[House Hearing, 112 Congress] [From the U.S. Government Publishing Office] INTERACTION OF TAX AND FINANCIAL ACCOUNTING ON TAX REFORM ======================================================================= HEARING before the COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ FEBRUARY 8, 2012 __________ Serial No. 112-19 __________ Printed for the use of the Committee on Ways and Means [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] _____ U.S. GOVERNMENT PRINTING OFFICE 73-382 WASHINGTON : 2013 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 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 TOM REED, New York Jennifer M. Safavian, Staff Director and General Counsel Janice Mays, Minority Staff Director C O N T E N T S __________ Page Advisory of February 8, 2012 announcing the hearing.............. 2 WITNESSES Mr. Michael D. Fryt, Corporate Vice President, Tax, FedEx Corporation.................................................... 6 Mr. Mark A. Schichtel, Senior Vice President & Chief Tax Officer, Time Warner Cable.............................................. 13 Ms. Michelle Hanlon, Associate Professor of Accounting, MIT Sloan School of Management........................................... 21 Mr. Tom S. Neubig, National Director, Quantitative Economics and Statistics, Ernst & Young LLP.................................. 30 Mr. Timothy S. Heenan, Vice President, Treasury & Tax, Praxair, Inc............................................................ 42 MEMBER SUBMISSIONS FOR THE RECORD The Honorable Jim McDermott...................................... 96 SUBMISSIONS FOR THE RECORD American Council for Capital Formation........................... 97 American Enterprise Institute.................................... 107 Association for Financial Professionals.......................... 117 Center for Fiscal Equity......................................... 120 Equipment Leasing and Finance Association........................ 124 Fiscal Associates................................................ 127 Institute for Research on the Economics of Taxation.............. 137 United States Steel Corporation.................................. 147 INTERACTION OF TAX AND FINANCIAL ACCOUNTING ON TAX REFORM ---------- WEDNESDAY, FEBRUARY 8, 2012 U.S. House of Representatives, Committee on Ways and Means, Washington, DC. The committee met, pursuant to call, at 9:05 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 Congressman Camp Announces Hearing on Interaction of Tax and Financial Accounting on Tax Reform Wednesday, February 8, 2012 Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and Means, today announced that the Committee will hold the first of two hearings on how accounting rules affect how businesses evaluate tax policy. This hearing will focus on the interaction of tax policy and financial accounting rules (such as Generally Accepted Accounting Principles, or ``GAAP''), and how this interaction affects how publicly-traded companies respond to tax policy. The second hearing will focus on the special challenges faced by small and closely-held businesses that are less concerned with GAAP but must confront tremendous complexity in dealing with tax accounting and related rules such as choice of entity. The hearing will take place on Wednesday, February 8, 2012, 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: Publicly-traded companies and other businesses that rely on outside investors must prepare financial statements (e.g., balance sheets and income statements) in conformity with GAAP. The impact of federal tax liability on certain key GAAP calculations, however, can diverge significantly from a company's actual cash tax liability. For instance, full expensing of capital investments can improve a company's cash flow in the short term, but it does not improve a company's earnings per share (``EPS'') as calculated under GAAP. Thus, comparing a rate cut with expensing requires consideration of the impact of financial accounting considerations on business investment decisions. More generally, tax policymakers might create unintended consequences when they enact tax policies without considering how such policies will affect financial statements. For instance, tax provisions might not work as intended if the GAAP treatment of such provisions diverges sharply from the effect on cash flows. Conversely, when policymakers structure tax policy around financial statement effects, they run the risk of adding complexity to the Tax Code in order to try to conform tax laws with financial reporting rules that were created without tax considerations in mind. In any case, the large and growing number of enacted and proposed temporary business tax incentives and other provisions creates planning and economic uncertainty for public and private companies alike, and diminishes the intended policy objectives of these provisions. As a result, companies across the business community have identified the need to bring stability to our tax laws as a key tax reform objective. In announcing this hearing, Chairman Camp said, ``As the Committee evaluates tax reform options intended both to make the United States a more attractive place to locate activity and to simplify tax compliance for business taxpayers, it is important to understand how financial accounting rules influence behavior. Tax policy does not exist in isolation, and the Committee needs to understand the interaction between tax policy and accounting rules so that we make informed decisions about which policy choices will help employers grow and create jobs.'' FOCUS OF THE HEARING: The hearing will consider how public companies evaluate tax policy options in light of financial accounting considerations. It will examine whether tax legislation works as intended when Congress fails to account for the effects of financial accounting on corporate behavior. 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 Wednesday, February 22, 2012. 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://www.waysandmeans.house.gov/.
