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House Ways & Means Hearing on the Corporate Income Tax

House Ways & Means Committee

“The Disappearing Corporate Income Tax”

Tuesday, February 11, 2020

Witnesses

  • Jason Furman, Professor of the Practice of Economic Policy, Harvard Kennedy School of Government
  • Rebecca Kysar, Professor of Law, Fordham University School of Law
  • Chye-Ching Huang, Director of Federal Fiscal Policy, Center on Budget and Policy Priorities
  • Douglas Holtz-Eakin, President, American Action Forum

Opening Statements 

Chairman Richard Neal (D-Mass)

In his opening statement, Neal criticized the passage of the Tax Cuts and Jobs Act (TCJA) and outlined his belief that it disproportionally benefits the wealthy and large corporations. He then addressed the current state of the corporate income tax, stating that it falls short of what he believes is sufficient and that the TCJA’s reduction in the corporate rate has not trickled down to workers. He then noted his concern regarding the current levels of funding for the Internal Revenue Service (IRS) and the negative impact this has had on the IRS’s ability to conduct audits and close the tax gap. He concluded by emphasizing the need for the committee to work together to pass “real tax reform that will give a fair shake to all Americans.”

Ranking Member Kevin Brady (R-Texas)

In his opening statement, Brady noted that despite the premise and title of this hearing, corporate revenues are growing and set to rise over the next decade both in terms of real dollars and as a percent of gross domestic product (GDP). He then pushed back on the assertion that the provisions outlined in the TCJA disproportionally benefit the wealthiest Americans and corporations. He emphasized the benefits of certain TCJA provisions, specifically noting the doubling of the standard deduction, the increase in the child tax credit, as well as the establishment of the small business deduction, and how these provisions are reducing income inequality, creating jobs, and benefitting ordinary workers. He continued that by lowering the corporate tax rate to 21 percent, passage and implementation of the TCJA has made sure that our economy, and our businesses, remain competitive internationally. He concluded that by making the tax cuts permanent, the federal government can increase revenues and provide for the creation of new jobs while also ensuring continued gains for working families.

Testimony 

Jason Furman, Professor of the Practice of Economic Policy, Harvard Kennedy School of Government

In his testimony, Furman outlined what he views as the four main points of importance regarding corporate taxation: 1) corporate tax collections are very low both in historical perspective and compared with other counties, thereby contributing to the overall low level of revenue; 2) the TCJA is a major reason for this revenue loss, with its total cost likely to be even larger than was estimated when the law was originally passed; 3) there is no evidence that the TCJA has made a substantial contribution to investment or longer-term economic growth. In fact, Furman stated that business investment growth has slowed to nearly a halt while economic growth has been “propped up” by increases in government spending; and 4) going forward, tax reform efforts should attempt to look to the future and that well-designed legislation could both increase revenue while encouraging more investment and innovation.

Rebecca Kysar, Professor of Law, Fordham University School of Law

In her testimony, Kysar focused on the efficacy of the TCJA’s business provisions as well as what she views as issues surrounding the regulatory implementation of this legislation. Specifically, she outlined her belief that the TCJA has failed to live up to the promise of broadening the tax base on the foreign income of multinational corporations and that the Treasury Department has “weakened” features of the TCJA as result of “intense lobbying for business interests, which will further erode the U.S. tax base.” She stated her opinion that these regulatory revisions have no statutory basis. She lamented pre-notice and comment communications between business interests, specifically criticizing foreign banks, and the Treasury Department. She claimed that these communications allow certain taxpayer interests to influence Treasury towards a favorable interpretation initially, therefore increasing the likelihood that this favorable interpretation will be included in the final regulations. She continued that this undermines transparency as well as the rule of law. She accused Treasury of acquiescing to certain taxpayer interests in contravention of statutory language, specifically criticizing the regulations implementing the new international tax provisions, Section 199A and the opportunity zone incentives. She concluded by emphasizing the need for Congress to exercise increased oversight of Treasury’s implementation efforts.

Chye-Ching Huang, Director of Federal Fiscal Policy, Center on Budget and Policy Priorities

In her testimony, Huang focused on how the IRS is currently underfunded and how such underfunding empowers tax evaders. She stated that the ability of the IRS to collect taxes has been significantly diminished over the past decade due to unavoidable cuts in staff, training, enforcement capacity and auditing capability. She specifically noted that the audit rate for corporations with more than $1 billion in assets is down 51 percent and that the audit rate for filers with more that $1 million in annual income is down 61 percent. She criticized the fact that due to this steep decline in audits for high-income individuals and corporations, households claiming the Earned Income Tax Credit (EITC) are now audited at roughly the same rate as the top one percent of filers. Huang outlined three important steps that she believes best secures long-term funding for the IRS: 1) Lawmakers should return the IRS budget to its 2010 funding levels, adjusted for inflation; 2) Lawmakers should outline and codify a multiyear commitment to this process as the IRS must hire and train a significant number of auditors and other skilled staff, necessitating time and effort; and 3) Lawmakers should establish a special budget mechanism to provide both increased funding and a multi-year commitment. She concluded by commending the Trump Administration’s FY2021 budget proposal for boosting IRS funding by $15 billion over 10 years via a special budget mechanism, specifically praising the administration’s recognition that IRS enforcement funding is special in nature because it generates budget savings.

