Transcripts For CSPAN3 Senate Republican Tax Reform Bill 20171114

Type tax reform. Today is day two of the Senate Committee review live on capitol hill. This is just getting under way. It collects input from amendments that have been filed. Because of a larm number of amendments we have processed the modified mark will be given to members later today as has been discussed with our Ranking Member and everyone can then have time to read over the modifications. After that process we will resume a markup tomorrow morning with the modified mark. Before we proceed today i want to make a few comments. I appreciate members participation during yesterdays session. I was glad to hear everyones initial thoughts. However a number of issues were raised that in my view werent additional responses. First is a massive tax cut for the rich. That particular claim was repeated by almost every minority member of this committee. The problem with that is that its just not true. J. T. C. s analysis shouldnt be ignored all together. Secondly there was the repeated claim that the bill is a massive tax hike on the middle class. To reach this conclusion members had to willfully twist the meaning of j. T. C. Data specifically members sited the j. T. C. Table concluding that someone in the middle class may see a tax increase under the bill while those same members completely ignored the fact that the very same data showed that the vast majority about 90 were either going to get a tax cut or at the very least be held harmless under the bill. Yesterday i mentioned a tax bill introduced by the Ranking Member a few years bag. I noted there were a number of similarities between his previous bill and the one we are debating today however there are some differences. Im not aware of any analysis on the tax bill but the Tax Policy Center did look at some of the potential distributional effects of the Ranking Members bill when he introduced it with former senator greg. Interestingly enough tpc found close to 25 of taxpayers would have gotten tax increase and about 17 of the lowest income earners would have seen their taxes raised. I dont raise this to play tit for tat but i do think its fair to note for the record that the Ranking Member in the relatively recent past that according to the standards he and others have used to criticize the other bill was far more problematic and according to a think tank would have raised taxes on far more middle and low income taxpayers than the legislation we are considering this week. Next i want to address the many complaints i heard during opening remarks yesterday. The lack of hearings arguing that the 70 plus hearings we have had on this committee were not enough and that we needed additional hearings to examine the specifics of the chairmans mark. What they didnt mention is that this demand would be a significant departure from the way it has traditionally operated. We heard members complain about and i dont think they knowledged the fact the fact that every one of them signed a letter indicating among other things they would not engage in a bipartisan tax reform process unless they agreed to not use reconciliation. Given the history of this committee and congresss recent history with regard to tax policy such a demand is entirely unreasonable. It is not a rarity for major tax bill to move through reconciliation. Even if im wrong in that interpretation i have called on my democratic colleagues to offer their views and advice without preconditions or up front commands. Yet to my knowledge no one on the democratic side said anything that my conclusion was incorrect. Im hoping we can get some democratic votes in favor of this bill. Lowering Corporate Tax rates is something they have to do for years. Updating our system has been a bipartisan endeavor. I know the Senate Minority leader as a cochair of one of our working groups drafted a report calling for International Tax reforms that are consistent with what we are trying to do with this bill. This is a good bill. Think most members that decided to vote against it will regret taking such a course. Once again, the next step is to walk through the mark. Ill turn to senator now. Thank you. She said she adored you i was thinking to myself, im not sure she would always say that about me. I was pleased she said it about me. I was going to say, very complimentary. It reflects our affection for you. I still want to make the point that what is going on now in the finance committee is not right. When we left last night we were told we would get the modified chairmans mark the first thing this morning. That has not happened. Legislation may not be relevant in five or six or maybe ten hours. This is further evidence that the finance committee isnt ready to proceed with a bill that makes trillions of dollars of changes to the tax code. This does not resemble no matter how much my colleagues say otherwise this does not resemble the regular order in the finance committee. This is reckless. We have already heard about the evidence about how millions and millions of middle class families are going to pay higher taxes. This morning the news was about how this proposal would open up a what nbananza for special int. Members are going to have less time to actually work on the real legislation, real legislation thats going to effect millions of our people or remake the American Committee in fundamental ways and will make changes in tax law that effects trillions of dollars. This is trying to make fundamental tax reform on the ply. That is not what Ronald Reagan did. Thats not what i did when i work with our former respective colleagues senator greg and senator coats. This is not in the public interest. I will make the plea that i did yesterday, mr. Chairman. We share your view but the tax code is a broken mess. We share your view that we would like a bipartisan bill but given what has happened just in the last 12 hours we are continuing to move in the wrong direction. I hope that well see that change. Thank you. Thank you. Once again, the committee has a chairmans mark of an original bill entitled the tax cuts and jobs. Ordinarily we would at this point in the markup. I know earlier we were working on final details of the modification. I want to make sure members of the committee have time to look the modification over before it is incorporated into the mark. Thats something that naturally i would like to accomplish. I expect to be able to deliver the modification later today. We should begin with our walkthrough of the mark and proceed questions for members. Then tomorrow we will walk through and hear questions about the modification tomorrow morning. The chief of staff the joining us here today. Could you please describe the mark . You have before you ccx 51, 52 and 53 to provide the staffs revenue estimates of the distributional analysis of the chairmans mark. The chairmans mark would undertake a significant restructuring of the Internal Revenue code. The chairman asked me if i could take several minutes to give a highlevel review highlighting for the members a number of significant features that are changed. It would provide for marginal tax rates of 10 , 12 , 22. 5, 25 , 35 and top rate of 38. 5 which would also unlike present lieu eliminate the threshold break point. It would repeal the individual alternative minimum tax. The chairmans mark nearly doubles the standard deduction to have a value of 24,000 for married joint filers, 12,000 for all other filers. At the same time the mark would appeal several itemized deductions including the present law deductions for personal property taxes, Real Property taxes, excess casualty losses and itemized deductions. It means that it would retain the mortgage interest deduction, charitable contributions and the mark would repeal the present law limitations on itemized deductions known as the limitation. The effects of this abdomen the estimates of my colleagues is where as under present law 29 of taxpayers claim itemized deductions it would be approximately 5 could claim itemized deductions. It would inclees the child credit to 1,650 for children under 18 which is an expansion of eligible children. 1,000 would remain refundable and would be indexed in the future. In addition for other nondependent children there would be a 500 credit. Also the phase outs of the credits would be increased expanding the number of taxpayers that might be able to take advantage of the child credit. The chairmans mark would provide a special effective reduced on income earned by owners of pass through enterprises and owners of s. Corporations. This reduction is effected by a 17. 4 deduction for the amount of taxable income otherwise earned by that business entity. This deduction would generally not be available to enterprises that largely provided services such as accounting, consulting law firms with the exception that if the professional Services Owners had annual income and taxable incomes of less than 150,000 in case of a joint return and 75,000 for our others they would be able to avail themselves. The deduction itself is limited to no more than 50 of the qualifying w2 wages paid to employees of the enterprise. The last thing of significant note is the mark would double the present lawfective exemption amount of 5. 49 million under the estate and gift tax just shy of 11 million. In terms of business income taxes the mark would reduce the present law corporate statutory tax rate effective starting in the year 2019. The mark would repeal the minimum tax. The mark would expand present law bonus depreciation which is 50 to 100 writeoff in the first year. That provision would be effective for five years. Mark would also expand expensing made under 179 which is limited to 500,000 worth of annual qualifying investment. It would expand it to 1 million. Mark would make some changes in terms of the Cost Recovery lives of nonresidential and residential real estate, would modify taxpayers timing of claiming net operating losses they may have occurred in a prior year, net operating losses would be limited in any one year to taxable income but any unused losses could be carried forward indefinitely. It puts a limitation on the net interest. It limits to no more than 30 of taxable income. Within that provision an exception is provided for Real Property businesses that might choose to elect out and choose to fully deduct their interest expense. It is expanding the inventory rules and uniform capitalization and completion method it provides a tax rate on those unrepay triuated earnings of 10 for liquid assets and 5 for nonliquid assets. Mark makes some other significant changes to protect against profit shifting. It creates a current tax on global intangible income. This is a calculation of income thats above that you might expect to be earned on the tangible investment abroad. In a manner his income would be currently taxable. The global low taxed income and theres a slight in the markup document. Ill clarify that in a second. The effect of the inclusion is that global intangible income would face a current tax rate of 12. 5 . In parallel the mark would create what is defined as derived intangible income. It is equivalent to the low taxed income but its income thats derived from foreign sources but is paid in the u. S. Or earned by the u. S. Taxpayer. Again, in this case the mark has ann an error in that thats say a deduction for that. This is a tax that would apply only to taxpayers that have gross receipts in excess of 500 million annually. It was a tax that in its workings that it would look at cross border related party payments. If this it has payments that are deductible and those exceed more than 4 of the taxpayers total deductible payments then the comparison would be made of Tax Liability under regular income tax and on an expanded base that adds back certain cross border payments. Thats very brief. Theres a lot of material in the mark. A number of details but i know the members are interested in getting to question. Ill conclude and happy to answer any questions that the members might have. Thank you. Joining time are from the finance Committee Majority staff. I believe Sarah Schafer will come later. Mr. West is here to give us the administrations under discussion. Im sure members of the committee have several questions about the marks and i will recognize for members of asking such questions under the roles of the committee. Ill just go from there. Thank you mr. Chairman. My view are the gold standard. Their objective, straight with democrats and across the spectr spectrum. I want to begin by thanking you and your staff for your habitual professionalism and i think well probably make you a little tired over a very very long day. We have had some colleagues come in in the last few minutes. We are now proceeding on something that is even bizarre by washington d. C. Standards. We are now asking questions on a bill that is not the bill. We were told we would get it first thing this a morning so we could ask questions about a bill that is a bill when we are looking at almost 10 trillion worth of changes in tax policy. So we do have a lot of questions. Im going to begin with two from this mornings headlines that have me deeply troubled. Haste on tax bill may leave a trail of loopholes and from bloombergs offshore tax ideas could be a gold mine for some companies. Both of these talk about how some of the new provisions in the bill which havent receive a ed a lot of scrutiny would u. S. Tax law and send even more taxable income overseas. These headlines from this morning ought to serve as alarm belling signaling rewriting americas entire committee inec matter of days. It focuses on the oneyear delay in the reduction of the Corporate Tax. These are complicated issues for businesses across the country. Not exactly dinner table conversation or stuff people will talk about today in the lunchroom but real important. So first the bill sets up complex new depending how much income it makes. The article says that under the bill a firm could quote skirt the limitations by creating multiple partnerships with one providing services and the other handling licensing or leasing. So i would like to get the staff reaction to this first ms. Schafer and then mr. Bartold. Whats your reaction . Is it true . Based on my understanding, yes, that would be correct. I guess senator, im not quite clear about what you have the taxpayers setting up. Well, what the article says is that under the bill a firm could skirt the limitations by creating multiple partnerships with different functions with one providing services and the other handling say licensing or leasing. True . Which th is a surface partnership . Yeah. We look to park anticipates looking at common control related parties and treating them as one. So if the Service Income that this owner was trying to attribute was 75,000 worth of Service Income where as all other income was 200,000 and im abstracting from taxable income, that individual would not qualify from the exception provided in the chairmans mark. So i think you agree with that . I guess whats unclear to me is if they partner, for instance, has a different Partnership Interest and that holds a business would they be able to bail themselves a deduction that way . Again, looking at the partner level when were measuring income and the source of their income. So just as if the individual owned three different retail establishments, forget the Service Income aspect, for the purpose of calculation we would add up the income from three different sources. If we then created a fourth business for this individual as a consultant in establishing Retail Enterprises Consulting Services are generally excluded except for the income limitation that i noted. If the individual were successful in earning income in his or her actual three Retail Enterprises a taxable income in excess of 150,000 it would not matter if they set up a Fourth Enterprise that income would not dwal f qualify. Looks like a lot of gaming with me. Yeah. I think the ability of taxpayers is what i would consider. Lets go onto the next sort of i think for you and any of the other panel member. Just a moment. Our understanding the chairmans mark is that the wage income limitation and perhaps i should just reemphasize is that the income that can benefit from the 17. 4 deduction is limited by 50 of the wage income of the enterprise paid to nonowners but that that test would apply on entity by entity basis. So in the example you just laid out where there was one enterprise that had 10 employees and another that only had two employees. The ones income would be limited by 50 of the wages paid to the 10. The owners income qualifying for the benefit with respect would be limited by 50 of the wages paid to the 2. You want to take that . Sure. Based on discussions last week while it is unclear in the mark our understanding is these rules are to operate like current law, section 199. Section 199 provides they may all qualified production activities income which would if thats how these rules are to operate would allow an own over multiple pass throughs as well as business income. Want to add anything to that . Thats not our understanding and so perhaps as the members deliberate its a point we should clarify. Thats what you were told by the majority staff, is that right . Thats correct. Now lets get into the multinational area. The article says companies could set up comply kaltd structures with various subsidiaries to avoid the rules. Mr. Abraham, is that right . The provisions might interact. Your staff has been looking at a proposal regarding corporations where if the controlled Foreign Corporation is operating abroad they could receive a 10 u. S. Tax rate and then sell back into the u. S. It would encourage potentially shifting your ip to a foreign jurisdiction. Mr. Abraham, correct in his analysis . Well, he was maybe a little bit too fast for me there so ill just step back and say relative to present law i think the point that mr. Abra bra ham made is that t incentives might be different than what they are today silt a substantially better outcome for the investor under present law without if it were shifted abroad the global intangible lowtax income would have current taxation at an effective rate of also 12. 5 , which would seem to equalize the outcome compared to present law also theres not current taxation of any income earned abroad. Im going to continue to see if we can drill into all of the ways this bill allows the Big Companies to gain the system. Under the foreign based erosion rule controlled Foreign Corporation of the United States pays 10 of income from their foreign ip. They can then sell a phone or something similar with no further tax because the inbound base erosion rule doesnt apply to the cost of goods sold. Thats what the article refers to. It includes to lower the tax of 12. 5 companies to remove to the u. S. The problem is the companying only get it if they export their ip which could be a trade violation. It doesnt allow them to get the lower tax rate when it sells to the largest market in the world, the u. S. I think we would like abraham and bartold to get into that. Yeah. You are picking up on the comments that i made a few moments ago. You know, your comment regarding the exporting of ip and the ability to claim the lower 37. 5 deduction which effectively gets you the 12. 5 rate in the u. S. As compared to the 20 rate is only available for foreign derived intangible income essentially exporting the good associated with the ip. There have been concerns raised dating back to when former chairman camp raised a proposal that that could prevent some issues with our trading partners. Overall you know, the Ranking Member has been concerned with where we are ultimately taxing the United States activities and then taxing foreign activities at another rate. That policy filters through the entire bill as you have seen in the Global Income tax rule which results in a u. S. Company being able to achieve a tax rate of 12. 