Chairman CAMP. Good morning. Today we are continuing our series of hearings on comprehensive tax reform. This morning's hearing will focus on the interaction of tax policy and financial accounting rules such as generally accepted accounting principles, or GAAP, and we will examine how this interaction affects the way in which publicly traded companies respond to tax policy. A later hearing will look at the special challenges faced by small and closely held businesses that might be less concerned with GAAP but must confront tremendous complexity in dealing with tax accounting and related rules such as choice of entity. During today's hearing, though, we will consider how public companies evaluate tax policy options in light of financial accounting or book considerations and, as such, will examine whether tax legislation works as intended when Congress does not consider the effects of financial accounting. When companies report profits in financial statements the primary purpose is to convey information about a company's financial condition to investors and creditors. Conversely, the primary purpose of tax accounting is to measure income for levying the Federal income tax. These two functions are not necessarily consistent and in some cases may even be at odds. For publicly traded companies focused on earnings per share in addition to cash flows, changes in tax policy might not produce intended results if the effective tax policy on earnings per share is not well understood. As a recent Tax Notes article suggests, when presented with an option between targeted tax benefits and lower corporate rate, many publicly traded companies might prefer a lower corporate rate over those tax benefits because of the book treatment. Similarly, tax provisions that provide cash benefits might not have their desired effect on behavior due to a less favorable book treatment. A variety of factors can affect publicly traded companies in their decision making processes differently. For instance, the high U.S. corporate rate is an important factor for companies that use either GAAP or international accounting standards. If the rate is too high, companies will, all other factors being equal, allocate capital to a location that provides more favorable tax treatment. Today, the current top Federal corporate income tax rate in the United States is 35 percent and the average combined Federal-State corporate income tax rate is 39.1 percent, second only to Japan's 39.5 percent rate. However, in fewer than 60 days, effective April 1, 2012, Japan will lower its combined corporate rate to 38 percent. That will leave the United States with the highest corporate tax rate in the entire industrialized world. This dubious distinction will make it that much more challenging to attract businesses to hire and invest here at home where we need jobs. However, not all employers have the same tax profile. The impact of Federal tax policy on certain key book calculations can diverge significantly from the impact of the same policy on a company's cash tax liability. We need to understand better how public companies respond to tax policy when such divergences occur. If the goal is, as I believe, to transform the code and create a climate ripe for hiring and investment, then we must solicit input and insight from the very job creators who will do the hiring and investing. Properly designing tax reform requires an understanding of the financial accounting rules and how those rules might influence the investment decisions of public companies. I am pleased to have some of those businesses here today, along with members of the academic community, who have done extensive research on how financial accounting affects corporate behavior, and I look forward to hearing from them all. Chairman CAMP. With that, I will yield to the ranking member for purposes of an opening statement. Mr. LEVIN. Thank you very much, and welcome. When this hearing was scheduled on the interaction of tax and financial accounting on tax reform I thought I would take out my accounting book from law school. Fortunately, I could not find it. I remember so well the course taught by a brilliant teacher, and it convinced me I never wanted to be an accountant. That was I think the main lesson I learned from his brilliance. It is useful to have this hearing to discuss these various techniques, important as they are, and their impact on tax reform. I do think we need to continue to talk about tax reform and always to keep our eye on the ball, and that is what are the purposes of tax reform and what would be the impact on what our needs are. And this is why I think it is so