House Ways and Means Committee: Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans
House Committee on Ways & Means
Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans
Thursday, April 11, 2024
Topline
- Republicans lauded the Tax Cuts and Jobs Act, and discussed how lowering the corporate tax rate has served as boon for attracting investment to the U.S., while allowing American businesses to reinvest in their employees and communities.
- Democrats blasted the TCJA for primarily benefiting the ultra-wealthy, increasing the deficit, and forgoing investments in social benefits.
Witnesses
- Senator Phil Gramm, Former Chairman, Committee on Banking, Housing, and Urban Affairs
- Paul Winfree, President and CEO, Economic Policy Innovation Center
- Michael Ervin, Founder, Coal River Coffee Company
- Austin Ramirez, CEO, Husco International Inc.
- Kathryn Anne Edwards, Ph.D., Labor Economist
Opening Statements
Ways & Means Committee Chair Jason Smith (R-Mo.)
In his opening statement, Smith discussed how in the first two years after passage of the Tax Cuts and Jobs Act (TCJA), real wages grew nearly five percent, the median household income increased by five thousand dollars, and the poverty rate dropped to its lowest level in recent history. He noted the TCJA increased the share of taxes paid by the top one percent of households, while reducing the burden paid by lower income earners. Smith lamented that President Biden’s Inflation Reduction Act forced taxpayers to subsidize big banks and corporations for tax credits to purchase luxurious EVs. He explained that the House of Representatives demonstrated bipartisan support for key provisions of the 2017 tax bill by passing the Tax Relief for American Families and Workers Act.
Smith said President Biden’s budget demonstrates that he values higher taxes and more inflationary spending over the wellbeing of the American people. He called on Congress to prevent the largest tax hike in history, which would occur if the 2017 tax cuts expire. Smith warned that middle income earners would be hit the hardest by the coming tax hike, and that with the expiration of the 199A small business deduction, more small businesses on main street will be forced to close. He concluded that Congress needs to consider ways to strengthen America’s competitive edge against China and use our tax code as a help, not hindrance to workers.
Ways & Means Committee Ranking Member Richard Neal (D-Mass.)
In his opening statement, Neal discussed how Republicans ballooned the deficit with trillions of dollars in tax cuts, largely for people that don’t need them, over the past three decades. He noted the 2017 tax cuts disproportionately benefited the wealthy and large corporations and did not pay for themselves. Neal cited the Joint Committee on Taxation’s findings that all the tax gains from the TCJA went to shareholders and high paid executives. He explained that our economy continues to defy expectations, as wages and wealth continue to rise, with consumer confidence reaching new highs. Neal concluded that using the tax code to invest in those who need it most benefits everyone and said that if workers and the middle class are actually a priority, Congress should put them ahead of big corporations and billionaires.
Testimony
Senator Phil Gramm, Former Chairman, Committee on Banking, Housing, and Urban Affairs
In his testimony, Gramm noted that the 2017 tax cuts took America from having the highest corporate rate in the world to an average rate of 21 percent. He said median household income soared the year after the TCJA was enacted, while the bottom quintile of Americans saw their income rise by 9.4 percent. Gramm explained that no tax change or spending increase in over 50 years delivered a more significant impact on median income and poverty than the TCJA. He said that when corporate tax rates are increased, corporations try to pass costs onto the consumer, worker, and investors. Gramm concluded that Congress consistently underappreciates the burden of the corporate tax rate.
Paul Winfree, President and CEO, Economic Policy Innovation Center
In his testimony, Winfree explained that the TCJA was estimated to increase investments by reducing the cost of capital while also lowering marginal tax rates. He urged Members not to consider the key provisions of the TCJA without acknowledging what has changed about the broader economy and the nation’s fiscal position since 2017. Winfree said the Treasury will need roughly $10 trillion in additional borrowing authority in 2024 alone to rollover existing debts and pay for new ones. He warned that extending the current policy baseline only pulls the death spiral forward three years. Winfree said the federal government will need to implement a deficit reduction without compromising economic growth.
He concluded that any policy that puts additional pressure on households’ budgets or small business would be unwarranted.
Michael Ervin, Founder, Coal River Coffee Company
In his testimony, Ervin noted that after the passage of the TCJA, LLCs and small businesses were able to benefit from the 199A deduction. He explained how the 199A deduction allowed him to deduct twenty percent of his business income to invest in his business. Ervin said his business would face a significant tax hike if Congress failed to extend the small business deduction. He emphasized that small businesses should not be placed at a competitive disadvantage by the tax code. Ervin concluded that it’s possible to have a thriving small business that is successful and can inspire other entrepreneurs because of these key deductions.