5 max to the extent it is earning normal returns on its Foreign Investment. Okay. You want to add anything . I want to wrap up with something. You want to add anything on that . Yeah. I think that my friend ryan didnt exactly answer the example that you gave. You had positive lets say a company with a fancy Electronic Device with lots of technology built into it. You mentioned this would seem ineffective and make sense to continue to maintain that structure. I think that this is part of the chairmans part where if you have high returns abroad thats what the global intangible low taxed income tax regime is about. It would say that the income earned in the u. S. Controlled cfc abroad would be currently taxable to the extent that it exceeds the threshold amount mr. Abraham mentioned. Well have lots more questions. It will be a long day. I thought it was important to start with the head its lines with what i think is reckless haste. It will leave a loophole what n bananza. I think it will be a gold mine for some companies and lets just wrap this round up with something simple. By cutting the corporate rate but by delaying it for one year theres to accelerate their deductions and delair they income that way they get deductions against a 35 rate and their income is taxed at only 20 creating another huge incentive to gain the tax code in america. Well wrap up the first round. No back and forth is needed. It is the case when there are changes in tax rates around a calendar date to the extent that an individual or business can have costs in the high tax rate year and income in the low tax year they will try to, you know, alter their affairs to it can happen. It can have good economic outcomes. In some cases the congress has tried to do that in the past to encourage earlier investment, for example. I just want to close this round because colleagues, theres no question that digging into these kinds of issues is sort of like prolonged root canal work. It is difficult important stuff but this is why you need to take time to really get tax policy right. In the last example we walked through where there was no disagreement is really going to create a huge incentive for gaming. When you cut the corporate rate, delay it for a year you create incentive to accelerate and delay their income that way they get deductions against a 35 rate. They income taxed at only 20 . I used this as the last example because this is just representative of the kind of gaming that is going to go on under this legislation and what happens when we dont take the time to get to the kind of result that they pursued in 1986 that senators greg and coats and i pursued that said we are going to make sure that our tax code is competitive so we can have more red, white and blue jobs. We are not going to create a highway for people to gain a tax code that is riddled with loopholes. Thank you. I want to first raise a serious concern over questions when we dont have the modified mark before us. He will modify the mark before we have the act dhual amendment process. Tax certainty is one of the issues i hear over and over again from people looking at tax reform as giving them some certainty. You know, in the house bill they have different time limits on different tax provisions. We are concerned as to whether the chairmans modified mark is going to put different dates than we have and perhaps not the perm nancy with are also concerned because the perm any si of certain provisions will be difficult. Are we really going to give a tax code that is certain . We are being asked to use a process that doesnt give us the tax proposal well be taking up in this committee. Mr. Barthold, just for one moment, if i might, i know it is very difficult to do a distributional charge on business income relief. I applaud your professionalism in trying to deal with that but you did not attempt to deal with it that 94 billion are not reflected in the distributional charge. Is that correct . Thats correct. Would you like me to explain th with the 94 billion of tax relief that is provided under the chairmans mark that goes to the billionaire families. I understand you may have a difficult time figuring out how heirers wind up economicwise. Were dealing with a class of people generally conceived to be the wealthiest in america. Senator cardin, its correct that the joint Committee Staff does not include the change in liabilities from the estate tax in our distribution analysis. Its not because the real conceptual issue is not one of data and matching up. In fact, i would be happy to provide to you and all the members of the finance staff some Data Analysis that we have done that links decedents for a prior year. I think our analysis is 2013, against their fiveyear proceeding death average income that gives an idea of that. I will have that provided to the members. It will be helpful. The conceptual issue is that tax on wealth is a tax on stock, and the income taxes are on flows. And adding stock values and flow values is i think i summarized it pretty well. Its not in here. You are dealing with the wealthiest families in america, which are at a different income level than we can even conceive, thats not included in the distributional charge. Thats correct. I will provide you the analysis that i described. You do, though, provide the bottomline number despite what some of my colleagues on the other side of the aisle have tried to dispute, and that is the amount of that it adds to the debt over ten years. Thats approximately 1. 5 trillion, is it not . Thats our estimate as reported in jcx 52. Thank you. Despite what the colleagues will say this bill, as scored by the rules adds 1. 5 trillion to our National Debt over the next ten years. I want to get to the state and local Tax Deduction. In my calculate close to half the taxpayers use this deduction. Am i correct in assuming that the chairmans mark allows businesses to continue to deduct the taxes they pay but not individuals . The chairmans mark allows businesses as under present law to recover the costs of earning business income. So that would include costs from property taxes on Business Property, sales or other use taxes that they might incur and state and local and foreign income taxes. But individuals would not be allowed to deduct those taxes and, in effect, pay a tax on taxes that theyve already paid to the state and local governments. Thats correct. The itemized deduction would be repealed. Have you done any analysis to what impact that could have on Property Valuation vectoring th considering that one of the selling points for owning a home is being able to deduct property taxes . I have not done any analysis on this particular point. That could have an effect on property evaluation which could affect local revenues, could it not . Property tax if Property Values change, the property tax is assessed on that base, local state and local governments would have to make decisions about whether to change their rates or just maintain what they have. Let me just ask one more question with the chairmans permission. This bill is called a jobs bill. To me, the most important tools we have out there, in my community, are the economic tools we have to generate Economic Activity. The historic tax credits, the new market tax credits, low Income Housing tax credits. Those types of issues create jobs. Am i correct that the only change in those tax provisions in this trillion dollar tax bill is to take away 50 of the benefit of the historic tax credit . Thats correct, senator cardin. Was there any rationale, policy reason for 50 hair cut in the historic tax credit . Senator cardin, i am not the person to ask about the policy policy choices. Well, i was just wondering. You did talk about some of the policy choices on the International Tax, going to a territorial, dealing with base erosion, but youre not prepared to talk about policies on historic tax credits . I am not trying to be evasive. I thought, in talking about the territorial system i was talking to the economic incentives. Was there any reason brought to your attention why we would do a 50 tax cut on the historic tax credits . I was not told the i was not informed of any specific specific reason. Thank you, mr. Chairman. Senator bennett. Thank you, mr. Chairman. Mr. Barthold, i understand a significant share of taxpayers receive a tax hike or a very minimal change in tax burdens of less than 100 in either direction based on your distributional analysis. Could you briefly tell the panel and help me understand more about who those taxpayers are. As i senator bennett, as i noted in the walkthrough, there is significant changes in the structure, the entire Internal Revenue code, but in particular the individual income tax. So the moving pieces that youre looking at, as siaid from chang in base points are the base of determining taxable income. Changes that can help reduce individual taxes, the increase in standard deduction, removes a significant amount of thats not the question i am asking, mr. Barthold. Who are the taxpayers did. I was trying. If you could get to that. You have consumed a minute of my time. I am sorry. Loss of personal exemptions can cause upper are the vast majority of those taxpayers not working that are seeing those tax increases . I do not believe that to be the case. Do you agree, mr. Barthold, that the taxpayers with the highest incomes do not receive a tax cut, on average, in this plan . Your question again, sir . This is my time, not your im sorry. Not your time, mr. Barthold. Do you agree that the taxpayers with the highest incomes do not receive a tax cut on average in this plan . Do not receive. On on average, there is a tax there is a tax reduction across all income categories. So yes, the highest do receive on average a tax reduction. A tax cut. Yes. Do you agree, ms. Acuna, that the highest income taxpayers on average, no matter which threshold you choose, receive a tax cut in this plan . As tom mentioned a moment ago, in every one of the cohorts, the taxpayers receive a tax reduction . Is the answer yes . Yes. Thank you. As a chair of the aftertax income, mr. Barthold do the taxpayers in the richest tloesh holds get a charger increase than taxpayers with incomes below 100,000 on average . I have not made that calculation on a basis of aftertax income. Our calculations presented to you in g id like to see that. Mr. Barthold in the chairmans mark for americans filing as a married couple living in washington, d. C. , and making 174,000 per year, how much do they receive from the 1,650 child credit if they have two children . The children are under age 18 . Yes. And the salary is 174 the salary is a senators salary of 174,000. In washington, d. C. , with two children. They should not be phased out, so it should be two times 16 3,300 . Yes. Does a single mom working as a waitress in rifle, colorado, making 18,000 a year receive 3,300 in child credits for her two children . How much was she making. 18,000. Not 174,000. Then, she would receive she would have, it would seem, no Tax Liability, accounting for the credit and would receive all or a portion of the 1,000 refundable credit. Some portion of 1,000, you think. What if she had three or four children. The same portimultiplied by or four. What about the person making 175,000 if they continued to kr children. Child credit is additive. So they get a massive credit whereas the single mom in rifle, colorado, get a de minimus credit. With three or four children, income Tax Liability would be driven to zero, and the amount of refundable credit would probably be to me, mr. Barthold it says it all about how this plan is stacked. We have such an opportunity if we worked in a bipartisan way to actually drive incomes of middle class people up and thats not what were using this to do. I said enough about the process yesterday, except i would say, mr. Chairman. I know ill lose that argument with my colleagues here, there is not a school board in colorado, there is not a city council in colorado faced with a zoning issue that would get away with a process that looks like this. Senator stabenow. Thank you, mr. Chairman. To follow up with senator bennett, this morning after putting together lots of questions and wanting to delve deeply into this bill now i am hearing that were asking questions about the bill thats not the final bill. Mr. Chairman, if there is going to be a new bill coming forward tonight, will we get to ask questions on the real bill . Yeah, the answer is yes. Yes . So right now were asking questions, but the real bill is not in front of us. Youre pretty sure of what the bill is going to be. This is very concerning, mr. Chairman. This is very its not normally our committee has done great bipartisan work, and its really unfortunate whats happening at the moment. Let me talk about the bill in front of us. So, assuming that this will be similar to the bill that were actually going to be voting on. There are a lot of promises that have been made to the american people, to families, to workers, about what the bill will do for them. They have been promised middle class new jobs, thousands of dollars in their pocket, but yet we know this is the same old trickle down scheme that has not ever produced that in the past. And so, i have some questions for mr. Barthold. The administration has promised the average family will get a 4,000 minimum of at least 4,000 annual raise if this legislation is enacted. Is there anything in this bill that would end the Corporate Tax giveaways if this turns out not to be the case . Ill make two comments, senator stabenow. That analysis is based on a macroeconomic analysis and the joint Committee Staff has not undertaken a macroeconomic analysis yet. To answer your question, there is, under the chairmans mark, the 20 Corporate Tax rate is permanent. So, if the promised minimum of 4,000 increase in wages doesnt happen, there is no consequences for that. The Corporate Tax rate is permanent under the mark. Thank you. If instead the a Large Corporation ends up using the windfall for stock buybacks or more dividends for shareholders instead of jobs is there anything in the bill that prevents them from doing that . The managers, the owners of the corporation, are free to make whatever Investment Choices or distribution choices they choose. So, in the past what weve seen is jobs havent been created, wages havent gone up, and there is nothing in the bill that would stop that outcome from happening. Nothing changes if in fact corporations choose to just basically reinvest in stock buybacks and so on. The mark is not predicated on future actions by any business entity. Thank you. The administration has promised the economy will gain millions of additional jobs, which i would love to see happen, would support anything that would really do that. They are saying if this legislation is enacted. Unfortunately weve never seen that happen. Weve seen the same promises over and over again. And weve not seen that happen with trickledown economics. But if the economy does not gain millions of additional jobs but instead only creates huge debt, is there anything in this bill that would end the Corporate Tax giveaways . As i noted before, senator stabenow, the under the chairmans mark, the 20 Corporate Tax rate would be a permanent feature of law. So no matter what, if there is debt, no matter what happens, the tax giveaway continues. What if the economy actually lost jobs compared to our current expectations as a result of the bills passage . Does this bill include anything that would end the Corporate Tax giveaways if companies actually created fewer jobs . Again, its not the Corporate Tax rate provided in the mark is not predicated on any other Economic Indicators or future actions. No matter what. Some have represented that this legislation will encourage companies to bring jobs home, which i certainly am at the front of the line and pushing to have done. To bring back jobs to america. Does anything in this bill end the Corporate Tax cuts if that turns out not to be true and instead we find that more jobs are being sent overseas . Again, the rate reduction is would be a permanent feature of law, not predicated on any subsequent economic action or Economic Indicators. Is it also true that today, if a Company Moves those jobs eve overseas we as taxpayers pay for it because they can write off the costs of their move . Moving expenses, whether they be a domestic relocation or International Relocation are an ordinary and necessary business expense deductible against gross income. Okay. Would finally, i would say, would one of my constituents who transferred from an employer, from a job in grand rapids, michigan, to detroit be able to deduct those moving expenses under this legislation . The chairmans mark would curtail the above the line deduction for moving expenses except in the case of the armed forces. So someone getting a new job in our country could not deduct moving expenses, but a company who takes our jobs and ships them overseas could deduct those moving expenses and taxpayers would pay for that. The ones deductible one is a deductible business expense and the other would not be deductible. Answer is yes. Senator widyden expressed concern about the Corporate Tax rate not going down to 20 until 2019 instead of in 2018. Let me ask this question for cl clarification. Would it be fair to say that many plans and and decisions as to making income in 2018 have already been made by corporations and that reading reducing Corporate Tax rates so abruptly might not materialize much additional Economic Activity in 2018. Mr. Chairman, your question goes to how possible is it for people to move around certain expenses and its certainly the case that many investment plans if were going to Start Building a new factory or something, those have long lead times, so there are many expenses that probably could not be the timing of which could not be materially changed. Mr. Chairman, if i could briefly respond. The point of the question and i was glad of mr. Bartholds answer was to show the kind of sleight of hand that is going to allow powerful interests to get around paying taxes, and the point is, this is just part of a long procession of changes that is going to allow for still more gaming. And certainly there are instances, as you suggest, mr. Chairman, where there is innocent intent. What i am concerned about is this opens up a bonanza for powerful interests to figure out how to lower their taxes, game the system. I thank you for the chance to further amplify on a point that mr. Barthold expressed, i think, very clearly, as demonstrating the kind of sleight of hand that represents this bill. Senator toomey. Thank you, mr. Chairman. I would like to follow up on this very topic with mr. Barthold and discuss this dynamic of the interaction between the capital expensing provision and the rate reduction. Senator wyden describes this as sleight of hand. Under the chairmans mark, capital items are permitted to be expensed beginning in 2018. Is that correct, mr. Barthold . I think its even with the date of date of introduction the november 2nd . Okay. November basically as as of after after this markup. That would include items like tractors, vehicles, machinery. Yes. Computer systems. Tangible property. Tangible property that businesses purchase from other businesses. That it takes jobs to build those items, right . Thats correct, sir. And i think economic theory has a very, very broad consensus that when workers have more capital intensive equipment to work with, all else being equal, they tend to be more productive and therefore able to earn higher wages. The dynamic that senator wyden calls a sleight of hand strikes me as, one, that all else being equal, simply encourages business to purchase this kind of equipment next year. Because the deduction is available at the rate of 35 . And in the future deduction will come against the 20 rate. All else being equal, it creates a greater incentive to make these purchases next year. Does that sound sensible to you . I think the economics of the accelerated depreciation proposal in the mark would be to encourage acquiring equipment sooner rather than later. So my point and ill i know senator wyden has characterized this as a sleight of hand. We should be clear that what this is is an incentive for business to make very substantial investments in growing their business, purchasing equipment from other businesses and hiring more workers to use that equipment. Of course, there will be a need for more workers to provide that equipment. If that is sleight of hand i guess i am in favor of sleight of hand. I think its a very, very constructive and progrowth dynamic. I just wanted to make that point. Mr. Chairman, ill yield the balance of my time. Thaernk you, senator. Senator enzi. I hpass until the end of the round. Senator casey. Is senator casey here . Yes, mr. Chairman. Thank you very much. Mr. Chairman, i want to start this morning on the matter that we have had a big dispute about, which is the process that has been undertaken to consider this legislation. We have heard for a long time now, months and months and months, on both sides, people expressing a desire to consider this legislation in a bipartisan fashion. Whether that was the intent at the beginning or not, i dont think its played out that way. And i think the most relevant comparison here is not is not some recent consideration of legislation generally. I think the most relevant comparison is what happened the last time the United States Senate Considered tax reform. 