Senate Committee on Finance
“The President’s Budget for Fiscal Year 2016”
Thursday, February 5, 2015
Key Topics & Takeaways
- Bank Tax: Sen. Tim Scott (R-S.C.) asked Lew if the President believes the Dodd-Frank Act provided ample tools for reducing risk. Lew responded that “the Dodd-Frank Act is working well” and financial institutions benefits in other aspects of the President’s proposal. Scott concluded that the bank tax, included in the President’s budget would make it harder for small business owners to borrow money.
- Capital Gains and Dividends: Sen. John Thune (R-S.D.) called this “strange proposal” a way to impose “yet another layer of taxation at death.” Lew responded that the proposal provides 15 years for the payment of capital gains and thus does not require the sale of assets. He argued, “Having tens of thousands of dollars that go untaxed from generation to generation is a problem.”
- Repatriation and Infrastructure Funding: Sen. Dean Heller (R-Nev.) asked Lew if the Administration would support voluntary repatriation to support infrastructure funding. Lew replied that the Administration would not support the idea and pointed to the failures of the repatriation holiday in 2004.
- Changes to 529 Plans: Chairman Orrin Hatch (R-Utah) said that the changes to 529 plans are “out of touch with the American people” and “still supported on policy grounds by the Administration,” but acknowledged that he was pleased to see the changes to 529 plans withdrawn.
In his opening statement, Chairman Orin Hatch (R-Utah) said the President’s FY2016 Budget proposal includes higher taxes, new wealth taxes, distribution issues, ongoing deficits, outsized risky federal debt, and a “bank tax that nods to the ineffectiveness of the Dodd-Frank law.” He added that the changes to 529 plans are “out of touch with the American people” and “still supported on policy grounds by the Administration,” but acknowledged that he was pleased to see the changes to 529 plans withdrawn. Hatch suggested that under the President’s FY ’16 Budget proposal, Americans’ savings are not their own, but instead targets for redistribution. Hatch added that he and Secretary Lew share a desire to reform the broken tax code, renew the Trade Promotion Authority (TPA), and promote investments in infrastructure.
In his opening statement, Ranking Member Ron Wyden (D-Ore.) said, “the underlying issue remains the budget of middle class Americans.” In his view, it is the government’s job to “put them on a solid economic budget so that everybody benefits when the economy grows.” Wyden continued that he would not want business-only tax reform, because he does not want to explain why the tax code could be overhauled for corporations, but not for every day Americans. Next, he suggested that the Senate Finance Committee consider its tone and that he “would like a less Socratic method” during committee hearings.
In his testimony, U.S. Department of Treasury Secretary Jacob Lew said that this year say the most jobs created since the1990s and that the nation has turned a corner, but this “resurgence has not reached every American.” He said that it is “too hard to get ahead” and that tax reform is one pro growth strategy to address these economic challenges. Lew explained that tax reform should simplify the system, lower rates, and end the “system where some businesses pay nothing.” Additionally, Lew argued that it is time to stop the practice of inversions. Under the President’s FY2016 Budget proposal, Lew highlighted that business tax reform would result in “one time transition revenues that the President wants to use to rebuild our nation’s infrastructure.” Lew also suggested that Congress send other measures to the President’s desk including legislation to raise the minimum wage, reform immigration, and pass trade promotion authority.
Question and Answer
Estate Tax & Capital Gains
Sen. John Thune (R-SD..) said that the President’s proposed estate tax would harm the transfer of a family farm to the next generation. Thune said if the estate tax is combined with President’s proposed tax on capital gains at 20 percent, then a family could face a tax bill of $1 million or more. He highlighted that these families’ assets are not liquid and they would have to sell assets to pay their tax bill. Thune called this “strange proposal” a way to impose “yet another layer of taxation at death.” Lew responded that the proposal provides 15 years for the payment of capital gains so that it would not require the sale of assets. He argued, “having tens of thousands of dollars that go untaxed from generation to generation is a problem.”
Sen. Tim Scott (R-S.C.) asked for the Administration to reconsider the million dollar threshold on illiquid assets. Lew responded that it is “much harder to make the case on stocks and bonds, which is where the real transfer of wealth takes place.”
Sen. Chuck Grassley (R-Iowa) described the one million dollar threshold as “detrimental to family farming.” Lew responded that the threshold is a dividing line and the tax is on the gain, not the base value of the entire property.