essential that we not jump to conclusions or essentially embrace I think rather simplified alternatives. As we know, we asked Joint Tax to take a look at the code and to determine if the rate were lowered to a certain level what would be the impact. And they came back with the conclusion that even if we eliminated all of the specific provisions it would not bring the rate down to 25 percent; and I think the challenge is now intensified, because at long last we are beginning to understand fully the importance of manufacturing in the American economy. I think we somewhat lost that understanding. And now I think with the return of the auto industry, with the help of the Federal Government, not to run the companies but to get all of them back on their feet, I think it has helped to highlight how as we proceed as we must, talking about tax reform, we keep our eyes on the ball. And here I want to quote what the President said just a few weeks ago: ``If you are an American manufacturer''--and this was part of his plea that we continue to help American manufacturing get fully back on its feet. ``If you are an American manufacturer, you should get a bigger tax cut. If you are a higher tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hard hit when a factory left town, you should get help financing a new plant, equipment, or training for new workers.'' The chairman and I--that is the end of the quote--for years have tried to expand, to strengthen the R&D tax credit; and here we are many, many months into this new session, a year plus a month now, and the R&D tax credit seems to be in jeopardy. So I think we very much welcome the testimony. I think at first some of us were somewhat perplexed whether we would ever understand what you are talking about. We will try. I yield back. Chairman CAMP. Thank you. We are pleased to welcome our panel of experts, all of whom bring a wealth of experience, either from academia or the private sector; and I believe that their experience and insight will be helpful as we focus on the interaction of tax policy and financial accounting rules. First, I would like to welcome and introduce Michael Fryt, the Corporate Vice President for Tax for the FedEx Corporation. Mr. Fryt has spent the last 30 years as a tax attorney for different corporations and comes to us today from FedEx's headquarters in Memphis, Tennessee. Second, we will hear from Mark Schichtel, the Senior Vice President and Chief Tax Officer for Time Warner Cable. He is responsible for all areas of tax at Time Warner Cable, including policy planning, financial reporting, and compliance. Third, we welcome Michelle Hanlon, an Associate Professor of Accounting at the Massachusetts Institute of Technology Sloan School of Management. Ms. Hanlon's research focuses on the intersection of taxation and financial accounting. Fourth, we will hear from Tom Neubig, the National Director of Quantitative Economics and Statistics for Ernst & Young, LLP, and the former Director and Chief Economist for the Treasury's Office of Tax Analysis. Mr. Neubig leads a group of 24 quantitative analysts who assist clients with tax and economic policy issues. And, finally, we welcome Mr. Timothy Heenan, the Vice President for Treasury and Tax at Praxair, Inc. Praxair is the largest provider of industrial gases in North and South America. Mr. Heenan joined Praxair in 2004 from Ernst & Young where he last served as a senior manager specializing in the development and implementation of international tax strategies. Thank you all very much 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 5 minutes for your oral remarks followed by questions. So, Mr. Fryt, we will begin with you. You are recognized for 5 minutes. STATEMENT OF MICHAEL D. FRYT, CORPORATE VICE PRESIDENT, TAX, FEDEX CORPORATION Mr. FRYT. Thank you. Good morning, Chairman Camp, Ranking Member Levin, Members of the Committee. I very much appreciate this opportunity to appear before you today to discuss the importance of tax reform to FedEx. We believe that reducing the U.S. corporate tax rate significantly to be more in line with the rest of the developed world is essential to overall economic and job growth and will help our company continue to invest in critical infrastructure to compete and grow. Before I delve into the details of how we analyze tax reform, I would like to make a couple of points about FedEx and our business and our tax profile. With respect to our business, through our global expedited transportation network we connect more than 90 percent of the world's GDP in 48 hours or less. So if a business of any size wants to send its product from Beijing to Billings or Cleveland to Cologne, we can do that for them without them having to invest billions of dollars to build their own distribution networks. Our business is based on this global network. If our global network is competitive, it will grow, so will we, both around the world and in the United States. With respect to our tax profile, we are a full-rate taxpayer. Our effective tax rate has not been below 35 percent in more than 20 years. This is a real competitive disadvantage for us. We are also troubled by other aspects of the current corporate Tax Code. It creates distortions in economic decision making, it diverts capital from its most efficient and effective use, and it leads to lower