30 years ago. Not not an insignificant matter. In this case, as i said yesterday, we are talking about moving around something on the order of 9 trillion. So weve heard a lot about bipartisanship, but i think the only way to achieve that and to achieve a process that would yield a bipartisan bill, or at least increase the prospects for that, would be a lot more hearings, a lot more time on the bill. Not on not having hearings about tax reform policy, which weve had in this committee, and all of that is important. Its good to have hearings on policy over a long period of time. Its good to have the efforts that were undertaken where groups were groups were formed to consider and study tax reform policy. Thats all positive. But when you get down to hearings on the bill, or hearings on a very detailed proposal, i think this process has fallen way short of that. And i cite again what happened in the 80s. President reagan had a proposal that was 489 pages long, very detailed proposal. The finance Committee Held 27 hearings on that 489page proposal. The house had a bill which had 26 days of markup, and when the finance committee and the senate got the house bill there were six hearings on that bill. So when you add the two together, its 33 hearings. I am not saying we need to have 33. But certainly more than we will have undertaken by the end of this process. So, let me move to the one of the major issues. And this is critical to the country but also in a very particular way critical to pennsylvania. Thats the state and local Tax Deduction. I would assert that, if we go in the direction of the senate bill on this particular issue, that lots of pennsylvanians will pay higher taxes. We know that, for example, in 2014 a little more than half of pennsylvania taxpayers claiming the state and local deduction made under under 100,000 in pennsylvania. Almost 30 of our taxpayers itemize. So its a big number. In pennsylvania. Mr. Barthold, i want to thank you for your work, your professionalism and that of your staff. I guess the first question i have for you is, will companies be able to deduct the state and local taxes they pay as this bill is currently written . Senator casey, the mark makes no changes in a business a Business Enterprises ability to deduct ordinary and necessary business expenses, which include the taxes that they may pay in terms of property taxes, sales taxes, use taxes and state and local and foreign income taxes. The same question with regard to individuals. Are individuals able to deduct state and local taxes . All the taxes that are currently deductible on schedule a would no longer be deductible. Mr. Abraham, i ask you if individuals cant cannot deduct their state and local taxes does that mean they will be taxed twice on the same income . Yeah, thats thats the effect of denying the deduction to the individual. In this provision, this deductibility provision as it relates to state and local taxes been in the code since what year . I believe its been in the code since the beginning of the United States federal tax code. Is there anything you can tell us about the services that state and local taxes finance . State and local Governments Fund that will they charge their state and local income taxes, property taxes and use them for any number of things from schools and hospitals to police and firefighters, voluntary volunteer firefighters and other items. Senator cornyn. Could senator casey have 30 more seconds at least to finish . 30 seconds over his time. I didnt know he wanted to finish. But he can finish. I have been doing that for every democrat here today. Going over every one. I will be brief and come back to it later. One point i wanted to make about pennsylvania. 21 of our states budget, the pec expenditures in the budget, go to Public Education. And there is a report just issued last week by the National Education association that is entitled the summary of the report says nearly 250,000 education jobs at risk if congress eliminates state and local Tax Deduction. The pennsylvania number for that comes down to about 800,000 i am sorry. 8. 9 8. 9 billion in Public Education revenue at risk over the next ten years. So mr. Chairman, thank you for the time. I will come back to some other issues later. Thank you. Let me ask you, mr. Barthold, just for clarification. Why does jct classify the slt deduction for individuals as a tax expenditure but does not classify the s salt deduction for businesses as the production of income as a tax expenditure . The answer to that question goes a little bit to tax theory or the theory of tax expenditure analysis. Tax expenditure analysis posits a normal income tax that would provide, aside from rates, a standard deduction and would not have exclusions or deductions for anything other than other than expenditures that are necessary for the production of income. So in the case of Business Property, Business Property taxes, as one example, thats necessary those are necessary costs for an enterprise engaged in earning income, so thats not a tax expenditure. Payment of a property tax on Owner Occupied housing is an elective consumption choice by the household. So its considered a tax expenditure. Thank you. Senator cornyn. Thank you, mr. Chairman. Miss acuna i want to ask you to repeat something you said earlier. Did you say every taxpayer in the country will see a reduction in their tax rate . To restate what i said previously, i said that every one of the income cohorts will experience a tax reduction. Those are people in the cohorts, right . Yes. Those are people. So the way i interpret what you said is that every taxpayer in the country will see a reduction in their tax rate. Thank you for your answer. Mr. Chairman mr. Chairman, i want to i want to address this argument. Mr. Chairman, parliamentary parliamentary inquiry. Let the senator ask his question and then well come well let the Ranking Member ask. Weve heard from our colleagues on the other side of the aisle. I would like to get a chance to make a few points. Weve heard the argument that this is somehow a secret bill, mr. Chairman, but i would point out that you as the chairman of the committee are handling this legislation like every other bill that the Senate Finance Committee Considers and every other bill that committees consider in congress. It is because our democratic colleagues refused to participate that we find ourselves in the unusual circumstances that we are in now. But the idea that there is some secret bill because there will be perhaps an amended mark, chairmans mark, or maybe amendments offered in the committee that are accepted is just defies logic and is just simply untrue. I appreciate you making that point. It strikes me its the old story of the child that does in their parents and then asks for sympathy because they are an orphan. This is entirely of the making of our democratic colleagues. And this idea that characterizing the legislation, reducing the Corporate Tax from 35 to 20 in order to make american businesses more competitive and investment in the United States more attractive, as some sort of corporate giveaway strikes me as pure demagoguery. The idea that, by eliminating the salt the state and local Tax Deduction from federal income taxes strikes me that the taxpayers that benefit from those services at the local level ought to pay for them. It makes no sense that the federal taxpayer in places like my state should have to subsidize the state and local taxes paid by taxpayers in new york or california or elsewhere. It strikes me as a matter of simple fairness and equity. And i guess our colleagues who are complaining about reducing the Corporate Tax rate, like the flight of american businesses overseas along with the jobs and investment that go along with it, because that, in essence is what they are complaining about, and wed like to reverse that. Wed like to see more businesses invest in the United States. More manufacturing here in the United States, stamped with made in america on it, rather than see them flee to lower tax countries like ireland and elsewhere. So i just i guess all i can say, mr. Chairman, is i am a little disappointed in the rhetoric and the refusal of our democratic colleagues to participate in the process. My understanding is that theyve got several hundred amendments that they intend to offer. I hope they do. And in that do join us in this process. I anticipate in the end that, like most reconciliation bills, it will be a bipartisan product. But i just think our democratic colleagues protest too much. Mr. Chairman. Yes. Just very briefly, before we leave that point. I mean, senator cornyn has been trying very hard to say that everybody is going to get a tax cut. And i would like, with mr. Corasso, to clear up this point. Everybody would get a tax rate reduction as a policy, but not everybody is going to see their taxes go down. Could you walk us through that, because i think people will leave that Little Exchange with the wrong impression. Thats correct, senator. In 2019, based on jcts distribution tables, as many as 14 million americans with incomes under 200,000 can expect to see a tax increase. And another 36 million could expect to see almost no tax change. So thats anywhere between less than 100 tax increase to less than 100 tax cut. The reason i am bringing this up, and ill drop it here, mr. Chairman, is you hear about tax rates on income cohorts. That is not going to be much comfort to the 14 million middle class families whose taxes go up because of this proposal, and i appreciate your clearing it up. Senator isaacson. I am going to show some of my ignorance in asking these questions. Ive gotten a lot of help and encouragement on what to ask. Its not original thought. Its important to make sure the system is not gamed. I hear a lot of people talking about gaming of the system and people talking about how they would do that. Mr. Barthold, thank you for your leadership on this and the provisions of this and the rule in the bill needed to prevent companies for gaming the system. Ive heard some from companies in my state that provisions may be overly broad. Lets say a usa corporation a has a 10 stake in Foreign Corporation b. Foreign corporation owns subsidiaries around the world with no connection to the United States. Is it act rat that under the current law as well as the bill were making up u. S. Corporation would not have tax liabilities under the earnings of the other corporation . Under present law, sub part f is generally about passive and mobile income. If it were portfolio income there would be Tax Liability of the controlled Foreign Corporation currently payable back to the United States. I may not understand completely the facts that you were positing. If it would be helpful, i could work with your staffer later and clarify this point to you in writing. It would be helpful if my staffer had a better senator. In the absence of that taking place right now i dont think thats the case, sir. It helps when you are showing your ignorance. Ill restate that. It owns the Foreign Corporations with no connection to the United States. If a corporation a owns an interest in corporation b that has interest in other subsidiaries of Foreign Corporations, the principal corporation a does not have, that would be treated just like it has been here . I think thats correct. I think i am right too, but i am obviously not certain. As i say, senator, if you would like, we can my colleagues can work with your staffer and we can answer the question in writing for all the members on the Committee Just to make it clear. I would be happy to do that, sir. I am going to get with you on that. Im going to try and ask this other one that i want to ask as soon as i get back to my note page. Chairman got to me faster than i thought. Mr. Barthold, under section the gentleman has the time. I thought he was worried about being over. No, no. I am worried about not being fast enough, which creates deduction for foreign dividends received by United States company. This is a key piece of moving toward more competitive International Tax system so United States companies can compete on a level Playing Field with nonu. S. Companies that dont face a second layer of tax, when they bring armies back home. It does level the Playing Field in terms of competition. Say a u. S. Corporation a owns control of Foreign Corporation b which holds a 10 share in Foreign Corporation c. Under current law a dividend paid to control Foreign Corporation is taxed the same way as if it had been taxed as a a u. S. Parent company. Would it be correct to say the d dividend to company b received from company c would be eligible for territorial tax treatment under this bill . Under the chairmans mark, thats correct, sir. A dividend paid by lower tier 10 owned Foreign Corporation subsidiary to a controlled Foreign Corporation will be eligible for a territorial exclusion like the dividend paid directly to a domestic shareholder. Yes, sir. I appreciate all your work. I yield back, mr. Chairman. Appreciate that. Let me make a couple of points here that i think might be clarifying points. My friends on the other side are making the claim that the modification of the chairmans mark will dramatically alter the structure of the bill. Under our rules, the chairman has the right to modify the mark. The chairman can do that up until he or she opens the bill for amendment. Thats been the general practice of the committee and it is the general practice of the committee. 20 years ago when the finance committee was marking up the taxpayer relief act of 1997, the chairmans mark was modified several times and several items including my state Childrens Health Insurance Program and an increase in the tobacco tax. The aviation tax was dramatically changed. As i stated at the beginning, we need to bring the mark in compliance with the byrd rule. We are working on those changes and will discuss them with all of you in a chairmans modification. These changes are essential to put the bill in good form for reconciliation purposes. That modification when finished will be released. We will walk through the modification and thats in keeping with our process. On substance, let me assure all my friends here the modification will be keeping the character of the tax relief in the mark. It will be focused on middle income tax relief. I have to do even better than we have for middle income taxpayers. It will bring the u. S. Corporate rate down to 20 level, bringing the u. S. Rate into line with our trading partners. It will make sure that u. S. Companies are competitive overseas and reverse the bleeding of the u. S. Tax base, which has been going on. Mr. Chairman. Yeah. If i could just respond briefly. As you know, you have heard it from colleagues, this is not a question about your integrity and your honor. I hope not. What we need to know is that we are dealing with a bill that is actually the bill. Were making changes that involve trillions and trillions of dollars of tax policy. And what we were told last night is that we would get the new modified chairmans mark first thing this morning. So that we would be able to use this time. I think we would both agree, because we tend to see these matters similarly, so that the senators on both sides could ask pertinent questions. Now, you have just said that the new modified chairmans mark will be in the character of what is really on offer. While we respect you, we still are legislators who have election certificates as well. We have to have the time to actually see this rather than move forward with what i consider to be reckless haste on changes of an extraordinary nature. I understand what youve said, and i want you to know how strongly we feel about how we are now asking about a bill that is not the bill. I understand. Senator stone. Thank you, mr. Chairman. Mr. Barthold, a lot has been made about how the benefits of this tax bill distribute across different income cohorts, and i am interested in your thoughts about how the tax burden, in other words, after this is all said and done, in the distribution tables in addition to determining how the benefits flow through different income categories but what the tax burden is when its all said and done. And whether or not that tax burden reflects the tax burden that is paid today by different income categories. Could you comment generally about after the effects, the benefits of the tax reform bill are distributed across different income categories, the overall tax burden borne, is it similar to or relative to what we would see today in terms of what people in different income categories are paying as their share of the overall tax burden in the country . Thank you, senator thune. I think what you are asking is actually just an explanation of how the joint Committee Staff presents some of its data. In jcx 53, which is our distribution analysis, if you look at page 5, for example, which is the last year of the budget period, 2027. We present two or three basic different ways of thinking about what the proposal in front of the committee does. The very far right we look at average tax rates on individuals in different income groups. And, as a general outcome, you can see that the average tax rate, because its a net because its there is net revenue loss to the billion, average tax rate across all income groups falls. I think the question that you are looking at is more the comparison in the middle two columns. Correct. Of federal taxes under present law, and federal taxes under the proposal. These two columns report on the aggregate amount of federal taxes paid by all the individuals in those income groups, and how that compares to the total federal tax the total federal tax take. So i believe the point that you are trying to that you are asking to highlight is that, if you compare the percentage column of percentage of tax paid out of the 100 total, its roughly comparable across all the income groups under present law and under the proposal in 2027. So, for example, the income group of our classifier of 20,000 to 30,000, pays. 7 of 1 of federal taxes on federal law. If you look at the income group of 100,000 to 200,000, 29. 3 of taxes under present law. 29. 4 of all taxes under the proposal. The 1 million and over, just out of curiosity, under present law, tax burden, and tax burden under the proposal, looks to me like goes up. As weve reported here, 19. 