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April 30, 2024

Treasury Secretary Yellen appears before Ways & Means

The April 30 House Ways & Means Committee hearing with Treasury Secretary Janet Yellen focused on how lawmakers plan to address both the expiration of TCJA individual and pass-through provisions at the end of 2025 and the OECD-led two-pillared global tax agreement. On the latter issue, Sec. Yellen repeatedly said that prior to the OECD agreement the US was the only country to impose a tax on the overseas profits of its multinational companies, and other countries doing so creates a level playing field for American companies.

In an opening statement, Chairman Jason Smith (R-MO) asserted that the TCJA increased taxes paid by the top 1% of households, decreased the tax burden on lower income earners, increased real median household income, reduced the poverty rate to its lowest level in US history, and "reversed the decades-long trend of American companies picking up and moving their jobs, factories, and money overseas." He also said, "The OECD global tax deal the Administration is trying to negotiate would surrender America's tax revenue and jobs to foreign countries. Congress writes the laws, not bureaucrats negotiating behind closed doors. This deal has no path forward in Congress."

Ranking Member Richard Neal (D-MA) called the American Rescue Plan Act and Inflation Reduction Act (IRA) "Democrats' legislative successes," and said, "While we expand what's possible and build the economy of the future, House Republicans plot their next round of failed trickle-down economics with another round of tax cuts for the wealthy."

2025 TCJA tax cliff

During Q&A, Chairman Smith alluded to the President's recent messaging on social media about letting the TCJA tax cuts expire and the Secretary's prior comments that there is no set plan for addressing the law's expiration. Sec. Yellen said the President has "principles that will guide his negotiations with Congress over how to handle this" and has made clear he will not agree to tax increases on those earning less than $400,000 annually.

Asked by Rep. Mike Thompson (D-CA) about ideas to offset the cost of TCJA extensions, Sec. Yellen cited the President's budget proposals including increasing the stock buyback excise tax and Corporate Alternative Minimum Tax (CAMT) and imposing a billionaires' tax. Additionally, Sec. Yellen told Rep. Bill Pascrell (D-NJ) that she would commit to prioritizing changing the tax treatment of carried interest.

Under questioning from Rep. Blake Moore (R-UT) about the budget proposal for an increase in the corporate tax rate to 28% and the potential to impose burdens on low- and middle-income taxpayers, Sec. Yellen suggested that the TCJA, including the corporate tax rate cut, disproportionately benefited the wealthy and large corporations and enriched corporate shareholders. Supporters of the law also promised an investment boom that, she said, never materialized.

Rep. Michelle Steel (R-CA) announced she is introducing the Growing and Preserving Innovation in America Act to make permanent the TCJA's Foreign-Derived Intangible Income (FDII) deduction. She also said increasing the corporate tax rate and adopting the OECD global tax agreement, and thereby forfeiting a significant amount of revenue, would hurt the US economy.


Republicans expressed concern about process issues regarding the global tax agreement and the projected cost to the US, citing June 2023 Joint Committee on Taxation (JCT) estimates that, under one scenario and set of assumptions, it would cost the US $122 billion over 10 years if the rest of the world enacts Pillar Two in 2025 and the US does not, and March 2024 JCT estimates that Pillar One could result in a revenue loss between $100 million and $4.4 billion.

Chairman Smith asked if Treasury would "commit to reject any OECD profit reallocation plan that disproportionately impacts American companies or allow US tax revenues to be stolen away by foreign governments." Sec. Yellen said, "The Biden Administration has worked very closely with Congress to inform and get input on Congress's priorities to guide these negotiations over the last three and a half years and will continue to do that." Chairman Smith also repeated concerns about the nonrefundable R&D tax credit not being exempted from determining a company's US effective tax rate under the OECD Pillar Two agreement. Sec. Yellen said, "We are negotiating with other countries right now to try to get favorable treatment to the R&D tax credit."

Under questioning from Rep. Lloyd Doggett (D-TX) about Republican criticism of the President's proposal to raise the GILTI tax rate on foreign profits higher than 15%, Sec. Yellen said competitiveness depends on differentials in incentives across countries. Prior to Pillar Two, the US was the only nation that taxed overseas earnings of its multinationals — the GILTI tax, a lower tax rate that isn't country-by-country, she said. "Our companies did just fine with that, the rest of the world had nothing," she said. "Now the rest of the world will go to a country-by-country 15% minimum … Even if we go up to 21%, the differential is substantially smaller than it was before."

Rep. Mike Kelly (R-PA) asked whether Treasury agrees to consult with Congress before signing an OECD Pillar One agreement. Sec. Yellen said she has heard from members of Congress regarding Pillar One that certainty over Amount B is important, as well as establishing clear definitions regarding Digital Services Taxes (DSTs). She said Treasury agrees with these concerns and these are the redlines the Administration is focused on resolving in the final months of negotiations. Rep. Kelly said he is concerned that Congress will be an afterthought in a process it is supposed to control. "I just don't understand at all how we sell this to the people we represent that, somehow, this is in the best interest of the United States," he said.

Rep. Kevin Hern (R-OK) is the chair of the newly announced Global Competitiveness tax team established by the Chairman to study and develop solutions relating to the expiration and automatic changes to the TJCA provisions. He expressed concerns about the OECD agreement and other countries providing subsidies to their companies and made clear that "Pillar Two is not going to take place under a Republican-led Ways & Means Committee." He said corporations don't pay taxes — owners, workers, and consumers do.

Testimony from the hearing is available here.

Chairman Smith's opening statement is available here.

Ranking Member Neal's opening statement is available here.

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