tax accountant. he charged me a lot of money to give me advice saying, this is what you can do, this is what you can't do. he said, i thought i should get something else because i sensed he wasn't totally certain that the advice he had given me was the correct advice. the second accountant gave me the exact opposite advice.
so i got to break the tie here. i go to a third and he gave me a third indication of what it would mean for me from the tax standpoint. and so three well-qualified, he said, all totally qualified, highly paid, highly respected tax lawyers, basic advisers, basically gave me three different pieces of advice. so i'm a small business guy sitting here. do i want to buy this -- buy into this new business which would increase my employment? and what do i do? i didn't have an answer for him. and we don't have an answer for him. so whether it's complexity, the need for commission simplicity, for differentiation between what the small guy and the big guy can do. ms. goschie, i'm sure i wasn't here, senator wyden, my staff tells me, asked a question and you responded to this. i guess i'm here to make more of
a statement than i am to hear your answers because i don't want to duplicate what has already been said. but it's been a long, long time of talking and not getting it done. so i'm hoping this committee can take action with the house. obviously it's going to have to be after the election and in a new year. i won't be here. but i guess i say to my colleagues, there really is an urgency in terms of maintaining the ability of small businesses to address something so complicated. i had three tax courses in law school. i would be in jail if i did my own tax returns. so i think it's time that we stepped up to the plate here. i know the chairman wants to do that. i guess one question i have, just your take, i'm sorry if you've already talked about
this, the separation of business tax reform from comprehensive tax reform. is this something that is desirable, something that is just absolutely necessary because we can't get there any other way? our businesses are hurting, area not competitive. but there's a lot of concern among the small business people i talk to about, we're going to be left out in the cold. any kiquick responses to that? >> very quick, because i think i said that in my remarks also. i don't think, looking at corporate reform only is viable. i think you need to go through to business and you also need to go through the owners of corporations as individuals. so i don't think -- i think you really need to go broader than just business only. >> does anybody disagree with that? >> i think there are available things we can do with business only tax reform, but they are very limited. in that sense i agree with dr. toder. there's a limit to how much good you can do with business only reform. but there are ways to improve
things that way. it's just, you'll do better still if you integrate the whole thing. >> one issue that i want to raise, when you start putting band-aids on some of these tax rules, it gets things more complicated. one of the things, as a matter of fact, on the plane down here i was talking to somebody next to me, he's got an s corporation. he said, this whole thing is the 2% owner's health insurance, and a lot of people don't understand it, accountants don't understand it sometimes, but basically what happens is, if you're a 2% shareholder in an s corporation and you have health insurance paid for by the corporation, you add it back to your income and you put it on your tax return and take it out of your tax return. that's a band-aid approach to what happened before. >> thank you. >> senator heller. >> thank you for holding this hearing, mr. chairman. i want to thank the witnesses,
we really do appreciate your insight and help on some of these issues. i want to thank senators thune and carper in the working group for small businesses for their hard work, and also portman and schumer on the international tax reform side. a lot of research has come on lately in this committee. whether or not it becomes law or legislation, i'm not certain at this point. i think a lot of us know what the problem is. and the problem is, is that we have more small businesses in america that are going out of business than new startups. and it's a historical data, since world war ii we haven't seen that. what's wrong? what's wrong? why are more businesses going out of business as opposed to new startups? the second problem is inversions. we've had over 1300 inversions in the last ten years. we're talking big companies here in america that have multiple accountants, so you have multiple accountants and you still can't make it work. what do you do when you're
inverting? companies like louisville slugger, burger king. the problem isn't getting better. it's getting worse. we'll see this continue to advance if you don't do something about the tax structure we have in this country. i want to share a quick story about a company back in nevada. a good company, not a multinational company, although they do international work. it's called the hamilton company. they do robotics. they also do medical devices. and it's the owner talking with the owner. we sat down a couple of weeks ago and he says, you know, it costs me $10 million for my business to stay here in america. and he says, i'm willing to pay it, i'm willing to pay it, but it costs me an additional $10 million to do business right here in the united states. he's a patriot, a good citizen, so he's willing to pay it. he says, i'll tell you what will happen when i get too old to run this company and we get -- we merge or get a buyout. what they're going to do is move this company to outside the
country, because of more favorable regulations, tax rates, and fees. so i guess my question is, is how do you keep -- i know we're repeating this question over and over, but i think it's the issue of this particular hearing. but starting with you, dr. hines, how do you keep the hamilton company in america? >> two things. one, we have to adopt a territorial tax system like every other large country has. and two, we have to lighten business tax burdens. if you do those two things, then you will keep a lot more companies in america. >> i thought that would be your answer. dr. toder, any -- >> so yeah, i would actually add, i don't think the territorial system is necessarily sufficient to accomplish that. foreign owned companies operating here in the united states have a tremendous advantage with the ability to strip profits out of the u.s., out of their u.s. subsidiaries.