1 under present law 19. 4 under the proposal, senator. So, in other words, millionaires would be paying at least as much or more of the overall tax burden in america under the proposal as they are today. Thats what this column calculates. Okay. And with respect to the reduction in business taxes, there has been a lot made about cutting the corporate rate and the rate for passthroughs by the amount thats under consideration in this proposal. And whether or not the 1. 5 trillion deficit, the instruction that was given to the finance committee to meet, if you back out i know you dont, you use current law baseline. If you use current policy baseline, that would make that number about a trillion dollars. My understanding is that the Congressional Budget Office says that for each one tenth 1 increase in gdp generates roughly 273 billion in additional revenue. And if thats the case, then the the growth rate thats assumed over the course of the next decade by the cbo is 2 or a little under, what would it take to cover that trillion dollar bogey in terms of additional growth in the economy over that year over year . Well, the simple arithmetic on that would be about. 4. You should qualify that some because that would be. 4 from the beginning of the budget period. It would be an immediate jump up in. 4 i think is what the cbo analysis would be. Right. Which would be different than achieving a growth rate. 4 higher somewhere out as the economy starts to grow faster. Yeah. But the assumption would be, in order to be able to achieve have this cover that trillion dollar number, you would have to have about. 4 of growth in the economy relative to whats predicted today, which is a little under 2 . So we would have to assume Economic Growth of somewhere in the 23 range perhaps in order to make that again, with the caveat i noted that 23 starting next year. Got it. I would simply say it seems to me the American Economy which has historically grown since the end of world war ii at 3 , 3, 3. 5, to achieve 3 growth in this great economy, if unleashed with some of the policies that are presented in this proposal, seems reasonable to me, and i would certainly hope we ought to be able to get the American Economy growing at 2. 3 or more. Thank you, senator. Senator mccaskill. I have in front of me the current tax code. This was billed as a simplification. I have tried the best of my ability in a very short period of time. I am jealous of senator toomey. I think he is much more familiar with this product than i am. I understand why he didnt need to use all of his time. I need lots of time. There are incredible complexities in this proposal particularly as it relates to the passthrough deductions and the change in the passthrough brackets, the international is very complex in terms of all of the different provisions that are there. Would you estimate how many of these books well take away with the change in the tax law thats being proposed in front of us . How many books will we remove . I think there are one, two, three, four, five, six, seven, eight of them. How many are going away . Any idea, mr. Barthold . Well, i i wouldnt hazard a guess. What you have before you, most of the books are. Correct. Regulations. Well need lots of regs based on these proposals, correct. There. Is that correct, mr. Barthold. There will be a lot of regulations with these proposals . Presumably some things go away. There would have to be new notices and regulations to effect the policies in the mark. The areas you mentioned the passthrough regime and shift to a territorial regime with the base erosion protections. What about base interest deductions . There are a number of regulations related to interest deductions in that now. That might be a net wash. Net wash. So, if we were having a friendly beer in a bar and i wanted to lay a bet with you on whether or not there would be a new book or whether or not wed take away a book, i am willing to bet there is a new book based on this proposal. Would you take that bet against me . Well, if if i may be a little light in answer, the publishers tend to like to leave the footnotes with the old prior law so that i would agree with you that there would almost certainly be a new book. So were not going to simplify here. Were going to add a book. What happened to the postcard . This is not simplification. This is incredibly complex. Is there anything in this proposal that will touch all the various regulations and laws that allow very wealthy people to avoid the state tax under trust law . Did anybody touch any of that . All the crumby trusts, the dynasty trusts, all the way trust lawyers gary cohn has publicly said a number of times that people with 10 million generally have trust lawyers and are not worried about estate taxes. Did we touch any of that in this bill . As noted in the walk through, the only change is the doubling of the present law deduction. Nothing that defines the base changes. The individual income tax rates have conforming rates for trust income. The definitions of income or qualifying trusts are not changed. And i want to make sure i want to, on my next rounds, i want to talk about the passthrough, understanding that the passthrough is about 95 of the businesses in america, correct . In terms of total entities, thats probably correct. I would have to doublecheck, but definitely a very, very high percentage. So 95 of the businesses in america are going to be looking at the new passthrough provisions as their tax planning guide. They certainly would like to look at it to see if they could take advantage of the if they would qualify for the 17. 4 deduction. And its my understanding correct me if im wrong but at this point in time jct and the finance staff dont even agree on how thats going to be calculated based on what w2, whether there is aggregation, not aggregation. Whether its an individual w2 or a businesswide w2. Is it my understanding at at this moment there is not agreement between the finance staff and jct on how that will work . The Ranking Member wyden asked an initial question. My friend ryan sara disagreed with the analysis that i presented. Okay. So, i am a little panicky that were going to have tax planning for 95 of businesses in america and you guys cant even decide how it works, together. And agree on it. I would say that is the definition of complexity and complexity is the playground for loopholes and tax avoidance. Thank you, mr. Chairman. Thank you, senator. Let me just make a point here that i think needs to be made. Miss acuna, will fewer people wait will fewer people want to itemize and instead claim the standard deduction . Am i right on that . Yes. Fewer people will not want to itemize, right . Thats correct. They want to claim the standard deduction. Now, will that be simplified . Yes. That would offer a simplification. That would be a massive simplification. Were talking about 90 of the people in this country, right . Thats right. Okay. Mr. Chairman, if i might, the senator from missouri was talking about businesses. I am not talking about the senator from missouri, i just wanted to ask that question because i think its been kind of misrepresented throughout this hearing. I think, mr. Chairman, if i could just continue, the senator from missouri, as i was trying to do, was highlighting the enormous complexity associated with these passthrough changes that involve business. And the chairman, my friend, is talking about individuals. Well, yeah, i am talking about individuals and how simple this is working out. And what a break it is going to be for individuals in this country. And, you know, i think its time people understood that. This is a major, major sea change in tax law. It certainly is a sea change for the wealthy, who will have, as senator mccaskill said, a bonanza of new opportunities to game the system, particularly in the area she talked about, business, when we cant even get the people at the table to agree with the passthrough changes. Thats what i call bull corn. Let me just turn to lets see who is next. Senator senator warner. Thank you, mr. Chairman. Echoing a little bit about what senator mccaskill said and as someone who falls into those categories and has Tax Accountants and planners. I was going to ask everyone who is in the room that was a lawyer or accountant to stand up. My staff convinced me not to ask that question. But i can assure you that, because were rushing this, were going to create a bonanza of new loopholes and i hope in later rounds to get into this. One of the ways that we have seen repeatedly to mask the cost of tax plan and both sides have used this tool repeatedly, is to make some tax provisions only temporary. Meaning that the provision terminates or only applies to a certain period of time. Dr. Barthold, tom, can you how long have you worked at jct . A little over 30 years, sir. Ygives you a great deal of experience. In all that time, how many times would you say that Congress Passed a tax package that had an Expiration Date and then, when it got close to that Expiration Date, we would go ahead and extend that tax provision . Thats happened on a large number of occasions, senator. We can call them. We have a name for it. We call them extenders. And so history has suggested that, as a provision thats enacted is temporary, congress often comes back when the rubber hits the road and extends those provisions, so all this does is actually hide the real longterm costs so that a tenyear estimate, you know, provided by jct or cbo oftentimes does not accurately reflect how much revenue is lost when we go ahead and extend these provisions. For example, the bill before us sunsets expensing for Large Businesses after five years. Hopefully well get into this in a later round where it actually shows by ending after five years, it generates additional revenue in the second five. Its a little complicated but i hope to get into it in the next round. I know that Senate Finance staff has asked for a while for a score so that, if we could assume what, tom, you have said has been congress behavior over the last 30 years, that oftentimes when we set these provisions to expire we then extend them. I would hope, and ill offer an mome amendment that would make all the provisions in this proposal permanent because thats what history has been shown us to do, so that we could actually know the real cost of this bill before we vote on it. Do you know if jct has completed that score yet . I can tell you that we have not. We have had a large number of requests. And actually its not quite as simple as looking at one line as a general matter because that affects a number of other. A number of the other provisions. Expensing would be a classic years would be about 128 million. Youve got it down to 61 billion and revenue gainer, thats because people would expense immediately and then not take those provisions later. But its not really an additional 63 billion in revenue. Again, both sides used these games for years. Before we do this kind of massive tax overhaul, i think we ought to have this data. One of the areas that i think all of us realized an interesting intent was amt. Amt was the notion that those of us who have done really well with the system ought to pay at least a minimum tax, hard for somebody making runs of millions of dollars as president has complained at times and complains about amt. Amt crept up and started hitting middle class tax. There was room for reform on amt. Is there any amt provision in this bill . Both individual and corporate amt are revealed. Some of the features some of the aspects of amt you see in the bill, for example, under amt there was a limitation on net operating losses. The chairmans mark would modify their recovery of net operating losses under present law. So you might say thats a i guess, and my time is running out. I dont want to offend the chairman because i want to make sure i get my full five minutes on the next round. Is there any even guesstimate that those folks who are paying amt at this point, when that is eliminated, any guesstimate how many of them will pay any tax at all or will we not arrive. Originally came in where people who do very, very well can end up paying zero taxes on a personal basis . Weve not made an estimate of that particular point, sir. Thank you, mr. Chairman. Okay. Thank you. Okay. Well go to senator carper at this point t excuse me, senator grassley is next. I apologize. You are next. Before i ask a question, i want to comment on the discussion just done. Original intent of the tax in 1969 was there was about 120 people werent paying any individual income tax. Youre relatively rich, take advantage of getting out of pay income tax, you ought to pay a little bit. 120 people at that time. It was never indexed. It was never intended to cover millions and millions and millions of upper middle income people. If you want something to apply to just a few rich people, it might have some legitimacy but it got out of control. Doing away with it is justified. Would expensing my question comes from the fact were hearing from the other side what were putting into this. My question comes from the fact i think were simplifying. Would expensing be simplifying for business . Yes. It would be substantial simplification just by virtue of the fact youre reducing the corporate rate and providing expensing that mitigates the incentive for costly tax planning. I think maybe you partly answered my last question. Would a much lower Corporate Tax rate mean corporations will engage in much less complex tax planning . Yes, thats right. It takes some of those incentives away when you have a lower rate. Thats oftentimes referred to as the most effective form of antibase erosion. I assume as an expert in this area, youre flabbergasted with people that say were making the system more complicated . I believe there are certain features that do provide simplification. Thank you. I yield back. Ill reserve my time, mr. Chairman. All right. Go to senator at this time. To your right. Good morning. Good morning, everybody. Thanks so much for joining us. Senator roberts, thank you for joining us. This is encouraging. I can assure you its just temporary. All right. Im sitting here this morning, folks, thinking back a month or two ago, im not on the Health Pension committee but became an honorary member there for several weeks. Senators alexander and murray held a series of bipartisan hearings. Two weeks in a row, two hearings per peek and they invited to talk about how to stabilize the exchanges, how to stabilize health exchanges. Governors in, democrat, republicans from all over the country, health providers, health economists. Those four hearings at 10 00 a. M. , four of them over the span of two weeks. Before they had the hearings to deal with this issue, stabilizing the exchanges, they had roundtables. Folks, members of the senate, democrats and republicans who are not on the Health Committee were invited to the roundtables to have a conversation for an hour or so with the witnesses. It was extraordinary. Out of that process came Bipartisan Legislation which has 12 democratic cosponsors and 12 republican cosponsors. I have a friend, ask him how hes doing, he always says compared to what, compared to what. What im doing is comparing this process were going through to what i thought was a good process that led to Bipartisan Legislation, which i think has a good shot of being active. I have a question i want i was elected state treasurer when i was 29, i was elected state treasurer the worst state in the country, tied with puerto rico, dead last, dead last. We could not balance our budget we could not balance our budgets at all. We were good at overstating revenues, underestimating spending. Overestimating revenues, underestimating spend, year over year, thats how we got the worst credit rating. We were tried with puerto rico. Puerto rico was embarrassed to be in the same company with us. I have a question for mr. Barthold, give us an idea if we enact legislation what is it likely to do to our budget over the next decade. The conventional estimate we provided to the committee jcx 52 projects that the chairmans mark would reduce revenues by 1 trillion 496 billion. How much 1 trillion 496 billion. 1. 5 trillion over the next 10 years. Beyond that, is the expectation that the deficit would go down. The next ten years things would get better . Under the baseline projections that we used, we dont actually have a baseline to measure against. If your question is are there, you know, provisions that reverse that. Ill sbroupt you. Affordable care act, when we passed Affordable Care act, expectation according to cbo was i think jct expectations first 10 years deficit would be reduced by 100 billion, second 10 years a trillion dollars. Thats what im looking for. The Affordable Care act had some provisions that changed at the end of the initial budget period and actually changed further in the second budget period. What im trying to get at. No similar provisions. If expected to go up by 1. 5 trillion first 10 years, should we expect it to go more than that or less than that in the second. Thats what i was saying. We havent made a projection, with the deficits projected here, would it be the same rate, bigger or smaller . We havent made that projection. Any idea on Interest Rates for borrowing, increasing federal deficits by this magnitude . I have not undertaken that analysis. I believe the Congressional Budget Office has made some analysis of may have been with respect to house legislation. My time has expired. Thank you. Senator cassidy. Let me just follow up where senator carper was. Based on those projections that there would be an increase in deficit, obviously youre basing that upon gdp growth. And the more the gdp grows, or whatever rate it grows, will grow federal revenues, what is the average gdp growth projected to come up with the baseline for those deficit numbers. As we noted a little earlier, all joint committee estimates, all congressional estimates made relative to Budget Office Macro Economic baseline. Budget office Macro Economic baseline projects gdp 1. 9 , 2 per year. This may have been covered earlier. I apologize. I was in another committee hearing. If growth goes up to 2. 5 , do you have a sense of what that would do to federal revenue . It would compounded basis. It would substantially increase federal revenue. If it substantially increases federal revenue, would it be sufficient to cover this projected deficit when gdp growth is projected to be 1. 9 . If the current growth rate suddenly jumps from where we are today to next year 2. 5 , yes, it would probably cover be sufficient to cover that deficit. You misspoke, if i may, someone whose hair is grayer than mine to a little youre misspoken where we are today is 3. 0 growth over the last two quarters. The growth what we would jump from is the projected 1. 9, weve seen graphs regulatory policies grow to 3. 0 over the last two quarters. Just to point that, youre welcome to dispute that, but i think thats where i would go with that . No, i wasnt disputing it. I was reporting the projected growth rate and making the change relative to the projected growth rate. Got it. I understand earlier senator casey was suggested repeal hft state and local taxes. Let me ask, if you double the standard deduction, to what extent does the repeal of the salt, the state and local Tax Deduction, which means obviously people can no longer deduct that from their taxes. To what extent would it affect middle income people and higher income people, assuming we double the standard deduction. Senator casey, starting from the base of present law, under present law approximately 30 of taxpayers itemize their deductions. 