wages in employment. Like many of you in Congress, our company has also been evaluating, and even modeling, some of the tax reform proposals. We look at these from the perspective of both what is good for our country and what is good for our company. Overall, we believe the ideal corporate tax system would include a materially lower tax rate, something at least close to the average OECD rate, along with capital investment incentives, such as 100 percent expensing. We have also said, however, that if tax reform must be revenue neutral so be it. We are willing to put all base- broadeners, including expensing or accelerated depreciation, on the table in exchange for a materially lower tax rate. Doing so, however, would come with a cost, both macroeconomically and to our company. Strong capital cost incentives, like expensing, generate new investment and new productive assets in the United States; and, as reflected in the chart--this chart that I attached to my written testimony--there is an almost perfect correlation between new investment and jobs in this country. From our company's perspective, we would generally expect a lower tax rate to increase our cash flow, bottom line earnings, and earnings per share. To the contrary, reducing capital incentives would have a generally greater adverse effect on our cash flow. This is important because, as is often said, cash is the lifeblood of any business. Our investors pay close attention to our cash flow, as well as to our bottom line earnings and earnings per share, and they routinely quiz our CEO and CFO about all three. One of our biggest cash outflows that gets a lot of attention is capital expenditures, $4.2 billion in our current year, for example, up from $3.4 billion last year. So while there are other factors, assuming business tax reform must be revenue neutral, the most critical analysis from my company's perspective is a comparison of the cash flow detriment from slowing capital cost recovery versus the earnings and cash flow benefits of a lower tax rate. If a tax reform package cannot get us to a materially lower tax rate, it will not address our competitiveness issues, particularly if capital cost incentives are reduced as part of the deal. One other thing that needs to be considered in the mix of tax reform is simplification. This is difficult, if not impossible, to measure, but its value should not be underestimated. In closing, we commend the recent tax reform discussion draft released by you Chairman Camp. We think it is an excellent starting point, and we urge that you continue your efforts to lower the corporate tax rate to be consistent with the OECD average and to simplify. We need to get back to the basics, where businesses compete on the basis of the merits of their products and services, not on the basis of what the Tax Code says. Thank you. Chairman CAMP. Thank you very much, Mr. Fryt. [The prepared statement of Mr. Fryt follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman CAMP. Mr. Schichtel, you have 5 minutes. STATEMENT OF MARK A. SCHICHTEL, SENIOR VICE PRESIDENT AND CHIEF TAX OFFICER, TIME WARNER CABLE Mr. SCHICHTEL. Thank you. Chairman Camp, Ranking Member Levin, and Members of the Committee, thank you very much for inviting me to share our views on corporate tax reform. I am the Senior Vice President and Chief Tax Officer for Time Warner Cable. I would like to first tell you about our business and the impact of taxes and tax policy on Time Warner Cable. Then I will explain why we believe that less complexity and a lower rate will benefit our investors, employees, and customers, as well as the overall economy and Americans at large. Spun off from Time Warner Cable nearly 3 years ago, Time Warner Cable is a Fortune 150 capital-intensive domestic company that provides high-speed data, video, and voice services to over 14\1/2\ million customers. We have over 48,000 employees in 29 States. We offer our workers secure jobs and wages and benefit packages that are competitive and that support families, dreams, and retirements. Last year, we hired over 7,300 people, including hundreds of veterans. We are part of our Nation's communications backbone that enables domestic companies to compete regionally, nationally, and globally. We help small- and medium-sized businesses grow and thrive. Time Warner Cable spends about $3 billion a year on capital improvements, a third of which goes to wages. In 2012, we are continuing to extend our network to even more businesses and families. Our investments also support a national network of suppliers, including nearly a quarter of a billion dollars spent annually with minority and female-owned businesses. Our effective tax rate is historically around 39 percent, while our cash taxes paid are lower, driven by temporary incentives such as bonus depreciation, the benefits of which are now reversing. Taxes are a significant business cost, ranking among our largest in terms of magnitude, along with our programming, employee, financing, and capital outlays. Although difficult to quantify and allocate, these taxes are ultimately borne by our investors, workers, and customers through lower returns in wages, less investment in training, and higher costs and prices. We are strongly influenced by tax policies that impact our net income, effective tax rate, and earnings per