Douglas Holtz-Eakin, President, American Action Forum

In his testimony, Holtz-Eakin provided historical context as it relates to the enactment of the TCJA, noting that there was bipartisan consensus that the corporate income tax had to be reformed. He praised the TCJA for moving the U.S. towards a territorial system and addressing many of the most important elements that harmed the tax-competitiveness of U.S.-headquartered multinationals. He continued that despite the dearth of data available to truly gauge the impact of the TCJA, there has been a reversal on the loss of corporate headquarters, a dramatic shift in repatriated funds, and promising shifts in top-line economic growth, business investment as well as wage growth. He concluded that the process surrounding the implementation of the TCJA and the component regulations, such as the Base Erosion and Anti-Abuse Tax (BEAT), the Global Intangible Low-Taxed Income (GILTI), and the Foreign-Derived Intangible Income (FDII), was entirely ordinary in his opinion and that the global companies affected by these international provisions had to await final rulemaking by the Treasury Department.

Question & Answer

TCJA

Generally, Republicans on the Committee defended the TCJA and the accompanying regulatory process while Democrats criticized the legislation.

Reps. Vern Buchanan (R-Fla.), Adrian Smith (R-Neb.), Kenny Marchant (R-Texas), Tom Reed (R-N.Y.), George Holding (R-N.C.), Jason Smith (R-Mo.), Tom Rice (R-S.C.), David Schweikert (R-Ariz.), Jackie Walorski (R-Ind.), Brad Wenstrup (R-Ohio), Jodey Arrington (R-Texas), Ron Estes (R-Kan.) and Brady all spoke in support of the TCJA and the subsequent implementation effort by the Treasury Department. They generally emphasized pro-growth tax reform and the TCJA’s role in lowering unemployment rates, raising wages, growing the U.S. economy, creating jobs and increasing U.S. business competitiveness in the international space.

Brady asked what would occur if TCJA was repealed and whether repeal would result in a “better” economy. Holtz-Eakin stated that any such repeal effort is misguided and would result in negative trends that were observable in the pre-TCJA environment such as U.S. companies moving their headquarters out of the U.S., funds being trapped offshore and U.S. firms being at a tax disadvantage compared to their peers in the international space. Brady noted the challenges that naturally accompany the rewriting of the international tax code and praised the Treasury Department for engaging with interested stakeholders through the notice and comment process. Adrian Smith noted that he disagrees with Kysar’s characterization that the base broadening provisions were insufficient, and that the Treasury department has implemented these international tax regulations in a correct manner consistent with congressional intent. Holtz-Eakin added that the shift from a worldwide to a territorial tax system, while correct, was bound to result in uncertainty and complications during implementation.

Reps. Lloyd Doggett (D-Texas), Mike Thompson (D-Calif.), John Larson (D-Conn.), Earl Blumenauer (D-Ore.), Ron Kind (D-Wis.), Bill Pascrell (D-N.J.), Danny Davis (D-Ill.), Linda Sanchez (D-Calif.) Brian Higgins (D-N.Y.), Terri Sewell (D-Ala.), Suzan DelBene (D-Wash.), Judy Chu (D-Calif.), Gwen Moore (D-Wis.), Dan Kildee (D-Mich.), Don Beyer (D-Va.), Brad Schneider (D-Ill.), Tom Suozzi (D-N.Y.), Jimmy Panetta (D-Calif), Stephanie Murphy (D-Fla.), Jimmy Gomez (D-Calif), Steven Horsford (D-Nev.) and Neal all spoke against the TCJA, specifically criticizing the TCJA for not being revenue neutral, as well as the low measurable impact on the U.S. economy in terms of investment or long-term growth, the increase in stock buybacks, the Treasury Department’s implementation process and what they view as the TCJA’s disproportionate benefit for corporations and wealthy individuals. Larson outlined his concern regarding entitlement reform and government spending in general, specifically criticizing the Trump Administration’s FY 2021 proposed budget cuts to Social Security.

Doggett referenced his No Tax Breaks for Outsourcing Act and stated that it would address many of the concerns outlined by Kysar in her testimony, such as the fact that GILTI allows for an exemption for a deemed return on assets held abroad which she claims incentivizes the U.S. to invest more intangible assets held outside the U.S.

IRS Funding & Enforcement

Neal, Blumenauer, Pascrell, Sanchez, Sewell, DelBene and Schneider all spoke in support of increasing funding for the IRS. Various members noted their concern regarding the increased auditing of households claiming EITC, how the lack of experienced IRS staff leads to inequity in carrying out their mission and that this decrease in IRS enforcement has allowed tax evaders to shift and shelter their income.

FIRPTA
Marchant outlined his Invest in America Act which would repeal the Foreign Investment in Real Property Tax Act (FIRPTA). He stated that FIRPTA is an outdated and discriminatory law that stifles investment and job creation in the U.S. Holtz-Eakin agreed that this legislation should be repealed. Furman acknowledged that it is worth considering but emphasized the need to replace revenue lost with another more efficient form of tax revenue.

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