[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]



 
                     THE NEED FOR COMPREHENSIVE TAX


                   REFORM TO HELP AMERICAN COMPANIES


                    COMPETE IN THE GLOBAL MARKET AND


                    CREATE JOBS FOR AMERICAN WORKERS

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 12, 2011

                               __________

                           Serial No. 112-11

                               __________

         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director



                            C O N T E N T S

                               __________
                                                                   Page

Advisory of May 12, 2011, announcing the hearing.................     2

                               WITNESSES

Greg Hayes, Senior Vice President and Chief Financial Officer, 
  United Technologies Corporation................................     7
Edward J. Rapp, Group President & Chief Financial Officer, 
  Caterpillar Inc................................................    16
James T. Crines, Executive Vice President, Finance, and Chief 
  Financial Officer, Zimmer Holdings, Inc........................    24
Mark A. Buthman, Senior Vice President and Chief Financial 
  Officer, Kimberly-Clark Corporation............................    31
James R. Hines, Jr., L. Hart Wright Collegiate Professor of Law, 
  University of Michigan Law School..............................    84
Dirk J.J. Suringa, Partner, Covington & Burling LLP..............   102
Jane Gravelle, Senior Specialist in Economic Policy, 
  Congressional Research Service.................................   106

                       SUBMISSIONS FOR THE RECORD

Roger Conklin, Retired International Sales and Marketing 
  Executive, Statement...........................................   138
Brian Garst, Director of Government Affairs, Center for Freedom 
  and Prosperity, Statement......................................   142
Chairman David Camp and Congressman Sander M. Levin, Joint 
  Statement......................................................   146
U.S. Chamber of Commerce, Statement..............................   152
Matthew Lykken, Director, SharedEconomicGrowth.org, Statement....   158

                   MATERIAL SUBMITTED FOR THE RECORD

Questions for the Record:
  Hon. Bill Pascrell, Jr. and Hon. Jim McDermott.................   162
      ...........................................................


    THE NEED FOR COMPREHENSIVE TAX REFORM TO HELP AMERICAN COMPANIES



   COMPETE IN THE GLOBAL MARKET AND CREATE JOBS FOR AMERICAN WORKERS

                              ----------                              


                         THURSDAY, MAY 12, 2011

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 9:02 a.m., in 
Room 1100, Longworth House Office Building, the Honorable Dave 
Camp [chairman of the committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

   Chairman Camp Announces Hearing on the Need for Comprehensive Tax 
  Reform to Help American Companies Compete in the Global Market and 
                    Create Jobs for American Workers

Thursday, May 05, 2011

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on the 
burdens that the Tax Code imposes on American companies and how such 
burdens place them at a competitive disadvantage as they try to sell 
goods and services around the world. The hearing will explore the 
potential economic and job creation benefits of comprehensive tax 
reform. The hearing will take place on Thursday, May 12, 2011, in Room 
1100 of the Longworth House Office Building, beginning at 9:00 A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    It has been almost 50 years since the last time Congress 
fundamentally reformed the tax rules governing international business 
and cross-border transactions. During that time, the nature of the 
global economy and the position of the United States within it have 
changed dramatically. There is a growing concern among employers, 
practitioners, economists, and academics that international tax laws 
that made sense when the United States accounted for 50 percent of the 
world's gross domestic product (GDP) might no longer make sense in 
today's increasingly competitive and global economy. According to 
recent testimony from the Chairman of the Business Roundtable's Fiscal 
Policy Initiative, the U.S. corporate tax system results in American 
companies being less globally competitive, less investment in the 
United States, fewer jobs for American workers and less economic 
growth.
      
    In announcing this hearing, Chairman Camp said, ``It's been 25 
years since we reformed the Tax Code, and almost 50 years since we 
undertook a bottom-up review of our international tax laws. During that 
time, our foreign competitors have lowered their corporate tax rates 
and updated their international tax regimes to reflect the realties of 
the global economy. As we pursue tax reform, we need to consider how to 
make American companies more competitive and how to make the United 
States a more attractive place to invest and create jobs.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine how the current structure of the 
international tax rules might distort economic decisions and the 
allocation of resources in ways that reduce employment for American 
workers and hamper the efforts of American employers to compete with 
foreign companies in global markets. In the context of comprehensive 
tax reform that substantially lowers marginal rates on individuals and 
corporations, the hearing will investigate which reforms to the 
international tax rules might improve the ability of American companies 
to compete and create jobs.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Thursday, May 
26, 2011. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. For questions, or if you encounter 
technical problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov/.

                                 

    Chairman CAMP. Good morning, and thank you for joining us 
today for the latest in a series of hearings the Ways and Means 
Committee has convened to discuss comprehensive tax reform. 
Today we will examine the impact of the Tax Code on American 
companies that operate in the global economy, both here and 
abroad. In a future hearing I expect we will examine the 
opposite side of the international tax coin, namely the way the 
U.S. treats inbound investments by companies headquartered 
abroad.
    But today, through the testimony of both our CFO panel and 
our panel of academics and practitioners, we hope to gain 
insight into how the current structure of the international tax 
rules affects the ability of U.S.-based businesses operating in 
a global environment to invest, grow, and create jobs.
    It has been 25 years since we reformed the Tax Code, and 
almost 50 years since we undertook a bottom-up review of our 
international tax laws. In those five decades, the global 
marketplace has changed dramatically. So, too, has America's 
role in that marketplace.
    To illustrate the intersection between America's tax 
environment and the global landscape, consider this single data 
point. In 1960, the largest worldwide companies were nearly all 
American companies. U.S.-headquartered companies comprised 17 
of the world's largest 20 companies. That is 85 percent. By 
1985, there were only 13, and by 2010 just 6, or a mere 30 
percent U.S.-headquartered companies ranked among the top 20. 
And there are many reasons for this trend, and certainly some 
of that has to do with the emergence of other strong economies 
around the world. But without a doubt, a common complaint that 
we hear from American companies trying to compete abroad is 
that our Tax Code, with its complexity and its high corporate 
rates, acts as a hindrance.
    The Tax Code's antiquated features have diminished the 
attractiveness of the U.S. as the premier country in which to 
locate a business. So, while the promise of the American Dream, 
having the ability to succeed and prosper might attract 
individuals to this country, too many employers and investors 
are finding that our Tax Code stands as a barrier to America 
being an attractive platform from which to grow abroad in ways 
that create jobs at home.
    In our current economic environment in which our recovery 
remains in such a fragile state, our Tax Code ought to be 
helping create jobs. America's combined federal tax corporate 
rate at 39.2 percent is only outpaced by Japan's rate of 39.5 
percent, and Japan has already indicated its intent to lower 
its rate. Such action will leave America with the highest 
corporate tax rate in the world, 50 percent higher than the 26 
percent average for OECD countries.
    As if that were not enough, the U.S. is one of the last 
major economies to operate a worldwide system for active 
business income, which many believe is a further barrier to the 
growth of American companies. Capital will find its way to the 
most profitable opportunities around the world. But when U.S. 
companies must pay an additional U.S. tax on top of the tax 
they pay in the foreign market, then that capital is more 
likely to be invested through foreign companies who do not face 
this additional tax. As a consequence, American workers lose 
out on the jobs that would have been created to support those 
opportunities.
    Simply put, the international tax laws that were in place 
when the United States accounted for 50 percent of the world's 
gross domestic product may have made sense 50 years ago. But 
today, those same laws are causing America to lag further and 
further behind. Ensuring long-term prosperity in the face of 
increasing global competition requires Congress to re-examine 
the Tax Code. As we pursue comprehensive tax reform, this 
committee intends to develop solutions that empower American 
companies to become more competitive, and make the U.S. a more 
attractive place to invest and create the jobs this country 
needs.
    Again, thanks to all of our witnesses for being here today. 
I will now yield to the ranking member, Mr. Levin, for his 
opening statement.
    Mr. LEVIN. Thank you, Mr. Chairman.
    Welcome. We are glad you are here, and thanks for coming.
    It is important for us to consider corporate tax reform. It 
is also important for us to dig beneath the surface of the many 
issues it presents. International tax issues are inherently 
complicated. That is an understatement.
    Some years ago, my colleague, Amo Houghton, and I sat down 
with the staff of the Joint Committee on Taxation, and 
essentially had a seminar on international corporate taxation 
for several days. We introduced a bill with a number of 
provisions designed to better reflect the realities of 
international competition, and a number of them became law. It 
was clear that some of the larger issues, like deferral and 
worldwide versus territorial systems, required further 
consideration and work, because there was no consensus about 
the effect of potential changes.
    Unfortunately, in the next years, those issues remained 
dormant. In the meantime, the pace of globalization has only 
increased, heightening the need to restart the effort. I have 
said before that tax reform needs to start with an agreement 
regarding basic principles. When it comes to corporate tax 
reform, a key principle should be that reform must encourage 
job creation here in the United States.
    Over the last 14 months, the economy has created more than 
2 million private sector jobs. And economic recovery is slowly 
taking hold, in part because of the efforts of this 
Administration, and the then-Democratic majority.
    But we still have a long way to go before we make up the 
nearly nine million jobs destroyed by the financial crisis and 
recession. So we must be extremely sensitive to the effect tax 
reform has on jobs. I would be concerned about any change to 
our tax laws that would create new incentives to move corporate 
profits and American jobs offshore.
    My staff and I have spoken to many large, multinational 
corporations that are advocating a transition from our present 
worldwide tax system to a territorial system. We will hear from 
some of these corporations today.
    It is important, I think, to recognize that there is no 
pure worldwide system or pure territorial system. The details 
matter a great deal, and there are many versions of territorial 
tax systems.
    We also need to recognize that our current system does 
include incentives for job creation that we should be sensitive 
to as we consider reform. The three largest corporate tax 
expenditures are the Section 199 domestic manufacturing 
deduction, accelerated appreciation, and the R&D tax credit. 
All of these provisions are designed to encourage job creation 
here at home.
    Finally, we must remember that there are many other factors 
that determine where a company does business in a global 
economy. Taxation is certainly an important factor, but it is 
just one factor companies use when deciding where to locate 
production, R&D, and even their headquarters. Workforce 
matters. Infrastructure matters. Rule of law matters.
    So, I especially look forward to hearing our witnesses' 
testimony today. And, again, a warm welcome.
    Chairman CAMP. Well, thank you, Mr. Levin. Today we will 
hear from two distinguished panels of witnesses. Our first 
panel is comprised of four chief financial officers from major 
U.S. companies United Technologies, Caterpillar, Zimmer, and 
Kimberly-Clark that operate around the world, and that, all 
together, provide nearly 150,000 jobs for hard-working 
Americans here at home. Each of these companies is 
headquartered or has a major presence in districts represented 
by Members of the Committee, and I will ask those members to 
formally introduce their constituents when it is their turn to 
testify.
    Later we will hear from a panel of well-respected experts 
on our international tax rules, including an academic, a 
practitioner, and a staff member from the Congressional 
Research Service.
    But we begin with our CFOs, each of whom has a front-row 
seat in seeing how our international tax rules affect the 
competitiveness of large American employers with substantial 
operations around the globe.
    So, let me turn first to Mr. Larson of Connecticut to 
introduce the chief financial officer of UTC, Mr. Hayes. And 
then, after Mr. Hayes testifies, I will recognize Mr. Schock to 
introduce Mr. Rapp of Caterpillar, and so on.
    So, Mr. Larson, you are recognized.
    Mr. LARSON. Thank you, Chairman Camp, for providing me the 
opportunity to introduce Greg Hayes, the chief financial 
officer of United Technologies, a company located in Hartford, 
Connecticut, and in my hometown, the home of Pratt & Whitney 
Aircraft that flies the most dependable engines created 
anywhere, and built anywhere in the world.
    [Laughter.]
    Mr. LARSON. Greg joined the United Technologies team more 
than 11 years ago, when Hamilton Standard moved with Sundstrand 
Corporation to form what we now know as Hamilton Sundstrand. 
Over the years, he has risen through the ranks, and now has 
global responsibility for UTC's finances, and directs 
communications and interactions with UTC's board of directors 
and its investors.
    I am happy that he is able to be here today to provide the 
committee with UTC's thoughts on international tax reform. Greg 
is often referred to as UTC's chief reality officer. We could 
use one of those here, in Congress. And because of this, and 
his straightforward, tell-it-like-it-is style, I am sure that 
the testimony here today will be no different.
    It is an honor for me to introduce him to the committee, 
and I thank you, Mr. Camp, and look forward to the testimony.
    Chairman CAMP. Well, thank you, Mr. Larson. Mr. Hayes, you 
and all of today's witnesses will be recognized for five 
minutes for your oral remarks. And each of your full written 
statements will be made part of the official record.
    So, Mr. Hayes, you may proceed. Thank you, and welcome.

STATEMENT OF GREGORY J. HAYES, SENIOR VICE PRESIDENT AND CHIEF 
 FINANCIAL OFFICER, UNITED TECHNOLOGIES CORPORATION, HARTFORD, 
                          CONNECTICUT

    Mr. HAYES. Thank you, Congressman Larson, for that very 
kind introduction, and I will certainly try and keep reality 
front and center this morning in my comments. And also, thank 
you, Chairman Camp, Ranking Member Levin, and Members of the 
Committee on Ways and Means. It is a privilege to be here to 
testify on the need for a pro-growth tax reform agenda.
    I am here as the chief financial officer of an established 
American manufacturing firm that does business around the 
world. Most people know United Technologies by our business 
units and our products: Otis elevators; Carrier air 
conditioners, Pratt & Whitney jet engines; Sikorsky Blackhawk 
helicopters, Hamilton Sundstrand aerospace systems, and UTC 
fire and security products.
    United Technologies has employees in all 50 states. We have 
facilities, however, in 71 countries around the world, and we 
do business in 180 countries around the world. About 40 percent 
of our $57 billion of sales are earned right here in the United 
States, and the remaining 60 percent are outside, in other 
countries. Our split of employees roughly tracks sales, about 
75,000 employees here, in the United States.
    But we also do most of our research and development right 
here in the U.S. About 70 percent, in fact, of the $3.7 billion 
of annual R&D investment occurs right here. And we are a net 
exporter. Approximately $7 billion of our products and services 
are exported on an annual basis.
    I was asked to testify to shed light on some of the 
problems American-based companies face with the current tax 
system. My written testimony details several of these, but in 
my five minutes I would like to highlight one problem: in 
particular, the tax impediment U.S. companies face when we try 
and grow through acquisitions.
    I was recently asked on an analyst call about a rumor that 
UTC would acquire a company that was headquartered in 
Switzerland. And the answer to that analyst question was 
obvious. It wasn't a great answer, but it was a true answer. 
Because of the high U.S. corporate tax rates, and the U.S. 
worldwide approach to taxing foreign income, UTC is at a 
serious disadvantage in trying to buy any foreign company. This 
is especially true as we compete against other bidders who are 
not domiciled here in the U.S.
    Switzerland's income tax rates are 18 points lower than the 
United States. Switzerland also has a territorial system, 
unlike our worldwide system. Because of these tax 
disadvantages, it is much more likely that a foreign buyer 
would win the opportunity and they, not the American firm, 
would reap the benefits of a consolidation. That is a problem.
    At UTC we like to focus on solutions. And from the 
perspective of a chief financial officer, there are three 
general areas of advice from business decision-making that may 
be useful in making decisions on how to improve the Tax Code 
for American worldwide firms.
    First of all, remember economic fundamentals. Secondly, we 
need to benchmark against our competition--that is, other 
countries around the world. And, lastly, we need to take a 
measured approach to tax reform.
    First, on economic fundamentals, it is the way business 
decisions are made. In my world, business decisions must rest 
on economic fundamentals. We cannot ignore economics if we are 
going to plan for the long term. The defects in our current 
system are not conducive to job creation. It follows that 
fixing these problems will make American companies more 
competitive.
    The second recommendation is benchmarking. When our 
businesses are trying to solve a problem, or improve a process, 
we benchmark against other companies for best-in-class results. 
Then we try to emulate them with adjustments for our own facts, 
cultures, values, and circumstances. The same thing should be 
done in developing and adopting a territorial tax system, and 
tax rates that are in line with international norms, but still 
responsive to American policy concerns.
    Finally, I would urge the Congress to take a measured or 
balanced approach. UTC is aligned with the broader business 
community when we say we don't want tax reform to break the 
back of the U.S. Treasury. We are committed to tax reform that 
is fiscally responsible, and we oppose tax evasion. But please 
don't punish American companies for serving global customers or 
succeeding in global markets.
    The tax laws should not single out certain industries for 
better or worse treatment. The Tax Code needs to be agnostic, 
and not pick winners and losers.
    In conclusion, we look forward to working with policy 
makers to continue to be a resource on the way forward that 
allows old and new companies with American headquarters to 
succeed today and into the future. Thank you.
    [The prepared statement of Mr. Hayes follows:]
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    Chairman CAMP. Thank you, Mr. Hayes. I will now yield to 
Mr. Schock of Illinois to introduce Mr. Rapp of Caterpillar.
    Mr. SCHOCK. Thank you, Chairman Camp, and thank you for 
hosting this very important hearing. It is my honor to 
introduce to the committee Mr. Ed Rapp, the chief financial 
officer of Caterpillar, Incorporated, located in my hometown of 
Peoria, Illinois.
    Mr. Rapp joined Caterpillar in 1979, and has held a variety 
of positions related to pricing, production scheduling, 
marketing, dealer development, manufacturing, and product 
development. Additionally, he worked for Cat Around the World, 
in such places like Johannesburg, South Africa and Geneva, 
Switzerland, where he was the Europe region manager.
    In 2000, Ed became an officer of Caterpillar, as the vice 
president of the Europe, Africa, Middle East marketing 
division, and he became a Caterpillar group president in 2007. 
Mr. Rapp has a bachelor's in finance from the University of 
Missouri, Columbia, and is a graduate of the University of 
Illinois executive development program.
    Ed, it is great to have you in Washington. On behalf of the 
committee, welcome. We look forward to your testimony.
    Chairman CAMP. Thank you, Mr. Schock.
    Mr. Rapp, you are recognized for five minutes.

STATEMENT OF EDWARD J. RAPP, GROUP PRESIDENT & CHIEF FINANCIAL 
          OFFICER, CATERPILLAR, INC., PEORIA, ILLINOIS

    Mr. RAPP. Thank you. Chairman Camp, Ranking Member Levin, 
and Members of the Committee, it is really a pleasure to be 
here, and have the opportunity to talk about tax reform.
    Just as background on Caterpillar, in 2010 our sales and 
revenues were about $42.6 billion, and we expect that number to 
exceed $50 billion in 2010. Foreign markets account for about 
70 percent of our revenues, and are the fastest growing. Our 
success stems from our ability to compete globally from a 
significant U.S. production base. In 2010 our exports exceeded 
$13 billion, which was roughly equal to our total U.S. sales. 
And half of the $3 billion that we are spending this year in 
capacity expansion will be invested in the United States.
    We directly employ about 47,000 employees, after adding 
7,000 over the last 12 months. Our dealer network employs 
another 34,000. And in 2010 we invested $4 billion with about 
4,900 small and medium-sized businesses, making them a key part 
of our exports and our global supply chain.
    Before I explain more, let me just say up front I didn't 
come here asking for a free lunch. What we are asking for is a 
level playing field as we compete with foreign competitors.
    We believe a key to our nation's competitiveness is the 
success of American companies with worldwide operations. 
Numerous studies indicate that U.S.-based companies with 
worldwide operations are critical to the health and growth and 
potential of the U.S. economy. We also believe that Americans 
cannot enjoy a high standard of living without manufacturing 
being a pillar of the U.S. economy.
    To continue to win in worldwide markets we need a level 
playing field. Unfortunately, the U.S. Tax Code too often tilts 
the field against us. Other OECD nations that have dropped 
their tax rates an average of 19 points since the 1986 reform.
    What does it mean for Caterpillar? Let me just give you a 
couple of examples. In China, the corporate tax rate is 25 
percent. If Caterpillar earns $1,000 there, we pay $250 in 
taxes. And if we bring the money back to the U.S. we pay 
another $100 in taxes. A UK competitor selling in China would 
pay the $250 in taxes, and the balance, that $100, they can use 
to price discount for market share or invest in R&D.
    But perhaps the biggest challenge we have is just the lack 
of consistency over time. We have had to deal with 14 
extensions to the R&D tax credit over the past 30 years. We 
commit to financing contracts over periods of four to five 
years, but can't predict our tax cost over that time, due to 
the continually expiring active financing exception. And while 
our global competitors freely move capital between countries, 
we have to deal with incredible complexity and the potential of 
added tax costs.
    You know, my intent here is to be constructive. And I would 
like to provide an outline of what we think are some of the key 
opportunities.
    You know, in our business, when we have to assess our 
competitiveness versus a key competitor, we take a simple 
approach. We buy their machine, we run it through its paces, 
and we tear it down. We gain a complete understanding of how it 
compares to our equipment, and what we have to do to maintain 
our competitive edge.
    Mr. Chairman, I would encourage you to do a foreign Tax 
Code tear-down. There are valuable lessons to be learned that 
would be instructive as you look to make improvements to the 
U.S. system.
    As we look around the world, we see common characteristics 
that we believe ought to be part of any tax reform. First, 
lower the corporate tax rate, which encourages businesses both 
at home and abroad to invest in the U.S. Second is 
implementation of a territorial tax system like the rest of the 
industrialized nations. Third, provide the incentives for the 
development and retention of intellectual property. And, 
lastly, give serious thought to the types of jobs you want.
    You know, other countries have given this serious 
consideration, and built their tax structures around the desire 
to maintain manufacturing as a base, versus moving strictly to 
services-based economies.
    Mr. Chairman we are really betting on you and your 
colleagues to get this right. Although we have opportunities 
around the world, we are heavily invested in the United States 
through bricks and mortar, through R&D, and more importantly, 
through our American workforce. We believe that we can compete 
and win in the global markets against any competitor, foreign 
or domestic. We just need the level playing field that only you 
can provide.
    Thank you for the opportunity to present my views, and I 
look forward to the discussions and questions from Members of 
the Committee.
    [The prepared statement of Mr. Rapp follows:]
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    Chairman CAMP. Well, thank you very much, Mr. Rapp. I will 
now yield to Mr. Paulsen of Minnesota to introduce Mr. Crines 
of Zimmer.
    Mr. PAULSEN. Thank you, Chairman Camp. I appreciate the 
opportunity also to introduce one of our witnesses, Jim Crines, 
who is the CFO of Zimmer, a medical technology company whose 
spine division is actually headquartered in Minnesota, in my 
district.
    Over the years, Zimmer has gone through much change, from 
being spun off from Bristol-Myers Squibb to acquiring a large 
foreign competitor. And since 2001, Zimmer grew U.S.-based jobs 
by 80 percent. And I believe we do need a Tax Code that is 
going to allow companies like Zimmer to continue to grow and be 
internationally competitive.
    Mr. Crines has been with the company since 1997. I look 
forward to his testimony, his ideas, his thoughts, and advice. 
And I thank him for being here today, Mr. Chairman.
    Chairman CAMP. Thank you very much. You are recognized for 
five minutes, Mr. Crines.

