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Senate Committee on the Budget: The Great Tax Escape: Closing Corporate Loopholes that Reward Offshoring Jobs and Profits

Senate Committee on the Budget
The Great Tax Escape: Closing Corporate Loopholes that Reward Offshoring Jobs and Profits
Wednesday, January 17, 2024

Topline

  • Democrats criticized the Tax Cuts & Jobs Act for increasing the deficit, creating incentives to offshore, and increasing wealth inequality.
  • Republicans called for simplification of the tax system.

Witnesses

  • Kimberly Clausing, Eric M. Zolt Chair in Tax Law and Policy, University of California, Los Angeles School of Law
  • Roy Houseman, Legislative Director, United Steelworkers
  • John Arensmeyer, Founder & CEO, Small Business Majority
  • James Hines Jr., Richard A. Musgrave Collegiate Professor of Economics & L. Hart Wright Collegiate Professor of Law, University of Michigan
  • Mindy Herzfeld, Professor of Tax Practice, University of Florida Levin College of Law

Opening Statements

Senate Budget Committee Chairman Sheldon Whitehouse (D-R.I.)

In his opening statement, Whitehouse blasted the Tax Cuts and Jobs Act (TCJA) as an America last policy. Whitehouse said the “Trump tax scam” was doomed from the start and criticized the bill for incentivizing offshoring jobs and stashing profits in international shell companies. He also criticized the TCJA’s special carve-outs for Big Oil and lamented that Trump’s tax scam adds hundreds of billions of dollars to the deficit each year. Whitehouse explained that while some companies are doing most or all their business in America, they are reporting all their profits internationally, thus reducing their tax liabilities and harming all of us.

Whitehouse noted that Democrats have proposals to raise revenue with taxes on the ultrawealthy. He cited the No Tax Breaks for Outsourcing Act, which would equalize the tax rate on profits earned abroad to the tax rate on profits earned domestically. Whitehouse explained the Act would end the race to the bottom and increase American competitiveness. He concluded that corporations should contribute their fair share to American infrastructure, national defense, and education. 

Senate Budget Committee Ranking Member Chuck Grassley (R-Iowa)

In his opening statement, which was read by Sen. Ron Johnson (R-Wisc.), Grassley called for ending the non-competitiveness of our corporate tax system. He noted America’s corporate tax base has substantially grown since 2017, due to the adoption of a lower corporate tax rate and other pro-growth policies. Grassley emphasized that the TCJA worked, decreased major corporate inversions, and made the U.S. more internationally competitive. He noted his support for exploring ways to make our corporate tax code more internationally competitive. Grassley warned that President Biden’s proposed corporate tax policies would take the U.S. backward, disadvantage American companies in international markets, and surrender our economic sovereignty and tax base to foreign nations. He concluded that increasing corporate tax rates would reduce wages and jobs. 

Senator Ron Johnson (R-Wisc.)

In his opening statement, Johnson said he would never defend the U.S. corporate tax system because it is a mess, and it is complicated. Johnson then called for Congress to work towards simplification and rationalization of the tax code. Whitehouse chimed in to say that on that point, they might have some common cause.

Testimony

Kimberly Clausing, Eric M. Zolt Chair in Tax Law and Policy, University of California, Los Angeles School of Law 

In her testimony, Clausing said international tax policy benefits from international cooperation. She noted that governments tend to craft tax policies with a fear of losing jobs, business, and tax revenue to countries with rock-bottom tax rates. Clausing discussed the OECD’s recent establishment of a global minimum tax rate and noted that about 90 percent of multinational companies are on track to be covered by this agreement. She explained the OECD agreement helps reduce the pressure of tax competition and said adopting this policy would allow the U.S. to increase its corporate tax revenue, which is relatively low compared to other OECD countries.

Clausing acknowledged that while the TCJA has done some good, it increased the deficit, offshored American jobs, and made our tax system less progressive. She said the U.S. would see significant benefits if we returned the corporate tax rate to 28 percent, halfway between the current law and pre-TCJA rates.

Clausing noted that increasing the corporate tax rate will affect shareholders more than average Americans and will make our capitalist system work more efficiently, benefitting small, domestic businesses. She said Senator Whitehouse’s proposed legislation is promising and concluded that the U.S. must work with its international partners to address this situation, climate change, and national security. 

