Mar.House Ways and Means Hearing on Fundamental Tax Reform
House Ways and Means Committee
“Fundamental Tax Reform Proposals”
Tuesday, March 22, 2016
Key Topics & Takeaways
- Impact of Tax on Investment Decisions: Chairman Boustany (R-La,.) asked members how their bills would change the impact of taxes on investment decisions by businesses. Rep. Nunes (R-Calif.) explained that all three bills presented are similar in the sense that they move to a consumption-based system. He added that in the ABC Act, businesses are taxed on net cash flow where income minus expenses will be taxed, therefore encouraging investment.
- Debt Financing: Boustany questioned the current and common use of debt financing and its impact on businesses. Rep. Woodall (R-Ga.) stated that with FairTax financing through debt or equity, businesses would be treated the same. Rep. Burgess (R-Texas) added that under the Flat Tax Act, businesses would not lose their ability to carry over excess deductions to the subsequent year. Nunes argued that for a consumption tax to “function properly,” you cannot allow for interest expenses. He added that the ABC Act would open up new investment opportunities because capital would be readily available.
- Small Businesses: Rep. Tiberi (R-Ohio) stressed his concern about the impact a reform proposal will have on small businesses and their owners. Tiberi asked how the last in, first out inventory method (LIFO) would be treated under the ABC Act. Nunes responded that the ABC Act would “do away with LIFO,” adding that he wrote the ABC Act with the small businessman in mind.
Witnesses
Opening Statements
In his opening statement, Chairman Charles Boustany (R-La.) announced this hearing would be the first of many to focus on fundamental tax reform. Boustany stated that our current tax code is broken and it is “abundantly clear that it is littered with exclusions, deductions, and special rules.” He argued that instead of devoting billions of hours a year to tax compliance and billions of dollars on tax preparation software or professional services, the resources should be promulgated to “jumpstart the lackluster economy.” He anticipated considering all ideas and proposals and believes the Ways and Means Committee must “weave” through pro-growth ideas and concepts to achieve comprehensive tax reform. Additionally, Boustany noted that the next members’ day reform hearing, April 13th, will focus on an income-based tax system.
Ranking Member Richard Neal (D-Mass.), in his opening statement, stated both sides are aware of the great need to reform our “broken and inefficient tax code” while replacing it with a code that promotes job growth, lifts wages for all workers and grows the middle class. He explained that while there is a broad agreement on the need for reform, he acknowledges the lack of agreement from both sides of the aisle on how to proceed. Neal urged that tax reform cannot wait, and neither can the economy or the American people. He referenced the “methodical bipartisanship” displayed in the former Rep. Dave Camp’s (R-Mich.) bill from last Congress and hoped to maintain the discussion.
Testimony
In his testimony, Rep. Devin Nunes (R-Calif.) discussed his bill, H.R. 4377, the American Business Competitiveness (ABC) Act of 2015, which would tax a business based on its actual cash flow instead of its income. Nunes stated that both Republicans and Democrats agree on the adoption of a broad-based consumption tax. He explained that the ABC Act would encourage business investment by allowing 100 percent expensing in the current year so that companies of any size would pay no taxes on any of their spending on personnel, equipment, property or any other expenditure related to the operation of their businesses. He noted that the ABC Act would eliminate the penalty new investments face with income taxes. Nunes stated that the ABC Act applies to all business entities and that it would lower the maximum tax rate on net business income to 25 percent. He added that the ABC Act replaces the “complicated” international tax code with a “simple territorial system.” Nunes argued that the ABC Act would provide every American the opportunity to start a business without being penalized with a big business tax.
In his testimony, Rep. Michael Burgess (R-Texas) talked about his bill, H.R. 1040, the Flat Tax Act, which would give businesses and individuals the choice to opt into a 17 percent flat tax and to be taxed on a cash-flow basis for business activities. Burgess argued that the Flat Tax concept is “simple” and Americans would fill out one form, thus eliminating the hours spent with accountants every year. He stated that individuals with the same income would pay the same amount. Burgess noted the uniqueness of his bill is that “if you like your tax, you can keep your tax” as the Flat Tax is voluntary. He explained that the election to opt into a flat tax can only be made once, leading to a 19 percent rate for three years before falling to a 17 percent flat tax.
In his testimony, Rep. Rob Woodall (R-Ga.) touted his bill, H.R. 25, the FairTax Act of 2015, which would repeal all federal income, payroll and withholding, and estate and gift taxes. The taxes would be replaced with a national sales tax on gross payments of taxable property or services. Woodall stressed the long history of his tax reform proposal and the initial bipartisan support it received. He argued that a consumption tax could grow the American economy faster and explained that his FairTax Act “deals with” the payroll tax, as 80 percent of families pay more in payroll tax than income tax.