Wyden lamented that “a lot proposals in the Green Book look like add on credits” and would be complicated. Wyden asked Lew if he could help move toward a system where many Americans would be able to file their taxes on a post card. Lew responded that he would look at the proposal, but the President’s FY2016 Budget proposal “targets specific things on the ladder of opportunity” such as education.
Small Business Threshold
Sen. Dean Heller (R-Nev.) asked Lew to clarify what defines a small business under the President’s plan. Lew responded that “it would be at least a million dollars” and was “designed to ease the burden on mom and pop stores.”
Repatriation & Infrastructure Funding
Heller asked Lew why the Administration did not look at the reparation proposal from the former House Ways and Means Chairman Dave Camp’s (R-Wis.) Tax Reform Act of 2014. Lew said this Administration has taken a different approach with a permanent rate of 19 percent and a “toll charge” for earnings that have built up over years. Lew explained that he thinks this model would “make it attractive for companies to bring their businesses home.” Next,Heller asked Lew if the Administration would support voluntary repatriation to support infrastructure funding. Lew replied that the Administration would not support the idea and pointed to the failures of the repatriation holiday in 2004.
Sen. Charles Schumer (D-N.Y.) said he was “very impressed with the budget” and is “very interested in a onetime tax on foreign income to pay for infrastructure.” Schumer asked Lew if he thought it was possible to reach broad support on the idea of “deemed repatriation.” Lew responded that business reform is the best solution and that “separating out the international provisions would not solve the problem.”
Sen. Thomas R. Carper (D-Del.) said he is not an advocate of repatriation because companies will “park money oversees” until rates are lowered again. Carper described the Administration’s international idea as “intriguing,” but said it would be difficult to achieve. Lew said the President’s proposal is the “best approach, good for the economy, and will create good middle class jobs.”
Scott called repatriation a “non-starter” and asked Lew for his view. Lew reminded Scott that the plan was proposed by former Chairman Camp “in the realm of this conversation.”
Sen. Rob Portman (R-Ohio) also asked Lew to comment on the concept of a tax holiday to help meet the shortfalls of the highway trust fund. Lew said the Administration has looked at the idea, but the Joint Committee on Taxation (JCT) and their estimators have determined that it would “cost money through conventional scoring.”
Schumer asked Lew if the Administration would support controls on currency manipulation. Lew responded that the G20 negotiations have been “good.”
Sen. Robert P. Casey (D-Pa.) contended that currency manipulation has not been addressed and that he is concerned about the economic impact, especially if China were to join the Trans-Pacific Partnership (TPP). Casey said he is also concerned about Japan. Lew responded that he not seen any manipulative adjustment by Japan.
Sen. Maria Cantwell (D-Wash.) asked Lew for his expectations on the future of the Export-Import Bank. Lew replied that reauthorization of the Export-Import is critical and that longer term certainty around the program is need.
Retirement and Savings
Sen. Benjamin L. Cardin (D-Md.) said the “savers credit” is important, saying that tax deferral is not enough of an incentive to save, and asked Lew for his view. Lew replied that the President’s FY2016 Budget proposal contains a way “to make it more advantageous” for companies to sponsor retirement savings plans for employees.
Country by Country Global Minimum Tax
Sen. Sherrod Brown (D-Ohio) stated that a country by country global minimum tax fundamentally shuts down tax havens and prevents a race to the bottom. Lew responded that base erosion and profit sharing (BEPS) is a concern and that companies will always want to argue for a lower rate.
Sen. Michael F. Bennet (D-Colo.) asked Lew how to address the wind production tax credit. Lew responded that tax extenders should be made permanent in the context of tax reform.
Scott highlighted that Section 165 of the Dodd-Frank Act addressed the amount of risk taken on by banks, but the President’s budget includes a new bank tax or free that would be passed on to the consumer. He asked Lew if the President believes the Dodd-Frank Act provided ample tools for reducing risk. Lew responded that “the Dodd-Frank Act is working well” and that financial institutions benefit in other aspects of the President’s proposal. Scott concluded that this bank tax would make it harder for small business owners to borrow money.
Portman said business tax reform is needed because U.S. companies and workers cannot compete. He cited a soon to be released EY study that found “over 9,000 U.S. companies have been acquired by foreign companies in the last ten years alone.”
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