    STATEMENT OF JAMES T. CRINES, EXECUTIVE VICE PRESIDENT, 
 FINANCE, AND CHIEF FINANCIAL OFFICER, ZIMMER HOLDINGS, INC., 
                        WARSAW, INDIANA

    Mr. CRINES. Congressman Paulsen, thank you for the 
introduction and your support for the medical device industry. 
Mr. Chairman, Ranking Member Levin, and distinguished members 
of the Ways and Means Committee, I appreciate the opportunity 
to present the views of Zimmer Holdings, Inc. on the need for 
reform of our nation's corporate tax laws.
    Zimmer is a global leader in the design, development, 
manufacturing, and marketing of orthopedic reconstructive 
devices, spinal and trauma devices, dental implants, and 
related surgical products. Zimmer is a member of the medical 
device competitiveness coalition, which consists of seven U.S.-
based medical device manufacturers that have been working 
together the last 18 months on the very topic of this hearing: 
comprehensive tax reform to help American companies compete in 
the global market, so that U.S. multinational firms are no 
longer placed at a competitive disadvantage to their foreign 
counterparts. And the U.S. will be a more attractive location 
for investment.
    While the United States is currently the world leader in 
medical device innovation and manufacturing, the U.S.-based 
medical device industry faces both immediate and longer-term 
challenges from foreign competitors. Many foreign countries 
offer significant incentives to attract research and 
development, as well as manufacturing. Additionally, most of 
our foreign competitors are headquartered in countries with 
both lower tax rates and territorial tax systems.
    Growing overseas has a positive impact on the U.S. economy 
and U.S. jobs. For example, as Zimmer expanded overseas from 
2001 to 2010, we increased U.S.-based employment by 80 percent. 
These laws should be designed to support the global growth and 
competitiveness of American companies, and encourage those 
companies to reinvest their foreign profits in the United 
States without additional taxation.
    We believe the following principles should guide any 
reform: the U.S. tax system should transition to a territorial 
tax system; reform should focus on simplicity; tax reform 
should retain incentives that encourage research and 
development, as well as manufacturing in the U.S.
    To accomplish these goals, we recommend the adoption of tax 
laws, again, that move the U.S. system towards a territorial 
tax regime consistent with the approach utilized by the 
overwhelming majority of our major trading partners. Under a 
territorial tax system, U.S. companies like Zimmer will have 
the ability to access our foreign resources for investment 
here, in our home country. This would eliminate the so-called 
lock-out effect inherent in today's U.S. tax system.
    We realize that the development of a territorial tax system 
in the United States raises numerous design issues. 
Additionally, it is important that policy makers modernize our 
current system, while retaining safeguards to prevent erosion 
of the U.S. tax base. We support a simplified approach that 
ensures the appropriate level of expenses are allocated to 
repatriated foreign earnings. Our approach would provide for a 
proxy in place of complex expensive allocation rules. Most 
countries with territorial tax regimes have adopted this 
approach, which imposes a tax on a small portion of repatriated 
foreign earnings. Such an approach would simplify the U.S. Tax 
Code.
    Another important issue that must be considered in the 
context of moving towards a territorial tax system is the 
retention of incentives for U.S.-based research and 
development, as well as manufacturing. A number of countries in 
Europe have begun to implement such incentives, in addition to 
having lower corporate tax rates within their territorial 
systems. Appropriately designed incentives could create a 
meaningful carrot for U.S. companies to retain high-paying and 
important research and development jobs in the United States.
    On behalf of Zimmer, I would like to thank the Ways and 
Means Committee for the opportunity to provide views on 
proposals to modernize this country's corporate tax laws by 
beginning a comprehensive examination of our nation's corporate 
tax laws and the impact they have on our global 
competitiveness. Your committee is undertaking a difficult, 
controversial, but fundamentally important task. We look 
forward to working with the committee and other tax policy 
makers as this effort moves forward.
    [The prepared statement of Mr. Crines follows:]
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    Chairman CAMP. Well, thank you very much, Mr. Crines.
    I will now yield to Mr. Marchant of Texas to introduce Mr. 
Buthman of Kimberly-Clark.
    Mr. MARCHANT. Thank you, Mr. Chairman. Mr. Mark Buthman is 
the senior vice president and chief financial officer of 
Kimberly-Clark Corporation in Irving, Texas. Kimberly-Clark has 
its world headquarters in my district in Irving, Texas, and 
employs 140 people there.
    I am also very proud to represent Mark as a constituent of 
South Lake, Texas, his hometown.
    And Kimberly-Clark also employs another 930 people in 
Texas.
    Mr. Buthman joined Kimberly-Clark in 1982. Throughout his 
tenure he has held a wide range of leadership roles, and is an 
active participant in the Dallas area CFO roundtable.
    I am very pleased to introduce Mr. Buthman and have 
Kimberly-Clark represented regarding these very important 
issues before the committee this morning.
    Thank you, Mr. Chairman, and I yield back.
    Chairman CAMP. Thank you. Mr. Buthman, you are recognized 
for five minutes.

 STATEMENT OF MARK A. BUTHMAN, SENIOR VICE PRESIDENT AND CHIEF 
  FINANCIAL OFFICER, KIMBERLY-CLARK CORPORATION, IRVING, TEXAS