Roy Houseman, Legislative Director, United Steelworkers 

In his testimony, Houseman said the success of American private workers depends on corporate tax codes. He noted that the AFL-CIO and the United Steelworkers strongly support the No Tax Breaks for Outsourcing Act, which corrects policies that have favored offshoring and will encourage American manufacturing. Houseman said the TCJA is divisive, saying that more than half of the benefit of it went to the top five percent of taxpayers in 2020. Houseman urged the Senators to favor new policies that don’t benefit offshoring, multinational corporations, and profit shifting. He explained that other countries already offer businesses incentives for companies to operate there, and it frustrates union members to see Congress add American tax incentives on top of that. Houseman concluded by emphasizing the need to close corporate tax loopholes and put that money to use in the U.S. economy, noting that Congress could fund 12 CHIPS programs with the revenue currently given away to multinational companies through the tax code. 

John Arensmeyer, Founder & CEO, Small Business Majority 

In his testimony, Arensmeyer called for inclusive entrepreneurship at the foundation of our tax system. 

He said large businesses need to pay their fair share, explaining that small businesses feel that the current tax system unfairly benefits large companies and the wealthy. Arensmeyer noted that two-thirds of small businesses support setting a tax rate of 21 percent on corporate offshore profits. He said the TCJA failed small businesses, who do not have the resources to manipulate complex corporate tax loopholes like large companies. Arensmeyer noted the average pass-through revenue for small businesses is $33,000, while it is over $500,000 for business owners in the two highest tax brackets. He offered his support for the No Tax Breaks for Outsourcing Act and other efforts to reduce corporate tax loopholes. Arensmeyer concluded that the tax revenue we are losing to offshoring could benefit small businesses and the public and joked that if a small business owner wanted to see any benefit from the TCJA, they should buy stock in a multinational company. 

James Hines Jr., Richard A. Musgrave Collegiate Professor of Economics & L. Hart Wright Collegiate Professor of Law, University of Michigan 

In his testimony, Hines said it is inefficient to impose high taxes on international operations that do not have the same economic conditions as the U.S. He explained that U.S. workers are harmed by policies that harm the productivity of U.S. companies, not policies that promote corporate foreign investment. Hines noted that increasing foreign business opportunities makes companies more productive and creates more American economic opportunities. Hines said that it is important not to exaggerate the magnitude of tax havens. He said most U.S.-based multinational companies do not profit shift because it is very costly and difficult. Hines concluded that we need to enforce our current tax policies and called for a competitive tax system that supports the economy and generates revenue. 

Mindy Herzfeld, Professor of Tax Practice, University of Florida Levin College of Law 

In her testimony, Herzfeld affirmed that the TCJA strengthens the tax base and warned that the OECD Pillar II Agreement poses a risk to the U.S. corporate tax base and U.S. revenue. She explained that the TCJA incorporated many bipartisan proposals and addressed several global pressures facing American companies. Herzfeld criticized Pillar I of the OECD Global Minimum Tax Initiative for reallocating historical taxing rights from the U.S. to market economies and Pillar II for encouraging companies to adopt a minimum tax rate of 15 percent, which the U.S. would effectively subside through the foreign tax credit. She warned that the Global Minimum Tax Initiative could cost the U.S. hundreds of billions of dollars in revenue and would primarily benefit investment hubs in lower-tax countries. Herzfeld lamented that the OECD opened the door for other countries to tax American domestic profits and called on Congress to mandate greater oversight over international tax rulemaking. She concluded that Congress should better define the U.S. tax base to ensure primary taxing rights over profits from U.S.-created intangibles.  

Question & Answer

Tax Cuts & Jobs Act

Johnson said he was not happy that the TCJA had huge disparities between C corps and pass-throughs. He added that he’d like to eliminate C corps and turn them into pass-through entities. 

Sen. Alex Padilla (D-Calif.) criticized the TCJA carve-outs for oil and gas as outdated, unneeded, and unacceptable. He asked what policy changes should be considered as Congress looks to reform the tax code in a forward-looking way. Clausing said closing the TCJA oil loophole would allow $80 billion in tax revenue to be reclaimed. She also suggested reducing or eliminating oil and gas subsidy programs and cited Senator Whitehouse’s Clean Competition Act as being worth considering. 