so i think you really need to look at the issue more broadly of all the ways in which foreign owned companies might be advantaged relative to u.s. companies. some of that might have to do with limits on interest deductions. the treasury has taken a step in that direction. i think it's a rather blunt instrument, what they've done. but i think a legislative solution to that problem or legislative action in that area is certainly called for. >> dr. zinman, you've talked about the corporate tax rate and the fact that individuals and passthroughs actually pay a higher rate. if you were to lower the corporate tax rate, would you say a movement back to c corp.s from these pass throughs if the rate were to be competitive at 20%? >> and thank you for calling me dr. zinman. it's mr. zinman. i'm not there yet. >> i'm sorry. >> that's okay. but we do have a distinguished panel. yes, when people want to start a company, the first thing they do is they go -- a lot of times
they go to an attorney and they say, we want to open up a restaurant, we want to open a building, we want to rent a property. often the attorneys will recommend a corporation, because that's what they know. llc's are around for quite a while but they're still somewhat new. there's more tax law and case study on corporations. so they go to the corporations, and then they go to the accountant and they say, should i be -- my attorney told me to come over to see you, should i be a c corporation or should i be an s corporation? well, on a small business level, sometimes it's irrelevant, because depending on the amount of income, depending on the shareholders, the owners, what kind of salaries they want to take, you can strip a lot of the profit out of the corporation just by paying a salary, which isn't necessarily a bad thing. when somebody pays a salary, they pay into social security,
they get the pension benefits, et cetera. so yeah, if you lower the c corporation profit tax percentage, you might get some turning toward that. and rather than using the s corporation as a device. >> mr. chairman, thank you. >> we only have two more senators. if you can keep within the time limit, i think we can make it and get over there and vote. senator portman? >> thank you, mr. chairman. i've really enjoyed the testimony today. and i thank you all for being here. and thanks to my colleagues thune and carper for putting out a great report. also thanks to senator schumer on our report on international. we do have a lot of the information. and i think we're poised to act. we just need a little political will to do so. i thought the chairman gave a great speech on the floor last
week. he said there is a glimmer of hope that the finance committee's bipartisan working group, however as is too often the case, that glimmer of hope may well be overtaken by the politics of the moment. we have to get beyond the politics of the moment because of everything you guys said here today. with all due respect to my colleagues who say this is about small businesses versus big businesses, this is about people. this is about workers. and i will tell you in my home state of ohio today, we are losing workers and losing investment because of the fact that our tax code is not competitive. it's not about the boardroom. the boardroom is going to be fine. when you do these inversions, i couldn't agree more with my colleague mr. heller on this, i couldn't agree more with mr. carper when he talked about the need to address this. what's going to happen if you don't address this is we'll continue to see more pressure on pages, salary. that's what the joint committee on taxation has said. that's what the cbo has said. the impact is on workers.
specifically, when you have these inversions, and that's the tip of the iceberg, it's really the foreign takeovers, it's the foreign acquisitions of u.s. companies, they take workers with them. and as we sit here today, it's happening in my home state of ohio. the eaton corporation, a great corporation in ohio, great storied history, finally kind of had to say uncle, because the tax code was hurting them so much. they went over to ireland, inverted to a smaller company, a quarter of their size, will save hundreds of millions on their tax bill. so workers are leaving ohio to go overseas to get away from the net of the u.s. tax code. this is outrageous. and we cannot let politics stop us from dealing with it. look, i'm a small business owner. i grew up in a pass through entity. i totally agree with the thought that we need to help small businesses. all of you have said we need to simplify. put me at the top of that list and the head of that line, i couldn't agree more. let's do that. i would like to have total reform of our tax code, of
course. we know we need that. but we do not have the consensus at this point. the issue no one's raised here today is the other side of the aisle and the admission insists on a couple of trillion of new taxes in order to do reform. that's what's in the president's budget. it's even higher than that this year. that's the reality. so we're not going to get to that. we cannot find common ground there. where we can find common ground is to deal with simplification, as you all have said, and ms. goschie, you gave some great comments on that, we loved your comments on hops and beer, we now have 115 craft brewers in ohio. thank you for supporting senator wyden's legislation. that's an important one to get passed. we'll have more workers not have their pay go up as it should or lose their jobs because our tax code is not competitive. every single day these companies are competing with one hand tied
behind their back. i want to thank you for being here and making this so clear to all of us. i love when you said we need -- i think it was dr. hines, a smarter way to tax business income. dr. toder, you talked about the $2 trillion plus locked up overseas, that's another huge issue. not only are we losing workers, and again, it's happening right now in my home state, but we are not taking advantage of $2 trillion plus that's locked up overseas that the europeans and others are going after now through not just the bepps project but also the estate aid cases. this is revenue that ought to come back here and be invested in jobs and infrastructure. i guess, mr. hines, i would just ask you a question, if i could. you talked about adopting what's called a territorial tax system rather than a worldwide tax system. not just what would be good about it, but what are the consequences for u.s. businesses and u.s. workers if we do not move in this regard? >> the consequence is we'll continue to lose out in competition with foreign businesses, depressed investment
in the united states, let's demand for labor. the more vibrant and competitive the business sector is, the more opportunities for workers. workers are paid based on their productivity in an economy like the united states. the more productive the business, the more capital and labor. we don't have a competitive system, so to reduces the productivity of labor and thereby reduces the job opportunities. >> i have eight seconds remaining. dr. toder, i would love to hear your comments on that, if we do nothing. >> bad things happen if we do nothing. i think a territorial system by itself without safeguards to prevent shifting of profits -- >> you saw our report, and we had that in our report. you need to do that as well. i think that's necessary not just for u.s. companies but for foreign companies investing here. >> yes. >> thank you, mr. chairman. >> thank you. senator scott?
>> thank you, mr. chairman. thank you to the witnesses for being here this morning and having an important conversation about an issue that seems to be a burden to taxpayers from a corporate perspective but also to every single american, because at the end of the day, the biggest taxpayer in the country is the individual who bears the burden of all the tax reform, all the taxes we're talking about, all of that conversation ends up on the shoulders of the individual. speaking of individuals, i think back to south carolina, where i'm from, where we have a wide range of life sciences companies that reflect the growing diversity of the life sciences industry across the united states. the life sciences sector employs almost 14,000 south carolinians, and specifically 8,000 are concentrated in the bye pharmaceutical and medical device sectors. over time the life sciences industry has grown rapidly to include companies that are contracted to specifically oversee and carry out the