70 claim present law standard deducti deduction. The 30 pours of taxpayers who itemize tend to be in the top half of the income distribution. If you increase the standard deduction, you take people from the bottom of that bottom incomes of those 30 and they would be more likely to choose the standard deduction. Thats where most of the initial benefit from increasing standard deduction would follow. Besides what youre saying if not outright stated the tax plan we put forward would benefit middle income folks. Those who would pay a little bit more because of the repeal of the state and local Tax Deduction would be those who would be upper income . Thats generally so. I should qualify a little bit because there are many other things changing in the plan. I get that. In a country of 310 Million People youre going to have some complexity. Im okay with that. Theres going to be some folks that win and some that dont win quite as much. So lets see if theres anything else. Now, senator mccaskills line of questioning i found very intriguing but ill wait for a later opportunity to speak to that and ill reserve the balance of my time. Senator. Thank you. Id like to direct questions to mr. Abraham. Thank you for anticipating that and moving up there. Our trade and tax policy as we all know and all perhaps both sides talked about this has encouraged a corporate Business Model fairly new to world economics. A corporate Business Model that shuts down factories in toledo or dayton, cashes in on a tax credit fundamentally at the expense of americans, shifts to reynosa, then sells those goods back to the United States. Far too many of those jobs that remain dont pay enough in wages and benefits from what they put in. The goal is to put dollars, as we said yesterday, if were going to give a tax break to the middle class, were going to give tax break to the middle class, we all to give a tax break to the middle class directly. The other goal is stop outsourcing. Weve all paid homage, said that in this committee but im not sure this bill does this. My question is this. The bill by Senate Republicans minimum tax rate, mr. Abraham, for profit attributed to intangible assets, intellectual property, trade secrets kept offshore. As i read it, theres no minimum tax rate no minimum rate for real Business Activity overseas. That means every u. S. Corporation would have an incentive to keep properties overseas, is that correct . Yes, theres no tax on routine returns for Companies Operating u. S. Companies operating overseas. So really does incent those companies to keep their profits overseas, correct . Yes. Thats Pretty Amazing considering the speeches weve heard and the position of the president and the position of my colleagues at the white house from this committee. So the minimum tax in this bill doesnt tax routine overall does not tax routine overseas returns at all. In other words, theres zero rate of taxation on profits held overseas. Is that right . Yes. So with that same u. S. Corporation get to exclude a routine return on the investment made in the u. S. . No. So a large u. S. Multinational corporation could shut down a factory in st. Louis or cleveland, deduct the cost of the move, build a new factory in the low tax in asia and pay no further u. S. Tax on that factory assuming its only earning routine returns. Is that correct . Yes. So those same earnings but those same earnings contrast this. Same earnings would be subject to full u. S. Tax if that same factory was built in akron, ohio. Yes. The u. S. Rate dropped to 20 . If that same facility is in a foreign jurisdiction and only earning routine rushes, theres no further tax under territorial system. So theres an nfgser in summit county, ohio, home of akron and barberton, two cities in summit county, and the investor decides to build in akron, that investor is paying 20 on his taxes under republican plan. Moving that plan overseas, the investor would pay zero. Thats my understanding. Under the senate bill what statutory u. S. Tax rate for corporations that hires American Workers, again, what is the statutory tax rate for a u. S. Company that hires American Workers to manufacture products in akron and sell them around the world . What is their statutory rate . Its 20 . Theres the loss of the 199 manufacturing deduction, so its a 20 top rate, top corporate rate. Under this bill. Now, what would the statutory u. S. Tax rate be for u. S. Multinationals, instead of manufacturers in the u. S. Decides to incorporate a tax haven like ireland or even lower rate tax haven and starts manufacturing let me stick to that. They inCorporate Tax haven like ireland, start manufacturing in lower or no Tax Jurisdiction area. My understanding under the chairmans mark is there would be no u. S. Tax on that earnings and profits assuming only routine returns associated with that manufacturing. So there is, in fact, a tax incentive on the bill for manufacturing but the tax incentive is to move the jobs out of the u. S. Under this bill incentivizi incentivizing. So one of the outcomes of the bill, this bill incentivizes outsourcing, correct . Under the situations that youve described, there seems to be incentive under the chairmans mark to achieve a lower tax rate by having manufacturing outside the u. S. That is just incredible. When we have othe time ive been in the senate, senator wyden, and my friends on the committee, the years senator mccaskill and i have been in senate, one of the things weve been most unhappy about is a tax code that encourages outsourcing of jobs. The president won an election talking about that. The president and senator after senator after senator at the white house and both parties said we have to do something about that. What this bill does is encourages corporations to keep jobs overseas, encourages corporations to send jobs overseas. Once again, mr. Chairman, if we want to cut taxes for the middle class, lets cut taxes for the middle class. This 3 tax reduction, 43 cut in Corporate Taxes under the guise of some of it will trickle down for lower tax rate for workers and some of it they say 4,000 will mean higher wages. Why idot that way . Why not cut out the middleman . If were going to give a tax break to middle class, lets give tax break to the middle class. Patriot corporation act, why working family relief act, put in the pockets of people making 25 and 50 and 75,000 works. Thank you, mr. Chairman. Okay. Senator portland, i guess youre next. Thank you, mr. Chairman. I was here earlier. I had to run out to another couple markups. I appreciate mr. Barthold your work with joint tax to try to give us a good analysis of this bill. I am concerned by some of the back and forth, including with the minority staff that i think inaccurately portrays this bill. I think its amazing that were sitting here talking about how great the current tax system is when we see jobs and investment going overseas constantly. 4700 companies would be American Companies today if we had this kind of proposal in place as we have before us. Thats based on ernst and young analysis. Its quite simple. Right now, there is an incentive to go overseas. Outsourcing is happening. For someone to defend whats going on and say we shouldnt change it, i just again refer you to the working group that i cochaired with Chuck Schumer. We reported two years ago we had to lower the business rate and we had to go to a Competitive International system, territorial system because otherwise we would continue to lose jobs and investment overseas. You know, three times as many Foreign Companies buying u. S. Companies now as u. S. Companies buying foreign. Thats whats happening. I would just ask you, mr. Barthold to tell us not from a partisan point of view but joint tax point of view, do you believe this bill changes the incentives. Does it for this person who was just referred to, who is a manufacturer in my home state of ohio, who now unfortunately is often in the position because of our tax code of being incentivized to move production overseas, how does this legislation change that incentive . Senator portman, in our analysis in part to produce the revenue estimates and for initiating our Macro Economic analysis required by congress, we see multiple incentives in the bill, not all of which necessarily go in the same direction. A lower the increased Cost Recovery in the United States, 100 bonus depreciation as a clear incentive for both domestic investors and Foreign Investors to invest in the United States. Lets stop there for a second. Lets say that you are a company that is finding the market expanding and want to increase production. Trite now lets say you produce globally. Lets say that company is headquartered in japan like honda, that has a huge facility in ohio. In fact, the biggest auto complex in ohio, i guess, most workers is honda. How do your incentives change in terms of whether you decide to invest in japan, in china, germany, or in the United States based on what you just said . The expensing provision by itself, absent other changes, immediately makes the United States more attractive tomorrow than it is today. So its more likely youre going to see Foreign Investment coming into ohio because of that change you mentioned but also obviously the lower rate also creates an incentive. One of the other factors i was going to mention was the lower tax rate is also an incentive to locate in the United States. Thats good. We want more jobs in the United States. I didnt mean to interrupt you, but continue to talk about the u. S. Company, the example of a multinational u. S. Company manufacturing in the United States now, manufacturing overseas now, which is the case of many of our companies. Currently they are in a situation where if they make money overseas and dont bring them back because of the deferral, they are not paying the taxes. At least the taxes are deferred. This why theres 2. 5 to 3 trillion locked out overseas, money that could come back. Talk to me about what the incentives are in this bill . What changes with current law . First of all, whether it be a foreign or domestic company, 20 domestic rate, the expensing in the United States are incentives to locate in the United States. Your next question really goes to changing to the territorial system. Theres some pluses and minuses. One of the pluses you alluded to is to the extent that u. S. Multinationals currently hold some earnings that they have earned abroad rather than pay residual tax upon repatriation, 100 dividends received deduction makes it easier. Theres not a tax cost to redeploying those earnings wherever they may choose. Again, the United States could be one such location. Territorial systems lets just for a second pause there. So the situation you mentioned earlier, you said a company that has a lot of technology and might now be moving its intellectual property to ireland, you didnt say apple, but you were describing apple as i heard you talk about it. Now, what is their incentive . Right now their incentive is to keep the money overseas. They dont bring it back. As you know, its in the area of hundreds of billions of dollars. What would be their incentive under this legislation . Remember, for whats already abroad, you have repatriation. Seting that aside and accounting of future earnings that that enterprise would be able to freely move the earnings back for reinvestment in the United States, or any other location in the world. Right. Now they are not doing that, dont have the ability to do that and invest in america. Tell me a little, if you would, maybe you could jump in here, too, because i know youre an expert on this. What are the other incentives in this bill to create product here in america and export it rather than what they are currently doing which Companies Take their intellectual property overseas to lower class jurisdiction, ireland, singapore, lux switzerland, use that export therefore creating jobs in america. Senator, your time is up. Very briefly, provision in the chairmans mark i think youre asking about, senator portman receipts to whats derived at foreign intangible income. That would be income attributable to Economic Activity in the United States but based on foreign sales. So it would be incentive. Lower tax rate to main export it here rather than making it overseas. Thats correct, sir. I think these are all incentives that go the right way because we want more jobs in america. Senator cantwell. We do want more jobs in america. If you wanted more jobs in ohio, you would make sure Export Import Bank was reauthorized. Ge jobs have left ohio because we dont have a functioning Export Import Bank. That should be number one. Well talk to your colleagues and this administration. If i could, mr. Chairman, we had this discussion yesterday, which was about middle class individuals. Now, im all for having the broad discussion my colleague from ohio just wanted to have but im not willing to have it at the expense of washington taxpayers. That is this chart shows two earning families, an average salary for Elementary School teacher and police officer. They have two kids under the age of 17. So they are trying to live the american dream. Yet under this proposal they will pay 900 more in taxes than they currently do. 900 more, which is less money for college education, less money for groceries, less money for rainy day. So when we started this debate, it was about how we were going to close corporate loopholes and make sure that the tax bill paid for itself or that we were going to close loopholes and maybe add, but not that we were going to do it on the backs of my constituents. So this number right here, 927 more for this family, which is average. Now, i think some of my colleagues think that must be an anomaly. That must be this mythical person that you came up with. No, i read charts, things pointed out by joint tax, my estimate in my state, is 20 of my middle class is what youre saying this affects, its more than 300,000 or could be 300,000 people in the state of washington this could affect. So am i reading the charts right joint tax estimating 20 . Im going to ask mr. Barthold the second question. Thats correct. Youve come up with the number you think could be the number across the United States. Your number is 13 million. Is that correct . Senator cantwell, i believe youre referring to in analysis we did at the request of senator wyden. I think i have that here but it will take a moment. Is that right . Estimating 13 Million People . Thats correct. I hardly call 13 million americans inconsequential. I hardly call it a random thing where were raising taxes on a few people. 13 Million People and certainly 300,000 in my state arent just a few people. So the point is, mr. Chairman, when we started this exercise we were going to close other loophol loopholes. We talked about businesses were telling they wanted simplification. They were willing to do things in order to get these. We havent done those things. I dont know in the process of this markup if were going to continue. But did we i dont want to distract you, mr. Barthold, from your looking at these. Are you verifying the 13 million . I cant immediately verify 13 million. The information we provided to senator wydens staff was percentage calculation of percentage of taxpayers in different income categories that would have tax increase, no tax change or tax decrease. So i assume the 13 million was calculated by my friend mr. Abraham or one of his colleagues. I think its actually 13. 8 million. My point is people are talking about letting states do what they want to do. Our state has a unique tax code. Weve grown economy faster than the National Average since world war ii. Now youre taking that away from us. People said they would close these loopholes. Ceo of at t said he would give up expensing perks on the books for 20 corporate rate. Does this eliminate accelerated depreciation or other expensing . After five years. So were going to take it from my constituents in the meantime. So mr. Chairman, i want us to understand that these are states like nevada, texas, florida that all have tax codes that are, i would say, efficient tax codes. A lot of people have debates about them, about whether they should have a different tax structure like the rest of the country. But this is our tax system. We do not appreciate a lot of these corporations are right in our state, too. They are doing very, very, very well. When you ask them what have they dealt with here, they say i want immigration policy dealt with, trained and skilled workforce, affordable housing, i want the infrastructure to work. Thats what they want. I guarantee you none of them is going to call me up and say please gouge middle class taxpayers in king county and make them pay 1,000 more and please open arctic life refuge because by god i cant be competitive without it. I guarantee you they arent going to say that. I hope ill be happy to send my colleague from louisiana the details here. So i hope that we can come to some resolution. Because the day thank you switched over to making state and local deductions, major pay for in this bill along with this huge deficit is the day you made a mistake. Gouging middle class families to pay for the corporation breaks you want to give is just wrong. Thank you, mr. Chairman. Thank you. Senator roberts, youre next. Thank you, mr. Chairman. Excuse me, senator heller is next. Im sorry. Please. Okay. Senator roberts, go ahead. Thank you, senator heller, thats very kind of you. To staff who are persevering and being very patient with all of the questions, slings, arrows and plaudits, thank you. Thank you for your patience, perseverance and what youre doing. Mr. Barthold, especially you, tom, youve been here 30 years. Is that right . Thats correct, senator roberts. Ive got you by seven. Im not counting the two years when i was administrative extent for senator carlson who was on the finance committee and was the Ranking Member at that particular time, 12 years in the house. The reason im saying, this not asking a question, which ill do in just a minute, but im not going to keep you long. Because i found out real quick youre only as good as your staff. I want to thank all of you for your insights and being able to respond at least to some degree to the questions. Some of these questions are not questions but sort of a conclusion and then asking you to agree with it. So im going to talk about agriculture just a minute. Senator establiand i visiting ht that were not interested in everybodys questions but we were talking about the farm bill and what well have to do down the road. This bill is pro growth with regard to agriculture. I want to thank senator thune, our budget director or budget chairman for efforts of treating agriculture in a fair way. Its so terribly important now because were in a pretty rough patch. We have a lot of problems a lot of challenges there. But to mr. Barthold, can you describe the Cost Recovery provision relating to farm property . Yes. The chairmans mark provides a fiveyear recovery period, senator roberts. When you do your macro score on this provision, could we accurately describe this as a pro growth policy . As my colleagues and i have written on several occasions things we view, things that accelerate Cost Recovery, pro growth economic incentives. This is a perfect example, i believe, of what were doing right in this bill, thats to induce investment, more particular for agriculture and for our farm eers and ranchers d growers going through a tough time. Again, i want to thank colleagues for producing i think doing a wonderful job on behalf of these folks. And again, i want to thank the staff for your perseverance and for your expertise. I yield back. Senator heller. Mr. Chairman, thank you. Thanks for this hearing. I want to thank those that are here with us today for your efforts and patience with all of us. Mr. Barthold, i want to go back to something i heard earlier in the hearing. That had to do with the White House Council of economic advisers chaired by hassett, also Boston University talking about the reduction of 15 points of your Corporate Tax rate and the impact it would have in increasing wages. I believe those numbers are somewhere between 3500 to 4,000 a year. Is that accurate . I have seen chairman hassett quoted as saying 4,000 a year . What are you doing about those studies . Excuse me . What do you know about those studies . Well, frankly, i havent had a chance to read some of them recently. Ive been doing some other work . I understand. I understand. So youve not had a chance to review those . I have not personally. Some of my colleagues i know have tried to take some time to read some but i havent had a chance to talk with them yet. Do you have any reason to believe they are inaccurate . I know that some of them were peer reviewed. I know some other people have raised questions about the methodology, applicability, some are crosscountry studies rather than studies that are based on u. S. Economic experience or based solely on u. S. Data. So i know theres some questions that one could call to mind. Again, i have not looked in detail. All right. To mr. Barthold to change subjects for a minute. The real Median Household Income in nevada is 55,000 a year, according to u. S. Census bureau. For that income group, from i guess 50 to 75,000, what percentage does this bill cut those taxes . Just a moment, senator. From the analysis referring in answer to senator cantwell, we had estimated in calendar year 2027 that lets see, that would be about a little over threequarters of taxpayers will have a tax decrease of 100 or greater. What do you get in year 2027 . That was year 2027. That was year 2027. What is your definition of middle class . I dont define middle class, senator. It means a lot of Different Things to a lot of different people . Have you ever tried . I guess i found it unwise in my position to define it. Does this bill provide a tax cut to every income group . Yes. On average theres tax reduction across all income groups. Im looking at the 2027 chart. 