Austin Ramirez, CEO, Husco International Inc.
In his testimony, Ramirez discussed how pro-growth tax policy allows him to create jobs, invest in R&D, and compete globally. He explained how the TCJA allowed his company to invest in renovations to its headquarters for the first time in 70 years. Ramirez warned that small manufacturers would experience a series of damaging tax increases if the TCJA’s provisions expired. He explained how allowing tax reform to sunset would prevent his firm from supporting its community and investing in job-creating projects. Ramirez concluded that Congress could ensure that small companies can not only prosper at home, but compete on the world stage by preserving the TCJA.
Kathryn Anne Edwards, Ph.D., Labor Economist
In her testimony, Edwards explained that while the TCJA was billed as a way to increase wages and income, the after-tax increase in income was 67 times larger for the top one percent than it was for the middle twenty percent. She cited CRS’ findings that the TCJA only increased output by 0.2 percent – a fraction of what was needed to generate growth to pay for itself. Edwards said that tax cuts must be limited in scope, well-targeted, and perfectly timed so that they benefit the people when demand is faltering. She emphasized that there is no justification for extending the TCJA, and concluded that while bad policy can create winners, policy must be effective at addressing economic needs.
Question & Answer
OECD Global Tax Agreement
Rep. Lloyd Doggett (D-Texas) noted that foreign investors own 42 percent of all American corporate stock and were among those who were the greatest beneficiaries of the TCJA’s corporate tax cut. He added that a global minimum tax that stops the race to the bottom is the right way to deal with our future.
Rep. Mike Kelly (R-Pa.) asked Gramm to touch on issues of tax jurisdiction and the global minimum tax negotiations. Gramm said the greatest abuse of the Constitution in his lifetime was President Biden negotiating the minimum corporate income tax and giving other jurisdictions the power to tax corporate income in the US if Congress doesn’t raise the tax rate. He said that it was extortion committed against Congress.
Rep. Ron Estes (R-Kans.) gave Gramm the opportunity to talk about international tax and specifically the Pillar II provision of the OECD’s framework. Gramm said that you don’t need to give Americans an advantage, they just need a level playing field. He said that the TCJA moved the US from the highest corporate tax rate in the world toward a competitive range, but that he is concerned the regulatory burden in the US is growing faster than other places in the world.
Rep. Kevin Hern (R-Okla.) said that the TCJA’s international tax provisions and reduction of the corporate tax rate stopped inversions, encouraged domestic investment, and made the U.S. an attractive place to do business. Hern criticized the Biden Administration for committing the U.S. to a global tax policy that would diminish U.S. competitiveness on a global scale and have grave consequences for our economy. Hern asked how harmful it would be for the U.S. economy and democracy if Congress rubber-stamped President Biden’s poorly negotiated global minimum tax. Gramm lamented that Congress was not able to advise or consent on any of the negotiations regarding the international global minimum rate. He criticized the President for agreeing to let European countries tax American subsidiaries in their country on income the subsidiary made in the U.S. Gramm urged the Committee to pass legislation to mandate retaliation against any country that implements a tax against American companies.
Foreign-Derived Intangible Income (FDII)
Rep. Michelle Steel (R-Calif.) emphasized that the FDII deduction will be pivotal to protecting the U.S. against taxation by other nations. She asked the witnesses whether FDII is a critical part of U.S. tax policy, and if enhancing it should be a top priority for Congress. Gramm said it’s important for the U.S. to have a competitive tax system. Winfree said he agreed with Steel, and discussed the need to ensure our tax system is competitive for domestic investors and those who want to invest in America.
Corporate Income Tax Rate
Rep. Brad Wenstrup (R-Ohio) noted that since the TCJA was enacted, there have been no corporate inversions and American businesses are bringing back their overseas earnings to fuel investment at home. Wenstrup said Congress must incentivize the production of critical goods here, which can’t be done by increasing corporate taxes.
Rep. Carol Miller (R-W.V.) explained how lowering the corporate tax rate has been a key driver for drawing investment to the U.S. and allowing American businesses to reinvest in their employees and communities.
Steel asked if Congress should maintain the 21 percent corporate tax. Gramm said yes.
Rep. Claudia Tenney (D-N.Y.) said the TCJA’s corporate tax cut led companies to bring hundreds of thousands of jobs back to the U.S.
Rep. Mike Carey (R-Ohio) noted that TCJA did cut the corporate tax rate, but asked whether the base was also broadened so that taxes were being paid on a much higher slice of income. Gramm said the U.S. was disadvantaging every company with the highest corporate tax rate in the world, and cutting it was a good idea. He explained that the TCJA let people bring money back to America so it could be invested across the country.