share. We do benefit from targeted incentives, like the research credit and Section 199. Given our capital intensity, however, we currently rely even more heavily on timing incentives that don't impact GAAP financial accounting, such as expensing and accelerated depreciation, which significantly enhance our cash flows and ability to invest in our people, technology, and network infrastructure. These policies have and continue to support our business. Over the decades, well-intentioned policy choices have helped produce a Tax Code and related regulations that are read in small print and measured in volumes. Each enacted policy objective is accompanied by nuanced rules needed to implement, clarify, and limit potential abuse. It is not just the complexity that burdens our economy, it is the year after year starts, fits, stops, changes, and uncertainty that frustrate business leaders, analysts, and investors alike. Often, the benefits are very large, swaying or thwarting decisions of what, when, and where to invest. Subtle changes from one year to the next, intentionally or unintentionally, deny one company a benefit while often heaping on an extra helping for another. It is time for American businesses to put aside our industry specific wish list and to work collectively to support a more coherent and equitable tax policy and corporate taxation structure. We recognize that competing priorities and deficit reduction efforts likely mean that corporate tax reform will need to be revenue neutral. As a member of the RATE coalition, we are willing to put all of our tax incentives on the table and broaden the base in order to bring America's corporate tax rate in line with the rest of the developed world. We advocate for a significantly lower rate, a simpler code, and a predictable, consistent set of tax rules upon which business can make long-term decisions. America has so many business advantages. Yet, we are saddled with an inefficient tax structure and an uncompetitive tax rate. We are pleased that there is growing consensus for reform that significantly reduces the corporate tax rate. We want to commend Chairman Camp and this committee for its leadership in this regard. We would welcome the opportunity to work with the committee and its members and staff in dealing with these issues as tax reform progresses. Once again, I want to thank Chairman Camp, Ranking Member Levin, and the members of this committee for inviting me today. I very much appreciate this opportunity to testify and would be happy to answer any questions you might have. Thank you. Chairman CAMP. Thank you, Mr. Schichtel. [The prepared statement of Mr. Schichtel follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman CAMP. Ms. Hanlon, you are recognized for 5 minutes. STATEMENT OF MICHELLE HANLON, ASSOCIATE PROFESSOR OF ACCOUNTING, MIT SLOAN SCHOOL OF MANAGEMENT Ms. HANLON. Thank you. Chairman Camp, Ranking Member Levin and distinguished members of this committee, thank you for the opportunity to testify before you today. The main point of my testimony is that the responsiveness to tax policies can be affected by the financial implications of those policies. I would like to first offer some general examples of the importance of financial accounting to managers of publicly traded companies. One example is found in a study of companies accused by the SEC of fraudulently overstating accounting earnings. It turns out that these companies also overstated their income to the IRS and paid taxes on their inflated accounting income. This suggests that these companies were willing to pay substantial sums of cash in order to report higher financial accounting earnings. In the literature we call this the book-tax tradeoff. A second example is found in a recent survey of tax executives of publicly traded companies. Eighty-five percent of the tax executives said that top management at their companies view the accounting effective tax rate as being as least as or more important than the actual cash taxes paid. To illustrate the financial accounting effect of tax policies, my written testimony discusses three current tax policies related to investments. As you know, the U.S. has one of the highest statutory corporate tax rates in the world, with a top rate of 35 percent. Rather than reducing our corporate rates, our policies have instead included targeted tax provisions such as bonus depreciation and Section 199 in attempts to reduce economic effective tax rates and promote investment. In addition to high corporate statutory tax rates in the U.S., we have a worldwide tax system with deferral, which has in part led to multinational U.S. companies holding a great deal of cash overseas. Financial accounting has affected corporation tax policy responses in each of these cases. Because the details can become technical quickly, I will discuss only one of these in detail today, accelerated depreciation, including bonus depreciation. Accounting earnings are computed using the accrual method of accounting. This means, for example, that expenses are recorded in financial statements when incurred, regardless of when the actual cash is paid. The same method of accounting applies to the accounting for income tax expense. In the case of depreciation, most companies use straight- line depreciation for both purposes and accelerated depreciation