50 to 75,000 income category, im looking at 6. 1 . Is that accurate . Okay. I think youre looking at e. The wrong thing . Not the wrong thing at all. Are you looking at jcx 53 . Okay. We want to look at 2027. Okay. Yes. 6. 1 is the change in federal taxes of the aggregate taxes paid to the federal government it will be a reduction by that income group of 6. 1 of the taxes. I want to make sure that was clarified. Mr. Barthold, thank you for your time. Thank you for answering my questions. Mr. Chairman, thank you. Thank you. Senator nelson. Mr. Chairman, thank you again for your courtesies. Yesterday you and the Ranking Member so that i could give my opening statement. Thank you very much. We appreciate the hardships youve had down there and appreciate all the good work youre doing . Thank you. Mr. Barthold. If you were a lawyer for someone a tax lawyer for someone well off, how would you advise them to gain the tax system and avoid taxes under this bill . First of all, senator nelson, you know youre asking me to play make believe because im not a tax lawyer. I do not have a good answer for you at this time. I guess it also goes a little bit into what you call lets talk about loopholes. Well, theres certainly advantages to doing some things than other things. So what loopholes would you want to use . Or the flip side of that, what loopholes should we close . Well, again, there are things there might be provisions of present law that are unchanged by the chairmans mark that you might like to address. Some things that the chairmans mark addresses, change relative advantage of aggressive pricing. I know the city has been concerned about aggressive transfer pricing in the past on both sides of the aisle. But thats in a business context. Let me ask mr. Abram. Senator, your colleagues have raised a few ideas earlier in the markup talking about areas where theres rate differentials. The Ranking Member was talking about the potential ability between a 35 corporate rate and 20 corporate rate. Theres been a discussion on the International Side of some of the interaction between the global low taxed income provision might work and different treatment between active and passive, or in tangible income. Off the top of my head, thats some of what weve talked about. Let me go back to mr. Barthold. Your Tax Committee on taxation memo shows that most middle income tax payers would see less than 100 change in this tax bill under this plan. But around 21 million middle class households would actually see a tax increase by 2025. So of those americans that make under 200,000 a year and would see a tax increase under the bill, do you have can you point out what in the tax bill were facing are the reasons why, why that middle income group would see a tax increase . Senator nelson, under the individual income tax, as i noted in the walkthrough, theres a lot of different significant changes. One significant change, of course, is the change to disallow certain itemized deductions, absent anything else that could create more taxable income for other households. On the other hand theres an expansion in the value of the child tax credits. That for any household leads it a potential decrease. Theres a loss of personal exemptions. That can lead to increase in personal income and greater Tax Liability for some households. On the other hand theres a change in the overall rate structure by lowering some of the rates and moving up the breakpoint so youre actually have a look for any given amount of income you might have lower Tax Liability had you not made any of the base changes. So its a weighing of those different factors and different individual circumstances. The biggest ones are probably the loss of some itemized deductions by some taxpayers and the loss of personal exemptions relative to the tradeoff of rates and child credit. Mr. Chairman, may i ask one more question . Sure. The chairmans mark has a passthrough deduction worth 17. 4 of a Small Business owners income. Why wouldnt you apply the 20 tax rates that corporations get under this tax bill, why wouldnt it be equalized as opposed to giving them a 17 deduction . Well, thats the answer would be a question for you and your colleagues, of course, to debate. The effect of the deduction is to reduce the effective marginal tax rate that would otherwise be provided by the statutory brackets. So in other words, take the 35 bracket, reduce it by 17. 4 , take the 25 bracket, reduce it by 17. 4 . Your broader question was why not have that why not have that equal to the Corporate Tax proposed Corporate Tax rate of 20 . I think that returns to sort of the question of the overall design recognizing that the Corporate Tax rate has two levels of tax that remains under chairmans mark, tax on qualified dividends and Capital Gains, so a tax paying owner of a Corporation Receives distribution such as a dividend, theres a tax at the corporate level at 20 and plus the dividend tax rate at the individual level. So it appears that the mark is making a balancing of the businesses that are organized such if theres two levels of tax as opposed to businesses that are organized where theres only one level of tax. Mr. Chairman, may i submit a question for the record about puerto rico . Of course. Senator. Thank you, mr. Chairman. Ive been listening all morning to these questions and trying to figure out how it all fits in with what were going to do, which is have an open process where people can propose amendments to correct any of the things they see here. But having worked in both state revenue and federal revenue for some time, i know its a complicated situation and i appreciate all that youve done with it. In the Budget Committee weve held hearings that affect what were doing here. One of those things is determine what gdp is and would be and how that would affect any tax proposals. And we agreed to go with a static scoring with a trillion and a half deficit, because we didnt want to argue. The dynamic effect of the whole thing would be but we held hearings on it anyway and found out that apparently the average is about 3. 2 growth. As was mentioned earlier by senator cassidy, weve been through two quarters of 3 growth. But the Congressional Budget Office relies on 1. 9 . We thought 2. 6 was pretty reasonable. Thats mostly affected by what happens with private businesses. The Corporate Tax and passthrough entities, that would be the private sector that were talking about here. I had the opportunity to talk to Prime Minister netanyahu. Ive talked several times to people in similar situations in israel about how they got their budget to balance. He made it clearer than any of the other treasure remembers i talked to that have phenomenal formulas we might have to dont and dont at some point in time, he made it Pretty Simple. Youve got to make sure the private sector grows twice as fact as government. That has not been the case. Thats what were trying to do with this bill. And i think what were talking about is the private sector here with the Corporate Tax and the passthrough entities. Mr. Barthold, would that be a correct assumption . Nonprofits are excluded from the tax system or we wouldnt call them nonprofit. Pass through entities are private entity as are c corporations. And thats who were relying on primarily for growth and gdp. Is that correct . That is where the economic incentives embedded the chairmans mark are targeted. Thank you. Weve finished the first round, so well start the second round at this attack point. Is it fair to say the great majority of individuals with less than 200,000 of income will have a tax cut, or at least no tax increase. Yes, thats correct. Okay. Again, is the trend to transition from worldwide tax system like the u. S. Currently has to territorial system like the mark provides. Is that the trend in the organized world . Yes, it is. The u. S. Is very much an outlier with its worldwide system. Were stupid to keep the system we have, if we dont make a change, right . No comment. I think could comment we are stupid. Were not competing with the rest of the world. Lets turn to senator wyden for the second round. Thank you very much, mr. Chairman. I think its appropriate to start the second round talking about the two tax systems in america. Theres one for a cop and a nurse, and they have to pay on a compulsory basis. It comes right out of their paycheck. Then theres another one for the people that can hire good accountants. They are high flyers. They know how to run the system. They can pretty much pay what they want when they want to. And nothing illustrates the Second System more than the carried interest loophole in the tax code today, because this essentially allows that second group to take ordinary income, call it a capital gain, and pay a lower tax rate. Question for you, mr. Barthold, candidate trump said he was going to close the interest loophole. Mr. Mnuchin promised at his confirmation hearing to close the carried interest loophole as part of the republican tax plan. Does this proposal close the carried interest loophole . The chairmans mark does not address carried interest. Thank you. Second, the secretary said the trump tax plan would provide no absolute tax cut for the wealthy. This strikes me to be really preposterous. So my question to you is, does this proposal provide no net tax cut for the wealthy . As i pointed out, our distribution Analysis Shows on average tax reductions in all income categories. So the wealthy would get a tax cut is what mr. Barthold has told us, contrary to what secretary mnuchin said to the committee. And third, secretary mnuchin has claimed that tax cuts dont just pay for themselves but raise an additional 1 trillion above and beyond their cost. That strikes me as really hocus pocus arithmetic. Mr. Barthold does jct believe republican tax cuts will pay for themselves, or frankly even come close . Senator wyden, congress has requested that for major tax legislation we provide a Macro Economic estimate to that legislation. We have not begun that analysis yet, so it would really be inappropriate to prejudge an answer for an analysis we havent completed. Well, what ill tell you is all the economists who came before the Senate Finance Committee Said tax cuts will not pay for themselves. Ive been of the view that you generally felt that there was some modest effect as it relates to behavior. We will await your final judgment. I want to close this round of questioning by setting something straight with respect to republicans saying the democrats are not interested in bipartisanship. They have been citing a letter that almost all of us signed. The very first sentence, the first sentence out of the gate, and i quote, is we are writing to express our interest in working with you on a bipartisan tax reform. That was the very first thing. As the chairman knows, i and others have actually laid out proposals for a bipartisan tax reform bill, something we shared with republicans, looked at specific tax. Now, i will tell you, our letter must sure be considered a doozy by republicans, because it caused them so much dismay they locked themselves intro a room and refused to invite us to work on actual text of a bipartisan bill. I guess they thought i come bearing superpowerful letter and asking consent, mr. Chairman, to put this super powerful letter that describes our great interest in bipartisanship at this point. Put whatever the letter is . Mr. Chairman, im not quite done here. Im going to use the remainder of my time to point out that this socalled extraordinary letter, which as ive said focuses on our desire for bipartisanship doesnt go as far as Ronald Reagan went in 1986 when he said we ought to treat income and wages as the same from a tax standpoint. And i think it just goes to show that these principles, and ill close with this, which the president of the United States has said he agrees with he said that point plank at the white house ought to be the basis for what we should be wo bipartisan way as Ronald Reagan did with a big group of democrats. I yield back. Were going to be tough on time limits here in the second round. Well turn to senator stabenow. I want people to live within the time constraints. Thank you, mr. Chairman. I have some specific questions on impact, but i wanted to start, mr. Abraham, i wanted to be clear on what we have said today, that based on the joint tax analysis that you have looked at, 14 Million People would get a tax increase . Thats my understanding from the documents. 14 Million People would get a tax increase. Then the number of people getting a tax increase would go up over time. Is that correct . Thats correct. Okay. So were looking at millions of people getting a tax increase on something that we would like very much to see everybody getting a tax decrease. Mr. Barthold, i wanted to ask some questions on specific provisions. What percentage of taxpayers would take the standard deduction under this legislation . Senator stabenow, we estimate that under the chairmans mark, 95 of individual taxpayers will claim the standard deduction. Thank you. So 95 of the taxpayers then would not be essentially would be barred from receiving literally any tax benefits for charitable giving. They would not be well, claiming the standard deduction is an elective choice. Right. But its usually in the taxpayers interest if the circumstances warrant that they do in fact choose standard deduction. So 95 of people would lose that, the tax incentive, not that they might not want to give, certainly, but i know the charitable organizations are extremely concerned about the impact of that. Lets talk about home ownership. The percentage of taxpayers who would no longer benefit, essentially, from home ownership. Homeownership in terms of using the mortgage Tax Deduction. How many people would qualify for that, if weve got 95 of the taxpayers using the new standard deduction . What does that mean in terms of homeownership . In 2018, the number of itemizers, we project to be approximately 9. 5 million. So that would be 9. 5 million who might avail themselves of the mortgage interest deduction, although it would not necessarily be all of them. Okay. So great concern in terms of that incentive for homeownership. Let me ask about the provisions in the house bill as it compares to the senate bill. Because we know that in the end, well have a house bill, and then well have a senate bill, and then the differences will be reconciled. So provisions in the house bill may be in the final bill. Thats how it works in a conference committee, correct . So we dont know for sure what will be in the final bill. So in light of that, let me ask some questions on the House Republican bill as well. Would the house bill eliminate the medical expense deduction for seniors . It eliminates the medical expense deduction for all taxpayers. For everyone, not just seniors. Its parents who have a child with disabilities or seniors or others. Okay. Would it eliminate the medical expense deduction, and i assume, for people with alzheimers disease in. All taxtaxpayers. And a person with cancer, someone with special needs and so on. Mr. West, does the Administration Support eliminating this important deduction . Thank you, senator. Im here to talk for the administration about the adminstrability of some of these provisions. I really wasnt prepared today to speak to the administrations position on any particular provision. We know, though, that in a conference committee, there will be the house, the senate, and the administration. So the trump administrations opinion, what you advocate for, will be very, very important. And we ask that you be here to speak about the administrations position. So im surprised that you dont feel you can do that. Senator, your time is up. Thank you very much, mr. Chairman. Lets go to senator enzi. Okay. Senator grassley would be next. Mr. Barthold, you have heard from my colleagues expressing concerns about the distribution of the tax burden under the bill. Doesnt your analysis of the mark show that those with incomes above 1 million will shoulder a greater share of the tax burden under the chairmans mark than under the current law . Senator grassley, this is a point that senator thune was making earlier, that when you look at the middle we present multiple takes on in our distribution analysis. When you look at the percentage of all federal taxes paid and you make a comparison, present law as opposed to under the proposal in the category of a million and over in all years, that percentage increases. At least modestly in all years. And the table that i think this is jcx53. Over a million, present law would have them paying 19. 3 of the total income tax. Go up to 19. 