Questions and Answers
Impact of Tax on Investment Decisions
Boustany asked the members how their bills would change the impact of taxes on investment decisions by business. Nunes explained that all three bills presented are similar in the sense that they move to a consumption-based system. He added that in the ABC Act, businesses are taxed on net cash flow where income minus expenses will be taxed, therefore encouraging investment. Burgess explained that businesses would have a flat tax option, consequently eliminating the capital gains tax. Woodall responded that the FairTax Act eliminates the payroll tax, enabling businesses to invest in people and workers.
Boustany questioned the current and common use of debt financing and its impact on businesses. Woodall stated that with FairTax financing through debt or equity, businesses would be treated the same. Burgess added that under the Flat Tax Act, businesses would not lose their ability to carry over excess deductions to the subsequent year. Nunes argued that for a consumption tax to “function properly,” you cannot allow for interest expenses. He added that the ABC Act would open up new investment opportunities because capital would be readily available.
Direction of Reform
Boustany addressed the long history of the Flat Tax and FairTax Acts and questioned whether the Committee should proceed along the line and direction of 1986 reform or consider new proposals. Woodall indicated that he appreciated the collaborative makeup of the 1986 model and added that concerns over inversions unite both parties. Nunes described the calculation of the ABC Act as “achievable because it does not disrupt the wage side of the equation.”
Rep. Pat Tiberi (R-Ohio) stressed his concern about the impact a reform proposal would have on small businesses and their owners. Tiberi asked how the last in, first out inventory method (LIFO) would be treated under the ABC Act. Nunes responded that the ABC Act would “do away with LIFO,” adding that he wrote the ABC Act with the small businessman in mind.
Rep. Jim Renacci (R-Ohio) displayed concern that Nunes’ ABC Act chooses “winners and losers” and that without interest deductions, new business owners will not be able to compete. Nunes explained that one of the challenges people initially have with the ABC bill is that “they look at it through the lenses of an income tax,” not realizing the income tax is done away with for all business activity in the United States.
Renacci asked Woodall about the double taxation the elderly will face with the FairTax Act. Woodall described it as a “rotten deal generationally,” adding that we can decide that future generations will not have to pay double taxes.
Transition Assistance
Rep. George Holding (R-N.C.) questioned the transition assistance new forms of taxation would require. Nunes explained that he has thought about transition assistance and would make the Committee aware of how much is needed should they move forward with the bill. Woodall stated that under the FairTax there is one transition rule on inventory and avoiding double taxation.
For more information on this hearing, please click here.
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House Ways and Means Committee
“Fundamental Tax Reform Proposals”
Tuesday, March 22, 2016
Key Topics & Takeaways
- Impact of Tax on Investment Decisions: Chairman Boustany (R-La,.) asked members how their bills would change the impact of taxes on investment decisions by businesses. Rep. Nunes (R-Calif.) explained that all three bills presented are similar in the sense that they move to a consumption-based system. He added that in the ABC Act, businesses are taxed on net cash flow where income minus expenses will be taxed, therefore encouraging investment.
- Debt Financing: Boustany questioned the current and common use of debt financing and its impact on businesses. Rep. Woodall (R-Ga.) stated that with FairTax financing through debt or equity, businesses would be treated the same. Rep. Burgess (R-Texas) added that under the Flat Tax Act, businesses would not lose their ability to carry over excess deductions to the subsequent year. Nunes argued that for a consumption tax to “function properly,” you cannot allow for interest expenses. He added that the ABC Act would open up new investment opportunities because capital would be readily available.
- Small Businesses: Rep. Tiberi (R-Ohio) stressed his concern about the impact a reform proposal will have on small businesses and their owners. Tiberi asked how the last in, first out inventory method (LIFO) would be treated under the ABC Act. Nunes responded that the ABC Act would “do away with LIFO,” adding that he wrote the ABC Act with the small businessman in mind.
Witnesses
Opening Statements
In his opening statement, Chairman Charles Boustany (R-La.) announced this hearing would be the first of many to focus on fundamental tax reform. Boustany stated that our current tax code is broken and it is “abundantly clear that it is littered with exclusions, deductions, and special rules.” He argued that instead of devoting billions of hours a year to tax compliance and billions of dollars on tax preparation software or professional services, the resources should be promulgated to “jumpstart the lackluster economy.” He anticipated considering all ideas and proposals and believes the Ways and Means Committee must “weave” through pro-growth ideas and concepts to achieve comprehensive tax reform. Additionally, Boustany noted that the next members’ day reform hearing, April 13th, will focus on an income-based tax system.
Ranking Member Richard Neal (D-Mass.), in his opening statement, stated both sides are aware of the great need to reform our “broken and inefficient tax code” while replacing it with a code that promotes job growth, lifts wages for all workers and grows the middle class. He explained that while there is a broad agreement on the need for reform, he acknowledges the lack of agreement from both sides of the aisle on how to proceed. Neal urged that tax reform cannot wait, and neither can the economy or the American people. He referenced the “methodical bipartisanship” displayed in the former Rep. Dave Camp’s (R-Mich.) bill from last Congress and hoped to maintain the discussion.