for tax purposes. Thus, the tax deduction for depreciation is larger than the depreciation expense for financial accounting in the early years of an asset's life. However, this is only temporary in nature, because the same amount will be depreciated for financial accounting and tax purposes over the life of the asset. The deduction for tax is just faster than the expense for book. To compute the income tax expense for financial accounting purposes in this case, the accounting rules require expensing not only the cash taxes actually paid but also accruing and expensing the future taxes that will be paid because a company used that tax shield early. Thus, accelerated or bonus depreciation does not reduce a firm's accounting income tax expense, it will not reduce their reported effective tax rate, and it does not increase reported accounting earnings relative to a world without accelerated depreciation for tax purposes. When asked, corporate management will often reveal a preference for a rate cut over bonus depreciation for several reasons, one of which is that there is no reduction in income tax expense on the income statement but there would be with a rate cut. In addition, empirical evidence on the responsiveness to accelerated depreciation relative to the investment tax credit which did reduce financial accounting income tax expense reveals that the responsiveness to the credit was greater holding the present value of the cash tax savings constant. This evidence suggests that the accounting effect is important and serves to mitigate the responsiveness to accelerated depreciation because there is no financial accounting benefit. In conclusion, the main point of my testimony is that what many consider to be cosmetic accounting effects actually play a role in responsiveness to tax policy. These financial accounting implications can often mitigate the effectiveness of policies, such as bonus depreciation for public firms. In addition, as I discuss more fully in my written testimony, sometimes the accounting implications lead to other unintended consequences, such as exasperating the tax incentives to leave cash overseas for U.S. multi-nationals. In addition, at times concern over the accounting implications has caused tax policy to be enacted in a particular manner, as was the case with Section 199. In sum, it is important to recognize that both tax and financial accounting effects are included in the set of factors that public corporations will consider in their decision making process. Thank you for inviting me to testify today. I look forward to your questions. Chairman CAMP. Thank you, Ms. Hanlon. [The prepared statement of Ms. Hanlon follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman CAMP. Mr. Neubig, you are recognized for 5 minutes. STATEMENT OF TOM S. NEUBIG, NATIONAL DIRECTOR, QUANTITATIVE ECONOMICS AND STATISTICS, ERNST & YOUNG LLP Mr. NEUBIG. Thank you for the opportunity to testify. I was an economist at the U.S. Treasury's Office of Tax Analysis from 1980 to 1990 during the development of the 1986 Tax Reform Act. Financial accounting issues were not very important then, but over the last 25 years I have seen their importance grow, not only at the Federal level but also in terms of State tax policy and tax policy in other countries. In 2005, President Bush's Advisory Panel on Federal Tax Reform outlined a business cash flow tax that allowed first year 100 percent write-off of capital investment, like bonus depreciation. One might have expected that this plan, which many of my economist brethren claim results in a zero effective tax rate for new capital investment, would have received strong support from the business community, but it did not. This led me to consider a number of reasons why many economists often predict the effects of tax reforms much differently than the business community. Although I am not an accountant, in testimony before the Select Revenue Measure Subcommittee in 2006, I noted the importance of financial accounting rules when many corporate executives evaluate alternative tax reform proposals. I will restrict my comments to several reasons why many corporations may prefer a lower corporate tax rate to more targeted tax reductions. I will use accelerated tax depreciation as one example, since its repeal has been proposed in combination with lowering the corporate tax rate in several recent tax reform plans. Also, a number of countries have moved towards economic depreciation to partially finance their reduction in their corporate tax rates. Timing of taxes matters, and particularly for cash constrained firms accelerated depreciation can provide important cash flow benefits. Accelerated deductions provide benefits similar to an unsecured zero interest rate loan from the Federal Government. At today's historically low interest rates, the value of accelerated tax deductions is relatively modest for corporations with access to capital markets. Many corporate tax executives, as Dr. Hanlon noted, focus not only on their cash tax liabilities but also on their reported financial statement effective tax rates and reported book earnings. Temporary book-tax differences, such as accelerated depreciation and many other provisions, do not affect the total financial statement effective tax rate, which is based on the total accrued tax expense, both