    Mr. BUTHMAN. Thank you, Congressman Marchant, for that 
introduction. Good morning, Chairman Camp, Ranking Member 
Levin, and distinguished Members of the Committee. Thank you 
for this opportunity to share our views on the need for 
comprehensive U.S. tax reform.
    First I want to start with a brief overview of Kimberly-
Clark, and then I want to address three key opportunities to 
improve the U.S. tax system to increase the competitiveness of 
American companies as we compete in the global marketplace.
    For nearly 140 years, Kimberly-Clark has been providing 
consumers with essentials for a better life. With brands like 
Kleenex, Kotex, Scott, Huggies, and Depend, we estimate that 
one out of every four people in the world use a Kimberly-Clark 
product every day.
    Due to the nature of the products that we sell, which are 
bulky and costly to ship, our manufacturing operations need to 
be close to our consumers. Our products are sold in 150 
countries around the world, we operate more than 100 
facilities, and we employ 57,000 people worldwide. Over 15,000 
of those employees are based here in the United States, with 
production facilities across 20 different states.
    Most of the products we sell in the U.S. are developed and 
manufactured here. In fact, the majority of our $300 million 
research and development budget is spent in the United States. 
The U.S. is by far our largest market, representing more than 
half of our sales, but the categories in which we compete are 
relatively mature in our country. In addition, Kimberly-Clark 
has a long-standing presence outside the United States, and 
given relatively low consumer usage of our products in those 
developing markets, we view this as an important growth 
opportunity.
    Kimberly-Clark has a strong track record of investing in 
the U.S. through research and development, capital investment, 
and by paying dividends to our shareholders. In addition to 
supporting jobs at Kimberly-Clark, our investment generates 
jobs and economic activity through our suppliers and in the 
communities in which we operate.
    To be able to effectively compete in today's global market, 
we need to expand and grow in the U.S. and abroad and we need a 
tax system that enables us to compete in the global 
marketplace. There are three key ways we believe our tax system 
could do more to encourage investment, job creation, and 
economic growth in the United States.
    First, we need to have a more competitive tax rate. Second, 
we need to move to a territorial system of taxation. And, 
third, we need to simplify our tax rules.
    American companies have a terrific base of talent, an 
unrivaled track record of innovation, and some of the greatest 
products and brands in the world. Unfortunately, American 
companies face a clear disadvantage as a result of our U.S. tax 
system. A good first step to improving the competitiveness of 
the U.S. tax system would be to reduce the combined federal and 
state tax rate to a level comparable to the combined rates of 
the rest of the OECD countries. As you know, the current 
combined U.S. federal and state tax rate is more than 50 
percent higher than the average of other OECD countries.
    The second step would be to adopt a so-called territorial 
system which does not layer U.S. tax on the income earned 
overseas that has already been subject to tax in the country in 
which it was earned. This includes taxing dividends being 
returned to the U.S. and taxing royalties that are paid by 
foreign affiliates for U.S.-based technology and intellectual 
property. By eliminating this extra layer of tax, the 
disincentive for American companies to reinvest their foreign 
earnings in the U.S. would be significantly reduced.
    The third way to improve our tax system would be to 
simplify our tax rules. The current international tax system is 
highly complex. This requires companies to devote significant 
resources to compliance activities rather than product 
innovation and growth. We need a system that reduces the cost 
of administration, reduces the risk of inadvertent error, and 
is easier to monitor.
    To continue to prosper and be relevant for the next 140 
years, Kimberly-Clark must grow our business at home and around 
the world. We have to be responsive to the needs and desires of 
our diverse global consumers, we must continue to innovate and 
reinvest for future growth. To do all this, we need a tax 
system that is competitive with global norms; which is less 
complex and easier to administer, a system which gives us the 
flexibility to manage global operations in the most efficient 
manner, and finally, which incentivizes the deployment of 
capital to the U.S., and which promotes U.S. economic growth 
and job creation.
    This is an important debate, and I commend you for tackling 
it. Thank you for giving us the opportunity to share our views 
on tax reform, and I look forward to the question and answers 
session.
    [The prepared statement of Mr. Buthman follows:]
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    Chairman CAMP. Well, thank you. And thank you all very much 
for taking time out of your busy schedules to come and talk to 
us today about international tax issues.
    I have a question I would like each member of the panel to 
address. We often hear that there are sort of two sides to this 
debate. Some people feel that the global economy is a zero-sum 
game, and that as a U.S. company expands overseas, it must be 
contracting at home. And others argue that when U.S. companies 
compete overseas, it leads to more jobs for American workers 
who are needed to support the foreign operations, and that 
leads to more tax revenue for the U.S. Government.
    In your company's experience, have your foreign operations 
benefitted your domestic operations, or have they come at the 
expense of your domestic operations? And if we just want to 
start with Mr. Hayes, and each of you take a shot at answering 
the question, I would appreciate it.
    Mr. HAYES. Thank you, Chairman Camp. I would say that, in 
general, the expansion that we have seen overseas has been a 
significant benefit to the domestic operations. And I say 
that--as you think about United Technologies, about 20 percent 
of our revenues today come from the emerging markets. That has 
more than doubled in the last 10 years. That growth overseas is 
allowing us to grow domestically, and allowing us to invest in 
R&D at home.
    Think about the Otis elevator company. Otis is a $12.5 
billion worldwide company. The R&D for Otis elevators happens 
right here, in the United States. It happens, in fact, in 
Bloomington, Indiana, and it happens in Farmington, 
Connecticut. That R&D, then, is shared with our operations 
around the world, and allows us to compete globally.
    Unfortunately, you can't build an elevator in Hartford, 
Connecticut, and ship it to Shanghai. You have to be in these 
local markets. You cannot service an elevator--and we service 
1.7 million elevators around the world--you can't do that from 
the U.S. You have to be in these local markets. But the 
earnings associated with those foreign operations drives growth 
here. It drives growth in the professional ranks, growth in the 
engineering ranks, and allows us to continue to invest to grow 
the business globally.
    And Otis is just one example. I would tell you that happens 
with our Carrier air conditioning. Again, the R&D for Carrier 
happens in Syracuse, New York. That technology is exported 
around the world, and we use that technology to grow the 
business globally.
    Pratt & Whitney, again, a very large company, $13 billion 
in revenue. We have some of the best technology in the world 
today. We have a new, very efficient jet engine called the 
geared turbofan. It is going to reduce energy costs by 15 
percent for airlines. That technology, which was developed in 
East Hartford, Connecticut, is going to allow us to expand 
globally.
    So, I would tell you, you know, taking advantage of global 
markets requires investment at home. Expansion in the global 
economy also allows us to reinvest at home in the things that 
are important, like research and development. And it is that 
R&D that ultimately creates jobs back here in the United 
States.
    Chairman CAMP. Thank you. Mr. Rapp.
    Mr. RAPP. Yes. Chairman Camp it has been a key driver for 
U.S. jobs growth since we started back in 1925. And I think 
there is probably no better example of that than what we have 
experienced over the last 12 months.
    In spite of a U.S. economy that is still weak, as we have 
all seen, in terms of the recent statistics, we have added 
7,000 jobs over the last 12 months. And that is based on the 
strength that we have in global markets. Because for us, as we 
grow globally, a lot of the central services that we provide, 
in terms of support, are headquartered here.
    I have the responsibility of our IT organization, 
headquartered in Peoria, Illinois. I have a responsibility for 
our purchasing organization headquartered in Peoria, Illinois. 
HR is in Peoria, Illinois. We are financing product around the 
world, headquartered in Nashville, Tennessee. Our corporate 
treasury services, tax services--you can just go down the 
list--are all headquartered out of the U.S. And as we grow 
globally, it drives growth and employment.
    And, of course, a key driver for us is R&D. We will invest 
about $2 billion this year in R&D. And the vast majority of 
that is going to be invested in the U.S. We have a great 
research and development center just outside of Peoria.
    The other place that it benefits U.S. jobs is with our 
growth overseas, and the exports, about $13 billion last year, 
8 out of 10 tractors that we built at our East Peoria plant go 
export. If you go to the plant, you walk down the aisle, and 
you look at each tractor, and it designates where it is being 
shipped. I mean it is like going to the United Nations. If you 
go to Decatur, Illinois, 9 out of 10 of our mining trucks go 
export.
    So, our ability to compete and win in export markets, for 
us, has always driven jobs back here, in the U.S.
    Chairman CAMP. Thank you. Mr. Crines.
    Mr. CRINES. Mr. Chairman, I would go back to maybe 10 years 
ago, when I joined the company. At that time, the company was 
about a quarter of its current size. So, about $1 billion in 
revenue, globally, most of that then was coming from our U.S. 
market.
    And then, as a consequence of an acquisition, a 
transformational acquisition that took place in 2003, where the 
company prevailed in a competition for a European-based 
manufacturer, the company has been able to grow, and grow 
significantly to where we are today, with $4 billion in 
revenues and 8,000 employees, globally. That revenue today, 
that $4 billion in revenue, is predominantly sourced out of our 
U.S. manufacturing facilities. Seventy percent of our foreign 
revenues are sourced either out of our manufacturing facilities 
in Warsaw, Indiana, in Carlsbad, California, in Parsippany, New 
Jersey.
    And, as well, today we now have approximately, out of the 
8,000 employees, about 1,000 employees dedicated to research 
and development. Innovation really is the life blood of this 
industry. And 75 percent of those research and development 
employees are based in our U.S. development operations.
    So, there is no doubt in my mind that the expansion of our 
business overseas has led to growth in jobs here in the U.S.
    Chairman CAMP. Mr. Buthman.
    Mr. BUTHMAN. Thank you, Mr. Chairman. I will take a little 
different spin. I think there are two key elements for 
Kimberly-Clark. One is research and new ideas and innovation, 
and the other is cash flow. I worked most of my adult life at 
Kimberly-Clark. When I first joined the company back in the 
early 1980s, we were largely a U.S.-based company. Our growth 
internationally has increased dramatically over that time. In 
the last 10 years it is particularly true in developing and 
emerging markets.
    Ten years ago, about twenty percent of our business was in 
developing and emerging markets outside of the United States 
and Europe. That is where 80 percent of the world's population 
resides. And for our company, many things that we take for 
granted in the United States--things we use every day--either 
are not used, or are used in very rudimentary forms. So today 
more than one-third of our top-line growth is in those 
developing and emerging markets.
    So, our ability to export technology and U.S.-based ideas 
around the world is an important part of the growth opportunity 
for our business. In fact, Kimberly-Clark invented five of the 
eight categories in which we compete, things that I am sure 
many of you may have used today, as a matter of fact. And so, 
our opportunity to bring ideas from around the world--which is 
increasing, the pace of innovation is increasing around the 
world--our ability to bring those ideas to the United States, 
developing them in our research and development facilities 
here, which are principally based in Neenah, Wisconsin and 
Roswell, Georgia, where we have--between those 2 locations, 
about 1,400 research and development employees. It is a great 
opportunity for us to grow.
    And I will just conclude by saying outside the United 
States we generate far more cash than we have opportunities to 
invest overseas. We have great opportunities to invest. But we 
constantly battle excess cash flow. We would like to return 
more cash to the U.S., both to invest in research, to invest in 
capital, and also to use as dividends to our shareholders, 
which can be redeployed elsewhere in the economy.
    Chairman CAMP. All right, thank you. Mr. Levin may inquire.
    Mr. LEVIN. Thank you. Interesting testimony. I think the 
testimony of the four of you, with all of your expertise and 
background, illustrates in each case the need for our 
committee, Mr. Chairman, to try to dig out the facts and see if 
we can find a common basis from which we can proceed.
    For example, I think we need to explore the issue of 
effective tax rates, and make sure that we really understand 
what are the effective tax rates in the U.S. and, for example, 
the OECD countries. We will have some testimony later on that 
indicates that, in terms of effective tax rates, there is not 
the differential that there would first appear to be.
    Secondly, and you have testified to this, to some extent, 
we need to understand more clearly the pattern of job growth 
here and overseas for the multinational corporations, because 
this is often something that becomes very, very significant and 
very controversial.
    For example, just last month in the Wall Street Journal 
there was an article by Dave Wessel April 19, 2011, it was 
headlined, ``Big U.S. Firms Shift Hiring Abroad, Workforces 
Shrink at Home, Sharpening the Debate on Economic Impact of 
Globalization.'' You have touched on this, but I think, Mr. 
Chairman, we need to try to dig out the facts.
    Thirdly, a number of you have mentioned the issue of 
permanence. I think everybody on the committee would agree that 
it has been a real problem that many of these provisions are 
simply renewed year after year, that there has not been 
anything close to permanence. We use the word ``permanence,'' 
but these provisions are temporary. And it is difficult, I 
think, for companies to plan. And I think we really need to dig 
out what the impact has been, because there are many different 
views of that.
    And, fourthly, I think we need to have an honest discussion 
about the tax expenditures. I mentioned the ones that are 
predominant in corporate taxation: Section 199, the accelerated 
depreciation, the R&D tax credit. I would simply urge that we 
beware of some of the rhetoric we sometimes use. For example, 
``picking winners and losers.'' Because one of the criticisms 
of the R&D tax credit is that we are doing exactly that.
    I think the more we look at it, the less valid that 
designation is. But I think we need to look at the importance 
of these tax expenditures because shifting to a territorial 
system has some major revenue implications. And there are some 
who think that the answer is to eliminate these tax 
expenditures in return for a lower rate.
    But I think in the case of each of your companies there has 
been effective use of these tax expenditures. And to simply 
propose their elimination would have a major impact. For 
example, Caterpillar has effectively used these, and Section 
48C has been effectively used in some cases.
    And I think if we are worried about the impact on jobs in 
the United States, Mr. Chairman, we have to have a very full 
discussion of the impact of each of these. Thank you very much.
    Chairman CAMP. Thank you. Mr. Herger is recognized.
    Mr. HERGER. Thank you, Mr. Chairman. I want to join in 
thanking our witnesses for your testimony. It is always very 
important to hear from those individuals who were actually 
being affected by the tax policies that we in Congress pass.
    It is very important for us to get this area of 
international taxation right, because it seems like the United 
States is falling behind in global economy. As Chairman Camp 
mentioned in his opening testimony--and I think it bears 
repeating--in 1960, 17 of the 20 largest companies were 
headquartered in the United States. But in 2010 only 6 of the 
top 20 are U.S.-headquartered companies.
    I would like to ask a question for each of our witnesses 
with whatever time we have. In our world of increasingly mobile 
capital, how does the very high corporate tax rate make 
business investment and job creation in the U.S. less 
attractive? And I would like to begin with you, Mr. Hayes.
    Mr. HAYES. Thank you, sir. I guess, just to start out, as 
we look at the investment horizon, we all understand that 
capital is mobile on a global basis. I mean we can make 
investments anywhere around the world.
    And the question for us is, on a long-term basis, where is 
the most efficient place to put those investment dollars? And 
tax policy plays a part, although it is not the end-all, in 
terms of the investment decisions. Clearly, having a 35 percent 
statutory tax rate is an impediment, versus the OECD, which has 
an average tax rate of about 25 percent. So the U.S. is at a 
disadvantage as we begin each of the analyses. It is not the 
ending point, though, it is simply one of the factors that we 
have to consider.
    Ranking Member Levin talked about our effective tax rates 
and how they are lower than the statutory rates, and that is 
obviously clear. Our effective tax rate is just under 28 
percent. But at the end of the day, we make investment 
decisions based upon the statutory rates that are in effect in 
the countries as they stand today. And the same goes with the 
R&D tax credit. To the extent that the R&D tax credit is not 
going to be renewed, you can't make decisions based upon the 
hope that you are going to have a short-term renewal of each of 
these tax expenditures. And I think permanence is critically 
important.
    And so, as we think about the long-term rate, the 35 
percent rate here, it puts us essentially 50 percent higher on 
the tax cost than any other OECD country, and certainly lower 
than any of the emerging market economies where we had 
opportunities to make investments. At the end of the day, we 
are going to make investments where the customers are, and 
where it makes the most economic sense.
    Mr. HERGER. Mr. Rapp.
    Mr. RAPP. Yes, Congressman, I would maybe touch on two 
points relative to the kind of the impact it has in terms of 
the attractiveness of the investments that we make.
    I think, first of all, if you look at the dynamics of the 
world that we operate in today, I don't have to explain to you 
just how dynamic and how volatile it is. Different markets 
growing at different rates around the world, and the ability to 
freely move capital to take advantage of those opportunities 
that drive those jobs back in the U.S., for me, is absolutely 
critical. Today our ability to do that relative to the foreign 
competitors that want our customers, want our jobs we are 
hamstrung, based on the current code.
    The other one--the nature of our business, when we make a 
decision to put down a plant, it is a 25 to 30-year type 
investment. Major facilities, big cap-ex, R&D. And when we make 
that, we are making it off of that view of what that statutory 
rate is going to be.
    So, as we look at that investment decision today, we are 
looking at a 35 percent rate here, versus if we make that 
investment to pursue opportunities in other parts of the 
world--with on average, a 25 percent rate. So it does, you 
know, skew it toward other opportunities to invest in other 
parts of the world.
    Mr. HERGER. Good. Mr. Crines.
    Mr. CRINES. Yes, sir, I would tell you that if tax rates 
were the only factor considered in where to locate, we would 
move most of our manufacturing operations offshore.
    The fact of the matter is that there are a number of 
factors, you know, that weigh into decisions around where to 
locate manufacturing operations. Zimmer operates in a highly 
regulated industry, and it is very important to us to be able 
to produce the highest quality products. We need to have access 
to people who have an understanding of quality systems 
regulations. We need to have access to highly-skilled labor. We 
are very fortunate in having access to a large skilled labor 
pool in northeastern Indiana, where we have been located since 
1927.
    We also like to locate our facilities--we have a 
preference, if we can, to locate them near our research and 
development functions, because our research and development 
people are not only focused on product innovation, but also 
process innovation.
    Chairman CAMP. All right, thank you.
    Mr. HERGER. Thank you.
    Chairman CAMP. Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman, and let me thank you 
for you and staff for picking such an outstanding panel for us 
to learn a lot from today. I think it is abundantly clear that 
we read from the same page. We are so proud of the genius of 
our private sector in maintaining a leadership position 
throughout the world. And you should know we don't want 
anything that we do to impede that, because it affects not just 
your companies, but it affects our constituents.
    Let me first ask, since five minutes is just too short, I 
assume that all of you have a representative in Washington that 
represents the thoughts that you expressed today?
    Mr. HAYES. Yes.
    Mr. RAPP. Yes.
    Mr. CRINES. Yes.
    Mr. BUTHMAN. Yes.
    Mr. RANGEL. Good. Okay. Well, we have to find out their 
names--at least I do--so that the chair and the leadership here 
can continue this discussion.
    Now, I think you all agree that 35 percent is too high of a 
corporate rate, and it does not make us competitive 
internationally. Who at this table pays 35 percent corporate 
taxes? Who pays 30 percent corporate taxes? Okay. There are 
people at the table that pay no taxes.
    Mr. HAYES. No, sir.
    Mr. RAPP. No, sir.
    Mr. RANGEL. I don't mean at this table. People who are not 
at this table--little or no taxes.
    [Laughter.]
    Mr. RANGEL. And so, what we have to do is to determine how 
we can bring equity because there is some outrageous incentives 
that we have in the Tax Codes. Billions of dollars are there 
with hundreds of incentives, loopholes, credits, waivers. And 
if we all could agree, of course we could dramatically bring 
down the tax rate.
    Now, when Richard Neal and I and certainly our 
distinguished chairman here talks about it, or when we started 
moving forward, bringing what we call equity, a lot of people 
started screaming that we were increasing taxes. And 
technically, if you are not paying any tax, and we say, ``Pay a 
fair tax,'' we are doing what, increasing taxes.
    So, you know and we know that the problem is going to be: 
Whose ox is being gored?
    Now, is there--I am going to make certain that your 
representatives talk with us. Because being candid and frank as 
to how far we can go is the key to this whole thing. And you 
are not going to find someone that has an unfair advantage over 
you looking for reform. He or she, the company, wants it the 
way it is.
    So, I assume that the business roundtable does not speak 
for all of you.
    Mr. HAYES. That is correct.
    Mr. RANGEL. I assume that the Chamber of Commerce does not 
speak for all of you, because their members have divided 
opinions as to what we should do.
    But if we did have some way of finding out what is painful, 
but fair, what gives you maybe not an unfair advantage, but 
certainly puts American in a very competitive way, which we 
would really want within the restrictions of the WTO, then that 
is what we want, and we are not ashamed of that. We have to 
find out what happens with sales when our people know it is 
made in the USA? Hey, that has to count for something, even 
though our wages may be higher than some other competitive 
countries.
    And so, I want the names of the people that we can extend 
this to, because doesn't our national efforts in education mean 
something to you, besides just research and development? 
Doesn't our health system, in terms of your employees here, 
mean something? Not just morally, but in dollars and sense? And 
so, you are not going to find problems with those people that 
agree with you. It is those people who are not at the table 
that have to be brought on board, because it is going to cause 
problems for all of us.
    I think that you make an outstanding contribution to make 
American great. And we support what you have. And I assume all 
of you think that it is a good idea to continue this discussion 
through your representatives here in Washington.
    Mr. RAPP. Absolutely. That is why we are sitting here in 
front of you today.
    Mr. RANGEL. Do all of you want----
    Mr. HAYES. Yes, sir.
    Mr. BUTHMAN. Yes, we do.
    Mr. CRINES. Absolutely.
    Mr. RAPP. We are not Washington-based, we have got a lot 
going on. But this is important to our competitiveness, it is 
important to the growth of our company and countries----
    Mr. RANGEL. Well, I am not going to----
    Mr. RAPP. We will engage.
    Mr. RANGEL. I am not going to let you leave until we get 
who you have anchored here.
    Mr. RAPP. You know what? He is sitting right behind me.
    [Laughter.]
    Chairman CAMP. I think I see many of them right from where 
I am sitting.
    Mr. RANGEL. Well, I yield back the balance. I want to thank 
you, Mr. Chairman, and Chairman Levin, because being honest and 
fair, rather than just public and talking about--you know that 
if we took away a whole lot of these expensive exceptions and 
preferential treatment, that would be no problem, and no 
profile and courage for us to reduce the corporate rate. Right?
    And so, let's get together and let's do it. And it is going 
to take courage, but we need some political cover from those 
people that want to be competitive with foreigners.
    Chairman CAMP. All right, thank you.
    Mr. RANGEL. Thank you.
    Chairman CAMP. Mr. Brady is recognized.
    Mr. BRADY. Thank you, Mr. Chairman. When Chairman Rangel 
speaks and asks questions, I never know whether I am supposed 
to answer them or not.
    [Laughter.]
    Mr. BRADY. But I appreciate the approach you take.
    You know, our panel makes a compelling argument that, to 
grow America's economy, it is simply not enough to buy 
American, we have to sell American, and that our Tax Code is a 
hindrance to competing and winning abroad, in its design, its 
rate, and its unreliable incentives to research and 
development. It is a discouragement to bring U.S. profits back 
home to invest in America. All that contributes to the anti-
competitive Tax Code we have today.
    I want to ask each of you, starting with Mr. Buthman and 
working our way down, this question. We hear two claims in 
Washington these days. One is that our current Tax Code is 
filled our international Tax Code is filled--with corporate 
loopholes like deferral that encourage companies, American 
companies, to ship our jobs overseas.
    We also hear that if America moves to match our competitors 
with a territorial tax system, that that will also encourage 
you to ship American jobs overseas. Is either of those claims 
accurate? And, if not, why?
    Mr. BUTHMAN. That is a great question, Congressman. I would 
say certainly today the complexity of our Tax Code influences 
behavior in the corporate community for the reasons we talked 
about. We make long-term investments. A tissue machine goes in, 
and it is around for 100 years. And we have to think about tax 
as not the only driver, for sure, but it is a very important 
component of that decision.
    So, I think the idea of moving to a simpler system, where 
you have more transparency coupled with a lower rate, is a good 
idea. Congressman Rangel made a great point. This is a very 
challenging problem to solve, and I think it should be only 
based on thoughtful reflection. But I think, in general, moving 
to a simpler system with a lower tax rate makes a lot of sense.
    The fact that we are--the more competitive we are overseas, 
the more cash we generate overseas--today, the fact is that it 
is very difficult to bring it back to this country. If we can 
eliminate that obstacle, there is no question that much of the 
cash we refer to as ``trapped'' overseas would return here, to 
be invested in some way, shape, or form in the United States.
    Mr. BRADY. Yes.
    Mr. CRINES. I would just point out that, with respect to 
deferral, Congressman Brady, I mentioned earlier that Zimmer 
prevailed in a bid for a large, European-based orthopedic 
manufacturer in 2003. I don't know that Zimmer would have 
prevailed. We were competing against a UK-based competitor of 
ours who was--also had expressed interest in buying that same 
business. Deferral is what allowed us to compete effectively, 
and win, ultimately, in that battle.
    So Zimmer is very much in favor of reform that leads to 
less complexity and a more simpler system. If deferral were to 
be eliminated, in our view, it would have to be replaced by a 
lower tax rate, such that we are in a position to compete on a 
level playing field with our foreign-based competitors.
    Mr. RAPP. Yes. Congressman Brady, I would look at it--if we 
leveled the playing field around the world, I think a lot of 
the motivation, in terms of arbitrage, goes away. And there you 
really get down to the fundamentals of what does it take to 
compete, and when, the customers that you are trying to draw to 
your business, to grow your business.
    We build skidsteer loaders in Sanford, North Carolina, 
because a customer won't wait eight weeks for it to be shipped 
from an overseas location. The shipping cost relative to the 
total price, it doesn't make sense.
    So, I think it really gets down to get a level playing 
field, and then allow companies to compete for that customer 
base. And, as I said earlier, we are absolutely convinced, 
given that level playing field, we can compete with anybody 
around the world.
    Mr. HAYES. Yes, Congressman, I would just add I think, you 
know, as we look at deferral--and I mean we can call it a 
loophole, we can call it a tax expenditure--I think any of the 
changes that we are talking about half to be done in the 
context of global reform.
    To Congressman Rangel's point, these tax expenditures have 
to be looked at holistically. We have to look at each one, and 
trade off the impact on job creation in the U.S. versus the 
cost of the U.S. Treasury. And I think we, as we sit here 
today, as well as many other of the large companies with large, 
export businesses, we would support this broad type of tax 
reform, which takes a look at all of these tax expenditures, 
and would be willing to put all of it on the table.
    Mr. BRADY. Thank you.
    Chairman CAMP. Thank you. Mr. Lewis is recognized.
    Mr. LEWIS. Mr. Chairman, I came in late, and I----
    Chairman CAMP. I have you here as here at the gavel, so----
    Mr. NEAL. Want to switch?
    Mr. LEWIS. Yes.
    Mr. NEAL. Mr. Chairman.
    Chairman CAMP. Okay. Mr. Neal is recognized. Are you----
    Mr. LEWIS. Yes, yes.
    Chairman CAMP [continuing]. Wishing Mr. Neal to question?--
--
    Mr. NEAL. Thank you, Mr. Chairman. And these hearings are 
very instructed. I am delighted with the panel. And I hope that 
the testimony can lead to a conversation.
    And on one point, where Mr. Rangel is right on target, is 
that in Washington a conversation about tax reform generally 
begins with histrionics, and it moves to fact shopping, and 
then it moves to intransigence. And it is very hard to have 
this conversation, but let me throw something out to you which 
I think is something that, by way of definition, we all ought 
to be able to agree to, and that is, what tax system will 
improve the quality of life for the American people? I mean 
that ought to be the fundamental goal, the cornerstone of the 
conversation that we are having.
    Pleased that Mr. Hayes raised that example of the Otis 
elevator, because that certainly unites the four panelists. I 
don't have to tell you, Mr. Rapp, what the R&D tax credit means 
in Massachusetts, where so much research is done every single 
day with terrific companies. But a couple of questions, and the 
panelists should feel free to give their views.
    One, wage pressure in China, and what is happening as to 
how the anxiety level that the American people currently feel 
about their job stature might be enhanced down the road because 
of the changes that you are witnessing on a firsthand business.
    And, secondly, given my lead-in question on R&D and the 
issue that you have raised with deferral, another thought that 
I think is very important, and that is what preferences in the 
code might you be willing to concede to lower the corporate 
rate?
    So, you are free to take your best shot.
    Mr. HAYES. Let me start with the China question if I can, 
Congressman Neal. I think, you know, there has been much 
rhetoric about the yuan, and the way that the Chinese have held 
down the value, relative to the U.S. dollar.
    But, as I said, we have 16,000 employees in China. And 
China is not the low-wage country that it was 10 years ago. As 
I look at the wages that we pay in China today, they have more 
than doubled in the last five years. And with inflation running 
at more than double digits, we expect wages to double again in 
the next five years. In fact, to have an aircraft mechanic in 
Shanghai at our overhaul repair facility, where we had a 75 
percent cost advantage 5 years ago, that advantage is less than 
30 percent today.
    So, the fact is, we have to be in China, because that is 
where the customers are. But they are not taking jobs away from 
the U.S. We don't export product from China to the U.S. We 
build product in China for the Chinese market, and you have to 
be there.
    And, again, I think the Chinese are having to deal with a 
very difficult problem around inflation, and they are having to 
do the same things that we have done in the states for the last 
50 years, which is find productivity in their factories, and 
adopt lean manufacturing technologies, and put technology to 
work in their factories, just as we have done here.
    You know, China is really not the threat, I believe, that 
people make it out to be, from a low-wage jurisdiction any 
long.
    Mr. RAPP. Yes, Congressman, I would agree. We have got more 
than 5,000 employees there, and it is really to build product 
to sell to China. In fact, we are an importer to China. In 
spite of the large manufacturing base there, and a lot of 
people there, that serves that local market. And we see it as a 
natural, if you would, migration of a society. The mass 
urbanization that has taken place, people searching for that 
higher quality of life, standard of living that only comes 
through the build-out of infrastructure.
    And so, we think that pressure on wages is going to be 
there, and we are going to be there with factories to serve the 
opportunities in China.
    On preferences in the code and what we would be willing to 
give up, I think, for us, back to the earlier discussion--and I 
think you described the emotions around this topic up front 
very well--that is why we try to do, in our business, take 
emotion out of it. If somebody says we are not competing with a 
competitor, as I said earlier, we just tear it down. We do the 
tests with independent people who really know how equipment 
operates, and then we have a very objective assessment of our 
competitiveness versus theirs. I think if we get to a low 
enough rate that is based on making us competitive, I think 
everything is on the table.
    Mr. CRINES. Congressman Neal, with respect to China, I 
agree with the other witnesses here that, over time, wage 
inflation will eliminate that comparative advantage that the 
Chinese have had over the past several years.
    We, Zimmer, is a net exporter to China. And with respect to 
medical devices the market there is tiered. At the high end of 
the market there is a great deal of interest in Western 
technology, and we compete very successfully in that end of the 
market. There is a growing middle-tier market that is serviced 
by some local manufacturers, smaller European-based 
manufacturers. Zimmer did complete an acquisition in the fourth 
quarter of last year to acquire a local manufacturer that will 
service that segment of the market.
    So, over time, we are going to compete in the high end of 
the market with the products that we develop and produce here, 
in the U.S., and we will be competing in that mid-tier by 
sourcing product out of the local manufacturer that we acquired 
in the fourth quarter.
    Mr. BUTHMAN. Congressman, just--I would echo the----
    Chairman CAMP. Thank you. I am afraid time has expired, so 
we will need to go on. Mr. Nunes is recognized.
    Mr. NUNES. Thank you, Mr. Camp. I am going to ask this 
question of all of the panelists. And maybe we will start on 
the right here, so that Mr. Buthman gets a chance to go.
    If we were to--if this committee was to get rid of all of 
the corporate tax deductions, every single one of them, if 
every one was on the table and we got rid of all of them, what 
rate would you like to see? And would you support that policy 
out of this committee?
    Mr. BUTHMAN. It is a challenging question, and a complex 
one.
    I think a place to start is our incremental rates, which 
are about 50 percent higher than the average of the OECD, which 
is something like the mid-twenties. So I think, if you wanted a 
place to start, that would be a good place. I think Congressman 
Rangel makes a great point. To unravel the behaviors that have 
been created over the last 50 and 25 years with our Tax Code is 
going to be complex. But from a base rate, that is where I 
would start. I would think about----
    Mr. NUNES. Low twenties? Mid-twenties?
    Mr. BUTHMAN. Mid-twenties.
    Mr. NUNES. Would be sufficient enough for you to give up 
all of the different--corporate tax deductions?
    Mr. BUTHMAN. I think we would love a simpler Tax Code with 
a lower rate. I think that objective is a good one.
    Mr. NUNES. Thank you. Mr. Crines?
    Mr. CRINES. Our effective tax rate, first of all, was just 
over 30 percent in 2010, as a consequence of accruing tax on 
our U.S. earnings and profits at around 40 percent, including 
what we have to accrue for state taxes, and accruing tax at a 
rate of about 15 percent on our foreign earnings and profits.
    A rate in the mid-twenties would provide us with 
opportunity to invest more aggressively in innovation, given 
the fact that we are paying and accruing taxes at a higher rate 
than that today, even though we will be competing against 
European-based medical device manufacturers that, in some 
cases, are accruing and paying taxes at a rate of around 15 or 
16 percent.
    Mr. NUNES. So if we were to get rid of all the deductions, 
would you prefer to see a rate at 15 or 16, or 20, or----
    Mr. CRINES. If you can do that, absolutely.
    [Laughter.]
    Mr. NUNES. So you are in the mid-twenties.
    Mr. CRINES. Yes.
    Mr. NUNES. All right.
    Mr. RAPP. And I would say we would be in the mid-twenties, 
as well, but all inclusive, including state income tax. And I 
think that is an important distinction. So that leaves you with 
the federal rate somewhere probably in the 20 percent range
    On getting rid of----
    Mr. NUNES. You may be moving states, then? No offense to 
Mr. Schock here, but----
    Mr. RAPP. We have such a good relationship locally, I don't 
see----
    Mr. NUNES. Just joking.
    Mr. RAPP. The other one, on getting rid of all the 
deductions, I will go back to the comment I made earlier. I do 
think--and it tails back to the earlier discussion about 
quality of life. If you look around the world at Tax Code, in 
most cases countries have determined what industries do they 
want to drive their local economy.
    I mean you can move to a low rate with no preference for 
manufacturing or anything else. You do run the risk in that 
kind of environment that you end up with just a services-based 
industry. And I think, if you do that, you just need to 
understand what the implications are for quality of life and 
what kind of economy you build. That would be my only caution 
on that one.
    Mr. HAYES. I would say just again, as we talk about taxes, 
obviously, deductions for payroll, deductions for cost of goods 
sold, those types of things that, you know, we all are--
deductions I think everybody agrees that are relevant, and is 
part of a GAAP income statement--but as you think about the tax 
preference items, I think accelerated depreciation is one of 
those things that ought to be on the table. I think the 
domestic production allowance should be on the table. R&D tax 
credit ought to be on the table.
    Again, I think what we need to do is to benchmark our 
corporate tax rate versus what the other OECD does. And we 
don't have to have the lowest rate. I think if we have a rate 
in the mid-twenties that promotes job growth in this country, 
that takes away these deductions--I have a tax return, a 
federal tax return, of 19,000 pages, 19,000. I mean that is 
crazy. The fact is, we need to simplify the Tax Code. We need 
to make it more agnostic.
    Again, I talked about not picking winners and losers. You 
can pick any industry, and everybody has got, as Chairman 
Rangel said, an ox to gore here. But I think it all has to be 
on the table. What we need to have is a simplified tax system 
that taxes us the same way everybody else is taxed. And that 
way, as we compete globally, we are not at a disadvantage.
    Mr. NUNES. Thank you. I thank the panel, and I yield back, 
Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Becerra is recognized.
    Mr. BECERRA. Mr. Chairman, thank you. And to the four of 
you, thank you very much for your testimony. I think we all 
want to get to a point where we can get to some place where you 
all will come to us and say--at this stage--just try to help us 
find those new minds that are going to create those new 
inventions or come up with the latest type of technology and 
not have to deal with the Tax Code in 19,000 pages of a filing.
    The good news is, from everything I have heard, you are all 
very normal. You come here, and you want your tax burden 
reduced. I have never seen a witness come before this committee 
and ask that his or her tax burden be increased. So you all are 
very, very normal.
    The bad news is--actually, the only bad news is if you 
happen to be one of those people who believes that America's 
best days are behind it, that America is broke, and therefore, 
we are in chaos and we have to make some decisions that are 
going to hurt you and going to hurt the average American.
    I don't think most people yet believe that about this 
country. I think most people still believe that, in the 21st 
century, we are still the country to model yourself after if 
you are an emerging nation, that America is still the place 
where you find innovation, where you find the kind of companies 
that can hire the best engineers and still help a guy like my 
father, who got to the sixth grade, get a chance to make a 
decent living and get to see his kids go on to college.
    So, I sense that there is a lot of good news here. Not only 
are you very normal, but you are very successful. And I suspect 
that you will find that each and every member of this committee 
is looking for ways to make you even more successful, because 
the more wildly successful you are, the more people you are 
going to hire. And I think, if we take that perspective, we 
will have a better understanding of what is going on.
    Let me give you some quick statistics. Because the prism 
looks very different from the eyes of differing Americans.
    In 2009, pretty much when we were feeling the effects of 
this recession hardest, most American multinational 
corporations, folks like you here, decreased the size of your 
workforce by about 5.3 percent, 1.2 million Americans lost 
their jobs in your companies. At the same time, about 100,000 
foreigners who worked for your companies, U.S. multinational 
corporations, lost their jobs, about 1.5 percent.
    And so, the perspective of many Americans, including those 
13 or so million Americans who are still not back at work is 
that we are not doing something right because too many 
Americans aren't working.
    Another statistic. During the 1990s, U.S. multinational 
companies reduced their workforce by--I am sorry, you 
increased--strike that.
    U.S. multinational companies cut their workforce by 2.9 
million in this past decade, 2000 to 2010. At the same time, 
these multinational companies from the U.S. increased their 
employment overseas by 2.4 million. Now, that is a switch from 
the 1990s, when these same multinational companies added 4.4 
million jobs in the U.S. and 2.7 million jobs abroad.
    And so, from the perspective of a lot of Americans, the 
constituents that we hear from, we are not seeing the job 
growth in the U.S., and we are seeing a lot of very successful 
U.S. companies increase jobs abroad.
    So, when we have to deal with policy, it is not just the 
nuts and bolts of a 19,000-page tax return. It is dealing with 
a guy who says, ``Wait a minute. I used to have a job that 
allowed me to send my kids to college. I am on the verge of 
losing that and my home.''
    So, we have to deal with an issue that is very complex, and 
come up with a simple solution, not just for you, but for the 
guy who we see back home. And so there I have a--I would then 
pose a couple of questions. And I don't know if you will have a 
chance to respond to it, but maybe later on, because I know, as 
Mr Rangel said, you will come back and talk to us.
    If you want to see us move to, say, a territorial system 
that our OECD competitors have, are you interested in seeing 
the other aspects of their system: a VAT tax, a higher income 
tax, more regulatory structures over your operations? If you 
like one aspect of what they do, do you like the rest of what 
they do? And so that we don't just cherry-pick what we like 
from all the rest of them and leave behind what we don't.
    The other--then the final point is--I hope you will 
consider giving us further advice and good counsel--is the 
issue of competitiveness. All things being equal, are you still 
hiring an American to do the job versus a foreigner with the 
same level of skill, the same title? And I think to the degree 
that you are coming back to us and saying, ``Absolutely, all 
things being equal, it is the American we look for,'' then 
guess what, we are going to be right there behind you, because 
at the end of the day it is that American who gets the job who 
is our constituent. So thank you very much.
    Chairman CAMP. Thank you. Mr. Tiberi is recognized.
    Mr. TIBERI. Thank you, Mr. Chairman. And thank you all for 
providing excellent testimony today.
    Mr. Crines, the so-called lock-out effect, a combination of 
the deferral regime that you have talked about, and a 
relatively high corporate tax rate that we have in America, 
does it prevent you, as a CFO for a company that does business 
overseas, does it prevent you from making investments in the 
United States that you otherwise would make if it weren't for 
that?
    Mr. CRINES. Congressman, we, like many other U.S. 
multinationals, accumulate earnings and profits offshore. We 
have asserted that we intend to reinvest those earnings and 
profits offshore, understanding that if we were to return those 
earnings and profits back to the U.S., we would pay a 
significant toll tax to do that.
    Mr. TIBERI. So, to go to Mr. Becerra's point that he just 
made, the Tax Code is causing your company to make investments 
that it otherwise wouldn't make overseas, it would make them 
here, because of the current Tax Code.
    Mr. CRINES. Well, the Tax Code certainly is structured in a 
way where there is significant disincentive to bringing those 
earnings and profits back here to the U.S. So if we are looking 
to invest in the U.S., we have to find alternative sources of 
capital to make those investments.
    Mr. TIBERI. But it would almost encourage you to make 
investments that you otherwise wouldn't make overseas. Is that 
correct?
    Mr. CRINES. I would agree with that, Congressman, yes.
    Mr. TIBERI. Do others agree with that? Yes or no answer.
    Mr. BUTHMAN. Yes.
    Mr. RAPP. Yes.