Sen. Jeff Merkley (D-Ore.) said the TCJA cut the corporate tax rate from 35 percent to 21 percent and benefitted the wealthy, not the workers. He noted Trump wants to continue to cut the corporate tax rate, and asked how that would help small businesses and employees. Houseman said those kinds of tax incentives create perverse incentives for those who can obtain tax advice to offshore, this makes American workers feel like there is no room for fair competition.

Merkley noted the GILTI provision of the TCJA drove more business overseas and said we should make our product here with American workers. Houseman agreed saying that it is atrocious that the money would be used to benefit outsourcing and that the money should be used to build factories in America.

Merkley said the U.S. collects less in corporate taxes as a share of its economy size than most other countries. He asked how the TCJA tax cuts contribute to that and how that impacts wealth inequalities in the U.S. Clausing said those tax cuts primarily benefited the top 10 percent and increased wealth inequality.

Merkley noted that he feels there is a sense of the system being rigged which increases cynicism in America because corporations use a tremendous amount of our infrastructure built with tax dollars. He then asked if it is unfair that corporations use a massive amount of our infrastructure and pay almost nothing towards sustaining and improving it. Clausing agreed and pointed out that this is inefficient because most of what the largest companies are earning is above and beyond the amount needed for the businesses to function. Clausing says that these profits could be taxed without disrupting the corporation’s labor and investment decisions.

Sen. Tim Kaine (D-Va.) blasted Republicans for creating tax cuts that supported investing in foreign countries and contrasted the TCJA with Democrats’ decision to invest in American infrastructure and innovation. Kaine asked Clausing to discuss the parties’ two approaches to building the economy and creating prosperity for Americans. Clausing said the TCJA increased shareholder value and buybacks but didn’t pay for itself or benefit the general public. She said the IRA, Bipartisan Infrastructure Act, and CHIPS Act represent more modern supply-side approaches to building the economy. Kaine then asked the same question to Houseman who responded saying that direct investment encourages quality jobs and can create an incentive that is more powerful than corporate tax cuts.

Kaine then claimed that while the TCJA was under consideration, the corporations in Virginia were asking for lower tax they were proposing around a 25 percent or so corporate tax rate. Kaine noted that he proposed making the TCJA tax cuts for individuals permanent and those for businesses temporary, but Republicans opposed it. Johnson replied that he had great sympathy for Kaine’s amendment.

Sen. Chris Van Hollen (D-Md.) asked Clausing to discuss offshoring and tangible assets overseas since the TCJA. Clausing explained that when a company increases its offshore tangible assets, such as plants and equipment, it increases offshore production and generates revenue offshore. Additionally noting that when you take a tangible asset offshore, you get an export subsidy which reduces its U.S. tax liability and leads to perverse incentives that facilitate their import back to the U.S. market. 

Van Hollen asked if the TCJA paid for itself. Clausing, Houseman, Arensmeyer, and Hines said no, Herzfeld said that she was not qualified to speak to that.

Sen. Mike Braun (R-Ind.) said the U.S. hasn’t generated more than 17.5 percent of its GDP in federal revenue in 50 years and, since the Bush years has been running chronic deficits. He asked all witnesses whether tax policy or spending is a bigger problem for the deficit. Clausing noted that the last time we were at a surplus tax revenue was 20 percent of the GDP, and that both taxes and spending are important. Braun replied that right now spending is at 25 percent of our GDP. Arensmeyer noted that tax revenue decreased after the TCJA. Braun replied this was a small percentage of the total deficit. Arensmeyer noted that tax revenue has decreased and said that now this is more of a taxation problem than a spending problem. Houseman said that tax policy does play a role because we need to make sure that we have revenue, but the problem is maybe 50/50 between tax revenue and spending. Hines pointed out the deficit as a huge problem. Saying that it is possible to tax 25 percent, as France does so, but claims this would lead to an economy like France’s economy. Herzfeld said that if you are addicted to spending, no amount of revenue will help to which Braun emphatically said that Herzfeld hit it right on the head.

Foreign Tax Loopholes & Offshoring

Padilla criticized the United States’ current foreign corporate tax policies for increasing state deficits and eroding local tax bases. He asked Clausing how foreign tax loopholes have impacted state budgets. Clausing said that most state definitions piggyback on the federal definitions, so these federal policies decrease federal and state tax revenue in tandem. She added that collectively, states could reclaim $17 billion in corporate income tax revenue if loopholes were closed. 

