Aaron Fobes, Julia Lawless (202)224-4515
Hatch Offers Keynote Address at Bloomberg BNA Tax Policy Event
WASHINGTON - Today, Senate Finance Committee Chairman Orrin Hatch (R-Utah) delivered the keynote address at the annual Bloomberg BNA tax policy event, The Politics of Tax: Making Sense of Uncertainty Tax Outlook 2016.
Remarks, as prepared for delivery:
We are here today to talk about tax reform, and, with that particular topic, I think a number of people are rightly frustrated with Congress. After all, there is bipartisan agreement on the need to fix our nation’s tax system. I think you’d be hard-pressed to find anyone in this town who is willing to defend the status quo when it comes to our tax code.
In the Senate Finance Committee, we’ve held countless hearings over the last several years examining various areas of the tax code and looking for agreement on ways to implement changes. Members from both parties and both chambers have put forward tax reform bills and proposals.
Yet, despite all these efforts, we have the same outdated, unfair, and overly complex tax system that we’ve had for some time. People have good reason to be frustrated.
Our tax system is, quite simply, an albatross. It is a roadblock, designed almost haphazardly, that stands between us and long-term growth and prosperity.
The tax code harms families struggling to save for the future while they try to pay for the present.
It chases businesses offshore to find more favorable conditions.
And, for the businesses that stay behind, it gives perverse and often contradictory incentives for how they invest their capital.
All of this has a negative impact on the health of our economy at a time when we can’t afford to be shooting ourselves in the foot.
It’s been three decades since the last major overhaul of the tax code. Since then, the tax code has grown exponentially. And, not surprisingly, a relative few of the myriad of additions have been very helpful. We are now past due for another major reform effort.
I’m pleased to say that, since I became Chairman of the Senate Finance Committee a little over a year ago, we have made some progress.
For example, last year, we set up five separate Tax Reform Working Groups in an effort to advance the larger tax reform conversation. These Working Groups – each of them co-chaired by a Republican and a Democrat – spent months examining various areas of the tax code and all five groups released a report detailing their findings, outlining reform opportunities, and acknowledging areas of likely disagreement.
Tax reform, whenever it happens, will be a long, difficult process. I believe the effort our committee members put in with these Working Groups will make a difference in how that process plays out and how the tax reform debate unfolds in the future.
Also, at the end of last year, Congress passed the PATH Act, which made a number of important – and formerly temporary – tax provisions permanent, putting an end to the repeated tax extenders exercise that has plagued Congress for decades and giving greater certainty to U.S. taxpayers across the board.
One of the many benefits of this new law is that it will adjust the revenue baseline going forward to make conditions vastly more favorable for tax reform in the future. That’s one of several reasons why many of us in Congress had been pursuing more permanence in the tax code – particularly for important provisions like the Research and Development Tax Credit – for many years.
Still, even with these successes, the goal of large-scale reform has continued to elude us, and we are all still looking to get there in the future, hopefully sooner rather than later.
As for myself, my goal is what it’s always been: I want to see bipartisan, comprehensive tax reform that addresses the needs of the business community as well as individuals and families. While my efforts – and the efforts of the Senate Finance Committee – in the tax space are directed toward that eventual end, I think most have acknowledged that comprehensive tax reform is a long-term goal.
Some have argued that, until we build the right coalition to reform the whole system, we shouldn’t reform any part of it. And, to be honest, I understand – and even sympathize – with some of those arguments.
However, I think the facts of the ground may require Congress to narrow its focus and enact targeted reforms in the near future to address some problems that likely can’t wait while Congress tries to navigate all the minefields that come with comprehensive tax reform.
For example, one problem that is on everyone’s mind these days is corporate inversions. Though the Department of Treasury’s actions over the last two years may have slowed the rate of inversions, the problem has most certainly not gone away.
Late last year, we heard Pfizer – a huge drug company with an iconic American brand – announced its plans to merge with another major drug company and move their tax headquarters from the U.S. to Ireland as part of the deal. Once completed, this will likely be the largest inversion in history.
More recently, Johnson Controls, a U.S. maker of car batteries as well as heating and ventilation equipment, announced that it was acquiring Tyco and inverting its tax headquarters to Ireland.
In addition to the inversion problem, we also know that American businesses continue to be attractive targets in foreign takeovers, which have precisely the same results as inversions: the loss of American companies and erosion of the U.S. tax base.
These and other problems continue to come up because of the many inefficiencies of our tax system, from our absurdly high corporate tax rates to our system of taxing business income earned overseas. If these negative consequences persist – and, make no mistake, absent reform, they WILL persist – we will likely be forced to talk about solutions that can be enacted on shorter notice.