    Mr. HAYES. Yes.
    Mr. TIBERI. Now, I am not going to ask you about your own 
companies, but--if you could give me a quick answer--talking to 
CFOs around the country, American CFOs who do business 
internationally--I assume you guys get together for a pop every 
once in a while and talk about the Tax Code--do you feel there 
is a risk that some of your CFOs and CEOs, not competitors in 
the United States, but peer companies who do business overseas, 
are talking about potentially, in the future, if we do nothing, 
if Rome continues to burn with respect to the Tax Code, that it 
would make sense for them to put their beer company in Belgium, 
for instance?
    Mr. HAYES. I think that is actually the issue here, 
Congressman. I think the fact is we are at such a competitive 
disadvantage that a company in France can buy a company in the 
United States, and because of the tax arbitrage alone, pay for 
whatever premium is required to make that acquisition.
    We saw it with InBev and Anheuser-Busch. And again, as UTC 
is a $60 billion business, even we are worried about the fact 
that there are foreign companies out there that could take 
advantage of the tax arbitrage to pay for a takeover of a U.S. 
company. And, again, tough to do with a UTC, but there are a 
lot of other mid-market companies that are going to suffer from 
this.
    Mr. TIBERI. And I would think you would agree with this 
statement, that the jobs that you provide around the world, the 
best paying jobs are at your headquarters? Is that true?
    Mr. HAYES. Yes.
    Mr. RAPP. The point you raise there is spot on. And if you 
take the combination of the tax arbitrage and a weak dollar, 
that risk has never been greater.
    I talked earlier about the jobs that we generate because 
we've got our HR staff, our IT staff, our R&D staff all 
headquartered here. If you get acquired by a company from 
another country, where do you think those jobs go?
    Mr. TIBERI. Well, in addition to that, then, let's say you 
were making diapers, and you are making diapers all over the 
world to sell diapers all over the world. Unfortunately, a lot 
of our constituents--Mr. Becerra made this point--believe that 
you are making diapers in China to sell to America. And I think 
your point is--all of your points are--you are growing jobs 
overseas, not at the detriment of the United States job market, 
but your growth is overseas. And if you don't grow overseas, 
somebody else from France or Germany or Belgium will grow 
overseas.
    And let me ask you this, as it relates to that, starting 
with the gentleman from Texas. If you grow overseas, and you 
sell more diapers and more Depends, and all the other things 
that you sell in Europe and China and Africa and Asia, does 
that help your corporate headquarters? Does that help American 
jobs? And how does it?
    Mr. BUTHMAN. Absolutely. And the fact is in our business, I 
think like in most businesses, you need to fish where the fish 
are. And the fact is, demand for our particular products are 
growing very rapidly overseas. And that is just going to be a 
natural evolution. The more competitive we can be overseas, the 
more successful we are going to be, the more successful our 
shareholders----
    Mr. TIBERI. Final question--if you could, provide this in 
writing back to the committee, because my time is about to 
expire--if we go to a territorial system, which I am for going 
to--are there things that we need to avoid? Because different 
countries have different types of territorial systems.
    Are there things that we should avoid if we go that way? 
And what are those things that we should try to avoid, to 
maximize the ability of U.S.--American companies that compete 
overseas to do better?
    Thank you. I yield back.
    Chairman CAMP. Thank you. Mr. Doggett is recognized.
    Mr. DOGGETT. Thank you very much. Thank you for your 
testimony. I certainly agree with you, that we need tax 
policies that encourage growth of jobs here in America. But, as 
you know, I have a very different perspective about some of the 
particulars of how we get there.
    And I am going to follow Mr. Tiberi's example, since there 
are four of you and five minutes, and ask you if you would, 
please, to--what will be narrow questions--respond with yes or 
no, or that you can't answer yes or no, and then if there is 
time I will come back around and get you to fill in some 
additional testimony, and certainly welcome, as he did, your 
supplementing your answers with written updates to our 
committee.
    Let me begin with you, Mr. Hayes. Is it correct that you 
were quoted in Bloomberg recently as saying, ``A one-time 
repatriation of profits is a bad idea. My fear is that we will 
have a repeat of 2004. If companies repatriate these profits 
and spend it on things like share buy-backs, they will create 
such negative connotations around tax reform with the public.'' 
Was that an accurate statement of your quote to them?
    Mr. HAYES. Yes, it is.
    Mr. DOGGETT. Mr. Rapp, do you agree with Mr. Hayes? And I 
think IBM took the same position.
    Mr. RAPP. I agree with Mr. Hayes.
    Mr. DOGGETT. Mr. Crines, do you agree with Mr. Rapp, Mr. 
Hayes, and IBM?
    Mr. CRINES. I agree, as well.
    Mr. DOGGETT. And Mr. Buthman?
    Mr. BUTHMAN. I am in agreement.
    Mr. DOGGETT. All of you agree that repatriation is a bad 
idea.
    Mr. Rapp, let me ask you about the example that would apply 
to any United States company that moved jobs to China--it 
applies to others, as well, but it would apply to those 
companies--where you say that the Chinese tax rate is 25 
percent. Am I correct that your testimony is that if an 
American company pays the Chinese $.25 on the dollar, that you 
think it is unfair that they should, in addition to that, have 
to pay $.10 on the dollar to the United States Treasury?
    Mr. RAPP. Yes, I do.
    Mr. DOGGETT. And, as I understand what you call a 
territorial system, the goal is to reduce the amount on 
earnings, on profits in China or elsewhere abroad, from $.10 on 
the dollar to zero to the United States Treasury?
    Mr. RAPP. Yes.
    Mr. DOGGETT. And the goal here is to have in what you call 
a territorial system a permanent exemption from all U.S. taxes 
on all earnings abroad, all foreign earnings. Isn't that the 
goal of a territorial system?
    Mr. RAPP. I think as we said earlier, you have got to do a 
benchmark of the territorial systems around the world. There is 
not one territorial system. What we are looking for----
    Mr. DOGGETT. But the one you are advancing would consist of 
what you just said, of going from $.10 to $0 to the treasury. 
The goal is to not pay taxes, except where you are making the 
profits.
    Mr. RAPP. In that example, absolutely, that we would pay 
the $25 there.
    Mr. DOGGETT. Mr. Crines, do you agree that the goal should 
be to pay zero dollars to the United States Treasury on 
earnings that you would have in China, if you paid the Chinese 
tax, that it should be zero here, that that is the goal of a 
territorial system?
    Mr. CRINES. No, sir, I would not agree with that----
    Mr. DOGGETT. Okay. And, Mr. Buthman, do you?
    Mr. BUTHMAN. Yes, I would agree with that, and I would also 
add that I would love to have access to the excess capital that 
we have overseas.
    Mr. DOGGETT. Overseas. I understand. And then, let me ask 
you, Mr. Rapp, you testified, especially in your written 
testimony, to the importance of the research and development 
credit to the active financing credit, which allows for 
extending credit abroad to operations without recognizing any 
earnings immediately from extending that credit.
    Are you saying that if the corporate tax rate were reduced, 
the statutory rate were reduced to the mid-twenties, that you 
would be willing to forego both of those?
    Mr. RAPP. As I said, if you get us to a statutory rate 
which includes states, that puts us competitive globally, 
everything is on the table.
    Mr. DOGGETT. And that would be--several of you have talked 
about what that rate is, but that is somewhere around 25 
percent?
    Mr. RAPP. Including state.
    Mr. DOGGETT. Including state taxes, as well.
    Mr. RAPP. Right, right.
    Mr. DOGGETT. So you--the federal rate you would be looking 
for is below 25 percent.
    Mr. RAPP. Right.
    Mr. DOGGETT. But if you got it below 25 percent, you would 
be willing, consistent with the testimony here about the need 
for simplification and the problems of having a 19,000-page tax 
return----
    Mr. RAPP. Yes.
    Mr. DOGGETT [continuing]. To eliminate the research and 
development credit. In fact, there are a long list of corporate 
deductions and exceptions and provisions that perhaps some of 
the team behind you have been successful in getting into our 
Tax Code in the past. And you would, for a flat rate of in the 
twenties, you would be willing to forego all of those?
    Mr. RAPP. What we have said--and I said it in my comment up 
front--what we are looking for is a level playing field. So 
what I want is a territorial system that lines up with the 
countries that we compete with around the world.
    Chairman CAMP. All right.
    Mr. DOGGETT. All right.
    Chairman CAMP. Thank you. Time has expired. Mr. Reichert is 
recognized.
    Mr. REICHERT. Thank you, Mr. Chairman. Well, first of all, 
Mr. Hayes, just a quick question. You mentioned 19,000 pages of 
tax returns that you have to fill out. Would you be more 
comfortable with a 10,000 to 15,000 page range, or----
    Mr. HAYES. I was hoping----
    Mr. HAYES. How about a one-pager?
    Mr. REICHERT. A 1-pager, instead of the 19,000. Well, you 
know, this is really all about jobs in America. And I think all 
of us here in this committee recognize that. All of you on the 
panel recognize that. It is all about making the United States 
of America leaders in this global economy. That is where we all 
are headed, that is where we all want to go.
    But I think part of the problem that we all have is that we 
hear from our constituents consistently--I mean they all 
agree--``Let's sell American, sell American, sell American.'' 
But I think most average Americans across this country believe 
that we can sell American within the United States borders, and 
I think some of us know and recognize that 95 percent of our 
market is outside of this country.
    Let's just say that I am one of your employees. What would 
you tell an employee who is thinking that, you know, I am 
working for one of these great companies, earning a great wage, 
but I see all the sudden this expansion around the globe, and 
jobs blooming up all over the world, but not so many jobs here, 
in the United States. How do you explain this global expansion 
to your average worker? Because I think that is where we hear 
the most complaints. And I would imagine that you probably hear 
some of the same.
    Mr. RAPP. Congressman, I will start with that. I think you 
raise a great point. It is the responsibility of the business 
community to have that good discussion with our employees to 
explain it. And I will give you an example.
    I was recently in our East Peoria plant, talking about the 
importance of global competitiveness. And I asked the open-
ended question, ``What do you think about free trade and some 
of the agreements that are out there? Do you think we should 
promote that kind of activity?'' And I was disappointed in the 
fact that there wasn't a stronger opinion from the group. And I 
commented that 8 out of the 10 tractors coming out of this 
factory go to export.
    And what I took away from that was that is not a failure of 
you, it is a failure of us, as a business, to engage with our 
employees. So we are aggressively going after it. We have 
created a speakers bureau, which creates presentations on tax 
competitiveness, trade, and the other key elements of our 
business. We are pushing it down our organization and expecting 
our leaders to communicate it to their employees, because we 
have got to do a better job of educating our employees to 
support the changes you know you need to make.
    Mr. REICHERT. There are some companies, too, that produce 
pieces of their product in other parts of the country, ship it 
back to the United States, and add it to the product to finish 
the product, which, of course, creates more concern for our 
employees here in the United States.
    The rest of the witnesses, do you have similar programs to 
educate your employees?
    Mr. HAYES. In fact, I would tell you, Congressman, at 
United Technologies we believe that lifelong education and 
furthering the education of all of our employees is of 
paramount importance. We spent nearly $1 billion in the last 15 
years on the UTC Employee Scholar program. More than 33,000 
degrees have been earned by our employees.
    Because globalization, as we tell everyone, is a reality. 
The jobs that we have today are not going to be the same jobs 
we have 10 years from now. We have to have a better educated 
workforce, we have to have people that have better skills. And 
we encourage that through paying for four-year college for 
people, we pay for books, we pay for fees. And we think that is 
the responsibility the corporations have to their employees, is 
to help them become better educated to deal with the 
globalization that is happening today.
    Mr. REICHERT. Yes.
    Mr. BUTHMAN. I would say we have the same emphasis on 
educating our workforce, but I also give them a lot of credit. 
In our industry, it is very competitive. We understand we have 
to drive efficiency. The best way to protect employment and 
growth is to drive efficiency and drive innovation. And our 
employees are actively engaged in that, and they are pretty 
aware. I am constantly amazed at how aware they are of the 
world around us----
    Mr. REICHERT. My time has just about expired, but I want to 
make this point that what you see here are people that really 
want to work with you in solving this problem and making 
America great again and bringing confidence back into our 
economy.
    Again, our constituents are the ones that drive us. And if 
you can help us with that, I think that would be one of the, I 
think, largest hurdles that we have to overcome in looking at 
restructuring the Tax Code, and also in looking at trade 
agreements that we have with other countries around this world.
    Chairman CAMP. Okay.
    Mr. REICHERT. And I yield back.
    Chairman CAMP. Thank you. Mr. Thompson is recognized.
    Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I think it has been incredibly 
instructive and helpful for all of us in dealing with this 
issue. And thank you all for being here to provide the 
testimony.
    I have a couple things I am not clear on that I would like 
to just have you help me out on. Am I to understand that you 
agree that whatever we do in regard to corporate tax reform 
should be revenue-neutral, we should not increase the debt, we 
should not increase the deficit? And we can do the yes or no 
thing; that is going to be popular----
    Mr. HAYES. I think that is the reality of today, a fiscally 
responsible----
    Mr. THOMPSON. So you are for that. Okay.
    Mr. RAPP. Yes, fiscally responsible.
    Mr. CRINES. Yes, sir we would support that.
    Mr. THOMPSON. No, no, not fiscally responsible. Revenue 
neutral doesn't increase the debt, doesn't increase the 
deficit.
    Mr. HAYES. Yes.
    Mr. THOMPSON. Okay.
    Mr. HAYES. That should be the goal.
    Mr. RAPP. Agreed.
    Mr. THOMPSON. Everybody is there? And then, on that, I 
think that Mr. Becerra started down this road, but on the issue 
of value added tax, let me be very, very clear. Many of us are 
either questionable of that, many of us are opposed to that. 
But just for the purpose of understanding the head nods when 
Mr. Becerra brought it up, are you saying that you would be in 
favor of a value-added tax in order to make up that difference 
that would come about because you--of the lower end of the 
corporate tax?
    Mr. HAYES. I would just say that I think that a value-added 
tax is probably the most efficient way to raise revenue, 
because it taxes consumption and not investment. And any review 
of taxes on a holistic basis should include a review of the 
potential for a value-added tax.
    Mr. RAPP. I would agree. I think that, to the degree that 
you can make this a comprehensive review of taxes, I think it 
makes it more valid. I think we have got to be realistic about 
how much you can bite off at one time.
    Mr. CRINES. To the extent we are advocating in favor of 
simplicity, Congressman, I think introducing a new tax regime 
would add a lot of complexity. I would prefer reform that 
really is focused on the income tax regime.
    Mr. BUTHMAN. And we would agree, that the essence is 
simplicity and really thinking through the administration that 
would be layered on through a VAT, which we see in, for 
example, in many countries in Europe, is something to be 
seriously considered.
    Mr. THOMPSON. Well, and I just want to point out for the 
record and anybody who might be listening, that the idea of 
broadening the base and lowering the rate is great. And, bottom 
line, it is a math problem. But you can't get to where you all 
said we ought to be by just eliminating the expenditures. So 
something else would have to be added in if we were, in fact, 
going to stay at revenue neutral. And everything on the table 
is different than a--saying that everything is on the table is 
different than stating specific ways for us to get there.
    A couple of other things. On Mr. Doggett's question on 
repatriation, I am not certain that I understood your position. 
You all think it is a bad idea, or you think the way that it 
was done last time was--shouldn't be duplicated?
    Mr. HAYES. I think a one-time repatriation is a bad idea. I 
think, again, it derails the idea of a comprehensive tax 
reform. So I would advocate against a one-time repatriation.
    Mr. RAPP. I would agree. We are encouraged by the type of 
debate that is happening here today, and we just don't want to 
give any relief valve to getting on with this.
    Mr. CRINES. Done in isolation, I don't believe it 
accomplishes the objective of leveling the playing field.
    Mr. BUTHMAN. Treats the symptom, and not the underlying 
issue.
    Mr. THOMPSON. Okay. And then, if you will indulge me for 
just a second, there is a hidden tax. And it was--the Secretary 
of the Treasury pointed this out the other day. And that is in 
our failing infrastructure in this country. He has stated 
specifically that that equates to a tax on business.
    And I am just curious if you, A, agree with that, and B, 
when you are looking at your investments in other countries, do 
you take into consideration their infrastructure and their 
plans for increasing efficiencies and infrastructure in your 
overall long-term business plans?
    Mr. RAPP. Absolutely. You know, as I mentioned earlier, we 
exported about $13 billion worth of product last year. And it 
is hard to do. I mean with the state of the U.S. 
infrastructure, the feeders into the ports, we definitely have 
seen a decline in infrastructure competitiveness in the U.S. 
versus other parts of the world. And as we invest around the 
world, infrastructure is one of the first things we look at.
    Mr. THOMPSON. So you all agree with that?
    Mr. CRINES. That is correct.
    Mr. BUTHMAN. Yes, sir.
    Mr. THOMPSON. And then, just lastly, you know, we are 
talking about this debt limit issue and how we are going to 
deal with that. And the experts tell us that if we don't do it, 
it will increase the interest rates. Would that, not increasing 
the debt limit, would that hurt or help you guys?
    Chairman CAMP. I am afraid time has expired.
    Mr. HAYES. That would hurt us.
    Chairman CAMP. Dr. Boustany is recognized.
    Dr. BOUSTANY. Thank you, Mr. Chairman. This is a great 
hearing, and I appreciate the panelists being here and 
providing testimony.
    Given our current tax system, worldwide taxation with 
deferral, foreign tax credits, and the fact that we have seen 
the international marketplace change, you have gone to regional 
management structures, as opposed to country-by-country. We 
have some provisions in our Tax Code that have to be renewed 
annually, or maybe once every two years.
    And one of those, Mr. Hayes, you mentioned, was the CFC 
look-through. And could you give us a little more background 
for the committee on why this is important, as you try to 
compete in this international environment?
    Mr. HAYES. Yes, Congressman. As I mentioned in my opening 
statement, about 60 percent of our revenues are earned outside 
of the United States. And about 60 percent of the cash that is 
generated is also earned outside of the United States. The CFC 
look-through rules allow us to move that cash to the various 
pools where it is most efficiently put to use without having to 
pay a U.S. tax on the interest income earned in the 
jurisdiction that is potentially lending that money.
    Again, I think this is simply a question of efficiency, and 
the CFC look-through rules provide a very efficient way for us 
to manage our foreign cash.
    Dr. BOUSTANY. And so, when we have a tax provision like 
this that comes up for renewal once a year or maybe every two 
years, depending on the circumstances, this creates a 
significant problem for you to predict your future tax 
liability and make business decisions. Is that correct?
    Mr. HAYES. That is correct.
    Dr. BOUSTANY. Thank you. With regard to compliance, I want 
to ask everybody on the panel. And I think, Mr. Hayes, you 
mentioned that you have 19,000 pages in your tax return. 
Obviously, this is very complex. Talk to us a little bit about 
your interactions with the IRS. How difficult is this process? 
I understand there are ongoing audits. You probably have IRS 
folks embedded. Is that a process that works? What would you do 
differently?
    Mr. HAYES. You know, I would tell you we have 12 full-time 
internal IRS agents that are on site at United Technologies in 
Hartford, Connecticut every single day. We have complete open 
books with the IRS. We share with them all of the information. 
As I mentioned, the 19,000-page tax return, that is just one 
year. We currently have five years open under examination. That 
is a lot of work.
    Again, I think the attitude with the agency is cooperative, 
that we try and be open book. And we think--we take compliance 
very seriously. It is very important to us not to have to go to 
tax court. We want to be fair and open.
    Mr. RAPP. I think the point you raise is why we have all 
talked about the need for simplicity. Because the high level of 
interaction we have is based on the complexity of the systems 
that we have to deal with.
    And so, I would say the process today, painful would be the 
description that comes to mind.
    Mr. CRINES. Congressman, it does take about six months for 
the company to prepare its consolidated tax return. It takes at 
least another six months for those returns to be audited by a 
team of auditors from the IRS that is larger in size than the 
size of our tax department. So I think that says it all.
    Mr. BUTHMAN. Yes. You know, I would say we have a 
cooperative relationship. But the complexity of the Tax Code 
does mean you have to share a lot of information. You have to 
have very skilled people at understanding the Tax Code.
    I feel a little bit better. Our tax return is only about 
4,000 pages long. So I come away from this hearing a little bit 
encouraged.
    Dr. BOUSTANY. It is my understanding that the IRS auditors 
rotate in and out as a team, and that there is some lack of 
continuity, and this creates some repetition and duplication of 
effort on your part. Is that a fair statement?
    Mr. HAYES. That is correct. Every two years or so.
    Mr. BUTHMAN. I think in any service organization, the 
quality of the individual is very important. And when we have 
good folks from the IRS working with us, it makes the process a 
lot easier.
    Dr. BOUSTANY. Thank you. I see my time is about to expire, 
so I will yield back. Thank you.
    Chairman CAMP. Mr. Larson is recognized.
    Mr. LARSON. Thank you very much, Mr. Camp, for holding this 
hearing, and I want to thank all of our witnesses. And let me 
start with a point that Mr. Hayes had made, and I hope all of 
you can answer that. It centers around the idea and concept of 
benchmarking.
    And in as much as this is a global economy, what, in your 
opinion, if your companies are benchmarking, and I assume all 
of them are, who would be the top benchmark in the world right 
now? What system in the world would you say would best 
advantage American companies if they were subscribing to it?
    Mr. HAYES. Congressman Larson, let me start there. I think, 
again, as we look across the globe and the OECD, I think there 
is probably no one system that is perfect. And I would hate to 
hold out France as the paragon of efficiency, but the fact is I 
think the French territorial system probably has merits that 
should be considered as part of this benchmarking.
    The fact is, under their territorial system, there is no 
expense disallowance, but there is a small toll tax of, I 
believe, five percent, as companies repatriate earnings back 
into France. But it is a very open system and, again, it does 
not focus on worldwide income, it focuses on income earned in 
France. And then French companies are simply taxed at a 
significantly lower rate than the statutory rate, as they bring 
earnings back.
    But again, it is just one of many systems that is out there 
that I think is worth studying.
    Mr. LARSON. Yes. Thank you. Mr. Hayes, you also realize--
and I want to put this in the context--I understand you frame 
that in the context of both having sound economic fundamentals 
and also recognizing that benchmarking would have to go along 
with reform. This is not--I am just trying to get your sense so 
that, as we are looking at this----
    Mr. HAYES. Yes.
    Mr. LARSON [continuing]. We can point to those best 
practices, or try to benchmark to those as to what might 
enhance our capability, globally.
    Mr. HAYES. Yes.
    Mr. RAPP. Yes, and one I would add to it is I think the 
thing that is interesting that shows why this is so timely is 
the UK and Japan have just gone through this very same process. 
And they did an extensive amount of benchmarking, asking what 
does it take to be competitive, what type of system and 
structure that has to be out there. I think that is--would be 
another source to look at, in terms of how they walk through 
the process, how they determine to make the changes that they 
have made.
    Mr. CRINES. And, Congressman, we believe the European 
territorial systems have made significant progress in 
simplifying their Tax Codes. And among those--and we have 
significant market share in Europe--would include the UK, 
Germany, and France.
    Mr. BUTHMAN. I have nothing to add to the discussion. I do 
think a comprehensive review--I think that the process the UK 
and Japan just went through would be a great place to start.
    Mr. LARSON. Following up on the line of questioning that a 
couple of my colleagues had, and Mr. Thompson, specifically, in 
knowing that the United States is currently--and this Congress 
is currently--dealing with raising the debt limit, what is your 
feeling on that?
    Do you think that there should be a--what are the 
ramifications of not acting on this in a timely basis for your 
companies?
    Mr. HAYES. You know, Congressman Larson, I think it would 
be devastating to the world economy, not just to the U.S. 
economy and not just to UTC, if the Congress failed to raise 
the debt limit. The full faith and credit of the U.S. 
Government is the basis upon which the entire world financial 
system revolves.
    If we think that the problems back in 2008 with the Lehman 
crisis were devastating, a default by the U.S. Government would 
have repercussions beyond anything we saw in 2008 and 2009. So, 
we would encourage the Congress to raise the debt ceiling.
    Mr. LARSON. This is in a process, then, from the 
perspective of business, of dealing with a credit card. This is 
a matter of default. That is how critical this is?
    Mr. HAYES. That is correct.
    Mr. RAPP. Yes. You know, for us, we are seeing improvements 
in our business around the world, but it is still a pretty 
fragile economy. The last thing we need now is another, if you 
would, shot across the bow that creates disruption, in terms of 
the global financial markets.
    So, we are counting on the fact that Congress is going to 
come together and figure out the right thing to do here.
    Mr. CRINES. I don't think I could say it any better than 
Mr. Hayes, Congressman. I would agree with his remarks.
    Mr. BUTHMAN. Confidence in the quality of our U.S. 
Government debt and the U.S. dollar are critical to running our 
business and, really, are a worldwide issue. I agree.
    Mr. LARSON. Thank you all for your expert testimony.
    Chairman CAMP. Thank you. Mr. Buchanan is recognized.
    Mr. BUCHANAN. Yes. Thank you, Mr. Chairman, for this 
important hearing. I appreciate the witnesses being here, and I 
applaud your companies because, at the end of the day, to me, 
it is about free enterprise. And the more we can help you be 
successful, it is in the best interest of the country, in terms 
of providing good jobs.
    I would like to get your opinions, and I don't know if you 
have given much thought about this, but I am thinking down the 
road as someone that has been in business for 30 years. I think 
there is a mindset in Washington that they are seriously 
looking at lowering the tax rate, you know, and cutting out 
deductions, maybe 25 percent, 28. I have heard the President 
express that interest, you know, when he talks to CEO 
roundtables and others.
    But help me understand. We are looking at one part of it. 
But as we look down the road, if we move down this road, you 
have a lot of competitors that might compete with your 
divisions or with other aspects of your business. They might 
not be the Fortune 500--in fact, they are not--the Fortune 500. 
But these are middle-market companies, these are small 
companies that compete with some of your divisions. They are 
called, as you know, pass-through entities. I am sure all of 
you are CPAs or work with a lot of accountants.
    How do we cut your rate a third, ideally, and eliminate 
deductions--how do we--how do you do that without addressing 
the LLCs, the subchapter S corporations? I used to be a C corp, 
and you know, over the years they moved me to an S corp in the 
1980s and an LLC in the 1990s. How do you do that when you have 
a mentality with some people that, they want to tax the rich? 
Well, the rich are a lot of those job providers. They are 
people that make over $250,000. A lot of them are my friends 
that have maybe 100 employees, 500 employees, but they happen 
to make $2 million a year.
    How can they give you a tax cut, which I would like to see 
go to 25 percent, but how do you do that and not address the 
LLCs and the other pass-throughs when you have got this 
political rhetoric that talks about taxing people over $250,000 
at a higher bracket?
    And you might say, ``Well, that is your problem,'' but I 
would like to get your thought on that. How do you deal--how do 
you propose that we consider something like that, as we move 
down the road?
    And Mr. Hayes, I am going to put you on the spot.
    Mr. HAYES. Okay. Well, again, I think, again, that the fact 
that there are many American companies, if not corporations, 
that don't pay tax is an issue that has to be dealt with. It is 
just a matter of law, the fact that if you are a company with 
less than 500 share owners you can be a pass-through entity, 
and you are not subject to corporate income tax, you are not 
subject to the same compliance rules, you are not subject to 
the 35 percent, and the income, in fact, is passed on to the 
individual owners of the business.
    And so, how do you reconcile that with not wanting to raise 
taxes on America, and how do you deal with the fact that you do 
not want to kill job creation by small businesses?
    I think, again, it goes back to, in our view, a holistic 
view of taxation in this country. What is the most efficient 
way to raise revenues? And, again, I think taxing capital, 
taxing investment is, at the end of the day, destructive to 
value creation, to job creation. And again, I know that the 
value-added tax is a very difficult----
    Mr. BUCHANAN. My time is limited. Let me go back, though.
    But can you imagine if we lowered your taxes to 35, 
corporate America, Fortune 1000, and then somehow the sub-S's 
and the LLCs either stayed at 35 or moved to 40? I don't see 
how that works. I mean am I missing something?
    Mr. HAYES. Well, I think, again, it is the issue of double-
taxation. Our share owners are taxed twice. They are taxed at 
the 35 percent statutory rate, and they are taxed again when we 
pay them dividends, whereas the pass-through entities are only 
taxed once.
    Mr. BUCHANAN. Yes. That is why they are pass-through, as 
you know.
    Mr. Rapp, do you have any thought on that?
    Mr. RAPP. Yes. We have talked about VAT earlier that 
involves the consumers. Now we bring another one into it. And I 
think the reality of the situation is if we throw all these 
issues on the table at one time, we are probably not going to 
move forward on any of them.
    The other thing I would say is, to the degree that we 
become more successful and more competitive, it has tremendous 
positive benefits to some of those very companies that you 
referenced. We are supported by about 4,900 small and medium-
sized businesses in the U.S. who are suppliers to us, as an 
example.
    Mr. BUCHANAN. And let me shift. I am going to shift gears, 
because my time is limited. On this territorial tax--I am not 
saying I agree or disagree with it, but, you know, I like less 
taxes. But the bottom line is if you are in a tax area--we said 
25 percent, but let's say you are in a tax area that provides 
10 percent. I was just talking to people from Hong Kong, they 
are at 16. Then you have a 20 percent tax incentive to do 
business there, instead of in the States.
    Chairman CAMP. Time has expired.
    Mr. BUCHANAN. Thank you. I yield back.
    Chairman CAMP. And what we will do is move to Mr. Smith.
    Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 
witnesses. We have heard a little bit about wage pressures here 
this morning. And I am intrigued by how diverse the panel is. 
And yet, when it comes to so many policies, whether it is 
energy policy or tax policy, I mean, there is so much 
interconnectivity. And, you know, with wage pressures around 
the world, those are very real issues.
    I was wondering if you could elaborate, perhaps, the effect 
of tax policy on wage pressures, or wage pressure the other way 
around. So, if any of you could, elaborate.
    Mr. BUTHMAN. Let me take a crack at it. You know, I am not 
sure that the two interact. As we look at an investment, where 
to set up a manufacturing plant, again, typically for our 
products you've got to be close to the consumer. And you 
consider tax policy, you consider wage rates, you consider 
infrastructure, you consider certainty, political and economic 
risk, I think, from our point of view, we don't see that 
interaction with tax policy driving wage rates lower or higher. 
It is just a fact of the local market.
    I think with regard to the reference to China earlier, we 
are seeing how rapidly things change around the world. A low 
labor cost jurisdiction in a very rapid time can get to global 
averages with a lot of factors. So, we would say there are two 
separate and distinct factors that we would consider in making 
an investment decision.
    Mr. CRINES. Congressman, the thing that we have to pay 
attention to with respect to our employee base is what is 
happening with disposable income and tax policy can certainly 
have an effect on that.
    I would tell you that a more significant source of pressure 
with respect to our domestic employees has been health care, 
and the rising cost of health care over the last many years. 
And as we look at those pressures, and decisions around whether 
or not to locate in the U.S. or OUS, I wouldn't say we are 
seeing significant differences in tax policies that are causing 
us to choose OUS locations over U.S. locations.
    Mr. RAPP. Yes, I would agree. I think the reality of the 
competitive world that we operate in today, you have got to be 
competitive in every part of your business. You have got to be 
competitive, relative to your tax structure. You have got to be 
competitive, relative to your wage rate. We have to build the 
best products, provided by the best services.
    So, there is no free lunch in the competitive world we deal 
with. And so I wouldn't draw a direct cause and effect between 
the effective tax rate and our wages. I would say that we look 
at how are we going to be competitive across the full spectrum 
of our business.
    Mr. HAYES. Yes, I would just add, as we look at long-term 
investment decisions, taxes is probably the biggest single 
cost, in terms of that investment decision. You know, direct 
labor, in our business, is less than 10 percent of our cost. So 
difference in wage rates really don't have a dramatic impact on 
investment decisions. It goes more to where are the customers, 
and where do the logistics costs--and then what are the tax 
costs associated with those investments.
    Mr. SMITH. Okay. Now, when you mention your labor costs, 
Mr. Hayes, so you said 10 percent of your overall costs are 
labor costs?
    Mr. HAYES. That is correct.
    Mr. SMITH. So then it is quite obvious that you are not 
locating overseas to avoid wage pressures or anything.
    Mr. HAYES. No, you locate in the markets where the 
customers are. And I think, again, you--I bring back the 
example of the Otis elevator. You cannot service an elevator in 
Shanghai from East Hartford, Connecticut. It is just not 
possible. You have to be in the markets where the customers 
are.
    Mr. SMITH. Okay. Very well. Thank you, Mr. Chairman. I 
yield back.
    Chairman CAMP. Thank you. Mr. Blumenauer.
    Mr. BLUMENAUER. Thank you very much. I really appreciate 
the frank and clear testimony that you are giving us, in terms 
of some of the complexities that you are facing. I know I had 
similar feedback, but frankly, not as eloquently, from some of 
the businesses back home of late.
    I also appreciated your clear and unequivocal statement 
about playing Russian roulette with the debt ceiling. I hope 
that--we have got all sorts of things we can argue about around 
here. We have got lots of leverage points that we can take 
hostages and push each other around. I hope that this is one 
that is not in that category. And your testimony, I think, 
helps add to the record that maybe will make that a little less 
likely, and I appreciate it.
    I am--and I think you have made clear that you have got to 
deal with the reality--I think, Mr. Rapp, you talked about 
making investments based on what your--what the costs are going 
to be for you, not the aggregate, but what the costs will be, 
marginally, for the deal that you are looking at, posing 
problems.
    One of the things that you have started to get at, and I 
would like you to elaborate on--because you have been clear, 
you are not interested in draining the treasury. You understand 
that there is investments, and several of your businesses would 
benefit, for example, if we were doing a better job of 
investing in infrastructure and some of the user fees that 
are--were--are worldwide, and we used to do here.
    But you know, you look at the data. We are not a high-tax 
country, compared to the other developed countries around the 
world. All the information suggests we are at the bottom end. 
France, that you mentioned a moment ago, has much higher total 
taxes. We put aside for a second the personal income tax.
    But, Mr. Hayes, I think you were starting to get into the 
value-added tax, which is a glaring omission. All our 
competitors have a value-added tax. Hard to evade, reasonably 
simple to administer, people have figured it out. It is part of 
this level playing field. And, Mr. Rapp, I know you were 
starting--maybe if you two gentlemen would, just comment on 
where you would like to put that on the record, in terms of our 
deliberation of deconstructing the Tax Code and putting it back 
together.
    Mr. HAYES. Again, I think I would say, as we look at the 
structural deficits in this country, which are approaching $1.5 
trillion annually, the fact is we know we have to figure out a 
way to raise revenue, as well as to cut expenditures.
    I think as we look at the OECD, we recognize that, you 
know, corporate taxes are perhaps not the most efficient place 
to raise revenue. And I think that is what we are talking about 
here today. Obviously, it should take a holistic view of how do 
we most efficiently raise revenue to meet the needs of the 
country. I think the value-added tax is one of those things 
that needs to be on the table. I think the deficit commission 
last year addressed this as a potential.
    And I think you can't simply ignore the fact that it is an 
efficient way, it is very compliant. It is compliant because 
every step along the way everyone is incentivized to have 
compliance, because they have to get a refund from the taxes 
that they paid.
    So, again, I am not saying it is the solution. I just think 
it has to be out there as a potential for us, as we have this 
debate on how do we deal with the structural deficits in the 
country.
    Mr. BLUMENAUER. Yes, I appreciate your reference about the 
deficit commission that also talked about maybe a gas tax, a 
user fee.
    Mr. Rapp, you have any thoughts?
    Mr. RAPP. Yes. I just echo what Greg said. To me it really 
gets back to this issue of what do you want to be as a country. 
And you have really got to be careful of the unintended 
consequences.
    I think a lot of the other OECD countries have decided that 
a good corporate, good manufacturing base is important, in 
terms of the long-term competitiveness, standard of living, and 
other things, and so they incent that type of behavior through 
their Tax Code. And they raise revenues through other 
mechanisms. Yes, I think it is clear.
    The challenge, I think, before you is how much change can 
you take on at one point in time.
    Mr. BLUMENAUER. Well, and I appreciate what our chairman 
has done, in terms of trying to lay a foundation for a broader 
conversation, having a variety of viewpoints. Because all those 
structural problems you talked about, actually it is the 
direction. We have got to bend the curve, we have got to send 
signals to business, to the bond market, to ourselves, as 
policy-makers. And I think you have given, I think, a very 
useful viewpoint about what we need to do to do that right. 
Thank you very much.
    Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Schock is recognized.
    Mr. SCHOCK. Well, thank you for all of your great testimony 
and answers to some important questions. You know, a lot of the 
good questions have already been asked, a lot of the issues I 
was going to raise have already been addressed.
    One thing I want to make clear, though, that some of my 
friends on the other side of the aisle continue to point to, 
and that is this issue of deficit neutrality.
    I think it is important to point out--and I would be 
interested in your comment--to the degree we become more 
competitive as a country, you know, one of the things we 
struggle with when we talk about budget scoring is that our 
budget scores base it on a static business environment. In 
other words, based on current activity in the United States or 
in foreign countries.
    Would a more competitive--and this is a softball, I think--
would a more competitive rate warrant you to invest more in the 
United States, or less, or would it be static, in terms of the 
amount of investment you would make in the United States if we 
had a more competitive tax rate?
    Mr. RAPP. On that one I would say as we talked throughout 
the discussion today, I think the four of us strongly support 
the principle that our global growth drives employment in the 
U.S. So the degree that you make us more competitive, it is 
going to lead to jobs and investment back here.
    I think the thing on the scoring that you just have to keep 
in mind is the scoring would tell you that if we maintain 
status quo there is no change in revenue. Chairman Camp, I 
think you pointed out some interesting statistics earlier about 
the decline of U.S. competitiveness, and what it has meant in 
terms of share of global GDP, share of investment, all those 
things.
    So, to assume that you can address the competitive issue 
and maintain a status quo may be a flawed assumption.
    Mr. HAYES. I would also add as we think about the amount of 
cash that sits offshore with U.S. companies--over $1 trillion, 
and at UTC that is over $4 billion that is trapped overseas--a 
simplified tax system, one with a territorial system that would 
allow us to bring cash more freely back into this country, even 
if that cash is returned to share owners, those share owners 
have the opportunity to invest, as do we, back in this country.
    And I think that is the key, is the free movement of 
capital here. And, right now, capital is stuck overseas, which 
forces us to make an investment overseas. To the extent that we 
have a territorial system, even one with a small toll tax, we 
will be encouraged to bring that cash back to make investments 
here, to give to our share owners, to invest in America.
    Mr. CRINES. We have to compete, not only for customers, but 
also have to compete for capital. And to the extent that we 
have foreign-based competitors that have an opportunity to earn 
higher after-tax returns on the capital that they have 
entrusted to them, that puts us at a competitive disadvantage, 
clearly.
    So, anything that can be done to reduce that disadvantage 
will put us in a position to invest more aggressively in 
innovation and grow our businesses on a global basis.
    Mr. BUTHMAN. And I would agree. It is just like our 
business. When we are faced with a profit shortfall, as you are 
faced with dealing with a deficit, we can drive cost 
efficiency, we can raise revenue through pricing, or we can try 
to drive volume.
    And, from our perspective, raising prices is sort of the 
last lever we pull, because we are in a competitive 
marketplace. And our consumers shift very rapidly to competing 
products, even if we think we have the best performing, most 
attractive product on the shelf. And to me, this is about 
creating more competitiveness. If we are more competitive, we 
will drive more volume.
    I think Greg makes a great point. There is a lot of capital 
trapped overseas that ought to be on shore, being deployed 
somehow, either through us, in research and capital, or 
deployed back to our shareholders to reinvest in other 
industries.
    Mr. SCHOCK. Thank you all. I appreciate it.
    Chairman CAMP. Thank you. Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chair. Thank you for holding 
this hearing. And thank you all for being here. I think we 
probably have covered most everything. So if--maybe just 
comment briefly for me Because all of you do represent 
companies worldwide, and I have understood from the comments 
and your testimony this morning that for most of your 
companies, intellectual property and R&D takes place in the 
U.S.
    So, I would just appreciate it if you might just reiterate 
for us the relationship between your domestic operations and 
your foreign operations, particularly how they support one 
another and how important your foreign earnings are to your 
domestic operations and our growth, here in the United States.
    Mr. BUTHMAN. Yes, let me take a shot at that first. The 
vast majority of our R&D investment is done today in the United 
States. Increasingly in our markets, though, the pace of change 
and the amount of innovation around the world is an important 
source of ideas. So I see that shifting over time. We are going 
to have more ideas come to the U.S., we are going to bring them 
to these markets, we are going to be able to use those ideas to 
enhance the lives of our consumers.
    But, by and large, and for the foreseeable future, the vast 
bulk of our technology and innovation investment is going to 
happen in the United States. The more capital we have to return 
here and deploy, the stronger that domestic base is, it 
strengthens our business here and around the world.
    Mr. CRINES. Congresswoman, approximately 75 percent of our 
research and development employees are based in the U.S. 
Seventy percent of our foreign source revenues are sourced out 
of manufacturing operations that are U.S.-based.
    So, as a consequence of being successful competing for 
business overseas, we have been able to increase U.S.-based 
employment over a 10-year period by 80 percent.
    So, we continue to look for opportunities to expand our 
innovation programs, hire more engineers out of some of the 
terrific universities that we have here in this country.
    Mr. RAPP. Yes, I would--Congresswoman, I would say our 
foreign operations have a tremendous impact on our domestic 
operations in a number of ways. One is--consistent here--is the 
R&D. We have got a tremendous investment on very complex sales 
systems and all that to test out the product that we have got 