Qualified Business Income Deduction
Rep. Vern Buchanan (R-Fla.) asked Ervin to talk about the importance of 199A business income deduction. Ervin said without that deduction, there are things he would personally lose as a business owner. Ervin said that his business does philanthropic and charitable work that would have to stop if this deduction was removed.
Rep. Lloyd Smucker (R-Pa.) asked Ervin how a 43.4 percent tax rate would impact his business if Congress fails to make 199A permanent. Ervin said he and most of the other businesses on his street would have to close.
Rep. Linda Sanchez (D-Calif.) noted that fans of the TCJA claim that the pass-through deductions strengthen main street and small businesses. She asked what kind of taxpayers are taking advantage of that deduction. Edwards said the deduction’s benefits are concentrated among the top one percent of filers by income. Sanchez asked if the pass-through deduction had driven enough economic growth to outweigh its costs. Edwards said no.
Miller explained how the 199A deduction allows small businesses to stay competitive and reinvest in their employees, and said she looks forward to extending these provisions. Miller asked Ervin how his business would be impacted if 199A was not extended. Ervin said his business has only existed under 199A, explaining that it created an environment for entrepreneurship. He said ending the deduction would kill the environment of entrepreneurship by decreasing the incentive to start a business and create jobs. He warned that if the deduction is not extended, small business owners might have to close.
Rep. Judy Chu (D-Calif.) said the pass-through deduction failed to invest in the smallest and youngest businesses that needed it the most.
Tenney asked Ervin about what would happen if the 199A deduction ended. Ervin said he would have to let go of some of his employees and pass costs onto the customer. He noted they would probably have to close at some point.
Full Expensing + R&D
Buchanan said in his opinion there is no more powerful tool for businesses than full expensing and asked Ramirez for his thoughts. Ramirez answered that accelerated depreciation does two things; gives more liquidity to firms to make more investments and improves the return on the investments businesses make.
Rep. Drew Ferguson (R-Ga.) asked Winfree to talk about how important creating an environment for research and development is to the economy. Winfree said there are three things that have driven innovation in the US: culture, institutions, and technology. He continued saying that we should promote investments in technology to achieve prosperity.
Estes talked about how critical R&D expensing was in driving innovation and asked how R&D and amortization impacts our ability to compete globally. Ramirez said that China has a 200% super deduction for R&D and that since the R&D deduction expired in 2022, his firm only gets 20%. He said that has created a $20 million hole in his balance sheet because he has to amortize R&D over 5 years instead of 100% in the year it was incurred.
Rep. Blake Moore (R-Utah) asked how expensing certain business equipment and purchases would help Ervin invest in expanding his operations and workforce. Ervin explained that equipment is vital to his business. He said expensing enables him to purchase equipment, train new people, expand and open other locations, and sell old equipment so that others can open businesses as well. He concluded that it helps him create more jobs and raise wages.
Child-Tax Credit
Chairman Smith asked if Winfree knows how the child-tax credit affects families and their federal tax rate. Winfree said it would provide tax relief to those families. Chairman Smith highlighted the benefit of the child-tax credit while emphasizing the need for there to be work requirements within it.
Rep. Danny Davis (D-Ill.) asked how restoring the child-tax credit could help families and the economy. Edwards said there is no no-strings attached cash that goes to the lowest income households and that has not been the case for decades. She went on to explain that the best ways to boost labor force participation are growing the economy and lowering barriers for workers to work, like not being able to afford childcare.
Stepped-Up Basis
Rep. Adrian Smith (R-Nebraska) said that a repeated proposal from the Biden Administration is the repeal of the stepped-up basis and said it would be highly detrimental to especially family businesses. He asked Ramirez to describe what the repeal of the stepped-up basis would look like as he looks at the future of his business. Ramirez said he believes family businesses are an indispensable part of the US economic system and said that the US needs policies to encourage multigenerational family business while explaining that the death tax and a repeal of the stepped-up basis do the opposite. Edwards said that she believes family businesses are important but not to the detriment of people that didn’t have rich parents. Smith pushed back and asked if the government should be taking a huge chunk of the value of family businesses. Edwards said that the government had been taking a large chunk up until the law went into effect and that small businesses still existed.
US Fiscal Situation
Buchanan asked Winfree to speak about the US fiscal deficit and debt. Winfree said that he does not believe you can look at the expiration of the TCJA or any of the other fiscal inflection points Congress will face in the next two years in a silo and that you have to take the debt question at hand. He explained that the Treasury market has seen rates on short term Treasuries shoot up by five percentage points over the last four years.
