House Ways & Means Committee: Hearing with Secretary Janet Yellen
House Committee on Ways & Means
Hearing with Treasury Secretary Janet Yellen
Topline
- Republicans criticized President Biden’s promise to let the TCJA expire and blasted the Biden Administration’s involvement in the OECD global tax agreement.
- Democrats highlighted the investments made possible by the clean energy tax provisions in the Inflation Reduction Act.
Witnesses
- Janet Yellen, United States Secretary of the Treasury
Opening Statements
Ways & Means Committee Chair Jason Smith (R-Mo.)
In his opening statement, Smith criticized President Biden’s reckless tax and spending policies for increasing the cost-of-living for Americans. He blasted President Biden for promising that the Trump tax cuts would expire if he was reelected, which Smith warned would lead to largest tax increases on families and small businesses in American history including through the child tax credit being slashed in half and small businesses facing a 43.4% tax rate. Smith said that President Biden continues breaking his promise to not raise taxes on families making less than $400,000, explaining that under his proposed budget, seniors would see more of their life savings captured by the federal government, small businesses would be taxed on their sweat equity and face tax rates approaching 50%, and energy producers would pay more weakening US energy security. He said that Treasury’s own data shows that millions of Americans earning less than $400,000 will end up paying a portion of the proposed business tax increases on top of the new IRS audits, of which 90% will fall on middle class earners and small businesses.
Smith blasted Democrats for spending billions of taxpayer dollars on welfare for the wealthy and well-connected, providing tax credits for leasing and buying luxury EVs, while working families got higher prices from the so-called Inflation Reduction Act (IRA). He warned that the Biden Administration is sending billions of dollars to Chinese-connected companies in the name of climate change and emphasized that America should be standing up to China’s unfair practices. Smith lauded the 2017 Trump tax cuts for reversing the decades-long trend of American companies moving their jobs, factories, and money overseas. He concluded that the OECD Global Tax Deal would surrender America’s tax revenue and jobs to foreign countries, and reiterated that Congress writes tax laws, not bureaucrats. Smith emphasized that the deal has no path forward in this Congress.
Ways & Means Committee Ranking Member Richard Neal (D-Mass.)
In his opening statement, Neal noted that even the Wall Street Journal recently described the U.S. economy as the envy of the world, which he described as a well-deserved recognition for an Administration that has created 15 million jobs and spurred a small business boom. He lauded President Joe Biden for returning the U.S. to a nation of science, sense, and stability. Neal said that Democrats’ legislative achievements over the last few years, including the American Rescue plan and IRA, as having transformed the nation. He said that because of the Democratic policies, healthcare and household energy costs have come down, the clean energy sector has created hundreds of thousands of jobs, and infrastructure projects are underway across the country. Neal congratulated the IRS on another outstanding filing season. He criticized Republicans for wasting Congress’ time on conspiracies, impeachments, and chaos. Neal warned that his Republican colleagues are plotting the next round of trickle-down economics with another round of tax cuts for the wealthy. He concluded that the current House Majority is a threat to the health and economic security of the American people and urged Congress to get past the chaos and get on with their work.
Testimony
Janet Yellen, United States Secretary of the Treasury
In her testimony, Yellen described how the Biden Administration drove a historic economic recovery. She noted that while inflation has decreased significantly, there is more work to do. Yellen described the labor market as extraordinarily healthy and explained that real wages and household median wealth have increased since before the Pandemic, spurring families to put their additional income back into the US economy. She discussed how the modernization of the IRS, made possible by the IRA, enabled Treasury to combat tax evasion by the wealthiest Americans. Yellen outlined how the President’s budget proposes additional investments to lower costs for workers and families and strengthen the economy while reducing the deficit. She explained these investments include making permanent the expansion of tax credits for health insurance premiums enacted in the American Rescue Plan and extended in the IRA and expanding the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Low-Income Housing Tax Credit (LIHTC). Yellen concluded by noting that she and President Biden proposed implementing a billionaire minimum tax to ensure the top 100th of one percent pay their fair share, raising the tax on corporate stock buybacks to encourage businesses to reinvest profits in their workers, and closing the estate and gift tax loopholes that allow wealthy Americans to pay less than they owe.