to do. So a big part of it is R&D.
    Another key driver is the corporate services. The amount of 
resources that we apply here--we are doing a global deployment 
of a new IT system right now worldwide led by the IT resources 
in the U.S. We have got about a $30 billion global portfolio on 
financing equipment for our customers headquartered treasury 
management, all out of the U.S. And the same goes for 
purchasing, IT. So those corporate services support our global 
operations, and it is really good for the U.S.
    And then the last one of our foreign business really being 
a positive impact on the domestic aide is just the exports that 
we drive, about $13 billion. You know, it is an interesting 
number. We have exported last year the equivalency of our total 
U.S. sales. And so people in our organization understand 
winning in China matters.
    So those would be the places that it would have the most 
direct impact.
    Mr. HAYES. Yes, Congresswoman, maybe just a couple of 
numbers here, because that is what we do every day. About 60 
percent of our revenues come from outside of the U.S., and 60 
percent of our profits. And so, last year we made about $5 
billion after tax at UTC. So $3 billion of earnings came from 
our overseas operations. We spent $3.7 billion on R&D last 
year. About a billion of that was overseas.
    But for the overseas earnings, that $3 billion that we were 
able to earn overseas, we wouldn't have been able to fund the 
$2.7 billion that we invested in this country in R&D.
    So, I look at this as, again, we are a global company. We 
serve global customers. But at the end of the day the big 
investments that we are making in R&D are coming in this 
country, and that is what creates the intellectual property 
that allows us to be successful around the world.
    Ms. JENKINS. Thank you all. Mr. Chairman, I will yield 
back.
    Chairman CAMP. Thank you. Mr. Pascrell is recognized. I 
think, under the rule of presence at the gavel, Mr. Pascrell is 
recognized.
    Mr. PASCRELL. Thank you, Mr. Chairman. Listened very, very 
carefully to this discussion this morning. I don't know of a 
person that sits in the Congress that doesn't want tax 
fairness. Of course that is perceived in different ways by 
different people. We understand that. And it would be foolish 
to take a position of anti-business, particularly in a time 
when so many of our own people are out of work throughout the 
nation--not in any one particular state, but throughout the 
nation.
    There is a--we lose approximately $100 billion in tax 
revenues every year, due to corporations and individuals moving 
money to offshore tax savings. Now, how do we make up for that 
lost revenue? Here is how we make up for the lost revenue. The 
average U.S. tax filer pays $434 that he doesn't even know he 
is paying. So that is how we make up that slack. That will feed 
a family for about three weeks, by the way.
    So that is a very serious problem in us trying to get 
equity. And, by the way, the thousands of pages that you 
complain about in the Tax Code were not written by the average 
guy on Main Street. Those pages--and every president in the 
past 30 years has promised us a simpler form and a shorter 
amount of pages, every president--but most of those pages are 
written by your lawyers. And you know it, and I know it. But 
the people of New Jersey better know that they are paying, each 
individual, $752 more in taxes because of what corporations do 
to us day in and day out.
    You have hundreds of lawyers. GE has 1,000 lawyers doing 
tax stuff. The average American has no one to turn to, usually, 
and is a victim. So let's get it straight. Who are the victims, 
and who are the perpetrators?
    Mr. Crines, I have waited a long time--it was quite by 
accident, I didn't even know you guys were going to testify 
today--Zimmer Holdings. You are here to advise us on tax 
policy. Your company, your corporation, was accused of Medicare 
fraud in 2007. In fact, your company paid $310 million in a 
fine. It has become part of how we do business nowadays.
    Let's talk about competitive advantage. Here is what your 
corporation was, in terms of corporate advantage: bribing 
doctors in hospitals to use your device. In fact, the person 
who was appointed the federal moderator of that case was the 
former attorney general, Ashcroft, who got a $52 million 
contract to oversee you to get you to fly straight to keep you 
from going to court in--not you, personally--so nobody would go 
to jail. So you made the agreement.
    I want to know one thing, first of all, is how much was 
your fine, as stated in that settlement? Did you engage in a 
monitoring agreement with Mr. Ashcroft, Mr. Crines, your 
company?
    Mr. CRINES. The company entered into a deferred prosecution 
agreement with the U.S. attorney's office. It was effective 
from September of 2007, expired in March of 2009, after the 
company had successfully complied with all the terms of that 
agreement, sir.
    Mr. PASCRELL. Were you able to deduct your tax liability 
from your--were you able to deduct that from your tax 
liability, the cost of the monitoring agreement which you made 
with the Federal Government?
    Mr. CRINES. As a result of a submission to the IRS 
requesting a ruling as to how we should handle the fine on our 
tax return, we were able to deduct one-half of the fine that we 
paid.
    Chairman CAMP. Time has expired. Mr. Paulsen is recognized.
    Mr. PASCRELL. May I ask one more question, Mr. Chairman?
    Chairman CAMP. I am afraid, Mr. Pascrell, time has expired. 
I have treated everyone the same way in the hearing today, and 
it is Mr. Paulsen's time.
    Mr. PASCRELL. Okay, thank you.
    Mr. PAULSEN. Thank you, Mr. Chairman, and thank you for--
all of you--for taking the time to be here today. And we 
certainly heard some common messages in terms of 
competitiveness and what you have to do to create jobs here in 
the United States.
    I want to ask one quick question, too, of Mr. Crines, and 
then I will open it up. You know, one of the issues that I 
really do have a strong concern with that we have touched on in 
a couple of hearings is this new medical device tax that is 
going to be a tax on innovation, a tax on R&D. You talked about 
75 percent of the R&D in your company is here, in the United 
States.
    Can you just maybe reflect how this is going to--this new 
tax, which starts in about a year-and-a-half, this new excise 
tax, doesn't matter if you are profitable or not--how is that 
going to affect your competitiveness in general, and will that 
come out of R&D?
    Mr. CRINES. Well, as a matter of fact, Congressman, the 
company announced at the beginning of this year a 
restructuring, in part, to get the company in a position to be 
able to afford the increased tax and still continue to produce 
returns on the capital that we have invested that are aligned 
with what our peers both our U.S. multinational peers, as well 
as our foreign-based multinational peers, can earn for their 
investors.
    So, the--as I said, the excise tax, which, for Zimmer, will 
result in additional expense of somewhere in the neighborhood 
of $50 million to $60 million, beginning in 2013, has forced us 
to take steps to--that have resulted in the reduction of about 
450 management and staff jobs at the company.
    And again, those reductions are taking place over the 
course of this year, and will put us in a position such that we 
can afford that tax. And those reductions did include, in some 
cases, research and development positions that are U.S.-based.
    Mr. PAULSEN. Thank you for that. Without a doubt, I have 
heard this similar story from other medical technology device 
companies, that this industry has been very successful. It is 
an American success story, got a strong presence in Minnesota. 
It is in New Jersey, it is in Boston, it is in California. And 
we want to keep it in the United States. And there are 
definitely threats that this is moving towards Europe. And the 
tax is just one component of that.
    But I think all of the witnesses here today also have just, 
really given a message that it is better to have a simpler 
system that you can all focus on with certainty, because you 
are allocating capital 10, 25 years out.
    And one of my observations with Congress is Congress's 
long-term thinking is six months or two years. And so, you 
know, we have the R&D tax credit, are we going to extend it for 
another year, are we going to extend it for six months. And you 
are thinking 10, 25 years out. So if you are going to create 
jobs, you have to be thinking down the long term.
    And wouldn't it be better to have that certainty and that 
predictability in your tax department, so you don't have to 
have 50 people, 100 people, 100 lawyers, 100 attorneys working 
for you, how to comply with the Tax Code or find deductions or 
loopholes, et cetera, and really put those people's knowledge 
and expertise to start their own company, to create their own 
jobs, to really harness that energy?
    I mean, feel free to just walk that line, share any 
thoughts.
    Mr. RAPP. I would just say yes. I think a lot of times I 
get the question, ``What does it take to get the U.S. growth 
engine moving,'' and I think you touched on the key issue, and 
that is certainty.
    And if you look at our company and the customers we serve, 
major contractors in the U.S., with absolutely no line of sight 
to are we going to get a highway bill or not, are not going to 
make the decision to make the investment to buy the equipment 
that generates the jobs.
    As we make decisions about the opportunities in terms of 
the export markets, but yet while we are encouraged by the 
recent progress, we have tremendous uncertainty relative to 
what is going on in trade. And then, of course, the debate we 
are having here today, with taxes.
    Business is all about confidence. And when you have 
confidence in a system that is going to yield a good 
investment, you are willing to put the money on the table. I 
think today, the uncertainty that exists makes that really 
difficult.
    Mr. PAULSEN. Mr. Hayes.
    Mr. HAYES. Yes. I would just add I think certainty is 
really the issue here. And the fact that we passed an R&D tax 
credit that was retroactive to the beginning of 2010 in 
December of 2010, while it was a nice Christmas gift, as I have 
told my people, ``It is hard to plan, waiting for Santa 
Claus.''
    And I think what we need here is long-term certainty that 
either the R&D tax credit is going to be here or it is not, so 
that we can make decisions, long-term, that are the best for 
the share owners and best for our employees. And that is all we 
are really talking about here, is simplicity, fairness, and 
competitiveness.
    Mr. PAULSEN. Mr. Buthman, final comments before my time 
runs out?
    Mr. BUTHMAN. Yes. I would say, as we look overseas, the 
degree of uncertainty, political and economic instability, is a 
key part of our cost of capital. And I think that is an 
advantage that the United States has. To the extent we can 
reduce it, maintain that advantage, it is to all our benefit.
    Mr. PAULSEN. Thank you.
    Chairman CAMP. Ms. Berkley has the time.
    Ms. BERKLEY. Thank you, Mr. Chairman. I appreciate this 
hearing very much. The longer I stay on this committee, the 
more I realize I don't know as much about these issues as I 
should.
    Mr. Buthman, it gives me--as I go further from Huggies and 
closer to Depends, it gives me great comfort to know that I am 
going to be a lifetime customer of your company.
    [Laughter.]
    Mr. BUTHMAN. We want to take care of you, cradle to grave.
    Ms. BERKLEY. Womb to tomb, yes. I represent Las Vegas. And 
up until very recently, we didn't have any multinational 
corporations doing business overseas, just very local. And 
because of the gaming laws, most of my companies--and I have 
one major industry in my state--they couldn't even do business 
in another state, and retain their gaming license. Now, of 
course, gaming is located in almost all 50 states, and we are 
doing heavy-duty business overseas, particularly in the Asian 
market. So, all of a sudden this is a very important issue for 
me.
    This is my question. I have a number of gaming companies, 
but I am going to highlight two without naming names. One of 
them pays over 30 percent corporate tax. The other pays eight 
percent.
    Now, if I go over to the corporation doing business 
overseas that is paying over 30 percent corporate tax rate, and 
tell them, ``In the interest of simplicity and certainty, we 
are going to lower the corporate tax rate to 26 percent,'' 
let's say, argument's sake, but they will have to lose whatever 
deductions and credits, they will probably think I am brilliant 
and beautiful, and wise to boot. But if I walk across the 
street and go over to the company that is only paying eight 
percent corporate tax, and I tell them in the interest of 
simplicity and certainty, that we are going to have a 26 
percent tax rate and they will lose all of their deductions in 
the interest of revenue neutrality, they are going to think I 
am Satan on a horse and I am a moron, to boot.
    Now, how would you counsel me to address that corporation 
doing business overseas that I am going to be voting to--for 
stability and certainty and simplicity, and I am going to jack 
up their corporate tax rate like crazy? I would love some 
counsel from you.
    Mr. HAYES. Well, let me start. First of all, I think there 
are really two different discussions here. One is around the 
effective tax rate, which you are referring to might be 8 
percent for one company and 30 percent for the other, versus 
the statutory tax rate, which is really what we are after here.
    And I think the fact is that, by leveling the playing 
field, and eliminating some of the preference items that are in 
the Tax Code, everybody is on the same basis, whether you were 
paying 30 percent or whether you were paying 8 percent or no 
tax, or 35 percent. The fact is what we are trying to do is to 
advocate for a system that is globally competitive for 
everyone.
    And, yes, there will be winners, there will be losers. I 
think all of us, as we sit here today, understand that we are 
going to have to give up things like accelerated depreciation. 
We are going to have to perhaps go to capitalizing some R&D, or 
capitalizing advertising costs to make this bill revenue 
neutral. And I think all of us understand that there is a 
shared sacrifice amongst corporations in the short run, to make 
a globally competitive system which will help drive jobs back 
to this country, and free up capital to come back to this 
country.
    So, again, I think we have to divorce ourselves from 
effective tax rates, which is really just an accounting 
question. And effective tax rates vary quarter to quarter, year 
to year, and circumstances by circumstances. But, really, we 
are talking about statutory tax rates and long-term 
competitiveness here.
    Ms. BERKLEY. Do you think my gaming company that pays eight 
percent is going to be happy with that answer?
    Mr. HAYES. I suspect not.
    [Laughter.]
    Mr. RAPP. And I would add trust me, within Caterpillar not 
all decisions we make make all of our employees happy. Tough 
decisions in tough times, and I think that is exactly where we 
are at.
    U.S. competitiveness, I think, is in question. Our share of 
global GDP has gone from close to 50 percent down to somewhere 
in the neighborhood of 20 over the last 50 years. And we have 
got a choice. We make those tough decisions, get ourselves 
competitive, compete and win globally. I think if you do that, 
you will have more people coming to Las Vegas.
    Ms. BERKLEY. That is my goal. Well, thank you very much. I 
appreciate it.
    Chairman CAMP. Thank you. Mr. Marchant is recognized.
    Mr. MARCHANT. Thank you, Mr. Chairman. You have all 
testified earlier that you would be willing to have a lowered 
tax rate, and it could be revenue neutral.
    But, in fact, wouldn't that put you in a position to 
ultimately make a higher profit, and ultimately pay more money 
into the treasury than you are paying now? I mean, isn't 
lowering the tax rate ultimately--doesn't it have a dynamic 
effect, because it will allow you to make more profit and then, 
ultimately, over the years, the treasury will actually net more 
money because of the lower tax rate?
    Mr. RAPP. We would welcome the opportunity, through having 
a simpler system and globally competitive, to grow our company, 
to grow our profits, and, as a result of that, send more money 
to the treasury. And we think that is one of the opportunities 
that exists.
    U.S. companies and their ability, their ingenuity, their 
entrepreneurial spirit, we are absolutely convinced we can 
compete and win around the world. And to the degree we do that, 
I think you are absolutely right, you have the opportunity to 
increase your revenue.
    Mr. HAYES. I really think it is one of the fallacies of the 
static scoring system we have today is the fact that it doesn't 
take into consideration the impact of repatriation into this 
country when you have a simplified tax system, when you have a 
territorial tax system and the free movement of capital that 
will drive job creation here in the United States, that will 
drive investment here in the United States.
    And, unfortunately, as the Congressional Budget Office 
scores tax reform, I think we miss that piece of the economic 
growth that is going to result from tax reform and 
simplification.
    Mr. CRINES. I mentioned earlier that Zimmer has grown as a 
consequence of being able to expand its operations overseas. 
And it was able to do that, in part, by taking advantage of 
deferral rules. That is what enabled the company to prevail in 
a competitive bid for a European-based manufacturer.
    Several years later our company is four times larger, the 
amount of pre-tax earnings that we earn is four times larger. I 
mentioned that our effective tax rate is 30.6 percent as a 
consequence of paying about 40 percent in the U.S. in federal 
and state taxes on half our earnings and 15 percent on our 
foreign earnings.
    So, in fact, we are paying more money into the U.S. 
treasury, as a consequence of being able to compete in that 
particular situation.
    Mr. BUTHMAN. And I would say for Kimberly-Clark--and I 
suspect most or all of the companies on the panel, and business 
in general, we welcome the opportunity to compete on the basis 
of having the best product in the marketplace at a fair price 
every day. The less noise, the less uncertainty, the less 
leakage we have, in terms of the resources we deploy toward 
innovation, toward manufacturing, toward driving efficiency and 
productivity, I think the better off we are.
    The more competitive we are, the more volume we drive, the 
more profit we generate. And that gives us the opportunity to 
generate--we are happy to pay more taxes for every incremental 
dollar of profit that we generate.
    Mr. MARCHANT. Your compliance cost is significant, I 
assume. A simpler system--a lower rate with a less complex 
code--it would lower your compliance cost, of course. How about 
your cost to minimize your tax? Every company incurs additional 
cost, simply to minimize their actual tax, because the rate is 
too high.
    Mr. HAYES. Well, I think that is clearly--all of us have 
tax departments, we have very talented people that understand 
the tax rules, not just in the U.S., but around the world. And 
I would tell you, at the end of the day, while it is a value to 
our share owners today to do this type of tax planning, it is 
not truly value added to the economy to do this type of tax 
planning.
    And I think we would all welcome the opportunity, with a 
simplified Tax Code--again, 19,000 pages will never go to 1. 
But to the extent that we can reduce complexity, reduce 
compliance costs, reduce the cost associated with trying to 
plan around what is a prohibitively high tax rate, is going to 
be a benefit to the economy.
    Mr. MARCHANT. Thank you very much.
    Chairman CAMP. Thank you. Mr. Lewis is recognized.
    Mr. LEWIS. Thank you very much, Mr. Chairman, for holding 
this hearing. I want to thank each of you for being here today.
    At our first hearing on tax reform, a CEO testified on 
behalf of the Business Roundtable, and said that corporate tax 
reform does not need to be revenue neutral. In other words, we 
do not need to pay for this, we should just add it on to the 
deficit, and shift the burden to American families, working 
families.
    For the past 10 years or so, we have seen an increased 
willingness to shift the burden of government on to the middle 
class and the working poor. This give me great concern. And, in 
my estimation, it is not right, it is not fair, and it is not 
just.
    Each of you represent corporation that do business in 
countries with lower corporate tax rates. Those countries 
compensate for those lower corporate tax rates by raising 
personal income taxes on families, and by adding a VAT tax on 
the things that they buy at the store.
    Now, tell me. I want each one of you to tell me, and tell 
Members of the Committee, what do you say to American families 
struggling to make ends meet who hear that their taxes are 
going up, to go up so multinational corporation can get a tax 
break? Why should they give more? Why should the middle class, 
why should working families, why should the poor, those at the 
bottom, give more so you can get less?
    Mr. HAYES. Congressman, just let me start. I think, as----
    Mr. LEWIS. So that you can give less.
    Mr. HAYES. I think the panel has all testified, and we 
would all agree that, you know, revenue neutrality is 
ultimately the goal of corporate tax reform. And while we talk 
about fiscal responsibility--and I think, as you heard from the 
Business Roundtable, we are looking for, originally, corporate 
tax reform that was fiscally responsible. But we would tell you 
that we understand the need for revenue neutrality with 
corporate tax reform.
    What I would tell you, and what I think we should tell the 
American people, is corporate tax reform is not a giveaway. We 
are not here looking for a gift from the government. We are not 
looking for a gift from the American taxpayers. What we are 
looking for is the ability to be competitive, globally, so that 
we can drive investment to this country and drive job growth 
into this country.
    And I think that is the way we need to frame this debate. 
It is not about taking away from the middle class, it is not 
about giving to corporate America----
    Mr. LEWIS. There is a perception abroad in America that the 
average taxpayer, middle class, working poor, they pay more 
than their fair share, and corporate America are not paying 
enough. So I want you to respond to that.
    Mr. HAYES. Again, I think as we sit here today, we look at 
the corporate taxes that we pay, the 35 percent statutory rate, 
what we are talking about is how do we drive job growth into 
this country. And we would tell you that the corporate tax 
structure that we have today is anti-competitive and anti-jobs.
    At the end of the day we can argue about what is the right 
rate for everyone to pay across the economic spectrum, and the 
fact is we are not advocating for a giveaway. We think we need 
to have a fair and reasonable corporate tax rate, but one that 
is globally competitive. Because, at the end of the day, 
capital is mobile. Capital will move to where it is most 
efficiently put to use. And that means if we cannot put it to 
use here in a tax-efficient manner, jobs will be created 
overseas. And I think that is all we are advocating for here 
today, Congressman.
    Mr. LEWIS. Thank you.
    Mr. RAPP. And my argument would be that it is not a 
question of transferring from one pocket to another. It is a 
question of how do you grow the economy. And I am absolutely 
convinced of that. We have done it since 1925. We can compete 
and win against people from all over the world. And to the 
degree we get a level playing field, we are able to do that.
    As we have talked throughout this discussion this morning, 
it generates jobs back here. And I think that is really what 
this country wants to do. They don't want to debate the issue 
of do I transfer tax from one pocket to the other. They want to 
debate how do we generate jobs here.
    Mr. LEWIS. Thank you.
    Mr. CRINES. Congressman, as I indicated earlier, the 
company accrues and pays taxes at a rate of about 40 percent on 
our U.S. earnings and profits. That includes both federal and 
state income tax. To increase that burden, I do believe, would 
put the company at a competitive disadvantage, relative to our 
foreign-based competitors.
    We are advocating as we have indicated, in favor of reform 
that would be revenue neutral, and believe that can be 
accomplished by lowering the rate and eliminating some of the 
deductions, as we have discussed.
    Chairman CAMP. All right. Time has expired. Mr. Berg is 
recognized.
    Mr. BERG. Thank you, Mr. Chairman. And thank you for being 
here today. A long hearing, but this has been very fruitful for 
me.
    I come from a state where, a few years ago, we lowered 
income tax and we lowered corporate income tax, and revenue 
came up, went higher. So, last month we did the same thing. We 
lowered corporate tax, we lowered income tax, and actually 
lowered property tax. You know, I think it is trying to find 
that sweet spot.
    And--as I sit here, I think about what really strikes me is 
when at one time 17 out of 20, or 85 percent of the top 20 
companies in the world, were U.S.-based, and today it is less 
than 30 percent. And when we look at historical corporate tax, 
at one time we were kind of middle of the road, globally, and 
now we are, highest.
    And so, it seems to me if we want to grow business here and 
create jobs, that we have to figure out a way for companies to 
grow within America or acquire companies and do that expansion.
    And so, we kind of talked about repatriation a little bit, 
and I think the position that I have heard is if we bring our 
corporate rate down to 25 percent, it is clean. That will kind 
of serve as repatriation of funds as we go forward.
    So, could each of you just respond to that just a minute?
    Mr. HAYES. Yes, I think that is exactly the idea here, 
with--there is no need for a one-time special repatriation if 
we have a territorial system which gives us some certainty. 
And, again, assuming there would be some toll tax associated 
with repatriating, at least we would have certainty around 
that. It is not a once every third or fourth congress that we 
do that.
    Mr. RAPP. And just one point on the 25 percent. As I said 
earlier, we look at the 25 percent benchmark relative to the 
other parts of the world as being a combination of federal and 
state. And I just wanted----
    Mr. BERG. I was very clear on that. I heard that.
    Mr. RAPP. I just wanted to make sure we were clear, no 
miscommunication here.
    And to me, it really gets down to what does it take to be 
competitive over the long haul. And that is why a one time only 
bring back just doesn't give the vision, long term, on where we 
are going to be at. And we would prefer to see this tough 
discussion through. We are very encouraged by the dialogue you 
are debating here today. Let's flog through this.
    Outside the United States today there are a lot of 
economies that are growing. And it is a tremendous opportunity 
for American companies to go compete and win in that. So I 
think the timing of what you are putting on the table is good, 
and we just want to see it through.
    Mr. BERG. Okay, thanks.
    Mr. CRINES. There are significant disincentives today 
towards bringing the earnings and profits that are being earned 
offshore back into the U.S. and deploying that capital here in 
the U.S.
    I do believe any reform that allows us to deploy capital 
more efficiently will ultimately lead to growth, growth in jobs 
here in the U.S., growth in employment, and growth in our 
businesses, globally.
    Mr. BUTHMAN. Yes, and I would echo the other panelists' 
comments. And just to be clear, in fact, in our accounting, in 
our financial statements, in our tax returns, we actually have 
to commit that we do not intend to return that cash home. 
Otherwise, we have to provide tax on it at some point.
    So, there is actually--it is very clear, the encouragement 
to leave that cash overseas, unless we can find a vehicle to 
bring it home. And there is no doubt in my mind that, if we can 
solve this problem, it is a huge source of capital for the U.S. 
economy that ultimately is going to make its way into our local 
market to drive technology, to drive manufacturing, to drive 
job creation.
    You are faced with a very difficult challenge. We have a 
fiscal deficit that we have got to tackle. Tax policy is an 
important part of that. Fiscal reform is an important part of 
that. So, again, I would echo the other panel members. I am 
happy to participate here, and I am very glad to see you 
tackling this issue, collectively.
    Mr. BERG. Well, thank you. Just one other quick issue, and 
that is when you acquire a property, or acquire a company, or a 
company competing with another company, how, again, there is a 
tax disadvantage, because you are working on two different 
levels.
    And I am just wondering if you had any examples of--public 
examples of where a foreign company was able to acquire 
something that an American company was not, because of that 
disparity in the corporate tax.
    Mr. BUTHMAN. I don't have a specific example, but I do have 
a number of examples of companies that we compete with around 
the world in, again, an increasingly global marketplace.
    As we look at a geography to buy a diaper business or a 
tissue business, to the extent we are competing in that, either 
with a local company or, let's just say, a European-based 
company--we have a number of competitors in Europe and northern 
Europe--there is a clear advantage, in terms of the cost of the 
capital that they are able to deploy, in terms of their after-
tax cost of that acquisition.
    We hope we can overcome that in terms of efficiencies, our 
market power, et cetera, and in other ways, but there is a 
clear structural advantage when we are competing for 
acquisitions on a global basis.
    Chairman CAMP. Thank you. Mr. Kind is recognized.
    Mr. KIND. Thank you, Mr. Chairman. I want to thank our 
panelists for your testimony and your presence here today. One 
of the advantages to being one of the last ones to ask 
questions, you get to hear a lot of testimony, which I think 
has been very candid and very helpful today. You also get to 
cross off a lot of items on your own sheet with good questions 
that have been asked beforehand.
    But at the risk of being the skunk at the picnic here, let 
me just illuminate the discussion a little bit further. We have 
been fortunate enough, with the chairman's leadership, to have 
some closed door, bipartisan sessions, talking about this, 
getting various options in front of us, exploring the 
complexity of the Tax Code.
    And the truth is--and I think there is wide agreement--that 
the goal ought to be trying to lower the rates, broaden the 
base, through the eyes of international competitiveness issues, 
something you have all been talking eloquently about today, the 
importance of that, domestically. But most of the tax 
expenditures aren't on the corporate side, they are on the 
individual side. In fact, only 8 percent of the total tax 
expenditures that exist in the code today are on the corporate 
side; 92 percent are on the individual or pass-through side.
    Now, if we were to get rid of all of them on the corporate 
side, every tax expenditure that exists from accelerated 
depreciation to R&D to everything else, we would be able to 
lower the rate down to 28 percent. Getting rid of all of them. 
And if we get rid of all of them except for accelerated 
depreciation, that is 31 percent. And yet, all of you are 
testifying today that we ought to do this in a deficit neutral 
fashion, which I appreciate and I agree with.
    But getting at that mid-20--or, Mr. Rapp, in your eyes, the 
lower 20 percent range, it means we are going to have to look 
elsewhere. And I guess that is the question I would pose to you 
is, where else can we look to make up the revenue shortfall, as 
far as paying for a lowering of the rate, overall?
    And you get into the individual side, the pass-through 
side, and Mr. Buchanan was talking about it a little bit 
earlier. The majority of the businesses right now in the United 
States are pass-through entities. They are not going to be too 
happy if we are going to be after them, and reducing their 
expenditures that they are currently enjoying in order to lower 
the overall corporate tax rate here.
    And, Mr. Hayes, I appreciate your candidness, too, about 
having the VAT as a part of the overall discussion. But, to be 
honest, given the political dynamics, and especially my friends 
on the other side, that is a non-starter. They are not going to 
want to talk about a VAT on top of or in addition to any kind 
of corporate tax structure that we have in our country today. 
That is just a non-starter, as far as a conversation.
    This is where it gets difficult. This is where it gets real 
complicated. And the fact that, as some of my other colleagues 
pointed out, there are going to be some clear winners, some 
clear losers in anything that we do.
    And maybe you can help me. You don't have to cite 
specifically what--your effective tax rate, but I think I am 
correct in my assumption that all of you are paying an 
effective tax rate that is north of 25 percent right now, is 
that right?
    Mr. HAYES. That is right.
    Mr. RAPP. That is correct.
    Mr. CRINES. That's correct.
    Mr. BUTHMAN. That is correct.
    Mr. KIND. You are all agreeing with that. Well, I think we 
might hear a little different testimony from some 
representative from GE today, in light of the news that they 
have just garnered in the last month or so. And that is really 
the point of this exercise.
    You talk about the statutory tax rate. We are high, 35 
percent. The effective tax rate, we are about average, as far 
as the rest of the developed world is concerned. The marginal 
rate on new investment in this country, we are slightly above 
average. So your perspective, and the testimony that you might 
bring to this issue is certainly going to depend on what seat 
you are viewing this issue from. And that is going to be very 
wide, and it is going to get very complicated and very 
difficult for us, then, to have to navigate through that.
    But if you have thoughts on where we can go, as far as 
additional offsets, in order to lower the rate down to the 
levels that you all are testifying about, mid to low 20 
percent, obviously we are all going to be--have a lot of ears 
for that.
    But this, I think, is what is going to be very difficult 
with the exercise that we have before our committee, and your 
guidance on this issue will be crucial.
    Mr. Rapp, let me also just quickly congratulate you in 
recognizing that your leadership in the corporate world, as it 
relates to the workers, will be important with these trade 
agreements. I got a company in Lacrosse, Wisconsin, 60 percent 
of what they are making there is exported overseas. The 
machinist union there is some of the fierce critics of any type 
of trade agreement. And your help, as far as educating the 
workers, will be important.
    And let me just leave you with this thought. And I was 
hoping to get testimony, but our time has limited. But 
something else is bothering me with our economy today. And if 
you have any ideas, we would be--we would welcome that.
    But in typical recoveries, you get an increase in worker 
productivity, and it has been true the last couple of years. 
About a 6.8 percent jump. But in the typical recovery, a 
majority of that increase in worker productivity goes back in 
the form of wages to workers. That is not happening. We have 
had wage stagnation in this country for the last 10 years. And 
in this last couple of years, of that 6.8 percent, roughly--a 
little less than 10 percent of that growth is going back into 
wage increase. And when the U.S. economy is 70 percent 
consumer-driven, we got a problem, and we get the economy that 
we have here today.
    I don't know what, policy-wise, we can do to incent 
companies--and I am not citing you specifically--to recognize 
the key role that wages play in our economically domestically, 
too, but we are kind of stuck right now. And I think the reason 
why Wisconsin has received so much attention, it wasn't just 
about pensions and health care, I think it is the middle 
income, working-class families feeling that no one is looking 
out for them. And they are working harder and running faster 
just to keep up, and they are not keeping up.
    Chairman CAMP. Thank you.
    Mr. KIND. And that is the frustration that so many people 
feel today. Thank you for your----
    Chairman CAMP. Thank you. Ms. Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman, and thank all of you 
for being here today. It has been very enlightening.
    All of you have talked about having your operations 
worldwide. And Mr. Hayes in particular, your one statement, 
``capital is mobile,'' is certainly a truth here that we have 
to recognize as we are dealing with this very important issue.
    And one of the pieces that I liked hearing is that most of 
your companies have your intellectual property and your 
research and development right here in the United States. 
Because, obviously, the United States has always been known for 
being the innovator of so much that is bought around the world.
    And so, can you briefly explain the relationship between 
your domestic operations and your foreign operations, in 
particular, how they support one another? And then, how 
important are these foreign earnings to our domestic operations 
and your growth in the United States?
    So, Mr. Hayes, if you could, speak to that.
    Mr. HAYES. Certainly. Yes. As I mentioned earlier, as we 
were speaking, I think it is important to understand that UTC 
is a global company. Most of our research and development is 
spent right here, in the United States.
    So, as we think about developing the next generation of jet 
engine, that is work that is being done in East Hartford, 
Connecticut. That work will support export sales to Airbus in 
Toulouse and in Frankfurt. It will support export sales to 
Japan for the Mitsubishi regional jet, to Russia, as well as to 
Canada, for the Bombardier C series.
    And again, I think it is critically important to understand 
that, as we keep R&D in this country, those are the types of 
jobs and the type of growth that will ultimately bring 
prosperity back to this country. Those are the great jobs. We 
are going to hire about 300 engineers this year in East 
Hartford, Connecticut, as we ramp up the spending on R&D.
    And again, most of the R&D, as I mentioned before, happens 
here in the U.S. And we use that to support development of 
products around the world and introductions of products around 
the world.
    Mrs. BLACK. And could I also draw the conclusion, then, 
that what you then sell around the world also helps to bring 
money back to the United States, so that we can have more 
research and development, and continue to be the leader in 
innovation in this country?
    Mr. HAYES. It certainly brings earnings, if not cash. 
Again, the cash, as we have said earlier, is still trapped 
overseas.
    Mrs. BLACK. Sure.
    Mr. HAYES. But the earnings, from an accounting standpoint, 
certainly supports the R&D efforts that we have in this 
country.
    Mr. RAPP. Yes. Congresswoman Black, let me give you an 
example of that. If you look at our business, the industries we 
serve in the U.S. market is still about 50 percent of what it 
was at the end of first quarter 2006. However, this year we 
will have an all-time record high spend in R&D, the majority of 
that coming into the United States. That is not because of the 
strength of the U.S. economy or what is going on here. It is 
based on the strength of our businesses around the world.
    So, I think it is a great example of the point you are 
poking at. Our success, winning in China, Brazil, Latin 
America--the other parts of the world we compete in--
definitely, positively impacts what goes on here, in the U.S.
    Mrs. BLACK. Mr. Crines.
    Mr. CRINES. Congresswoman, 45 percent of our revenues are 
coming from our foreign markets. And, as I said earlier, 70 
percent of the revenues are sourced out of our U.S.-based 
manufacturing facilities. Three-quarters of our research and 
development efforts are based in our U.S.-based facilities.
    So, clearly, very similar to the other companies 
represented here, we have been able to grow employment here in 
the U.S., on the basis of our success in competing for business 
overseas.
    And it is the case that much of that growth now is taking 
place in places like China, Brazil, Russia, India, Eastern 
Europe, because those economies are growing at a faster clip 
than the more developed economies of the world, because those 
governments are investing in a pretty significant way in 
building out infrastructure--in our case, health care 
infrastructure that is giving access to health care to their 
citizens that they have not in the past had access to.
    Mr. BUTHMAN. And we are similar. We export not only 
technology, but brands. So you can find a Kleenex box, a 
Kleenex facial tissue around the world. And every box of facial 
tissue that is sold in a country around the world, we get a 
royalty as a result of that. We pay income tax on that today. 
So it is--to your point, Congresswoman, it is a source of 
income and cash, in our perspective.
    I think there is a reality that, as the economy gets 
increasingly global, we are going to build our R&D footprint 
here, which is almost exclusively U.S., I think more and more 
we are going to keep that base, we are going to grow that base. 
We are also going to bring ideas in from around the world, 
which will benefit U.S. consumers, if not just the cash flow 
that comes back----
    Chairman CAMP. Thank you. Mr. McDermott is recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Let me thank you 
for having this hearing, because hearings are always 
interesting to learn from.
    Before I came to the Congress, I was a state legislator and 
was Ways and Means chairman in the state senate for five years, 
ran a state budget. And then I got here in 1988. Old, wise guy 
in the State of Washington said to me one time, ``Business 
doesn't give a damn what the rate is, as long as they can count 
on it. They want certainty. They want to know how long it is 
going to last.'' And I hear some of that from you, Mr. Hayes.
    I look out in this audience, there is a lot of empty seats. 
But I know there are a lot of people sitting in their offices, 
watching this on television. And when I got here in 1988, just 
after tax reform had passed in 1986, my office in 1989 was 
loaded with folks coming in, telling me they wanted to make a 
little adjustment in the tax reform. And I have had a steady 
stream of those people for the 23 years that I have been in the 
state legislature--or in this--in the Congress.
    Now, my question to you is, how long a moratorium do you 
think we could put into the law that says we have done tax 
reform, and nobody is going to get a change for--six months? A 
year? Two years? How long would you sign up for, if we gave you 
this new rate?
    Mr. RAPP. I would probably sign up for a moratorium with a 
quid pro quo that we won't come ask for any special exceptions, 
if you don't come and ask for more, in terms of the tax rate.
    I think the key issue is how do we maintain 
competitiveness. And to the degree you give us that competitive 
rate, then it turns over to our responsibility to compete and 
win against our global competitors. And so, I think if we get 
that right, then it is up to us. I think you hold the rate, I 
think we hold off on asking for the exceptions.
    Mr. MCDERMOTT. You think the whole business community would 
be willing to accept that? Because, you see, in 1986 we did 
that once, right? We made all these careful compromises between 
reinvestment trusts and, oh God, real estate industry, and 
everybody. And all that was done--bingo, as soon as it was 
passed----
    Mr. RAPP. But what I would say about the business community 
in that regard is you are engaging the business community in 
this debate. We had a request earlier, in terms of continuing 
the discussion after this session. I think we all realize that 
this has gone far enough, and it is in the long-term interest 
of the business community, as well as the country, that we get 
this issue on the table, find a solution that gets us to a 
competitive playing field around the world, and then we get on 
with what this country is best at, and that is competing and 
winning.
    Mr. MCDERMOTT. Could I ask one question further, then? We 
talk about competitiveness. Because this is like a spider web. 
We are talking about one little piece of the spider web, and 
there is all kinds of things related to your competitiveness. 
Your decisions aren't made simply on tax rates. They are made 
on a whole lot of other things.
    Do you support, as a group, the President's Affordable Care 
Act, as passed by the Congress? Mr. Hayes.
    Mr. HAYES. I think the need for health care reform is 
paramount in this country, because health care costs are one of 
the things that will bankrupt the economy sooner than anything 
else. And we certainly support the effort, if not the 
specifics, of everything that is in the health care bill.
    Mr. RAPP. We support the effort, but we think private 
enterprise is a good place to solve the solutions.
    I mean if you look at, from 2002 to 2010, as a company, our 
health care costs have tracked below CPI.
    Mr. MCDERMOTT. So you think leaving it in the private 
insurance industry, as the President's bill does, and including 
more people into the private insurance industry, is 
competitive? That is a good way to go to control costs?
    Mr. RAPP. As Greg said, we need absolute reform. And I 
think private enterprise is a better place to solve that.
    Mr. MCDERMOTT. You mean the government should get out and 
let you on your own?
    Mr. RAPP. As we said earlier, I think there is some reform 
that is required. But, in terms of private enterprise, 
addressing the issue, that is where we found the best result.
    Mr. MCDERMOTT. So I can't tell whether you would be for a 
repeal or not. How about you?
    Mr. CRINES. The company supported the health care reform 
efforts, certainly support providing access to health insurance 
to what was 46 million Americans, now 50 million uninsured 
Americans. We did, however, object to the way that it is being 
paid for, in particular----
    Mr. MCDERMOTT. The 2.3 percent----
    Mr. CRINES [continuing]. 2.3 percent excise tax that is 
being imposed on the company.
    Mr. MCDERMOTT. Okay.
    Mr. BUTHMAN. I am not convinced--I am all for health care 
reform. I am not convinced we really solved the underlying 
issue of rising costs.
    Chairman CAMP. All right, thank you.
    Mr. MCDERMOTT. So you think repeal would be a good--that 
would make you more competitive?
    Chairman CAMP. I have to tell the gentleman his time has 
expired. And I want to thank this panel for their participation 
this morning. Your testimony today has been very helpful as we 
consider these critical issues, and I want to thank you all for 
listening to every Member who wanted to talk to you today, and 
trying to answer their questions. And I hope we will be able, 
as others have said, to continue this discussion as it unfolds.
    And Members may wish to submit some additional questions to 
you, in writing, and I hope you would respond, so we could 
include those in the formal record, if that were to occur.
    Again, let me thank you for being here.
    And I now invite our second panel to come forward to the 
witness table.
    Thanks again.
    [Brief Recess.]
    Chairman CAMP. Thank you. We are pleased to welcome our 
second panel which features three experts in the field of 
international tax law. All three witnesses on our second panel 
have previously testified before the Ways and Means Committee, 
and we welcome you all back today.
    First, I would like to welcome and introduce a fellow 
Michigander, Jim Hines. Mr. Hines is the L. Hart Wright 
Collegiate Professor of Law at the University of Michigan Law 
School, and a research associate of the National Bureau of 
Economic Research.
    Second, we will hear from Dirk Suringa, a partner at 
Covington & Burling, specializing in international tax law 
here, in Washington, D.C. Mr. Suringa previously served in the 
Department of the Treasury's office of international tax 
counsel from 2000 to 2003. And finally, we will hear from Jane 
Gravelle, a senior specialist in economic policy from the 
Congressional Research Service.
    Thank you all again for your time today. The committee has 
received each of your written statements, and they will be made 
part of the formal hearing record. Each of you will be 
recognized for five minutes for your oral remarks. And Mr. 
Hines, we will begin with you, and you are recognized for five 
minutes. Thank you for being here.