4 . Thats correct for calendar year 2019. Okay. Also, how does the individual amt impact affect tax s. A. L. T. Deductions. Under present law, it does not permit you to claim state and local income tax or sales Tax Deduction. Its added back into the amt base. So then by repealing the state and local Tax Deduction, are we not achieving some of the effects of the amt but without all of that complexity . Well, certainly its the case that it has some of the same effect. Okay. I yield, senator. All right, thank you. Senator bennet, well go to you next. Thank you, mr. Chairman. Thanks so much for having a second round of questions. Ms. Acuna, i would like to know if the lack of energy title in the Senate Markup implies an endorsement of the house bill which undercuts the permanent extension of the itc for solar and reduces the credit for the wind ptc, or does the Committee Plan on honoring the itc ptc commitment we paid two years ago in a bipartisan way during reconciliation, that conference. Do you expect to maintain that in the conference . And is that our position . Thank you. Im not at liberty to speak whether or not the markup presents an endorsement or lack of endorsement of the house bill. With respect to the energy provisions, that rests with our members. And ill leave it at that. So can silence be read to be acquiescence to the house bill . How should we understand it . Whats the administrations position, mr. West, on this question . Im not here to speak to the administrations position today, senator, on that particular provision. If the senator would yield, i can speak. Sure. I would yield to my colleague. You are at the heart of those negotiations. From this standpoint, both in the privacy of my office premnuchin nomination and at this hearing, i asked that very question about the administrations or at least his view on preserving it. I dont know whether he got into the pros and cons of the tax, but i brought it up from the standpoint that two years ago, we established a Transition Rule phasing out the Wind Energy Credit in 2020. And thats three years through that process. That Transition Rule ought to be maintained. And he said yes. Well, let me say im grateful for your leadership, as i always have been. That is not the position that the house has taken in their bill. Well, they have done great damage to our Transition Rule. I would agree. Now we dont know what the administrations position is. What about with respect, this was going to be a question, but it occurred to me, with respect to the difference between the house and Senate Versions of the bill with respect to the exemption for property tax and state and local . Is that something that the administration has a position on . Mr. West . Senator, i was here today to speak to the adminstrability of the provisions in the chairmans mark. And the administration to date is leaving it to the tax writing committee. I appreciate that. Thank you. Ms. Acuna, can you assure the committee that all of the tax policy in your bill will eventually comply with the byrd rule . I the committee will be responsive and meet its requirements under the reconciliation instruction. So is your answer to my question yes . I would be happy to repeat it again. Can you assure us that all of the tax policy in this bill will eventually comply with the byrd rule . Im not at liberty to make those assumptions or assurances at the moment. This is just incredible. This is so unfair to the people that i represent. This process and these answers. Mr. Barthold, at a time when were nearing full employment, is permanent tax policy more supportive of growth than temporary tax policy, all else held equal . Permanent policy is generally better in any economic environment because of the uncertainty of the temporary policy, sir. What about a permanent Corporate Tax rate versus a temporary tax rate cut . I would actually like to work with my colleagues to run the analysis on it rather than wing it from the table. I dont think it would be winging it asking that question. I mean, the answer to that question is obviously it would significantly deter growth if tax cuts are to senate, dont you agree with that . As i said, permanent policies always is better in any environment. I thought you were asking for a relative magnitude. No, i wasnt. So i appreciate your answer. Im sorry i wasnt clear. Mr. Chairman, thank you for the opportunity. Thank you. Senator crapo. Thank you very much, mr. Chairman. Mr. Barthold, with regard to jcts distributional analysis, to what extent does the benefit to workers of the reduction in the Corporate Tax rate show up in your distributional analysis . Senator crapo, thank you for the opportunity to explain a little bit more the detail. The analysis that we present to the committees incorporates both tax changes that reduce liabilities of businesses and reduce the direct liabilities of individuals as they fill out their form 1040, for example. But we believe as most economists that fundamentally business entities dont pay taxes, people do. And then its a question of what people and in what form. And thats the question of economic incidence. And theres a fair body of economic empirical work as well as theory that suggests that taxes imposed on capital income or Business Enterprises can in part be born by workers. Or in the opposite case, tax reductions can lead to a benefit by workers. The process in relatively simple terms is that investment means increases in tangible property, intangible property, research, all of which can lead to either increased demands for employment or it can lead to increased Labor Productivity, and its Labor Productivity, higher Labor Productivity generates higher wages. Higher demand for labor generates higher wages. Its in that way that theres transmission of benefit in economic incidence from business taxes to labor. Thats reflected in our analysis. To try to put this into laymans terms, a reduction in the Corporate Tax rate will yield more jobs, greater income for workers, and growth in the economy . Our analysis is that there will be benefit for workers, yes, sir. Have you identified, for example, what portion of the burden or reduction of burden would benefit the workers as opposed to owners . Reflected in the analysis that we provided to the committees, because as i explained, its a process of increasing capital, which increases Labor Productivity, its a process that builds up through time. Our analysis in the very short run takes the stance, again, based on impempirical evidence, that the owner of the enterprise essentially would receive the full benefit, like in the first year. But as there is increase in capital, theres more benefit to labor so that by the end of the tenth year, our projections based on 25 of the effective Corporate Tax change be it an increase or decrease is born as a detriment or benefit by workers. So has your analysis taken into consideration that an ever increasing portion of the corporate ownership is held by Pension Funds or other personal Retirement Funds . Yes, thats part of how labor can labor in the form of an owner of pension assets in a defined Contribution Plan can benefit directly as an owner, as well as perhaps benefit in the longer run process that i was describing by an increased demand for labor. So an individual could benefit both as an owner through a pension plan and as a laborer as an employee . Very definitely, and also as a direct owner outside of a pension plan. And outside of a pension plan. And how about to the extent that our doubling of the standard deduction could save millions of families potentially hundreds of dollars if they dont any longer have to pay someone else to do their taxes . Has that been calculated into your distributional models . Well, we calculate compliance and administrative effects into all of the basic revenue analysis, and the distributional analysis is based off the revenue analysis. So in that sort of chain of events, the answer is yes. Although i could not point you to a direct line. Okay, one last question, and that is im looking at a study done by the Tax Foundation back to our earlier questions that indicate that the growth and the impact in the corporate rate or the reduction of the corporate rate could lead to 2. 9 higher wages and 925,000 new fulltime equivalent jobs. Does that sound accurate to you . I have not read the Tax Foundations analysis, and as i was suggesting earlier in response to question, i prefer to wait to undertake our own analysis and report to the committee. All right, thank you. Let me just make something clear here. We intend to comply with our reconciliation instruction and budget rules. I think its a bit unfair to task our staff to make assurances about member decisions. We have to be careful about that. Senator burr. And then senator mccaskill. I dont know ill have time to go into the details of the passthrough provisions in this mark. But its nuts. The way this is done. And let me just ask some specific questions, mr. Barthold, that will expose this. Mr. Barthold, would a local dentist that is not married and earns 110,000 a year be eligible for the passthrough deduction . No, senator. And would a casino developer that reports business income of a Million Dollars annually be eligible for the passthrough deduction . Yes, senator. And would an engineer earning 200,000 be eligible for the passthrough, mr. Barthold . Is the engineer selfemployed Sole Proprietor . Yes. Earning 200,000. No. No, he wouldnt. How about the owner of a massage parlor earning 750,000 a year, would he be eligible for the passthrough . Yes, senator. And would a husband and wife that own a small Accounting Firm and have a combined net income of 200,000 be eligible for the passthrough. No, they would be phased out of the income limitation. Because theyre making 200,000 a year, they would not be entitled. The massage parlor owner would be entitled to it . Thats correct, senator. Would the owner of a golf course, let me say that again, would the owner of a golf course reporting passthrough earnings of 3 million a year be eligible for the passthrough . Subject to the other limitations on the provision, yes. And how about a single lawyer running a legal clinic in st. Louis making 95,000 a year . Would they be eligible for the passthrough . Single individual, at that level of income generally would not. What about a venture capitalist who earns millions on wall street by buying bakeries up around the country. Would they benefit from the passthrough deduction . Probably not because Financial Services are also excluded. Okay, so a venture capitalist, somebody who is just investing . That would if theyre just investing, then the other provisions of chairmans mark with respect to Capital Gains qualify dividends because passive income is included in this, right . Not in the passthrough deduction calculation. Passive income is not included in the passthrough deduction . No, its not. Okay. But what about a bakery thats operating at a breakeven their bakery, their llc thats a bakery is at a breakeven with no net business income, but picking up shifts at the local super market to make ends meet. Would they see a benefit from the passthrough. Could you quickly repeat . A bakery, somebody who started a bakery that they have no net business income but their wr working another parttime job to try to make their business work, do they see any benefit from the passthrough . If theyre not earning any if theyre not at present earning any income from the passthrough entity, there would be no benefit conferred. And that dentist i talked about in the beginning, hes not eligible for any passthrough deductions if hes earning 110,000 a year. What if he created three llcs . And he had one for cleaning and checkups. One for orthodontics, and one for oral surgery and fillings . And each one of those three separate llcs made less than 75,000 a year . Then he would qualify, wouldnt he . All three of them. I think not because, again, as i noted once before, we look at related parties. So were going to aggregate them . Its the calculation is ultimately done at the individuals return. Okay. So what youre saying is a Real Estate Developer that has lots and lots of llcs is not going to take advantage of this . Because youre going to aggregate them all . I dont think i said that. Theres not a prohibition against real estate as qualifying. Oh, so the real estate guy gets them all but the dentist doesnt . In each case, its in each case, its aggregated, and youre tested against in the one case, the dentist is Service Income, a service provider, Labor Service provider, which is generally excluded except in the case of the incomes less than the designated levels. In the case of other enterprises that are not in professional services, they are generally qualified, regardless of their size and in both cases, all the entities, however they organize themselves, flow to the individual return. I think those examples just show how crazy this is. This is nuts. The massage parlor guy gets a break. The golf course guy gets a break, but a couple who has an accounting business doesnt get a break . That makes no sense, mr. Chairman. I have more questions about the passive versus active, more questions about how this is designed. I will save that for the next round, then we have to get to the incredible complexity of the International Taxation scheme thats laid out in this mark. Thank you, mr. Chairman. Senator enzi. Thank you, mr. Chairman. In light of the questions that were just asked there, under the present tax system, is there any variation within the cohort between the people in that cohort . Do they all pay the same . Senator enzi, of course, theres substantial variation within our income classifications. So there are a lot of moving parts to it then. In the version that the chairman has put up as a mark, would there be any difference within a cohort and what the people would be paying on . Of course, senator enzi, as we talked about before, theres a number of reasons why there might be different outcomes at same income levels depending upon marital status, number of children, age of children, other personal circumstances. Ill be interested to see the amendments that apparently the other side can fix within a cohort so that all people get a tax break regardless of what kind of business theyre working for or in or make or how many jobs they hold. I think well still wind up with a variation within a cohort where some people will get less than 100. Some will get more than 100. Some people wont get any break at all. Ill be interested to see the solutions the other side has. This isnt my first time legislating. I was in the legislature for ten years, and clear back then, i discovered its easier to kill a bill than it is to pass one. And all you have to do during any one of the several steps, and here we have committee work, we have floor work, we have conference. Well have then a reaffirmation of the conference votes. And at any one of those points, if you can create a little confusion, you can kill a bill. But to pass a bill, you have to get a positive vote at every one of those. So i hope there will be some effort, and well see through the amendments whether its an attempt to kill a bill or whether its an attempt to improve the bill. So i havent seen so far much effort to pass a bill. But well look at the amendments. I yield. Okay, senator crapo, you can take over. And senator heller. Mr. Chairman. Ranking member. Thank you, mr. Chairman. A couple additional questions for you, mr. Barthold. The administration majority promised that if the 1. 5 trillion deficit busting bill is passed, households can expect average raises to rise by 4,000. Based on the tax provisions and the debt its going to rack up, does the joint committee or the Congressional Budget Office forecasting average wages to rise 4,000 any time over these next five years . I dont know what the congressional budget Macro Economic baseline forecast for employment Income Growth as part of the baseline. The 4,000 figure that you attribute to the administration i believe is the figure cited by the council of economic advisers chairman, kevin hast. And as to the joint Committee Staff, as i noted earlier, with respect to the mark before us, i would prefer to wait to do our economic analysis. I understand. Let me ask it this way. I would like to know whether you think that there is any possibility of Something Like this, because my understanding listening to you over the years, the senate bill provisions are unlikely to produce that sort of increase in household incomes, at least within the tenyear forecast. Is that off base given your history . We have on our website, as i know you well know, analysis that we have done, we have done in the past. They have all been in the context of bills that do not make as many and as substantial changes as this bill. But it would be fair to characterize them as probably not having as big an increase as chairman hassett has suggested. Colleagues, i hope everybody gets the significance of that before lunch. Mr. Barthold does it by the book. He doesnt do it by politics. He said, and i respect economic speak, he said it was unlikely that youre going to see what the heart of the administrations proposal for these Corporate Tax breaks is about. That workers are going to see a 4,000 increase, and i appreciate the answer. Let me ask about one other matter. Mr. Barthold, there have been press reports indicating that the president recently called a group of Democratic Senators and said that he would personally get killed financially under this senate bill. Now, i find that hard to believe. And i also very much respect that you cant comment on the president. But lets just set that aside. Thats not what my question is about. What i would like to do, though, is talk and have you walk us through a hypothetical billionaire Real Estate Investor who, say, has investments in more than 500 partnerships. This is a hypothetical example. I want to underline it, hypothetical billionaire example. Do you think that a taxpayer in this hypothetical billionaire example im talking about would get, quote, killed under the senate bill . Senator wyden, just with the exchange with senator mccaskill, regardless of the size of the enterprise or the number of entities that an owner might own, if were not an enterprise thats a professional Service Enterprise can generally claim the benefit of the 17. 4 deduction for your business income. Subject to the limitations of 50 of the w2 wages you pay your employee. So there is a limit on that. So in your hypothetical example, i guess we dont know how many or how much the employees are paid. That would be a limiter. Just for, again, for the general awareness of this, what might our hypothetical billionaire benefit from . Because it strikes me there are a host of past provisions, the lower rate for people at the top of the top and the estate tax and the like, but just tick off what might this hypothetical real estate billionaire benefit from . Well, aside i guess we should start with the rate. Youre saying the person is a billionaire, so youre thinking they probably have a fair probably have an income in excess of 500,000 or a million dollar. Those are the single and joint threshold taxable incomes for the 38. 5 rate under the chairmans mark. On the qualified business income, the bill would allow a 17. 4 deduction, which hoping one of my colleagues has quickly figured out the deduction amount for the effective marginal rate. Reduction from 38 . Let me say its roughly not quite a sixth, so maybe six points down. It would mean instead of having a 38. 