Question & Answer
OECD Global Tax Agreement
Smith said that each of the Biden Administration’s failures at the OECD can be traced to its decision to act unilaterally and without Congress. He asked if Yellen would commit to rejecting any OECD profit reallocation plan that disproportionately impacts American companies or allows U.S. tax revenues to be stolen away by foreign governments. Yellen said Treasury worked closely with Congress to get input on Congress’ priorities to guide the OECD negotiations. She said the Pillar II agreement is in support of goals that are good for this country, because the agreement means all countries will tax the profits of their multinational companies, which creates a level-playing field for American companies and stops the race to the bottom.
Smith said he had previously raised the issue of the research and development tax credit not being accounted for in the OECD minimum tax agreement, and that direct government subsidies, like those used by China, get much more credit than our research and development tax credit. Yellen said that Treasury is negotiating with other countries right now to try and get favorable treatment for the research and development tax credit and that she is hopeful these negotiations will be successful. She then noted that the green tax credits and LIHTCs have been codified under Pillar II.
Rep. Lloyd Doggett (D-Texas) asked why it’s important the U.S. fully implements the global OECD agreement to stop the race to the bottom in corporate taxation. Yellen explained that stopping the race to the bottom in corporate tax rates means multinational corporations based in every country will all face the same minimum tax. She said that some countries will charge more than the minimum and discussed the Administration’s belief that the U.S. can afford to do so, given the environment for business in our country. She noted they have proposed a minimum rate of 21% and said that would be in line with Treasury’s proposal on the corporate alternative minimum tax (CAMT).
Doggett asked how American multinational corporations would remain competitive if made to pay a rate higher than 15%. Yellen explained that prior to Pillar II, the U.S. was the only country that taxed the overseas earnings of its multinationals. She noted with the adoption of the OECD agreement around the world, the differential between what is paid on overseas earnings will be substantially smaller than it was before.
Rep. Mike Kelly (R-Pa.) asked how the U.S. will replace the possible $200 billion in revenue lost due to Pillar I and Pillar II. Yellen said that the estimate Kelly was referring to is an extremely negative case from the Joint Committee on Taxation and that in most cases the JCT looked at, the outcome in terms of tax collection is more likely to be positive than negative.
Kelly asked if Treasury would commit to working with Congress before signing the OECD Pillar I agreement. Yellen explained they have been in touch with Congress throughout the process. She noted Treasury heard from Congress on multiple items including the importance of there being a public comment opportunity, certainty around Amount B which has to do with transfer pricing, ensuring firm commitments from other countries, and getting a clear definition of digital service taxes (DSTs). She described those items as redlines, and said Treasury is negotiating for these items throughout the final months of negotiations. Kelly lamented that Congress seems to be an afterthought. He described the process of the negotiations as totally unconstitutional and reiterated that it is not the right way to do things.
Rep. Drew Ferguson (R-Ga.) warned that there would be $160 billion in lost revenue for the Treasury due to OECD. He lamented that we would be turning that revenue over to other countries, and noted two Georgia companies told him that Pillar I would cost them a combined $1 billion in sales.
Rep. Ron Estes (R-Kans.) discussed OECD negotiations and noted that both Republicans and Democrats are in favor of ending discriminatory DSTs to provide tax simplicity and consistency for businesses in the growing digital economy. He explained that despite ongoing discussions, more and more countries, like Canada, are enacting DSTs. Estes warned that the proliferation of Pillar I and Pillar II has provided opportunities for countries to raid our tax space. He also warned that Pillar II would cost Treasury $120 billion in revenue and called on Yellen to change course.
Rep. Kevin Hern (R-Okla.) said that Yellen may be aware that Bermuda is introducing its new corporate income tax which will take effect in 2025. He explained that Bermuda entities will be able to mark up their intangible assets to their estimated market value and amortize those assets over 10 years for tax purposes. Hern said this creation of a new deferred tax asset also results in a deferred tax expense and that under general guidelines of the OECD agreement for Pillar II, deferred tax expense will not trigger minimum tax liability that could be imposed by other global participating countries. He said that Bermuda has no intention of giving up its ability to attract business through the tax code and that other countries including Singapore and Ireland are adopting similar measures to maintain their status as an attractive jurisdiction.