current and deferred. A lower corporate tax rate and accelerated depreciation both reduce the economic effective tax rate on tangible business capital investments, but a lower corporate tax rate also reduces many other tax distortions, including the double tax on corporate equity, the bias toward corporate debt, taxable income shifting across tax jurisdictions, the lock-in effect on corporate capital gain realizations, the lock-out effect on foreign dividend repatriations, and also reduces the tax on corporate entrepreneurship and innovation. A number of reports emphasize the necessity of combining permanent expensing with repeal of interest deductibility in order to prevent negative effective tax rates. In 1982, Congress scaled back accelerated depreciation as part of its deficit reduction efforts due to what were considered excessive tax benefits from combining an investment tax credit with accelerated depreciation and interest deductibility. The 1982 Tax Act was a key starting point for the 1986 tax reform process. The base broadening in 1982 enabled the lower individual income tax rates to continue to be indexed for inflation while also reducing the deficit. It was clearly a tradeoff between base broadening versus lower tax rates, which continued in 1984 and then culminated in the 1986 Tax Reform Act. Finally, I would like to point out a recent study by two Treasury economists. A report found that only 50 to 60 percent of corporations and only 30 to 40 percent of pass-through businesses took advantage of the recent bonus depreciation rules. The study notes that while accelerated depreciation in theory reduces the cost of investment, in practice various factors limit the use of bonus depreciation and its relative value. Financial statement accounting is one of those factors that influence a company's business decisions and which economists generally don't include in their tax modeling. In addition to financial accounting, tax risk and uncertainty, compliance burdens and other non-income taxes also affect business decisions. Financial accounting is one of several reasons why many corporations may prefer a permanently lower corporate tax rate to more targeted tax incentives. I would be happy to answer any questions about my testimony. Chairman CAMP. Thank you very much, Mr. Neubig. [The prepared statement of Mr. Neubig follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman CAMP. Mr. Heenan, you are recognized for 5 minutes. STATEMENT OF TIMOTHY S. HEENAN, VICE PRESIDENT, TREASURY AND TAX, PRAXAIR, INC. Mr. HEENAN. Good morning. Thank you for inviting me today. I appreciate it. I would like to just start by commending you, Chairman, for tackling--and the rest of the committee for tackling this important topic of tax reform. We support the efforts and appreciate the time to talk about it here today. I would like to just start to give a little bit of a background about Praxair, not maybe a household name. We sell air. We sell the components in air. We have a diverse customer mix. We can sell to a food and beverage company for the nitrogen in your potato chip bag or the fizz in your soda. We also sell to big companies, steel companies, who use tons and tons of gases. So a very diverse customer group. We have about $11 billion in sales worldwide, and we are the largest industrial gas producer here in the United States. Importantly, we spend about $2 billion a year on new capital investment. We go through a very rigorous process. We sit at a table with the senior leaders on each new project, and they tend to be big projects, and we discuss capital investment, and we compare projects around the world. And for us cash is king. And to answer the question that was posed, in what way does financial accounting affect our business investment decisions, our answer is simple. It really does not affect our decisions. For us, it is about cash. Cash is king. You know, earnings will follow the cash. If we get more cash, we have more to invest, and the earnings will follow. So we do not focus on financial accounting. It is important to focus on earnings for other decisions in the business, but on the investment decisions, cash is king. So we use sort of a net present value cash flow model, and we don't vary from it. I can tell you, Thursday this week we will go through 10 projects, and not one of those projects is going to say anything about earnings. All of them will talk about internal rate of return, which is a cash flow model we focus on. So while I support tax reform I think that we really have to take a close look at the targeted deductions that we may eliminate that pay for that tax reform. And specifically, you know, many folks here that have been testifying have mentioned accelerated depreciation. Under the current U.S. rules, that is a very important factor that helps influence our investment decisions. So if we are going to remove accelerated depreciation in favor of a lower rate, we really need to weigh the two very closely to see what it is going to do to investment decisions for companies like Praxair. So thank you, and I would be happy to take any questions you might have. Chairman CAMP. Well, thank you. [The prepared statement of Mr. Heenan follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman CAMP. Thank you all for your excellent testimony. Now we will move into