5 rate on the qualified business income, you would have something around a 32 marginal tax rate. So that person got a significant reduction based on your marginal rate calculation on the top rate as well . And that was independent of real estate, manufacturing, retail, whatever the enterprise might be. Anything else they would be eligible for . I know im over my time. I assume the state tax reduction . There are changes in since you mentioned real estate, theres changes in the Cost Recovery lives of residential and nonresidential real estate. And so that could prove beneficial. Im over my time. Senator stabenow. Thank you, mr. Chairman. I do want to note that its very possible to do bipartisan tax reform that really benefits our Small Businesses, middle class families, makes us Competitive Internationally, lowers a tax rate while closing loopholes. We started working on that last year. Senator enzi and i cochaired a bipartisan working group. And its disappointing, very, very disappointing, to see this bills moving with reckless haste through the process and at the initial numbers, what we see is within a year, this bill would raise actually raise taxes on 14 Million People and in seven years raise taxes on 21 Million People. So thats the concern that i have. And other colleagues have. But let me talk a little more about specifics. Again, back to the fact that we have house, senate, administration. All will be coming together in a room to decide the final bill. So i want to talk a little more, again, about the house. Mr. Barthold, would the house bill eliminate the ability of a teacher who buys books and supplies for their classroom out of their own pocket to deduct those costs on their taxes . Hr1 has ordered reported by the committee on ways and means would repeal the above the line deduction for classroom expenses incurred by teachers. Thank you, mr. West, when chairman hatch introduced you this morning, he said mr. West is here to give the administrations position on the tax proposal being discussed. So i would ask does the Administration Support eliminating this important deduction for teachers . I understand the introduction this morning, senator. I was invited up here to talk about the administration and the potential adminstrability of these provisions. I would be happy to help with questions about that. Otherwise, im not here to discuss the position of the administration on any particular provision. Thats unfortunate. Because that would be very helpful to know where the president and the Administration Stands on these bills. Mr. Barthold, would the house bill eliminate tax exempt bonds for nonprofit rural hospitals . The house bill would eliminate the ability to issue private activity bonds. So that would include nonprofits. Thank you very much. Mr. West, do you know where the president stands on this . Again, im not going to talk about the position of the administration on any particular provision. Thank you. Mr. Barthold, would the house bill end the deduction for student Loan Interest raising taxes on millions of young people who are struggling to pay off Student Loan Debt . The student Loan Interest deduction in present law is one of several nonitemized deductions and itemized deductions that hr1 is reported by the ways and Means Committee would repeal. Yes. Any idea on where the president stands on supporting students that are going to college . Again, senator, im not going to speak to the administrations position on any of these particular provisions. Okay. Let me talk about another provision that relates to tax loopholes. I thought we were supposed to be closing tax loopholes, and i support doing that. Bringing jobs home, making the tax system more fair for all businesses, as well as individuals. But looking at things, mr. Barthold, as you we look at the tax provisions for Oil Companies, could you speak about the current tax provisions that Oil Companies enjoy in the current code . Income of Oil Companies is measured with a number of special industry specific rules that the congress has passed through time. Among them are the treatment generally, expensing for smaller producers, amortization for larger producers for intangible drilling costs. Theres amortization of geological and geophysical costs. Theres percentage depletion allowed for small producers. So theres a lot. Just in that time. Several. A number of things. Some starting as far back as 1916 or 1917. Theres a current part of the tax code called foreignbased company oil related income that as i understand it, keeps companies from gaming our international system. Is that correct . Its actually basketing of foreign tax credits on foreign income taxes. On income taxes that foreign governments impose on oil operations. The genesis of it is that oil, particularly moving it and trading across seas was seen as mobile income, and the congress in im not sure when decided to wall off that source of foreign tax credits to diminish whats referred to as cross crediting. I understand, so it relates to minimum taxes, but as i understand it, both the house and senate bills eliminate this provision. Is that correct . Thats correct. So were going to actually see a new loophole being put in . Well, that might be for Oil Companies. That actually might be hard to judge. Without speaking for the chairman, in moving to a territorial regime in general, there will be very there will not Many Companies will not be claiming foreign tax credits on active business activities. I understand, but actually repealing this loses money, correct . Repealing this provision would lose money. Relative to present law. So relative to present law. Thank you very much. Senator cardin. Thank you very much, mr. Chairman. Mr. Barthold, i want to concentrate this round on one of our objectives here, thats to make the tax code simpler and to provide more certainty, which is one of the issues i hear a great deal, particularly from those who have the burdens of trying to comply with our tax laws. Now, as you went through the explanation of foreign intangible income and base erosion provisions, i doubt whether many people fully understood what you were saying, not your fault, but because it is anything but simple or easy to understand. I want to get to the foreign and tangible income, because i served in the house of representatives on the ways and Means Committee when we went through the debates, and the problems we had because we felt we passed a Pretty Simple provision for manufacturing only to find out it was wto illegal. What were trying to do here is encourage imports exports at a lower rate, which seems to me is going to be a red light for the wto. Do we have a plan b or are we going to potentially go through many years of uncertainty in regards to this provisions legality under the World Trade Organization . Well, senator cardin, its the chairmans mark. I am not a trade expert. My colleagues on staff are not trade experts. So we cant really opine on the important issue that youre raising. If trade people think that theres, you know, some uncertainty there, you know, as you say, the uncertainty is unfortunate for business. And mr. Chairman, i would just urge us. We went through years of debate on trying to fix something that we thought was well intended to encourage exports only to find out because of wto rules we couldnt do. My guess is that this is going to be an issue that will be challenged in the wto, which means that were not going to have the certainty that we want to encourage u. S. Exports. Its just another uncertainty that we would be baked into the law. Another reason why you need time to make sure hot were doing is right. Let me, if i could, go over a second issue that could run into problems. That is our International Trade International Tax treaties. And how youre trying to deal with the deductibility of certain expenses that may run contrary to tax treaties that we have entered into. Do you have somebody on staff thats an expert on treaties to make sure were not violating any of the treaties . Obviously, treaties would be i would think take precedent, but im not sure if the tax law requires one result and a treaty is a different result. Well, to answer the simple part of your question is several of my colleagues are quite expert on treaties that we help advise the Senate Foreign Relations Committee in their review of income tax treaties as a regular matter. And i believe you were talking about the proposed base erosion antiabuse provision of the chairmans mark. And its structured as an alternative tax compared to the income tax. So i think our view is that theres not a treaty override inherent in that design. So you believe even though its circumventing a treaty, it will be acknowledged by our trading partners as a clever way to avoid the treaty . I think thats what you just said. I dont think i used quite those words. I wonder whether we would take the same view if our treaty partner used a sirkm vention to get around their obligations under a tax treaty. I wonder whether we would take the same attitude. Let me im trying to figure out how were going to force the passthrough limitations you have on getting the reduction that you have to the antiprofessional service rule. You have the w2 income rule. Are we how would the taxpayer know what they can deduct and what they cant deduct . Will this revise the k1s if its a Partnership Type of entity . Is this really enforceable . In terms of thinking about the deduction, senator, you first start with taxable income as you would compute it today. So compute taxable income i understand that, but i have a k1 im a passive the deduction is then taken against the individual returns rate. But would i get the information about whether how would i know . Youre asking so how does the taxpayer know. I guess your question is how to apply the wage limitation. A wage limitation. I dont know the workings of an underlying company. I just have income. I think youre correct that we envision that there would be reporting of wage information so that taxpayers can comply. A taxpayer wouldnt know, so theyre using thirdparty information. Thats right. They could be if that gets audited later which is the same as present law. If there are errors, be they unintentional or intentional, report it to the tax company. That is true, but today some of this is a little bit more subjective and more removed than what we have on k1s today. I just point out, i think youre creating an enforcement challenge because some of this was personal service is another area that may be subject to different interpretation, and youre going to have taxpayers relying on information received from third parties that may or may not be accurate. Senator casey. Thank you, mr. Chairman. Ill be focused on outsourcing. Mr. Chairman, i realize that this panel has not had a break, and its the lunch hour, so ill stay within my limits here. I wanted to focus on outsourcing because one of the concerns we have about the bill is it could actually encourage outsourcing, which would be devastating to American Families who have already endured the adverse impact of that over many years. The bill includes a complicated calculation which may actually allow companies who outsource manufacturing to avoid paying any tax on these on those foreign profits. At best, the senate plan the senate bill, i should say, will tax foreign profits at a rate that is 7. 5 less than profits earned in the United States. 7. 5 less than that earned in the u. S. So if youre a company that moved a manufacturing plant overseas to take advantage of cheap labor, you get a tax cut under this proposal. Our workers have lived for decades under the constant threat of jobs leaving to go to mexico or other places and its been a terrible pall or dark cloud over our communities. I would ask you, is four days enough time to fully understand the impact of the changes being proposed in this bill as it relates to how we tax profits of Global Corporations . Yeah, we have started analyzing it since thursday evening. So were still trying to understand the broader effects, ramifications of the bill. Im assuming you could use more time. That would be helpful to better understand the implications, yes. So were concerned about encouraging outsourcing, as i said. From what you know about the bill so far, can you explain how this bill may actually encourage outsourcing as well as how it may reward companies who actually have already outsourced jobs . Yes, senator. So based on my understanding of the bill, of the chairmans mark for us, maybe ill handle the second part first. There is a Transition Rule in the bill having to do with previously untaxed earnings and profits of controlled Foreign Corporations. Normally that would be subject to 35 u. S. Rate and the chairmans mark provides both a 5 and 10 rate bifurcated rate on that income. Some have said, other proposals have had a higher rate on the previous income. That might be an issue. And then on the first part of your question as far as sort of permanent tax relief or tax incentive comparing the u. S. Manufacturing facility, i believe was your example, to a foreign, as you said, theres potentially a 7. 5 meaning a 20 verses a 12. 5 rate differential. And you can achieve that because the highest rate that would be paid on the intangible portion of the income will be 12. 5 , but on normal routines, you could potentially be paying nothing. As compared to a 20 rate in the u. S. Thats my understanding of the legislation. So is it correct that if youre a u. S. Company with a manufacturing facility in china, is it likely that your profits are, quote i should say it is likely your profits are, quote, routine returns, and you will likely pay a zero percent rate on u. S. Tax on the profits. And at most, youre paying 37. 5 less than if those profits were in the United States . Is that correct . Yes. Assuming its a manufacturing facility, as i understand your example, thats my understanding of the chairmans mark and how it would be treated. And this is just my assessment of it, but that means a company who has outsourced jobs will be paying less tax on profits than a company that kept their jobs here. Mr. Chairman, thank you. Okay. Senator portman. Thank you, mr. Chairman. Weve had this discussion already so i wont belabor it except to say the insennicentiv the bill are to stop what is happening now, which is jobs and investment going overseas. Mr. Abraham, you talked about you think the repatriation will cause more jobs to go overseas. Were saying were going to tax you for earnings you already earned and for the investments you already made. Its not going to help in terms of companies that want to send their profits overseas. It will do just the opposite. Its going to require them to pay taxes that are going to be owed in order to shift to a territorial type system. Again, we have looked at this for years. We just had a working group, Chuck Schumer and i cochaired it. We said a territorial system is a way to go, a lower rate to stop the current system, which is moving jobs and investment overseas. We did an investigation of this and the permanent subcommittee investigations i chair, we found out these companies are taking their jobs with them and money with them. I would just say that what i think my colleagues are recommending on the democratic side of the aisle is a worldwide system thats going to have even more jobs going overseas and having even more companies that are foreign buying u. S. Companies. Because if you tell Procter Gamble thats in ohio that they have to make diapers in america only, guess what. You cant make diapers in america and sell them all over the world like they do, and be able to be competitive. You make the diapers where the market is. And by telling them theyre going to have a higher tax than anybody else on that, Procter Gamble becomes a Foreign Company because a Foreign Company can pay a premium. Thats the problem we have now. Theres also an argument made earlier that somehow this is going to be violative of the wto, that the World Trade Organization is going to step in and say this is something that is inconsistent with their rules. Senator cardin talked about, it senator wyden talked about it earlier. Let me say what were talking about here has been carefully crafted to avoid that very problem. The provision targets intellectual property, wto subsidy rules do not apply to intellectual property. To the extent the lower rate applies to intuck lectual property income, thats the extent of the analysis right there. In addition, this 10 rate is not export independent. Yes, its to bring ip back here and export it, thats the carrot, but theres also a stick so that its not dependent on whether its exported or not. Its a rate on intangible income. Including cfc intangible income, which also deals with any potential wto problems. So i would just ask you, i know mr. Barthold, you are the joint Tax Committee, not the joint trade committee, and you said youre not a trade lawyer expert, but has anything i have said with regard to the International Trade elements of this been incorrect . Well, not to my knowledge, but again, im not a trade expert. Yeah. Well, its drafted in a way that avoids the wto problems that were raised. Let me ask you something you can talk about, which is the tax side of this. Again, democrats have called our international plan, quote, today, a multibillion dollar tax break for u. S. Multinationals. Can you tell me what the revenue cost of the International Tax system in this bill are . Does it raise revenue or lose revenue . Is it a big tax cut . Im looking at page 6 right now of your revenue title, thats this table, page 6 of your revenue tables. Does the international provision as was said earlier provide for a big tax cut for Multinational Companies . Its fairly much break even across the tenyear budget period, senator. So its break even. I see actually 104 billion razor. Thats correct. I guess my washington standards, 104 billion one way or the other its not a big loser. Its positive. It raises money. Theres no tax cut here. So i appreciate the back and forth, but i think we have to go back to the facts. And look at whats happening. And let me ask ms. Acuna, who hasnt gotten a chance to talk much today, but shes been involved in a lot of this base erosion, antiabuse stuff that we have been trying to do to insure were not going to lose out on our revenue were due here in this country. You have been involved in this issue trying to be sure that this is fair and balanced. Can you talk to us a little bit about why its so important to move to these kinds of incentives to keep jobs here in america . Well, as you mentioned, one of the biggest problems that were facing is international competition, and our global competitors do provide preferential rates in their countries. And in recent years, now those rates have to be paired with nexus requirements. That means they actually have to move bodies and jobs overseas in order to take advantage of those rates. What this is designed to do is to level the Playing Field. In that respect. To provide a preferential rate with respect to your foreign earnings and a similar rate with respect to your u. S. Earnings. So that there isnt a large tax difference between being u. S. And foreign. So to keep the jobs from going overseas, and as you indicate, its an increasing problem. Now countries are saying you can take advantage of our patent box and lower rate but only if you bring the r d with you. You have to do the r d in those countries. Thats the future. If we dont do this, well find ourselves losing out even more. Is that accurate, ms. Acuna . That is accurate. Thanks, mr. Chairman. Mr. Chairman. On the point you and i have been talking about, and i want to, again, express my appreciation for our working relationship. Senators on our side are not filibustering. Weve got real questions that go right to the heart of making 10 trillion worth of changes in tax law. On the last round, i got what i think is a key question where the white house said as a result of this tax reform, people are going to see their wages rise 4,000. Mr. Barthold, a professional that he is, used economic speak and said that that was very unlikely. So i appreciate your saying were going to come back at 2 30. My colleagues have very real questions. When you and i talked about it, and i have appreciated it, you said as long as theyre not filibustering, as long as theyre asking real questions, and we are not yet even on the bill thats the bill. We should continue. And i want to say that im going to work with you and well discuss it with our colleagues. Okay. Well recess to 2 30. It is addae two of the Senate Finance committees work on the republicans tax pitch taking their first break of the day for lunch. When they return, we will have live coverage here on cspan3. Right now, some of this mornings session with the finance committee, beginning with remarks from utah senator orrin hatch, who is the committee chair. Today the committee will continue its consideration of the chairmans mark for the tax cuts and jobs act. We will begin by walking through the mark with the help of the chief of staff for the joint committee on taxation, and then proceed to questions from members. Following the conclusion of this process, which will likely take some time a modified mark will be provided to members later today, which provides input received from the amendments that have been filed. Because of a large number of amendments that we have processed, the modified mark will be given to members later today as has been discussed with our Ranking Member and everyone can then have time to read over the modifications. After that process, we will resume the markup tomorrow morning, with the modified mark. But before we proceed today, i want to make a