Hern asked whether Yellen was concerned that Pillar II was creating a new tax subsidy race where countries enact Pillar II taxes but offset the higher tax costs with tax subsidies in the form of qualified refundable tax credits and other incentives. Yellen said Pillar II is intended to level the playing field and added that she was not aware that this is widely occurring but committed to looking at it. Hern cited Ireland as having floated putting a cap on recurring revenues, Singapore as having pushed refundable credits as a way to stay competitive and noted China’s use of direct cash payments to their firms to be able to offset taxable income. He added that corporations don’t pay taxes, the people that work for those corporations pay taxes. Hern warned that consumers would pay for these new taxes, concluding that it’s disingenuous to say that no one making less than $400,000 will pay a single cent more.
Rep. Suzan DelBene (D-Wash.) asked how the suggestion that we will never implement Pillar II makes it more difficult for the U.S. to achieve the changes that we would like to see. Yellen explained that the US led on this global agreement and made the case that it would be positive for the entire world. She said other countries would see it as a failure on our part if we were not willing to adopt it ourselves, and it would undermine our ability to exhibit leadership.
Rep. Carol Miller (R-W.V.) criticized the Administration for surrendering the U.S. tax base to unelected bureaucrats at the OECD and failing to protect the American tax system from heinous international interference.
Rep. Michelle Steel (R-Calif.) warned the OECD deal would hurt the US economy, while failing to hold China accountable. She asked if Yellen had any assurances that China would truly comply with the rules of the deal, and why the US should give the CCP economic advantages on the backs of American taxpayers. Yellen noted the agreement contains an enforcement mechanism and explained that if a country doesn’t comply, other countries can levy additional taxes against firms based in that country.
Rep. Beth Van Duyne (R-Texas) asked whether the TCJA lowered the corporate tax rate to the lowest in the OECD. Yellen said it’s among the lowest. Van Duyne noted that under the President’s budget, we would have the second highest corporate tax rate, and asked whether Yellen was proud of this. Yellen said 21% is not the second highest in the world.
Rep. Randy Feenstra (R-Iowa) noted that in the Pillar I negotiations, market countries have sought taxing rights over companies selling into them. He warned that if local data storage requirements are allowed to proliferate, US businesses will face not only an incentive to invest abroad, but a requirement to do so – which will cost us jobs, investment, and IP transfers. Feenstra asked whether Treasury consulted with the USTR on the likely economic impacts of this decision. Yellen noted this was USTR’s decision, and deferred to them and the position Ambassador Tai has taken on the WTO situation with digital trade. She said that when it comes to Pillar I, they’ve had interagency coordination, and are trying as hard as they can to get rid of digital service taxes that they regard as discriminatory against US firms.
Tax Cuts & Jobs Act (TCJA) & the Corporate Tax Rate
Smith noted that President Biden promised to let the Trump tax cuts expire. He asked whether that pledge meant that President Biden was promising a $1,500 tax hike on a family of four earning less than $75,000. Yellen said that the President has been very clear that no family earning less than $400,000 will face a tax hike and emphasized that he would not allow that to happen when parts of TCJA expire.
Smith said that Yellen recently told the Senate Finance Committee that the President doesn’t have a plan to address the expiring provisions of the TCJA. He noted that without a plan, the President would slash the Child Tax Credit in half which means parents would lose $1,000 dollars from their pocketbooks for each child, each year. Yellen said the President’s principles would guide his negotiations with Congress and reiterated that he has made clear he opposes increasing taxes on people earning less than $400,000.
Smith asked if President Biden would support the CTC being made permanent at $2,000, as was included in the TCJA. Yellen explained that President Biden’s most recent budget proposed expanding the CTC and noted his support for the Wyden-Smith tax legislation, which would increase the CTC. Smith blasted President Biden for not having a plan to ensure there will be no tax increases on families earning less than $400,000.