Van Hollen talked about the lack of reliable information on how corporations use tax havens and the challenge it presents to implementing tax policies. He then spoke about the Financial Accounting Standards Board’s recently introduced requirement for international tax disclosure and noted that he introduced the Disclosure of Tax Havens and Offshoring Act, which would require large companies to disclose that information on a country-by-country basis. He asked if it’s valuable to disclose that information on a country-by-country basis. Clausing said yes, explaining that when one can see simple information such as how many employees a company has in a country and how much of their profits they are reporting there, one gets more transparency. Then he said that this transparency is a market friendly nudge that can lead to useful changes in behavior without regulating per se.

Whitehouse said Congress needs to come together to end the nonsense with shell companies and foreign profit hiding. He added that Congress needs to incentivize domestic operations and jobs, not offshoring. 

Whitehouse noted that people say they’re concerned about the U.S. becoming less competitive when we increase foreign corporate taxes, but they don’t address the non-competitiveness we’re creating between domestic and multinational businesses in the U.S. Clausing said the OECD Pillar II Agreement addresses the competitiveness of our businesses with others in international markets. She added that current domestic corporate tax policies benefit multinational businesses over domestic businesses. Arensmeyer said that small businesses aren’t looking for anything beyond a level playing field when it comes to corporate tax rates. 

Future Tax Policy

Sen. Ron Wyden (D-Ore.) said what Congress is working to do is use this year to help people and then to tee up 2025. Wyden gave the example of a three-year tax bill which he said he likes because the expensing provision will benefit small businesses and includes pro-family policies such as increased Child Tax Credits. Wyden asked what the key priorities are going in to the 2025 debate. Clausing pointed to 2025 as being an important year because the expense associated with a complete extension of the TCJA would be $4 trillion and noted that there are four key priorities. First, deficit reduction by not extending tax cuts that are not working. Second, progressive changes such as Child Tax Credit and Earned Income Tax Credit improvements while collecting more from those at the top that can afford it. Third is efficiency, explaining that in the TCJA there were too many sacrifices in revenue in comparison to the benefit of incentives created. Fourth, better alignment on global collective action problems such as climate change and international tax competition.

Wyden then asked about ending “buy, borrow, and die” that allows billionaires to defer taxes, then citing a Joint Committee on Taxation revenue estimate for ending “buy, borrow, and die” as $550 billion over 10 years. Wyden then asked if there is anything that could raise more money from 900 billionaires then ending “buy, borrow, and die.” Clausing said that ending that legislation would probably be the most you could get from that population. She also noted that she thinks that there are other things that could bring in tax revenue such as raising corporate tax rates and cutting benefits from offshoring, but ending tax deferral loopholes is a great compliment to those changes.

Johnson says that he thinks that not all reform is making something better and that he thinks that Congress is putting Band-Aids on a dying patient. Johnson said he’d like to see a flat tax but added that he believes that ship has sailed. Johnson encouraged thinking outside of the box and said that he believes that there is potential for a lot more agreement than disagreement.

Johnson said that he would like a clean slate to make a rational tax system and asked the witnesses how they would create a new tax system. Clausing said Congress should make a fairer tax system that differentiates clearly on income type rather than keeping rates high. She said that would include more uniform rates between labor and capital for individuals, and urged Congress to avoid distortions in organizational form, tax all large businesses similarly, and reduce rate differentials between foreign and domestic profit. Houseman said tax policy needs to stop incentivizing offshoring and decrease the burden domestic companies feel when they compete with multinational companies. 

Arensmeyer said Congress needs to even out the rates, but noted the existence of practical issues when it comes to taxing shareholders of multinational companies. 

Johnson replied that we should collect the tax through withholding, and corporations would pay the tax for the shareholder. He said this would create pressure for companies to pay more dividends. Johnson also said he’d like to base income on cash and get rid of everything else. 

Johnson asked Hines and Herzfeld the same question. Hines said Congress should consider a value-added tax, which would comprehensively tax income at a uniform rate. Herzfeld called for a singular definition of income.

For more information on this meeting, please click here. 

For an archive of past SIFMA hearing coverage, please click here.