Rep. Jodey Arrington (R-Texas) contrasted the Republicans and Democrats approach saying that while Republicans are seeking to bring the American fiscal house into order, Democrats under Joe Biden are doubling down on spending. He then asked Gramm if he agreed with that assessment. Gramm said the proof is in what happened, explaining that for the past 50 years social spending has increased but the TCJA increased median income twice as much as any other action by any other government in the last 50 years.
Criticism of the TCJA
Neal questioned Republican assertions that the TCJA assisted all taxpayers equally and asked Edwards to describe his own research on the distribution of the TCJA tax cuts across income groups. Edwards explained that the top 1% saw a reduction in taxes of $61,000 which is an increase of post-tax income of three percent, the middle twenty percent income quintile saw a reduction in taxes of $910 which is an increase of post-tax income of 1.3 percent, and the lowest income quintile saw a reduction in taxes of $70 which is an increase of .4 percent.
Neal said her research also points out that the income groups receiving the largest tax cut aren’t necessarily the ones spending the extra cash and asked why that’s important. Edwards said the mechanism by which we think a tax cut grows the economy is that when you give households money they then go out and spend it and so for a tax cut to be effective it must go to those most likely to spend that money immediately. She said that the issue with how tax cuts are legislated is that the people who pay the most in taxes and receive the largest cuts are also those that are least likely to immediately spend it.
Doggett asked Edwards what evidence there is that the 2017 tax cuts that benefitted the largest corporations and wealthiest individuals trickled down to struggling Americans. Edwards said that a two trillion-dollar benefit should not be so difficult to track down for the people it is intended to benefit. She explained that there was evidence that the largest wage gains in large corporations after the TCJA went to managers and executives, not workers.
Rep. Bill Pascrell (D-N.J.) slammed the TCJA for giving the wealthiest Americans tax breaks while not helping the middle class as promised and asked if the 2017 tax cuts raised wages, reduce inequity, and help the middle class. Edwards said the wage increases from 2018 were primarily due to the economy hitting full employment following the global financial crisis in 2008 and that the law’s greatest strength is that it happened at a good time.
Pascrell then asked how making the TCJA’s tax cuts permanent would harm American society and the middleclass. Edwards said the most expensive part of the tax cuts are the investments it did not make.
Rep. John Larson (D-Conn.) said Social Security is facing a shortfall because of Congress’s inaction and Republicans’ massive tax cuts. Ervin said that increasing the payroll tax directly impacts small business owners and other main street employers. He explained that while Social Security is great, Congress should be coming up with solutions that do not harm small businesses.
Davis said the $2 trillion from the TCJA should have been used to reduce child poverty, establish paid sick leave, or make housing affordable.
Sanchez warned that doubling down on the TCJA would allow corporations to continue to pay less in taxes than ever before. She asked about the opportunity cost of extending the TCJA instead of investing in working families. Edwards noted that working families who are spending a quarter of their income on childcare would be upset to learn that the cost of the TCJA was enough to fund universal childcare and Pre-K four or five times over.
Rep. Gwen Moore (D-Wisc.) asked Edwards whether TCJA paid for itself, and if the TCJA only raised GDP by 0.2 percent, as opposed to the 6.7 percent projection. Edwards said it did not pay for itself and explained that CRS concluded that the economy grew 0.2 larger than it would have thanks to the TCJA.
Rep. Don Beyer (D-Va.) said the TCJA contributed to the U.S. having some of the highest income inequality among developed nations.
Rep. Jimmy Gomez (D-Calif.) said it was insulting that Republicans gave temporary tax cuts to working families but made the corporate tax cuts permanent. He warned that tax cuts never pay for themselves.
Competition with China
Rep. Darrin LaHood (R-Ill.) praised the TCJA for lifting 6 million people out of poverty and leading to a wide range of economic benefits for Americans. He then asked the witnesses about the repatriation of corporate profits from overseas because of the TCJA. Winfree said that the TCJA did do that, and that additional revenue has gone to Treasury as a result. He also noted that there should be ongoing discussion about what our corporate tax rate should be to ensure American companies remain competitive, especially given that our combined federal and corporate tax rate surpasses China’s.
LaHood explained that it is estimated that the TCJA repatriated $3 trillion back to the US, and asked Gramm how that impacted the economy and how we can beat the Chinese Communist Party in the ongoing strategic competition. Gramm said we should not attempt to copy China by implementing industrial policy. Gramm said that if we want to compete with China, we should reduce regulatory burden, the tax rate, and deal with programs that disincentivize people to work.
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