Rep. Vern Buchanan (R-Fla.) asked Yellen where she stood on 199A, and whether she would let the deduction sunset. Yellen said she would get back to him. Buchanan responded that we can’t have pass-through rates over 40% because it would force everyone to move to a C Corp.
Rep. Mike Thompson (D-Calif.) noted the TCJA was not paid for, which by definition is inflationary. He asked Yellen to discuss responsible ways to offset the cost of TCJA extensions. Yellen noted the President’s budget includes a large set of raisers, including raising the stock buyback tax, raising the corporate alternative minimum tax, enacting Pillar II, raising the corporate income tax to 28%, and a billionaire’s tax.
Rep. Brad Wenstrup (R-Ohio) discussed how keeping our tax code globally competitive is a crucial part of strengthening our domestic manufacturing base and reducing our dependence on unreliable supply chains. He described the TCJA as a huge step in making our tax code globally competitive and emphasized the need to build on that type of progress. Wenstrup said he didn’t understand how increasing corporate tax rates and making the U.S. less competitive would help bring back business.
Rep. Michelle Fischbach (R-Minn.) said allowing the Trump tax cuts to expire on middle-income Americans seems like a misguided principle. She asked whether allowing the Trump tax cuts to expire would cause Americans to pay less in taxes. Yellen reiterated that the President has made absolutely clear that he opposes increasing taxes on Americans earning less than $400,000. She said he would work with Congress to achieve that. Fischbach said it doesn’t seem responsible for President Biden to just say he will let this expire without having a plan.
Rep. Blake Moore (R-Utah) said it’s frustrating to hear Democrats say we have such a great economy and we’ve had such a great recovery, because the bare bones of our economy are still in place from the 2017 TCJA. He cited the strong economic growth and real wage growth resulting from the TCJA.
Moore noted the top combined marginal rate on corporate income under current law is 25.6% and explained that the President’s proposal would increase that to 32.2%, a corporate tax rate that would be the second highest in the OECD behind Colombia. He warned that most of the cost of the increase would be borne Americans making less than $500,000, and asked if Yellen could point to a specific analysis that proves that raising the corporate tax rate won’t increase burdens on low and middle-income Americans. Yellen said the TCJA was a regressive tax cut that disproportionately benefited the wealthy and large corporations. She noted the corporate tax cut enriched shareholders at the expense of benefits to middle class families, while the promised investment boom never materialized.
Steel highlighted a provision from TCJA that has bipartisan support, and explained how Foreign-Derived Intangible Income (FDII) incentivizes companies to keep their intellectual property in the U.S. She explained she was introducing the Growing and Preserving Innovation in America Act to permanently preserve the FDII deduction rate.
Inflation Reduction Act (IRA) & China
Smith criticized Treasury for creating multiple loopholes that will send American taxpayer dollars to Chinese companies and manufacturers. He explained how the foreign entity of concern rules written by the Treasury Department are more China-favorable than the same standards from the Commerce Department for semiconductors. Yellen disagreed and said the rules are similar. Smith noted the Committee recently passed the End Chinese Dominance of Electric Vehicles in America Act in response to Treasury’s rules, which would close those loopholes and protect American taxpayers.
Neal noted that implementation of the IRA is really important, and asked Yellen to discuss it. Yellen said Treasury has made tremendous progress implementing the IRA and discussed the Department’s collaboration with the EPA and DOE. She explained how IRA and IRA tax credits are catalyzing investment in cutting edge technology and strengthening our supply chains, while also lowering emissions and creating good jobs.
Thompson asked Yellen to discuss the implementation of the clean energy tax credits in the IRA, and whether the investments are working. Yellen said Treasury is working around the clock to write the regulations around the credits. She noted the credits are catalyzing investment in green energy technologies and discussed the concerns about our supply chains being over reliant on China.
