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Senate Finance Committee Tax Hearing

Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth                              

Creating Opportunity Through a Fairer Tax System

Tuesday, April 27, 2021

Witnesses

Opening Statements
Chairwoman Elizabeth Warren (D-Mass.)
In her opening statement, Warren mentioned Biden’s proposed $2 trillion infrastructure package and the $1.5 trillion plan for the caregiving economy. She said with a total price tag of $3.5 trillion, the looming question is how will we pay for it, and outlined that this hearing is intended to help address that question by examining revenues. Warren highlighted three proposals that she believes will help move the economy towards a stronger future. Specifically, she outlined her support for the a wealth tax that would impose an annual two-cent tax on fortunes over $50 million as well as the Real Corporate Profits Tax, which she emphasized would force companies like Amazon, FedEx and Nike that make billions of dollars in profits and pay little or nothing in federal income taxes to pay more. She continued that the Real Corporate Profits Tax would apply only to corporations that report profits to their shareholders and the public of more than $100 million. Finally, she said she would like increased tax enforcement for wealthy individuals and big corporations, citing estimates from the IRS that indicate we lose $1 trillion a year from tax cheating. She concluded by highlighting the diversity of witnesses who range from academics to millionaires to small business owners and will provide a variety of views on proposals for the tax system.

Ranking Member Bill Cassidy (R-La.)
In his opening statement, Cassidy began by acknowledging that both conservatives and liberals want what is best for the country. He said we all want prosperity for those less fortunate, but this hearing will demonstrate the disagreements on how to get there. He said he believes allowing markets to dictate where money should best be allocated is what gave us prosperity to date and is most likely to give us prosperity in the future. Addressing the wealth tax, Cassidy said we have seen socialist countries try them and eventually abandon them. He said this tax is disingenuous because it does not fully fund the proposed spending packages and it presupposes that the wealthy are not using their wealth for purposes that create jobs and otherwise bring prosperity. Cassidy quoted Supreme Court Justice John Marshall saying “the power to tax involves the power to destroy,” adding that when you decrease taxes, you encourage investment and jobs follow. Cassidy noted before the pandemic, Republican-led tax cuts spurred the best economy in U.S. history. He outlined his hope that the Biden administration will work with Republicans to get small businesses back on their feet and move the economy in the right direction, and not “tax our way to prosperity.” Finally, he mentioned the proposals he believes are better solutions: provide predictability to taxpayers by locking in current individual tax policies on a permanent basis, expand the child tax credit, and lower tax rates on the middle class.

Testimony
Abigail E. Disney, CEO & Owner, Fork Films
In her testimony, Disney said the more capital you have, the more income and growth you can count on. She said she is well off today largely due to what the government has done to shape tax policies and ensure the wealthy stay wealthy. She mentioned the low corporate tax and high tolerance of tax avoidance allow savings to flow to top shareholders and executives like herself. Disney said corporate spending on political campaigns has also had a large influence and made some policymakers “blind to trickery.” She said if a tax system is a statement of a country’s values, this makes her question ours. She said the government has been complicit in contributing to the wealthy accumulating massive amounts of money, promoting more wealth inequality. Disney argued that for working class people, salary alone will never be enough to close this gap, and is supportive of a wealth tax. She concluded by saying a tax is not theft, it’s a responsibility and what you owe to society.

Cheryl Straughter, Owner, Soleil
In her testimony, Straughter opened by saying she is neither a billionaire, nor a millionaire, or even close. She said she has been worried about the status of even being a “thousandaire.” Straughter owns Soleil, a small restaurant in Boston, Massachusetts, and throughout her life has been an employee, a student, a caregiver, and is now a small business owner. To that end, she believes it is necessary to have a fair system of taxation. She said while no one enjoys paying taxes, she is proud to pay because the revenue goes towards services we care about. Straughter said a fairer tax system would give us the opportunity to provide affordable child care, create a better education system, repair our roads, provide more support to small businesses, especially those owned by African Americans, as well as make housing more affordable.