  STATEMENT OF JAMES R. HINES, JR., L. HART WRIGHT COLLEGIATE 
PROFESSOR OF LAW, UNIVERSITY OF Michigan LAW SCHOOL, ANN ARBOR, 
                            MICHIGAN

    Mr. HINES. Thank you, Chairman Camp, Representative Levin, 
and Members of the Committee. As you know, the United States 
has a different tax system than any other major capital 
exporting country and any other G7 nation. The consequence of 
our tax system is that it distorts business activity around the 
world, it distorts asset ownership, and it erodes the 
productivity of American businesses.
    It is an interesting fact that 50 years ago the prevailing 
theory was that the United States should have a tax system like 
the one we do now. But what has happened in the intervening 50 
years is we have come to realize it is a mistake. Countries 
around the world that used to have tax systems like the United 
States have abandoned them. The United States is, as I 
mentioned, the only remaining major capital exporter that taxes 
the active foreign income of its residents' businesses.
    As a consequence of this system, American firms are less 
productive than they otherwise would be. And that feeds back to 
the American labor market. In order for American workers to get 
high wages and have good jobs that produce good lifestyles, 
they have to be productive. And in order for them to be 
productive, they have to work for companies that make them 
productive. The way for companies to make workers productive is 
for the companies to be efficient and effective in deploying 
their labor and other productive assets. And the tax system has 
the opportunity to help companies do that, or, unfortunately, 
the tax system can get in the way.
    Now, this is a challenging time for labor markets in high-
income countries like the United States. If you think about 
what the impact of moving to a territorial tax system would be, 
if it makes American labor more productive, then it will 
increase employment opportunities in the United States, and it 
will increase wages in the United States.
    There are two separate effects that territoriality and 
offshore business activity would have on American labor. One is 
substitution. And that is a concern of people. It is an 
appropriate concern. The concern is that American firms--or for 
that matter, German firms or other foreign firms--would employ 
labor in other countries, rather than the United States, and, 
as a result erode the employment opportunities of Americans.
    There is a separate effect, and that is what you heard from 
some of the witnesses this morning about, which is the 
productivity effect of offshore business activities. If 
offshore business activities enhance the productivity of 
American workers, then it increases demand for them, and 
increases the wages that they earn.
    There are examples of cases where foreign business 
activities substitute for domestic business activities. And, as 
a result, there is less demand for American workers. That 
happens. What also happens is that there are many cases in 
which foreign business activities enhance the productivity of 
American workers. The question, I think, for Congress is: What 
happens mostly in the American economy?
    If we look at the business sector, the American economy as 
a whole, what is the predominant effect? Is it this 
substitution, or is it the productivity effect? The statistical 
evidence that we have, not just from the United States, but 
from around the world, suggests very strongly that the 
productivity effect is more potent than the substitution 
effect, that the foreign business activities of American firms 
enhance the productivity of their domestic operations, and 
thereby increase demand for American labor.
    The evidence that we have for the United States is that, 
for multinational firms, 10 percent expansions of foreign 
employment are associated with 3.7 percent expansions of 
domestic employment by the same firms at the same time. Now, 
that is an average effect. It doesn't apply in every single 
case.
    However, if the question is, for the American economy, is 
foreign business activity productive from the standpoint of 
generating demand for American labor, the answer is yes.
    We know that these productivity effects are important. If 
they were unimportant, one might entertain the possibility of 
passing a law that would make it illegal for American companies 
to employ workers abroad. Nobody contemplates such a law. But 
why don't we contemplate that law? Because we know it would not 
be good for the American economy, and ultimately, would not be 
good for American workers. American workers benefit when their 
work is productive. And their work is productive when American 
companies help them make it productive. And so, that is why we 
need a tax system that doesn't distort the activities of 
American companies.
    The United States has a serious budgetary problem. There 
are things that we need to do about it. Mr. Becerra this 
morning said that he never heard a witness testify that their 
tax burden should be increased. Mr. Chairman, you should 
increase my tax burden. And I think you should increase the tax 
burdens of others, too, because we are not on a fiscally 
sustainable path right now.
    Let me quickly add we also need spending reduction.
    But when we think about our fiscal problems, taxing the 
foreign incomes of American business is not a good way to 
address them.
    [The prepared statement of Mr. Hines follows:]
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    Chairman CAMP. All right, thank you.
    Mr. Suringa, you have five minutes, as well. And your 
written statement is part of the record, as well.