Ferguson noted that if a company that owes the Treasury $200 million in taxes can then turn around and write that all off by buying green energy tax credits. Yellen said if that company is using the transferability feature to buy these tax credits, then another company that Treasury wants to benefit from those credits and lacks sufficient tax liability will be financed. Ferguson questioned the reasoning behind giving major companies like Amazon and Walmart refundable tax credits to go spend in the green energy sector. Yellen explained that many of the companies responding to the IRA lack sufficient tax liability. Ferguson responded that Treasury is giving tax credits to the same people that Democrats argue need to pay their fair share in taxes, like Amazon, and warned that this undermines our competitiveness.
Miller blasted the Treasury Department for issuing weak foreign entity of concern definitions that fail to protect American tax dollars from flowing to Chinese companies. She discussed her two bills, the Protecting American Advanced Manufacturing Act, and the End Chinese Dominance of Electric Vehicles Act, which she introduced to improve on the foreign entity of concern definitions for the 45X and the 30D tax credits, respectively. Miller warned that without immediate passage of both of her bills, Chinese entities will receive millions of American taxpayer dollars every single year.
Miller asked whether the Biden Administration supports taxpayer dollars funding Chinese entities. Yellen explained that when it comes to electric vehicles, the IRA has foreign entity of concern restrictions coming into effect this year and next, which will severely curtail participation of Chinese firms in producing components or processing for batteries. Miller said that allowing Chinese companies to maintain control of these technologies, intellectual property, and supply chains, while receiving American subsidies, would fail to encourage American companies to develop technologies to become less dependent on China.
Miller asked whether the Biden Administration shares her concerns that China is using various IRA credits to deepen its influence on our domestic manufacturing industries. Yellen said the Administration is doing everything it can through implementation of the IRA to strengthen our supply chains.
Rep. Dan Kildee (D-Mich.) warned that China’s state-backed solar industry is flooding the global market with cheap products, undercutting American workers. He emphasized the need for policy that drives demand for U.S. solar products across the solar supply chain. Kildee explained this could be done through strong domestic content rules.
Kildee asked about Treasury’s plan to ensure that the final domestic content guidance for solar facilities incentivizes onshoring for the full solar supply chain and reduces our dependence on China for components like polysilicon. Yellen noted they put out initial guidance on domestic content, which was the culmination of an interagency effort where Treasury relied heavily on advice from the DOT in applying the Buy America rules. She said they received a lot of public feedback and would take it into account as they revise the regulations.
Rep. Brian Fitzpatrick (R-Penn.) noted that China controls up to 50% of the EV battery supply chain, which he described as troubling. He said the Treasury put out foreign entity of concern rules that are favorable to China, and asked why Treasury defined battery components this way, and what the Department is doing to help US manufacturers outcompete Chinese manufacturers. Yellen said the foreign entity of concern rules are very strong and explained they would expand to critical minerals and processing next year.
Carried Interest Loophole
Rep. Bill Pascrell (D-N.J.) said he was glad the President’s budget finally includes closing the carried interest loophole, which he described as possibly the worst loophole in the entire tax code. He noted his Ending Wall Street Tax Giveaway Act mirrors the proposal and would make private equity tycoons pay their fair share. Pascrell asked Yellen to commit to making carried interest fairness a top priority, which she did.
Van Duyne cited Yellen’s exchange with Pascrell and noted that while closing the carried interest loophole has become a popular punchline, for many Americans who don’t come from Wall Street or wealthy backgrounds, carried interest is the sweat equity they put into their business.
Capital Gains
Rep. Don Beyer (D-Va.) asked how the minimum income tax of 25% on the ultra-wealthy would work, and noted he was proud to work with Steve Cohen to turn the idea into legislation. Yellen explained the President’s budget would impose a minimum tax of 25% on total income, which would include unrealized capital gains. She clarified that it would only apply to taxpayers with more than $100 million in wealth, and taxpayers with highly illiquid assets could defer this or pay in installments.
Rep. Jimmy Panetta (D-Calif.) warned that if housing is unaffordable, local companies can struggle to attract workers. He noted he has long advocated for making sure there is a first-time homebuyer tax credit and for doubling the capital gains tax on home sales.
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