The House Ways and Means Tax Policy Subcommittee hearing on May 25, 2016, on "Perspectives on the Need for Tax Reform" focused on concerns about the Administration's recent Section 385 regulations, which would treat certain related-party debt as equity for US tax purposes, and the need to both hear from and educate the public about tax reform.

In an opening statement, Chairman Charles Boustany (R-LA) said the Committee has a responsibility to respond to witness and stakeholder input with a strong tax reform plan that is built for growth, and to harness motivators for tax reform in order to develop a new tax code that is ready for the next President to sign in 2017. Ranking Member Richard Neal (D-MA) noted that the Committee has heard from many of the hearing's witnesses in the past and must "expand our gaze" to hear from the American public.

Witnesses at the hearing were:

— Dr. Douglas Holtz-Eakin, President, American Action Forum
— Dr. J.D. Foster, Vice President, Economic Policy Division, and Deputy Chief Economist, U.S. Chamber of Commerce
— Mr. Scott Hodge, President, Tax Foundation
— Dr. Martin Sullivan, Chief Economist, Tax Analysts

In testimony, Holtz-Eakin said the United States is lagging in competitiveness behind other nations that have reduced their corporate income tax rates and shifted toward territorial systems that exempt foreign source income. Both Foster and Hodge also advocated reducing the corporate tax rate and moving toward a territorial system, as well as full expensing for capital investment.

Sullivan said it is now widely accepted that there must be limitations of related-party lending to prevent profit shifting to low-tax jurisdictions. Concern about related-party debt prompted Treasury to issue Section 385 proposed regulations that would re-characterize certain types of such debt as equity, and economists have long bemoaned the large tax advantages of corporate investment financed with debt over investment financed with equity, he said.

During questioning, Chairman Boustany said he is concerned about the competitive climate faced by US companies here as well as abroad. He said recent global developments are very disturbing: the OECD Base Erosion and Profit Shifting (BEPS) project and European state aid investigations are "clearly targeting American job creators overseas, seeking to grab tax profits retroactively, [and] increase the cost of doing business abroad." He said the inability or unwillingness for Congress to act on these issues is a problem.

Boustany said the Administration's Section 385 regulations are punitive and are hurting American companies — not just large US companies that are trying to be competitive abroad, but companies and businesses here in the United States, "making the United States less competitive and a less attractive place to do business and invest."

Responding to the Chairman's statements, Hodge said the United States has reached a point at which either we define our tax base or the Europeans will: our major competitors are defining our tax base and trying to "plunder" it. He said the sooner we move toward a competitive international tax system and lower the statutory corporate income tax rate as dramatically as possible — in the 15%-20% range — the better.

Holtz-Eakin said the United States must recognize that we need to stop playing defense and aggressively make this a nation where people want to be, so that we attract companies. Alluding to the process that led to the 1986 tax reform, he said the nation needs a public education campaign to convey, on a bipartisan basis, that a better tax code means a better standard of living in the United States. "If we look like we are just playing defense to hold onto things for big corporations, I don't think we are going to make the sale," Holtz-Eakin said.

Sullivan said we have to be realistic about the economic populism of the current presidential election. "If anything, the American public will be less tolerant of business tax cuts now than they have ever been before. So we are actually moving in the wrong direction, unfortunately … " he said. "And we have to think about the appearances of profit shifting, of tax shelters — whether they are just or unjust — how they are affecting the public's attitudes towards a business tax reduction."

Rep. Dave Reichert (R-WA) asked for the panel's thoughts on the effect of some of the Administration's decisions, especially the Section 385 guidance. Holtz-Eakin said what the Administration has done under Section 385 might best be characterized as desperate, and is certainly not good tax policy. He said the rulemaking is predicated on stopping deals that have been entered into in mergers and acquisitions; a foreign investor will not want to go to a place where the rules change midstream or after the fact.

Also, related to educating the public, Reichert said the idea of growing businesses to hire more workers to make more products is something the public understands; what they don't understand are terms like repatriation, inversions, innovation box, and dynamic scoring. "None of that makes sense," he said.

Member statements and witness testimony from the hearing are attached.

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ATTACHMENTS

Boustany statement

Foster statement

Hodge statement

Holtz-Eakin statement

Neal statement

Sullivan statement