 STATEMENT OF DIRK J.J. SURINGA, PARTNER, COVINGTON & BURLING 
                     LLP, WASHINGTON, D.C.

    Mr. SURINGA. Thank you, Mr. Chairman. Chairman Camp, 
Ranking Member Levin, and Members of the Committee, my name is 
Dirk Suringa. I am a partner with the law firm of Covington & 
Burling. From 2000 to 2003 I was an attorney advisor in the 
office of international tax counsel at the Treasury Department. 
I appreciate very much the opportunity to testify before the 
committee today. I appear before you today on my own behalf, 
and not on behalf of my firm or any firm client.
    I would like to make three basic points today, and I make 
these points as a practitioner who advises clients on a daily 
basis about how to work with and how to comply with the 
existing U.S. foreign tax credit rules.
    First, those rules are widely--and I think correctly--
regarded as highly complex and unstable. We started in the 
early days of the Internal Revenue Code with a very simple 
principle, that the United States should provide a credit for 
foreign taxes paid by U.S. businesses on their overseas 
operations. That simple principle has become, over the last 90 
years, a thicket of rules and restrictions that now occupies 
about 35 pages of the Internal Revenue Code, and almost 190 
pages of Treasury regulations.
    What is more, this highly complex set of rules is a moving 
target. Virtually every major piece of international tax 
legislation in the history of the code has changed the foreign 
tax credit rules. The most recent examples are the enactment 
just last year of new code sections 909, 901(m), 960(c), and 
904(d)(6). This instability not only creates a significant 
compliance burden, but also makes it difficult for U.S. 
companies to engage in the type of long-term business planning 
that is necessary for them to compete internationally.
    Second, the main cause for this complexity, from at least a 
tax practitioner's perspective, is what could be called the 
continual pursuit of technical perfection. Now, trying to 
ensure that the rules on the books operate as intended is, of 
course, a worthy and important goal. But in the case of the 
foreign tax credit, it has led, over time, to a system that 
makes comprehensive compliance and administration nearly 
impossible.
    What we have, in effect, is a feedback loop that has been 
in place over many decades. Each change to the rules raises 
difficult interpretative questions, including how that 
particular change interacts with existing rules, what specific 
transactions were meant to be covered, and what specific 
structures were meant to be impacted. Those types of questions 
often lead to another round of fixes, or even wholesale 
revisions, which, in turn, raise their own sets of questions. 
The result, over time, is a tangle of rules and regulations 
that are full of traps for the unwary.
    Therefore, third and finally, as you consider international 
tax reform, I urge you to keep in mind simplicity, stability, 
and, not least, support for U.S. businesses trying to compete 
abroad. International tax reform offers the opportunity to 
clear away the thicket of rules we now have to live with. But 
in the design of any new system, there will arise many choices 
about how to structure the rules. In dealing with such 
questions, we can learn a great deal about the very recent 
experience from some of our major trading partners, like Canada 
and the UK. These countries have been very up front about the 
importance of making their systems competitive, simpler, and 
stabler. We can learn from their example.
    Now, it is something of a statement against self interest 
to say it, but I think our rules really should be simpler. 
There should be less economic opportunity for people like me, 
who practice in this area, and more economic opportunity for 
working Americans who are trying to bring home a living. We 
can, I think, in order to achieve that objective, resist the 
impulse to let the technically perfect system become the enemy 
of the perfectly good system.
    So, with the objectives of simplicity and stability, and 
with a frank analysis of what our system needs to be 
competitive with the systems of other countries and our major 
trading partners, I think we can create a system of 
international taxation that supports U.S. business and attracts 
capital to our markets.
    Once again, I would like to thank the committee for the 
opportunity to testify today, and I look forward to your 
questions.
    [The prepared statement of Mr. Suringa follows:]
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    Chairman CAMP. Thank you.
    Ms. Gravelle, you are recognized for five minutes, and your 
written statement is also part of the record.

 STATEMENT OF JANE G. GRAVELLE, SENIOR SPECIALIST IN ECONOMIC 
    POLICY, CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, D.C.