David Gamage, Professor Of Law, Maurer School of Law, Indiana University
In his testimony, Gamage said each of the three proposals being discussed go together as reforms for raising revenues necessary for public investment, fixing our current broken tax system, and creating opportunity for Americans by leveling the playing field. Gamage expressed his support of the Ultra-Millionaire Tax Act of 2021 and the Real Corporate Profits Tax Act of 2021. In making his case for taxing real corporate profits, he said taxpayers keep two sets of accounting books and tend to inflate reported earnings in the first for shareholders, while deflating earnings in the second to pay less taxes. Gamage said he is in favor of approaching 50 percent book-tax conformity as a solution. He concluded by emphasizing the need to improve IRS funding and extend the federal False Claims Tax.

Scott A. Hodge, President, Tax Foundation
In his testimony, Hodge began by saying “there are no solutions, only tradeoffs.” He said it is important to understand these dynamics in funding government investments. Hodge cited research by the Congressional Budget Office (CBO) which found government investments deliver only half of the economic returns of private sector investments. As a result, he urged lawmakers to be careful in choosing offsets that do not do more harm to the economy than the modest benefits generated by the public investments. He applauded the U.S. tax system for being one of the most progressive and redistributive in the world. Hodge argued that trying to make it more progressive through a wealth tax or a minimum tax on book income would be among the most damaging options to fund government programs. Hodge said that wealth tax impact on GDP would be greater than the effect of raising the corporate rate to 28 percent and would lead to a shift in ownership of assets as people sell to try and pay off taxes. He said it would also lead to a transfer of wealth from rich Americans to rich foreigners. Hodge concluded by saying there can be less economically harmful options to fund the new government packages. His ideas included cutting wasteful spending, expanding user fees, eliminating tax expenditures, and shifting the tax burden to consumption-based taxes.

Jeff Hoopes, Associate Professor and Harold Q. Langendefer Scholar Of Accounting, University of North Carolina
In his testimony, Hoopes said Congress should not layer on more taxes that will add to the systems complexity, but should rather try to simplify the tax code. He said taxing book income and wealth taxes are inadvisable solutions. He continued that taxing book income and incorporating financial accounting income directly into the tax base would not net out the opposing incentives between the two book reports. He mentioned there are several problems with a wealth tax that that outweigh the revenue generated by such a tax. Hoopes said these concerns are primarily rooted in the fact that the tax is very costly to administer and enforce, and that wealth taxation would result in unintended consequences. He concluded by outlining his hope that members of Congress call out specific provisions they believe should be changed, take them to the court of public opinion, and change those provisions, rather than “plastering over” a broken tax code with other fundamentally flawed laws.

Kyle Pomerleau, Resident Fellow, American Enterprise Institute
In his testimony, Pomerleau said he plans to discuss concerns around the tax policy proposals and conclude with discussing alternative sources of revenue he urges law makers to at least consider. He said taxing book income does not necessarily address the tax avoidance issue, undermines Congress’s policy goals, and would distort investment incentives. Pomerleau said a wealth tax would place a significant burden on savings and the broader economy, and the potential revenue is not certain. He said there would be an inflow of foreign capital from abroad and an accompanying increase in the trade deficit. He pointed to other sources of revenue that would be simpler to administer and more efficient such as raising the gas tax to pay for infrastructure, imposing a carbon tax to simultaneously help address climate change, or a value-added tax could raise revenue with limited negative impact on the economy.

Question & Answer

Current Flaws

Warren said our tax system is broken, claiming there is one set of rules for most Americans and a different set for the rich. To show what wealth looks like at the top, Warren asked Disney how much wealth she has and how much it grew last year. Disney said she has about $120 million and it grows at four to eight percent annually. Warren asked Disney if she knows how much taxes she will pay on her wealth increase this year, to which Disney said not much as it mostly comes from dividends and capital gains which qualifies for a lower tax. Disney added that on her $120 million, she will pay essentially nothing in taxes.

Sen. Ron Wyden (D-Ore.) asked what effect loopholes have on the tax code and how they contribute to driving income inequality. Gamage said most Americans face wage and salary income taxes at high rates, so, those working for their money see less of it than those born into inherited wealth who can borrow at cheap rates and pay fewer taxes. Gamage said this makes it harder to “catch-up.” Wyden said this is one of the fundamental flaws that underpin what he views as the two tax codes in America.

