July 19, 2017 Finance Committee questions Former Assistant Secretaries for Tax Policy, current nominee The Senate Finance Committee tax reform hearing on July 18, 2017, featured witnesses who have previously served as Treasury Assistant Secretary for Tax Policy. The hearing included discussion of the need for anti-base erosion rules under a territorial tax system and issues related to the taxation of pass-through entities. The Committee held a separate hearing, directly after, on the nomination of David Kautter, a former Director of National Tax at EY, to be the next Assistant Secretary of the Treasury for Tax Policy. The Senate health care debate was an undercurrent of both hearings, with Democratic members raising questions about the merits of a partisan approach that utilizes the budget reconciliation process and the lack of hearings, as opposed to a more open deliberation. Senator Claire McCaskill (D-MO) asked whether the Committee would hold a hearing on a tax reform proposal when it is developed, to which Chairman Orrin Hatch (R-UT) replied, "I'd like to, I don't know as of right now." In an opening statement (attached), Chairman Hatch listed factors that make the current tax code unsustainable, including the fact that "America's multinational businesses find it difficult to compete abroad and are often targets for acquisition by foreign companies." Ranking Member Ron Wyden (D-OR) said Treasury "has begun to wipe out tax rules designed to crack down on corporate inversions, protect jobs and close estate tax loopholes," referencing the July 7 Notice 2017-38 on regulatory burdens. The lack of a plan to replace the rules poses risks, including "a new outbreak of the inversion virus," he said. Witnesses at the hearing were (testimony attached): — Eric Solomon, Former Assistant Secretary for Tax Policy, 2006-2009 In testimony, Solomon, the current EY Co-Director of National Tax, cited increasing global competitive pressures as one reason for pursuing tax reform, and said that other countries have responded to increased global competition by lowering their corporate tax rates and shifting to territorial tax systems. The other witnesses also cited the US statutory corporate tax rate as high relative to the rest of the world. Senator Wyden said a centerpiece of tax reform should be policies that increase take-home pay for the middle class, which the witnesses said would be helped by business tax reform. Mazur said business tax reform could make progress toward ensuring there are an adequate number of jobs and adequate wage growth. Solomon said economic growth from a better system will create jobs and opportunities; fewer distortions will make economic decisions more neutral, helping all Americans; and simplification will reduce compliance burdens and help taxpayers better understand benefits available to them under the tax code. Senator Rob Portman (R-OH) cited research finding that the majority of the burden of the high corporate rate and worldwide system falls on workers. "So, you want to get wages up, which all of us do, this is, I think, a great opportunity to do it," he said of reforming the tax system. International tax issues Senator Tim Scott (R-SC) asked about how a minimum tax, a concept raised earlier in the hearing, would function when companies invert. Mazur said in the case of a US company acquired by a foreign buyer, there still is a US entity subject to tax and sufficient anti-base erosion rules are necessary so the entity can't shift income abroad. One approach to preventing base erosion is a global minimum tax so no matter where the income is "pushed around the world" it is subject to some US tax, he said. Scott cited the high number of manufacturers in his state and asked how a shift to a territorial system could benefit the economy. Olson said a high corporate tax rate and worldwide system result in the lockout effect. The key is a lower corporate rate and fixing the international tax rules, she said. Solomon said an example of the situation Scott inquired about is a US company wanting to do business in a foreign country: another company from a third country that does not have a repatriation tax will have a competitive advantage over the US company. Pass-through issues Senator Wyden expressed concern about proposals for a reduced tax rate for pass-through entities. Senator John Thune (R-SD) said the issue raises a number of challenging questions, including: how to treat pass-through owners who are active members of a business; and whether the pass-through tax rate of active owners should be based on the return of the capital they invest in the business or the compensation they pay themselves. Solomon said the biggest challenge is figuring out what the compensation element is. It may require a certain formula to treat a certain percentage as compensation income, or determining the capital contribution the owner has made and applying the lower rate to that amount, he said. Also during the hearing, Senator Mark Warner (D-VA) expressed skepticism about reducing the statutory corporate tax rate even to 25% by going after tax expenditures, given the rule-of-thumb that each percentage point reduction costs $100 billion over 10 years and the willingness of businesses to defend the expenditures that benefit them. Senator Ben Cardin (D-MD) advocated his proposal for a progressive consumption tax. Kautter nomination During the Kautter confirmation hearing, Senator Chuck Grassley (R-IA) asked about the potential trade-off between lower tax rates and expensing, and which is more important. Kautter said different businesses would prefer different things; capital-intensive businesses prefer expensing. He said simplifying the rules for depreciation of capital equipment and consolidating some existing rules would be beneficial. Grassley further asked about potential restrictions on the ability to deduct interest, given the House Republican Blueprint proposal to eliminate the deductibility of net interest expense as a trade-off for full expensing. Kautter said that, as part of tax reform, everything should be on the table, including deductibility of interest expense. He said there is concern that the current treatment of interest deductibility leads to excessive leverage. If something is done, it would not be wise to do it as a simple across-the-board change, he said, given that some businesses rely heavily on interest and it is critical that it be deductible for them. Senator Thune said two of the most powerful proposals under tax reform are to lower business tax rates for businesses and pass-through entities, and to allow businesses to recover the costs of investments as quickly as possible. He asked whether the macroeconomic effects of those changes should be accounted for. Kautter said both the changes would have a favorable effect on the economy, and trying to strike the right balance between lowering the rate and shortening depreciation rules is "an imprecise science" but must be a focus of tax reform. Thune also discussed the bill he recently introduced, the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549), that addresses the classification of workers — independent contractors versus employees — and creates a safe harbor for those who meet a set of objective tests that would qualify them as an independent contractor, both for income and employment tax purposes. Thune said there has been a traditional bias in favor of classifying individuals as employees over independent contractors that does not square with the current economy, and asked whether Kautter shares the belief that we cannot afford to look past the worker classification issue in tax reform. Kautter said he agreed and that the rules governing classification between employee and independent contractor have been uncertain for decades; bringing greater clarity is an important thing to do; and tax reform is the right time to do it. The Committee has scheduled a vote on the nomination for July 20, at 10 a.m. ———————————————
——————————————— Finance Committee
Hatch statement
Mazur statement
Olson statement
Solomon statement
Talisman statement
Wyden statement
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