    Ms. GRAVELLE. Thank you, Chairman. Many proposals for tax 
revision argue that our corporate tax system should be revised 
to improve our ``international competitiveness'' by moving from 
the current deferral regime to an exemption of foreign source 
income or a territorial tax. Related policies we have heard 
discussed today include another repatriation holiday or 
corporate rate cut.
    International tax policy could also move in the opposite 
direction, by eliminating or restricting deferral, as the 
President has proposed. Deferral means that the U.S. system has 
territorial elements. It encourages firms to conduct activities 
and retain earnings abroad. A territorial tax would further 
encourage firms to operate abroad. But both a territorial tax 
and eliminating deferral would remove the retention incentive.
    Although competitiveness has been invoked in this debate, 
it is not countries that are competitive, it is companies that 
are. A country's firms cannot be competitive in all areas. Even 
if firms in our country are more productive than firms in all 
other countries, a country would still produce those goods in 
which its relative advantage is greatest, and trade with other 
countries for other goods. The other countries need to produce 
goods with their resources, as well.
    So, competitiveness, in economic terms, is not a very 
helpful concept here. When you do economic analysis of 
international tax policy, the issues are really of either 
efficient tax policy or optimal tax policy. Efficiency refers 
to allocating capital to uses around the world with the highest 
pre-tax or social yield. And it maximizes world welfare. 
Optimal policy maximizes U.S. welfare.
    Concepts that relate to these two goals are a term called 
capital export neutrality and a term called national 
neutrality. Capital export neutrality is efficient, and 
requires a country to apply the same tax rate to its firm's 
investments, regardless of where they are located. It is 
embodied in a residence-based system. National neutrality 
requires only allowing a deduction for foreign taxes paid.
    A third concept, called capital import neutrality is 
achieved with territorial taxation. This approach will cause a 
misallocation of capital to low-tax countries, lowering the 
wages of workers in high-tax countries, and raising them in 
low-tax countries.
    Although capital import neutrality appears to be fair, a 
level playing field, it is not efficient because firms make 
choices based not on the options facing each country's firm, 
but their own returns to investments in different locations.
    Although this discussion focuses on the allocation of 
investment, another consequence, an important consequence of 
the choice of tax regime, is the ability to shift profits 
artificially from high-tax to low-tax countries, which occurs 
with deferral, and would likely increase with a territorial 
tax.
    Now, arguments have been made that these concepts are 
outmoded because they assume that U.S. firms are constrained by 
U.S. rules. The firms can shift their nationality, or if 
investors can shift their portfolios to foreign firms, capital 
export neutrality cannot be achieved. Evidence indicates, 
however, that these options are not available or important, and 
they could also be further restricted.
    Our anti-inversion rules seem to be working very 
effectively. Recent research suggests that headquarters 
locations are not very sensitive to tax, and that new firms 
rarely incorporate abroad--new U.S. firms. The increasing 
portfolio investment by U.S. citizens in foreign firms appears 
motivated by portfolio diversification, and not tax issues.
    While moving to a territorial tax would reduce any existing 
incentive to headquarter abroad, it is not clear that this 
issue would be important enough, considering revenues, to--
compared with the increase incentive for profit shifting. That 
is, I think it is a lot easier to shift profits than to shift 
headquarters.
    Another proposal that has been made is to cut the corporate 
tax rate. I don't have a lot of time to talk about that, 
although I mention it in my testimony. It would be opposite 
from the effect of a territorial tax. My own research finds 
that cutting the corporate tax rate by 10 percentage points 
would increase output on a 1-time basis by only 2/10 of 1 
percent of income, and will increase national income, the 
income we own, by only 2/100 of 1 percent of income. So it is 
important to growth, but certainly not important to things like 
getting the deficit under control. Thank you.
    [The prepared statement of Ms. Gravelle follows:]
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    Chairman CAMP. Thank you very much. Thank you all for your 
testimony. We have heard that there are different territorial 
systems, and we know there are. But let me ask you, Mr. 
Suringa, if there was a properly designed territorial system. 
What advantages to the U.S. economy would there be from 
adopting such a system? And I realize we are talking in a 
generality here, and there are specifics, but----
    Mr. SURINGA. Yes, I think that is right. The main advantage 
of territoriality, is as a way to end the lock-out effect on 
capital that is abroad, the earnings and profits that are now, 
in essence, trapped in foreign subsidiaries.
    The notion is that if a company is looking for how to use 
its capital or its earnings in a foreign jurisdiction, its 
choice about bringing those back to the United States is 
handicapped by the hurdle rate that is imposed by the tax on 
repatriation.
    So, let's assume you get a foreign tax credit to offset the 
U.S. tax on some piece of a distribution to the United States. 
You are still talking about playing with, you know, $.65, $.75 
on the dollar if you bring the money back home. And if you are 
looking at what kind of investment do I make, do I make the 
investment abroad, where I am starting with 100 cents on the 
dollar, do I make the investment in the United States, when I 
am talking about $.65, $.75 on the dollar? That is just a very 
basic sort of dollars and cents problem that territoriality 
helps to address by, essentially, taking away the tax cost of 
bringing the money back home. I think that is the main 
advantage of a territorial system, relative to the current 
system.
    In addition, I think a properly designed territorial system 
gives the opportunity to reduce a lot of the complexity 
associated with our current rules, in particular, the foreign 
tax credit limitation, which is incredibly complex, and has 
pages and pages of rules. I mean it is fun for people like me, 
but it is not fun for American businesses. And these types of 
rules are much less significant if you move to a territorial 
system.
    Chairman CAMP. And, Mr. Hines, what are the important--some 
of the most important decisions that policy makers should 
consider when trying to design a territorial system?
    Mr. HINES. One of the big issues is how you think about 
expense deductions associated with a territorial system, 
because American firms will have general expenses like interest 
expense in the United States or general and administrative 
expense. And the question is whether you want to permit those 
expenses to be fully deductible if the foreign income earned by 
those companies is not taxed by the U.S.
    It seems intuitive that if a company is doing 20 percent of 
its business abroad and has administrative expenses in the 
United States that cover both its domestic and foreign 
activities, then perhaps only 80 percent of those 
administrative expenses should be deductible in the United 
States.
    However, that is not really the right answer to that 
question. This expense deductibility question is a very 
important one. If you look at what other countries do--like the 
example of France was given earlier today generally do permit 
full domestic deductibility of the associated expenses, and 
that is the right way to run a territorial system. If you 
don't, then you are implicitly taxing the foreign income again, 
and that is a mistake.
    Chairman CAMP. Okay. Mr. Suringa, do you have anything to 
add to that?
    Mr. SURINGA. Well, I think also on the deductibility of 
interest expense and other costs, I would agree with Professor 
Hines. One of the things to think about is if you are 
disallowing a portion of the interest and other expenses that 
are allocable to foreign source income, and you make an 
investment in the U.S.--let's say you borrow to build a factory 
in the U.S.--if you have just a general expense allocation rule 
that allocates a piece of that to foreign source income, you 
are going to actually lose your interest expense deduction for 
borrowing to build something in the U.S.
    I think that a lot of the complexity that people talk about 
in existing territorial systems is related to expense 
allocation. And that is why, in countries like Canada and the 
UK and France, as well, they have basically said, ``We are not 
going to get into that game,'' just for competitiveness 
reasons.
    Chairman CAMP. All right, thank you. Mr. Levin is 
recognized.
    Mr. LEVIN. You know, in a way, one should hesitate to ask 
questions because the answers often aren't what we want.
    [Laughter.]
    Mr. LEVIN. I think we found that out today with a 
repatriation holiday because the witnesses who were here before 
very much articulated the reasons why we should not do it on a 
one-year basis, or a periodic basis. And I am not sure, 
Professor Hines, that my colleagues to my right here like your 
answer, in terms of raising taxes on individuals.
    So, maybe there should be some hesitation to ask questions, 
but I will anyway.
    Chairman CAMP. I would just say the committee doesn't 
normally do rifle shots, but we might make an exception in his 
case.
    [Laughter.]
    Mr. LEVIN. I remember how previous chairs--myself, for a 
period of time, and those before us--talked rather negatively 
about rifle shots. But anyway, I can just look on the wall, and 
hear Dan Rostenkowski talking about rifle shots.
    But let's have some discussion back and forth among the 
three of you, because you don't agree, I don't think. And I 
think the more discussion we have, the better. Your response on 
interest allocation, I think we need to spend some time on it. 
Because with territorial, you can very much escape taxation by 
an unfair allocation. And to simply say, ``Let anybody do 
whatever they want,'' is an open door to abuse of the tax 
system. And so, if you avoid complexity, you may increase 
undermining the integrity of a Tax Code.
    So, let me ask you, Ms. Gravelle, to bring you into this 
discussion, your view of the adoption of a territorial tax 
system and what impact it would have on wage income, labor 
income, what is your judgement there?
    Ms. GRAVELLE. I think it would cause--although we have got 
a lot--we are very close to a territorial system already, but 
it would make foreign investment more attractive. That would 
cause investment to flow abroad, and that would reduce the 
capital with which workers in the United States have, so it 
should reduce wages. A capital flow reduces wages in the United 
States, increases wages abroad.
    Mr. LEVIN. Okay, because on page eight of your testimony 
you say that a territorial tax encourages the flow of capital 
out of the U.S.
    Ms. GRAVELLE. That is right.
    Mr. LEVIN. Why don't you elaborate on that? And then, 
because, Mr. Chairman, we need to have some discussion here--
this is not an easy issue----
    Ms. GRAVELLE. Well----
    Mr. LEVIN [continuing]. Maybe those who disagree with Ms. 
Gravelle, who has a long history with these issues, chime in if 
I have the time. Ms. Gravelle?
    Ms. GRAVELLE. Well, I mean, basically, if you lower the 
tax, either the perceived tax, because of eliminating, you 
know, any prospect of tax, with a territorial system, you will 
increase the after-tax rate of return that firms see abroad, so 
they will want to move their investments--they would want to 
make investments abroad, instead of the United States.
    I mean it is a very straightforward idea. And the more 
capital abroad, the less capital in the United States, that is 
going to lower wages in the United States. So that is just a 
very standard notion of where investment flows, and capital 
output--capital stock versus worker ratios in different 
countries.
    Mr. LEVIN. I----
    Ms. GRAVELLE. I also think, though, an equally important 
issue is profit shifting. I think profit shifting is a problem 
that you have to be concerned about that is going to grow with 
territorial tax.
    Mr. LEVIN. Professor.
    Mr. HINES. I have been disagreeing with Dr. Gravelle for 25 
years, and I disagree with her right now.
    Mr. LEVIN. You are not old enough to have disagreed with 
her for 25 years.
    Mr. HINES. Oh, I guess you are right about that.
    [Laughter.]
    Mr. HINES. A territorial system would encourage business 
activity abroad, and that would stimulate greater and more 
productive business activity in the United States. The mistake 
in Dr. Gravelle's logic is the assumption that there is one 
piece of capital, and it can either go to the United States or 
it can go abroad.
    The fact is, in the world there is lots of capital. And if 
business is more productive abroad, they can also be more 
productive and expand at home.
    Mr. LEVIN. All right.
    Chairman CAMP. Thank you. Dr. Boustany is recognized.
    Dr. BOUSTANY. Thank you, Mr. Chairman. Thank you all for 
appearing before the committee today.
    Mr. Suringa, in your testimony you warned us against the 
pursuit of perfection as we go about looking at this. And if we 
go to a territorial system, and we move to exempt active 
foreign income, we will only need the foreign tax credit for 
passive income. Is that correct?
    So would this allow us to really simplify the use of 
foreign tax credits? You mentioned the complexity in the code 
and in the regulations. Could you elaborate on that?
    Mr. SURINGA. Sure. I think it would certainly reduce the 
pressure on the foreign tax credit rules. It depends a lot on 
what type of system you go to. So, for example, if you choose a 
system like the Netherlands, which exempts both dividends and 
also branch income, then you are really not talking about much 
scope for application for the foreign tax credit rules, because 
double taxation is being relieved through the exemption system 
across the board.
    If you, on the other hand, go to a system like the UK has 
gone to, where you exempt dividend income but do not exempt 
branch income, you rely on treaties for whatever exemption you 
are going to get in that context, then the foreign tax credit 
rules would still play a role.
    So I think it really depends a lot on the type of system 
you adopt. And I think that that type of dialogue about whether 
to adopt that system wholesale or piecemeal, that is sort of an 
ongoing dialogue that those countries are having internally.
    For example, there has been discussion in the UK and in 
Canada about going from a participation exemption system for 
dividends only to a system in which they also exempt branch 
income as well. And I think the motivation for that is, in 
part, simplicity of application, and not having to deal with 
the foreign tax credit rules very much at all.
    Dr. BOUSTANY. Thank you. Mr. Tiberi asked the first panel 
earlier, ``What pitfalls should we look for, as we move 
forward?'' And let's say we go forward with a territorial 
system.
    So, Mr. Hines, I know we talked a little bit about the 
expense allocation issue just a moment ago. I don't know if 
there is any--if you want to add more to that. But could you 
also talk a little bit about pitfall, just in general terms? I 
know it is beyond the scope of the time we have here, but give 
us some guidelines.
    Mr. HINES. Well, certainly, expense allocation is a 
pitfall, because it is very easy to talk yourself into 
propositions about limiting deductibility that would be 
mistakes in a territorial system.
    A second issue is you have to think about the tax treaties 
that we have. I realize that is not the House's responsibility, 
but we have a lot of treaties, and they are based on the tax 
system we currently have. And so we would need to think about a 
number of our treaty arrangements. *Dr. Boustany. Thank you. 
Mr. Suringa, you want to comment there?
    Mr. SURINGA. There are various sorts of design elements. So 
an example is in Canada. Their participation exemption is an 
exemption for what is referred to as ``exempt surplus''. Exempt 
surplus is a portion of the earnings that are basically active 
earnings that are earned in jurisdiction with which Canada has 
a treaty or a tax information exchange agreement, and that has 
certain other similarities to the Canadian tax system.
    If you have active earnings in a jurisdiction that is 
outside that set of parameters, it is called ``taxable 
surplus''. And so when a Canadian company brings home a 
dividend, they have to figure out, okay, is this out of the 
taxable surplus account or the exempt surplus account, or is it 
under the foreign accrual property income regime, which is 
their anti-deferral regime. And you have to maintain all these 
sorts of complex accounts for how to deal with that.
    Because of the distinction between taxable and exempt 
surplus, you get discontinuities. For example, they have a 
treaty with the Bahamas. So you can earn active income in the 
Bahamas in Canada that is going to be treated as exempt 
surplus. They don't have a treaty with Hong Kong. So you have 
an active manufacturing operation in Hong Kong. That is all 
taxable surplus.
    You get these sort of odd discontinuities, in terms of 
where you would expect to see an exemption apply, versus where 
you would expect to see residual taxation apply. For that 
reason, I think they are leaning towards trying to adopt a 
reform in which they would not make those types of 
distinctions, that they would treat all active foreign business 
income as exempt surplus. And I think those are the types of 
design criteria that the U.S. should think about if we are 
going to move to a territorial system.
    Dr. BOUSTANY. Thank you. I yield back, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman. Assuming that we all 
agree that our foreign tax system is overly complicated, and it 
has to be simplified, your mission today is to make certain 
that we provide whatever incentives is necessary to encourage 
our multinationals to invest in the United States of America 
without doing violence to their competitive position, as 
relates to transportation and other reasons that encourage them 
to do business and invest abroad.
    But your jobs, collectively, is to tell us what we can do 
with the existing code so that, at the end of the day, you 
know, as tax writers, that we did the best we could to 
encourage foreign--strike that--multinationals to bring that 
money and invest it--invest it, not just give it out in 
dividends--into American business, expansion of business 
opportunities to create more jobs in the USA.
    If you three can find some area of agreement, we will be 
way ahead with our problem. Mr. Hines.
    Mr. HINES. Well, I don't know about agreement, but I will 
start with what I think the answer is, which is American 
companies will invest in the United States if it is profitable 
to do so, and if it is feasible to do so.
    Mr. RANGEL. What can we do?
    Mr. HINES. To make it profitable, I think we should exempt 
foreign business income from U.S. taxation, and allow companies 
to structure their businesses in the most profitable way.
    If it is in their interest to invest in the United States, 
they will do it. And the current tax system puts impediments in 
the way to the most productive business structuring.
    Mr. RANGEL. Suppose it is in their interest just to pay off 
debts and to increase dividends and to do things that are not 
directly related to creating jobs here.
    Mr. HINES. But we need to have confidence in the American 
economy. This is a great economy, we just need to get the tax 
system out of the way of the economy. And that has been our 
history, and there is no reason----
    Mr. RANGEL [continuing]. Depend on them to do the job 
creating thing here by improving the economy generally?
    Mr. HINES. Yes.
    Mr. RANGEL. Okay. Mr. Suringa.
    Mr. SURINGA. Well, I think my perspective is one of as a 
practitioner, and this may be a little bit above my pay grade. 
But I think where I would start with is the rules that create 
complexity in the existing code. And, you know, I would 
probably start, you know, with last year's bill and work 
backwards. I mean I just----
    Mr. RANGEL. There is no question that is a done deal. We 
promise you that we will simplify the system, based on your 
recommendations.
    Now, what can we do to get that investment money here to 
create jobs here?
    Mr. SURINGA. Well, I think moving to a participation 
exemption is going to simplify things and improve the ability 
of U.S. businesses to bring their money back home. So I think 
it is just a question of----
    Mr. RANGEL. Bringing it back home is not the issue. Getting 
them to invest here and create jobs is the problem.
    Mr. SURINGA. Well, that is a very difficult problem. I 
think it really ultimately ends up being a matter of faith, as 
the----
    Mr. RANGEL. Faith?
    Mr. SURINGA [continuing]. As Professor Hines has said, in 
the sense that----
    Mr. RANGEL. Faith in the economists and multinationals is 
at an all-time low.
    Mr. SURINGA. Well, that is--I understand. The issue is that 
if you--the extent to which you put restrictions on their 
ability to use the money when they come back home, that is 
either going to discourage them from bringing the money back 
home, or they are going to bring it back home and use it in the 
right way, or they are going to bring it back home and try to 
figure out a way to work around those rules. So----
    Mr. RANGEL. Thank you for your contribution.
    Mr. SURINGA. Well, that----
    Mr. RANGEL. Ms. Gravelle.
    Ms. GRAVELLE. Well, I think the answer to moving that 
direction is simple. We could have a tax reform that increases 
the tax on foreign source income and reduces the tax rate in 
the United States. One example of that is in the Wyden-Gregg 
Bill, which was introduced last year. It is now the Wyden-Coats 
Bill.
    But basically, I don't see that cutting taxes abroad is 
going to help bring capital here. I think it will do the 
opposite. And I do think we have a fixed pot of capital that 
belongs to U.S. companies. And if you move it one place it 
can't be another place. So I think that is a very 
straightforward answer.
    But I think we should think about efficiency, and we should 
think about tax administration, too. I actually think a system 
that ends deferral would be easier to administer, because there 
wouldn't be all these incentives to have profit shifting.
    Mr. RANGEL. Thank you. Mr. Chairman, what is your idea?
    Chairman CAMP. Well, I think my idea, if you are yielding 
back your time, is to recognize Ms. Black for five minutes.
    [Laughter.]
    Mrs. BLACK. Thank you, Mr. Chairman. And thank you for 
being here today, panel.
    I want to go back to something that was talked about in our 
first panel. I think you may have all been in the audience at 
that point in time, but let me just go back and remind you what 
was said. I think it actually was my colleague, Mr. Berg, who 
made the observation that in 1960, 17 of the 20 largest 
companies were headquartered here in the United States. And we 
are now down in 2010 to just 6 of those top 20 businesses being 
headquartered here, in the United States.
    And given the fact that both on this panel and also the 
previous panel it was noted that capital is mobile, and in our 
world of increasingly mobile capital, how do these very high 
corporate taxes make business investment and job creation in 
the United States attractive? Or, in the other case, not 
attractive?
    Mr. HINES. So the question is how do high tax rates make 
investment attractive?
    Mrs. BLACK. Well, I am trying to see can if we draw a 
conclusion about these businesses being headquartered and going 
to another country where the tax rate is, frankly, just more 
attractive. Would you draw that conclusion? And if so, what 
makes that happen?
    Mr. HINES. Oh, there is ample evidence that investment is 
attracted to lower tax locations. That is clear, and virtually 
every statistical study shows that. Furthermore, if taxes 
discourage certain kinds of industries, then you get fewer of 
those industries.
    There have been, in the past, expatriations, where 
companies actually pick up and move their headquarters, move 
their site of incorporation outside of their home country if 
the home country imposes a punishing tax burden.
    The United States had a spate of expatriations in the late 
1990s, although subsequent legislation made it very difficult 
for companies to do that. Part of what motivated Great 
Britain's recent tax reform move to a territorial system was 
concern about expatriating British companies that were moving 
elsewhere in Europe.
    So, expatriation is not itself quantitatively a large 
problem, but it is a little bit the canary in the coal mine, in 
that it illustrates the problem that your tax system has, that 
it makes your companies less competitive and discourages 
investment which, alas, is what we have had.
    Mrs. BLACK. Mr. Suringa.
    Mr. SURINGA. Yes. I think in the planning context you see 
this very much in what are referred to as sandwich structures, 
where you have got a foreign parent above a U.S. parent above a 
foreign subsidiary. And in that circumstance, the U.S. company 
ends up becoming a significant tax driver for that series of 
corporations. It leads to a lot of incentives on the part of 
the foreign company to actually move those operations out of 
the U.S. and align them under the foreign group, because the 
top tier foreign group can benefit from an exemption system, 
from concessions that are offered in its jurisdiction of 
incorporation.
    That is an example in which you see a direct incentive, in 
terms of business planning, for moving operations out of the 
U.S. And, obviously, to the extent that we can create a much 
more attractive environment for corporations to be 
headquartered in the U.S., you would expect to see that to 
stop. People would want to put operations underneath the U.S., 
because they are expecting to be able to get exempt dividends 
back up to their U.S. operations, and then to be able to 
redeploy them into our market, and into other markets, as well.
    Ms. GRAVELLE. Well, I think that most of the expatriations 
that occurred before 2004, and I think our legislation there 
pretty much took care of that problem. Most people felt that 
was the purpose of moving abroad, so you could strip earnings 
out of the United States. In other words, you would move your 
headquarters abroad, and then you would engage in some sort of 
interactions with your related companies in the United States, 
particularly leveraging for earnings stripping.
    Every country has thin capitalization rules to prevent 
that, but ours are pretty weak. So, and that is what the 
evidence has showed, is the firms that inverted before 2004 
moving mainly to places like Bermuda, used that as a way to 
reduce income that properly belongs in the United States, which 
is why you have this issue with allocation of deductions. That 
is another way you do earnings stripping.
    Mrs. BLACK. So if we have a territorial system where we 
equalize the competitiveness, would it not seem, by just 
reasonable-thinking people, that if you have an American-owned 
company and you are apples-to-apples on the taxes that you 
would not want to be headquarters here in the United States, 
and grow your business here in the United States?
    As I talk to those companies that I go to visit that do 
have operations offshore, and then they have them here, they 
tell me if they could just have a more equal footing, it would 
be more attractive for them to be here.
    Chairman CAMP. Thank you. Mr. Doggett is recognized.
    Mr. DOGGETT. Dr. Gravelle, if we move to a territorial 
system that eliminates taxes on foreign investment, or makes it 
nominal, won't that have the effect of incentivizing investment 
overseas, instead of investing here, in America?
    Ms. GRAVELLE. I think that is pretty obvious.
    Mr. DOGGETT. I think it is pretty obvious----
    Ms. GRAVELLE. I mean if you lower the tax abroad, capital 
is going to go abroad. I don't know where the extra capital 
that Jim is talking about comes from. But, you know, unless we 
have a savings response, there is no reason to have more 
capital. So if you put capital in one place, it is not going to 
be in another place.
    Mr. DOGGETT. I agree with you, that----
    Ms. GRAVELLE. So that is just logic.
    Mr. DOGGETT [continuing]. It is extremely obvious, despite 
all those who claim it is a panacea, that if you want to 
encourage economic growth overseas, adopt a territorial system. 
It is not aimed at creating jobs in America----
    Ms. GRAVELLE. Absolutely.
    Mr. DOGGETT. And, in fact, won't the economic effect of 
adopting a territorial system--over time, won't American 
workers actually see their wages go down?
    Ms. GRAVELLE. That is what you would expect if you moved 
capital out of the United States elsewhere. You would expect 
wages to go down in the United States.
    Mr. DOGGETT. So, American workers that are already 
struggling will pay a price if we adopt the Republican panacea 
approach. And let me discuss more specifically a matter that 
all of you have referred to, and those are these rules that few 
people on this committee, much less the American people, fully 
understand. And I will admit to being one of those.
    As I understand moving to a territorial system, if you tell 
any of the corporations that were here today that they pay zero 
on their investments overseas, but they will pay--according to 
their standard--20, 25 percent on their income that they earn 
in the United States, isn't there a rather dramatic incentive 
that that provides to characterize as much of your American 
income as foreign income as possible?
    Ms. GRAVELLE. There is. In fact, there already is, under 
the----
    Mr. DOGGETT. There is, because----
    Ms. GRAVELLE [continuing]. Territorial elements of our 
system----
    Mr. DOGGETT [continuing]. As you point out, in many ways a 
company like General Electric, that doesn't really believe in 
paying taxes, they practically have a territorial system now.
    Ms. GRAVELLE. Yes.
    Mr. DOGGETT. But the same rules that are a problem today 
are the same rules we would have to use in a territorial 
system. We would be saying to any of these corporations, 
``These are the rules that apply.'' And the problem referenced 
to some degree by all of the witnesses here, though clearly 
disagreeing on how severe it is, but the point is that the--
those rules apply.
    And we are not just talking about the income they earn in 
China, we are talking about the income that they earn in 
Detroit or in Hartford or in Austin, and that there is an 
incentive to categorize, under the rules that haven't worked 
very well in the past, to categorize as much of that American-
earned income paid by American consumers as foreign income, 
because they won't have to pay any tax on that, whatsoever.
    Ms. GRAVELLE. That is correct. And I think that problem 
becomes a little more serious. These guys wouldn't have been 
here before if they didn't think there was a value in a 
territorial tax. So I think it would--by removing any 
possibility of paying tax, it will increase the incentive--
nobody knows how much--to engage in more of the schemes like 
you saw with Google and Forest Labs and GE----
    Mr. DOGGETT. More tax-dodging, more cheating, more 
avoidance----
    Ms. GRAVELLE. Right, there is a big incentive to shift 
paper profits.
    Mr. DOGGETT. More not playing by the rules that would apply 
to the distributor of one of these companies down in Texas that 
may be paying near a full 35 percent. So you distort and 
disadvantage domestic companies versus these multinationals.
    You mentioned, of course, the anti-inversion rules we have. 
But is it also your belief that, for a company like Transocean 
that didn't only drill for BP in the Gulf, but drilled the Tax 
Code by claiming that it was no longer--renouncing its American 
citizenship and claiming that it was a Swiss corporation, do 
you believe we should have a rule that if you are managed and 
controlled in the United States, as Transocean still is, it 
ought to pay taxes, just like every other American corporation, 
instead of dodging them in Zug, Switzerland?
    Ms. GRAVELLE. Well, I think it would probably be helpful. I 
wouldn't abandon the anti-inversion rules, which work well.
    Mr. DOGGETT. Of course not.
    Ms. GRAVELLE. But I think it would be helpful to have a 
facts and circumstances approach to enforcing these tax rules, 
because why should just a piece of paper determine----
    Mr. DOGGETT. Allow you, if you have management and control 
here----
    Ms. GRAVELLE [continuing]. Determine all of this?
    Mr. DOGGETT. And----
    Ms. GRAVELLE. I know there is a concern that people would 
move their headquarters, but I have heard some recent research 
by Kimberly Clausing that suggested that the headquarters 
themselves are not very sensitive to taxes----
    Mr. DOGGETT. But there is no merit to that job export----
    Ms. GRAVELLE. Well, you know, there is always some effect.
    Mr. DOGGETT. But no substantial merit----
    Ms. GRAVELLE. But I don't think it would be a serious 
problem.
    Mr. DOGGETT. And specifically, finally, on your point about 
even the--lowering the corporate tax rate, which may have some 
merit, but your feeling is lowering the corporate tax rate from 
35 to, say, 25 percent, as has been advanced as a panacea, will 
have very modest impact on any type of economic growth. We 
would be much better to address the size of the deficits----
    Ms. GRAVELLE. Yes.
    Mr. DOGGETT [continuing]. And the national debt than 
focusing on that one aspect.
    Ms. GRAVELLE. Yes. My estimates, and I am one of the people 
who have one of the only international corporate tax models in 
the country, with a colleague from Wharton--using those 
estimates, capital is just not all that mobile. It is 
constrained by all sorts of effects. And most of the income 
that comes in from abroad isn't going to belong to us.
    Chairman CAMP. All right, thank you.
    Ms. GRAVELLE. It is going to belong to foreigners.
    Chairman CAMP. Time has expired.
    Mr. DOGGETT. Thank you.
    Chairman CAMP. I do think, though, that it is important to 
note that we are hearing about capital as if it is U.S.-based, 
and that is it. And if there is an investment opportunity 
around the world, the question isn't: ``Is it just U.S. 
capital?'' It is: ``What capital is going to be taking 
advantage of that opportunity?''
    And what we have been hearing from the other panel is we 
need to make sure that American-based companies are competitive 
when it comes to that investment. So will the U.S. and U.S. 
workers reap the benefit from that investment, or will it be a 
foreign entity, and foreign workers? And I think we just need 
to understand, it is not just this limited issue of: ``Is it 
U.S. capital?''
    But Mr. Pascrell is recognized.
    Mr. PASCRELL. Yes. Thank you, Mr. Chairman. Mr. Hines, you 
aren't suggesting, are you, in reviewing the Tax Code that we 
are examining today, you aren't suggesting, when you said--your 
words were the tax system is in the way of these multi--you 
weren't suggesting that we--there not be any taxes on the 
deliberations between companies and between countries. You 
weren't suggesting--you were just suggesting that we need a new 
system.
    Mr. HINES. That is right.
    Mr. PASCRELL. Yes. Do we need a new system for middle class 
taxes, people on their income? Do we need a new system for 
that, too?
    Mr. HINES. I think we could all agree that the tax system, 
as a whole, could be improved.
    Mr. PASCRELL. Okay. We all agree that it could be improved. 
But how would you pay for the recommendations that you are 
making today, and how would you pay for what the consequences--
because as soon as you change one part of that code, you are 
affecting a--many different parts of the code. Are we not?
    Mr. HINES. That is right.
    Mr. PASCRELL. Well, how would you pay for it?
    Mr. HINES. There are many things that need to be paid for. 
I----
    Mr. PASCRELL. No, how would you pay for your changes that 
you are recommending to us today?
    Mr. HINES. The territorial system?
    Mr. PASCRELL. Yes.
    Mr. HINES. I think you have a couple of options of things 
that would be improvements, if we adopted a territorial system, 
and we eliminated the section 199----
    Mr. PASCRELL. How would you pay for it?
    Mr. HINES. You eliminate Section 199, you more than pay for 
it.
    Mr. PASCRELL. And what would that do?
    Mr. HINES. That is the domestic, you know, production 
activities deduction.
    Mr. PASCRELL. All right.
    Mr. HINES. And so you generate revenue that way. And it 
would increase the efficiency of businesses in America, and 
thereby increase the productivity of American workers.
    Mr. PASCRELL. Well, that doesn't make sense to me. You know 
what else doesn't make sense to me? What we saw in the 
Republican budget this year. That budget gave--reduced the 
corporate tax 10 percent, did it not, over the next 10 years?
    Mr. HINES. There was a reduction. I don't remember the 
amount.
    Mr. PASCRELL. It was 10 percent. That was the rate 
reduction. And you know how it was paid for? You do agree that 
we have to pay for these things. You are not saying that we 
simply reduce the rates, reduce the taxes, and just move on. 
Because everything that will happen after that will produce, 
and therefore, will cover the gap that--we are missing revenue 
here.
    Mr. HINES. The country has a serious problem with the 
deficit, as it is.
    Mr. PASCRELL. Yes.
    Mr. HINES. So, I agree, we don't want to be fiscally 
irresponsible.
    Mr. PASCRELL. You want to pay for it.
    Mr. HINES. Oh, yes.
    Mr. PASCRELL. You know how we paid for it in the budget?
    Mr. HINES. Please tell me.
    Mr. PASCRELL. Well, we paid for it by ending Medicare and 
Medicaid as we know it. Want me to tell you how we did that? 
You got my idea? What is your response?
    Mr. HINES. I think these are entirely separate issues, 
actually.
    Mr. PASCRELL. They sure are. But one affects the other, 
don't they?
    Mr. HINES. We need to put our fiscal house in order across 
the board.
    Mr. PASCRELL. We all agree with that. I have heard that 
four million times and you have heard it five million.
    Ms. Gravelle, let me ask you this question. The system is 
broken. Okay, we agree that we need some changes. In your 
opinion, what effect would a move to a pure territorial system 
have?
    Ms. GRAVELLE. Well, as I said, I think it would cause 
capital flow out of the United States to abroad. That has 
consequences for wages in the United States falling, wages 
abroad rising.
    I think it would also exacerbate our problems with profit-
shifting, companies like Google or GE that we have all read 
about in the newspapers that managed to move their income 
abroad.
    And I also think it is very important to not abandon the 
notion of allocating deductions, because debt----
    Mr. PASCRELL. How much more revenue in wages could we lose 
under a territorial system in the United States of America?
    Ms. GRAVELLE. I don't know. I mean I think it would be 
small, because I think all of these things are small. I mean I 
don't think it would be a big effect, because it is not a big--
we don't collect very much tax already.
    Mr. PASCRELL. Certainly not compared to the $100 billion 
that we lose in revenue in offshoring most of our business 
dealings----
    Ms. GRAVELLE. It would certainly be small compared to the 
revenue loss and the deficits. And in my corporate paper I show 
that the effects on growth from the deficit, if you cut the 
corporate tax rate or made any of these changes----
    Mr. PASCRELL. Mr. Chairman, in--thank you, all three of 
you.
    In conclusion, simply let me say this. The amount of 
business investment under three presidents, three prior 
presidents--President Carter, President Reagan--four actually--
President Bush and President Clinton--is very eye-opening. The 
amount of business investment under President Clinton was 10.3 
percent, under Ronald Reagan was 3.7 percent, under George Bush 
I was 3.8 percent.
    Mr. RANGEL. Mr. Chairman.
    Chairman CAMP. Yes.
    Mr. PASCRELL. So all of the philosophical discussions that 
we have about private enterprise, and how we help business 
grow--let's look at the facts and the detail, rather than the 
myths.
    Chairman CAMP. All right. And I do want to just say, as the 
witnesses have pointed out, it isn't clear that a territorial 
system would lose revenue. It depends how it is designed. It 
could very easily be designed in a way----
    Mr. PASCRELL. That is correct.
    Chairman Camp.--that it would not lose revenue. And I would 
just point out that the tax reform in our budget was revenue 
neutral, it did not lose revenue. But Mr. Becerra----
    Mr. PASCRELL. Well, it did--you did it in cutting Medicaid 
and Medicare.
    Chairman CAMP. No, the tax reform piece----
    Mr. PASCRELL. Right.
    Chairman Camp.--in and of itself, did not have a cost to 
it.
    Mr. PASCRELL. Well, how did you pay for it, then? Tell me.
    Chairman CAMP. Well, we designed it in a way that it was 
revenue neutral.
    Mr. PASCRELL. Well, what did you design?
    Chairman CAMP. Well, Mr. Becerra is recognized for five 
minutes.
    Mr. BECERRA. Thank you, Mr. Chairman. And you obviously 
need to have more of these hearings, Mr. Chairman. They are 
stimulating.
    Thank you all for your testimony. Actually, I would love to 
pick up on something the chairman just mentioned, the design of 
the system. It really is all in the design. You could make a 
system, whether territorial or worldwide, that collects a whole 
bunch of revenue, or not enough revenue. It is all in the 
design. And when we talk about the design, it is not just the 
design of the elements of the Tax Code or your revenue-
collecting system, it is everything that impacts it, as well.
    So, how do you treat your personal income tax issues in 
your--in that host country? What type of infrastructure do you 
have? What are the--what is the wage rate in your country? What 
level of exportation or importation do you have in your 
country? So all of those things come into play.
    Dr. Gravelle, I was wondering if you could give me a sense. 
What--so many of the CFOs who testified were attracted to a 
territorial system, I think, because they saw a simplicity in 
it, in that it meant that they knew what would be taxed if it 
was domestically produced. And if it wasn't, then chances are 
they wouldn't have to worry so much about the U.S. Tax Code.
    But there--as far as I know--and we have had several 
private sessions with experts on this within the committee, 
which I am very appreciative of, because they have been very 
learning experiences, is that no one has a purely territorial 
system.
    And so, if you can, give us your sense of what you see goes 
into coming up with a system, whether territorial or not.
    Ms. GRAVELLE. Well, there is several different elements, 
some we see in other countries, and some we could just do. I 
mean you have heard the talk about the haircut, the five 
percent tax. Or you could do more than that, if you wanted to.
    France has a system where they don't extend their 
territorial treatment to tax haven countries with very low 
taxes, and I think some other countries might have that. But I 
know France does.
    There is a proposal that--it is in the CBO budget options, 
actually--that has floated around for years that would allow a 
territorial tax with an allocation of deductions, of parent 
company deductions. Would actually raise revenue.
    And I think one other feature of that proposal is to 
source, for purposes of the foreign tax credit--because you 
would still have the foreign tax credit, because you have flow-
through income, you would still have anti-abuse rules, like 
sub-part F--but one of the things that has been proposed.
    And this was an idea that came from people at Treasury, is 
to resource royalties from things produced in the United 
States, consider that U.S. source income. Because right now, 
people can deduct royalties abroad and use the excess, and then 
shelter them from U.S. income with foreign tax credits--you 
don't ever pay any taxes on them. So that was an important 
proposal. That did split the multinational community.
    Mr. BECERRA. My----
    Ms. GRAVELLE. As to whether they wanted that system or not.
    Mr. BECERRA. My sense is that when we speak of moving 
towards a different system, it is because that system that we 
speak of brings down our rates, whoever the definition of 
``our'' is, my rates.
    But if you take a look at the entire system--take France, 
for example, which does have a territorial system. Its social 
systems are far different than our social systems.
    Ms. GRAVELLE. Right.
    Mr. BECERRA. So that if their taxation system, along with 
their different systems towards manufacturing and so forth lead 
to high levels of export or import, they have in place an 
infrastructure that helps catch any French workers that might 
be impacted----
    Ms. GRAVELLE. Right.
    Mr. BECERRA [continuing]. Detrimentally by whatever 
industrial policy they have in place, far better than we do. We 
have a whole bunch of American workers who, right now, don't 
even get trade adjustment assistance, because Congress hasn't 
reauthorized the monies for American workers impacted 
negatively, losing their jobs, because of trade.
    And so, if you are going to talk about a territorial system 
that you might like, whether it is France or any other 
countries, you have to also be willing to talk about the other 
things those countries do to be able to absorb that type of tax 
regime, instead of what we might have.
    Because everybody, at the end of the day, still has to 
collect enough revenue to do all of the welfare activities--and 
by that I mean general welfare of your population, not a 
welfare program--the general welfare activities that are 
required of any sovereign nation.
    And so, I am wondering, then. Have you found any particular 
country that fits the U.S. condition, circumstance today, that 
has a--or has an exclusively territorial system as it can get?
    Ms. GRAVELLE. No.
    Chairman CAMP. All right----
    Ms. GRAVELLE. No.
    Chairman CAMP. Thank you.
    Mr. BECERRA. Thank you very much. Thank you, Mr. Chairman.
    Chairman CAMP. Time has expired. I want to thank our panel 
of witnesses for being here, and thank you for responding to 
questions. And this hearing is now adjourned.
    [Whereupon, at 1:04 p.m., the committee was adjourned.]

    [Submissions for the Record follow:]

                  Roger Conklin, Retired International
                Sales and Marketing Executive, Statement
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              Brian Garst, Director of Government Affairs,
              Center for Freedom and Prosperity, Statement
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  Chairman David Camp and Congressman Sander M. Levin, Joint Statement
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                  U.S. Chamber of Commerce, Statement
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     Matthew Lykken, Director, SharedEconomicGrowth.org, Statement
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                   MATERIAL SUBMITTED FOR THE RECORD
                       Questions for the Record:
             Hon. Bill Pascrell, Jr. and Hon. Jim McDermott
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