Warren asked Disney how her company uses the current tax system and how much it benefited from deducting stock options. Disney said they saved roughly $1 billion between 2008 to 2015 just with that one loophole. Warren asked Slaughter how much she has deducted in stock options on her tax returns in recent years. Slaughter said zero. Warren asked Disney how much they benefit from profit shifting schemes into a subsidiary in a lower taxed country. Disney said in 2013, they saved $315 million on their tax bill.

Wealth Tax

Warren asked Disney if she agrees the increase in her taxes would be “dumping on the American dream” if the wealth tax were to become law. Disney said the only impact she would see is a slight slowing on the growth of her wealth. To understand the benefits from Biden’s proposed packages and revenues created from a possible wealth tax, Warren asked Straughter how her business and employees would be impacted. Straughter said it would allow her to increase her staff, grow from a small to medium sized business, as well as allow her to pivot and expand her client base.

Cassidy asked why European nations have abandoned a wealth tax in the past. Gamage said some wealth taxes were poorly designed and it was easier for wealthy families to hide their wealth abroad. Hodge said the issues in other countries included the general complexity, the fact that it raised very little revenue, and that there was an avoidance issue causing people to flee to lower taxed countries. Cassidy asked if there should be a worldwide wealth tax to avoid potential capital flight. Gamage said capital flight would be minimal because the U.S. tax system, compared to France, is citizenship based, and to escape, you would have to revoke your citizenship and face a substantial exit tax.

Warren asked how a wealth tax could be implemented and if it would be too difficult to do so due to the inability to value wealthy individuals’ assets. Gamage said any tax system will be imperfect, but it would not be difficult at all to design a wealth tax that would be dramatically better than the existing income tax. He expressed confidence in the proposed ultra-millionaire wealth tax doing better at measuring and valuing “the true economic resources of millionaires.”

Private versus Government Returns on Investment

Cassidy asked for more detail on the implications of seeing twice as much return on investment through the private sector versus the government and what that means for next steps in tax policy. Hodge said the data mentioned in his testimony was from CBO, and said it is actually an underestimate because it does not take into account the impact of taxing these dollars in the first place to pay for the investment, and then there is the lower return seen when filtered through the government. To counter the idea that private investment creates a better return than public, Gamage said the private and public sectors are better suited for different pieces of the economy, and that the problem right now is a lack of overall investment.

Real Corporate Profits Tax (RCP)

Warren asked if a tax on book income would help ensure big companies cannot evade taxes and would serve as a backstop to existing loopholes. Gamage said yes, adding that because corporations can keep two books, they can report high earnings to investors and low or even zero earnings to the IRS. He said the RCP tax would limit both of these sets of accounting gains and deter all financial tax accounting “shenanigans,” benefiting the economy and leveling the playing field. He suggested a 50 percent book conformity being a solution versus the current percent at zero.

Cassidy asked about the impact of taxing book income under an RCP tax. Hoopes said anytime there have been discrepancies in books and the Financial Accounting Standards Board (FASB) has wanted to correct the problem, Congress has essentially “threatened to put the FASB out of business” and that an RCP tax would just further exacerbate the problem.

Internal Revenue Service (IRS) and Tax Enforcement

Sen. Tom Carper (D-Del.) and Warren asked how to best equip the IRS to close the tax gap and what greater enforcement will mean for broader fairness in the tax code. Gamage said illegal tax evasion is a real problem and should be policed better, but it is small in comparison to legal tax avoidance enabled by loopholes in the current system. Gamage said the ideal solution is to fund the IRS adequately and make it less dependent on the annual appropriations process, improve information reporting, and extend the federal False Claims Act to include large tax claims.

Warren asked if “the honor system” for reporting taxes is working as it applies to the wealthiest Americans. Gamage said no, and added that we know compliance is high when there is information reporting and withholding, and in contrast, tax compliance is lower when there is no reporting or withholding which is more often the case for the wealthy.

Value-Added Tax

Cassidy said he believes the value-added tax is regressive and asked Hodge for his thoughts on this, as well as how the U.S. compares to other progressive or socialist countries. Hodge said the U.S. has one of the most progressive tax systems, pointing to the ITC and refundable tax credits as examples. He said the Organisation for Economic Co-operation and Development (OECD) found that the poorest individuals in America have the lowest income tax burden compared to the poor in any other country.

For more information on this hearing, please click here.