Testimony
In his testimony, Rep. Devin Nunes (R-Calif.) discussed his bill, H.R. 4377, the American Business Competitiveness (ABC) Act of 2015, which would tax a business based on its actual cash flow instead of its income. Nunes stated that both Republicans and Democrats agree on the adoption of a broad-based consumption tax. He explained that the ABC Act would encourage business investment by allowing 100 percent expensing in the current year so that companies of any size would pay no taxes on any of their spending on personnel, equipment, property or any other expenditure related to the operation of their businesses. He noted that the ABC Act would eliminate the penalty new investments face with income taxes. Nunes stated that the ABC Act applies to all business entities and that it would lower the maximum tax rate on net business income to 25 percent. He added that the ABC Act replaces the “complicated” international tax code with a “simple territorial system.” Nunes argued that the ABC Act would provide every American the opportunity to start a business without being penalized with a big business tax.
In his testimony, Rep. Michael Burgess (R-Texas) talked about his bill, H.R. 1040, the Flat Tax Act, which would give businesses and individuals the choice to opt into a 17 percent flat tax and to be taxed on a cash-flow basis for business activities. Burgess argued that the Flat Tax concept is “simple” and Americans would fill out one form, thus eliminating the hours spent with accountants every year. He stated that individuals with the same income would pay the same amount. Burgess noted the uniqueness of his bill is that “if you like your tax, you can keep your tax” as the Flat Tax is voluntary. He explained that the election to opt into a flat tax can only be made once, leading to a 19 percent rate for three years before falling to a 17 percent flat tax.
In his testimony, Rep. Rob Woodall (R-Ga.) touted his bill, H.R. 25, the FairTax Act of 2015, which would repeal all federal income, payroll and withholding, and estate and gift taxes. The taxes would be replaced with a national sales tax on gross payments of taxable property or services. Woodall stressed the long history of his tax reform proposal and the initial bipartisan support it received. He argued that a consumption tax could grow the American economy faster and explained that his FairTax Act “deals with” the payroll tax, as 80 percent of families pay more in payroll tax than income tax.
Questions and Answers
Impact of Tax on Investment Decisions
Boustany asked the members how their bills would change the impact of taxes on investment decisions by business. Nunes explained that all three bills presented are similar in the sense that they move to a consumption-based system. He added that in the ABC Act, businesses are taxed on net cash flow where income minus expenses will be taxed, therefore encouraging investment. Burgess explained that businesses would have a flat tax option, consequently eliminating the capital gains tax. Woodall responded that the FairTax Act eliminates the payroll tax, enabling businesses to invest in people and workers.
Boustany questioned the current and common use of debt financing and its impact on businesses. Woodall stated that with FairTax financing through debt or equity, businesses would be treated the same. Burgess added that under the Flat Tax Act, businesses would not lose their ability to carry over excess deductions to the subsequent year. Nunes argued that for a consumption tax to “function properly,” you cannot allow for interest expenses. He added that the ABC Act would open up new investment opportunities because capital would be readily available.
Direction of Reform
Boustany addressed the long history of the Flat Tax and FairTax Acts and questioned whether the Committee should proceed along the line and direction of 1986 reform or consider new proposals. Woodall indicated that he appreciated the collaborative makeup of the 1986 model and added that concerns over inversions unite both parties. Nunes described the calculation of the ABC Act as “achievable because it does not disrupt the wage side of the equation.”
Rep. Pat Tiberi (R-Ohio) stressed his concern about the impact a reform proposal would have on small businesses and their owners. Tiberi asked how the last in, first out inventory method (LIFO) would be treated under the ABC Act. Nunes responded that the ABC Act would “do away with LIFO,” adding that he wrote the ABC Act with the small businessman in mind.
Rep. Jim Renacci (R-Ohio) displayed concern that Nunes’ ABC Act chooses “winners and losers” and that without interest deductions, new business owners will not be able to compete. Nunes explained that one of the challenges people initially have with the ABC bill is that “they look at it through the lenses of an income tax,” not realizing the income tax is done away with for all business activity in the United States.
Renacci asked Woodall about the double taxation the elderly will face with the FairTax Act. Woodall described it as a “rotten deal generationally,” adding that we can decide that future generations will not have to pay double taxes.
Transition Assistance
Rep. George Holding (R-N.C.) questioned the transition assistance new forms of taxation would require. Nunes explained that he has thought about transition assistance and would make the Committee aware of how much is needed should they move forward with the bill. Woodall stated that under the FairTax there is one transition rule on inventory and avoiding double taxation.
For more information on this hearing, please click here.