I suppose I shouldn’t talk about this in the future tense, because many of those conversations are ongoing, and have been for some time.
For example, I think we’re all aware of the bipartisan interest in international tax reform. In fact, even as we speak, the House Ways and Means Committee is holding a hearing on that topic.
The main goal of this particular effort is – or at least should be – to convert our current system of worldwide taxation – where U.S. businesses pay U.S. tax on earnings made offshore that they bring back to the U.S. – with something resembling a territorial tax system – which would ideally exempt most offshore income from our domestic tax system.
I support this goal. Our international tax system greatly hinders our ability to compete in the world marketplace as so many of our competitors overseas have already modernized their system. This is one of the core problems with our tax code and one of the main factors that puts pressure on U.S. companies to move offshore. A solution to this problem is an essential element of our overall reform efforts.
Of course, I think it goes without saying that, in our current political environment – with the ever-growing thirst on the part of some for more revenue and a real lack of presidential leadership – this type of reform presents a real challenge in the immediate future.
Still, I think Chairman Brady is right to pursue this type of reform and I want to do all I can to help him be successful.
Another approach – and one that I’ve been exploring for over a year – is the concept of corporate tax integration. We’re still working out some of the details on this idea, but I’d like to take a minute or two to discuss the big picture.
Put simply, the U.S. tax code treats both corporations and their shareholders as separate taxable entities, resulting in a number of inefficiencies and unwanted incentives that do real harm to our economy. The main inefficiency is that corporate income – unlike the income of any other kind of business – is taxed twice – once at the corporate level and then again at the shareholder level when the profits are distributed to shareholders as dividends.
First we tax the earnings at the corporate rate of 35 percent. Then, dividends are taxed at a maximum rate of up to 25 percent. So, combined, the overall tax rate on corporate earnings paid out as dividends is often over 50 percent.
An integrated tax system would impose a single level of tax on corporate earnings. Rather than taxing income at both the corporate and shareholder levels, the tax would occur only once.
This approach, depending on how you go about it, could address a number of problems. Today, I’ll just talk about one: the corporate tax rate.
Both Democrats and Republicans have at least nominally agreed that corporate tax reform is necessary and that a successful reform effort should include a reduction in the statutory tax rates. Our corporate tax rate is one of the highest in the industrialized world and, particularly when we try to apply that rate to overseas earnings, it is one of the main drivers of inversions.
Of course, reducing those rates makes for difficult choices. It means cutting back on incentives, credits, and deductions, many of which are very popular. It means making decisions that many would like to defer until a safer, quieter time.
If any of you come across one of those safer, quieter times here in Washington, please let me know.
Corporate integration, once again depending on how it is designed, could significantly reduce effective corporate tax rates without all the difficult and highly politicized tradeoffs that will accompany a reduction in the statutory corporate tax rate. This could help prevent future inversions and foreign takeovers and simply make the United States a better place to do business overall.
I believe corporate tax integration could also spur more investment in the U.S. and encourage companies to bring back earnings they’ve made overseas to invest here at home. All of this, I believe, will help create more jobs and increase the wages of U.S. workers.
Like I said, I’m still working out the details and deciding on the right approach. I’ll have much more to say about this concept in the near future.
For now, I’ll just say that I believe corporate integration is a viable and workable option, one that I think members of both parties should eventually be able to get behind. It may not be a silver bullet, but it would help address many of the persistent problems caused by our current tax system.
I get asked a lot about how I plan to move this proposal forward. One of the best features of a potential integration proposal is that, while it would have significant positive effects on its own, it does not prejudice or limit our ability to enact other reforms. We could pass a standalone integration bill to quickly address immediate problems. Or, as Chairman Brady recently said, it could be enacted to complement a broader international tax reform package. It could also eventually be included as part of a comprehensive tax reform bill, once we get to that point.
One thing is for sure: I am going to continue to be forward-looking when it comes to tax reform. On the Senate Finance Committee we are always working to ensure that we will be ready to act on tax reform when the time is right or when circumstances require us to move. That’s what has driven all of our efforts since I became Chairman – from the Working Groups to the permanent extenders – and that is what will continue to drive us in the future.
Whether we’re talking about a near-term targeted fix to address an immediate need or the long-term goal of comprehensive reform in 2017 and beyond, I remain optimistic that we can do great things. I’m willing to work with anyone from either party to do what we all know needs to be done.
Thank you, once again, for having me here today. And thanks for taking the time to listen.
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