a question time; and, Mr. Fryt, Mr. Schichtel, and Mr. Heenan, I have a question for all of you. You were invited here today because you do represent capital- intensive businesses that could be asked to consider trading off a substantial amount of tax benefit if there was a comprehensive reform plan put forward that could alter pretty dramatically the corporate tax rate and reduce it somewhat drastically. The committee wants to understand better how businesses such as yours evaluate those tradeoffs that will be part of tax reform. Now, I understand that we are not talking about details today, but especially with respect to choosing the right base- broadening measures, could a revenue-neutral reform package that reduces the corporate rate to 25 percent and moves to a territorial system, could that improve the competitiveness of your companies? And if you each could take a few moments to answer that. Mr. FRYT. My answer would be yes. At 25 percent, I think that is close to the OECD average, which is about 25 percent right now; and given our international competition, that is about where we need to be at a minimum. You talk about base- broadeners and the tradeoff. There certainly is, as I mentioned in my prepared remarks, and that is something that we take into consideration. The cash flow effects are detrimental. There is no question about it. But lowering a tax rate overall to something around 25 percent, I think, would be well received. Chairman CAMP. Mr. Schichtel. Mr. SCHICHTEL. I agree with Mike, a resounding yes. I think if we can get to a 25 percent rate, or something close to that that is in line with the rest of the developed world, you will find the vast majority of the business community coming out in support of it. I know it is a challenge to get there. From our perspective as a company, our health and growth is tied inextricably to the growth and health of the overall economy. No question about it. That is the biggest driving factor in how well we do over the long run. Our view is that a significantly lower rate and a simpler Tax Code will redound to the benefit of the entire economy, will encourage overall more growth and development, and that will in turn increase the returns that we have to our shareholders and the opportunities that we have out there. Chairman CAMP. Mr. Heenan. Mr. HEENAN. I would like to give you an answer yes or no, but, really, I have been doing this a long time and the devil is in the detail. And, in our view, clearly all tax expenditures are not created equal. And, you know, to just focus on accelerated depreciation, a tax rate will affect both our old business and our new investment, and so we have a large--we are the largest industrial gas company in the U.S. We will certainly benefit from a rate reduction. But to your specific question on investment decisions, that is a future question. A rate benefit is not going to impact our future decision. And so when I look at something like accelerated depreciation, that is very focused on new investment. New investment will bring growth and jobs. So, I think we just have to be very cautious as to which tax expenditure we are using, and we are particularly focused on accelerated depreciation because we think it has a special place in promoting new growth, and we think with that will come jobs. Chairman CAMP. But if the right base-broadening measures were chosen, do you think a revenue-neutral package that reduced the rate to 25 percent would help the competitiveness, including a territorial system? Mr. HEENAN. Well, I can clearly say if accelerated depreciation remains the same and everything else goes, we could---- Chairman CAMP. From your point of view, I am asking your opinion. So if the right base-broadening measures were chosen, from your point of view, that it would be something that would increase the competitiveness of---- Mr. HEENAN. Absolutely. Chairman CAMP. The other--just to follow up, could you envision a package, each, the three of you, being designed that would lead employers to invest more and hire more American workers? Mr. FRYT. Absolutely. I think the package--well, I described in my prepared remarks the ideal one--maybe not a practical, but the ideal one would be some rate close to the OECD rate with 100 percent expensing. I think you would see tremendous new investment, additional global expansion, U.S. expansion, and job growth, absolutely. And even if you went with the base-broadeners that you were talking about, Chairman Camp, if you got down to a rate of around 25 percent I think there is no doubt in my mind that also would increase growth. Chairman CAMP. Thank you. Mr. Schichtel. Mr. SCHICHTEL. I would love to keep our tax incentives like accelerated depreciation. I would love to see expensing extended as part of an overall tax reform that lowered the rate to 25 percent. But I don't see how that is possible in a revenue-neutral fashion. I think for the short term, until we do have corporate tax reform, I think expensing, extending bonus depreciation is tremendously important and impactful. Certainly from our vantage point and our C suite's vantage point--because I get calls all the time--it is tremendously important. That being said, if we all put everything on the table and we start working towards a targeted rate and a simpler code, I think we will see more growth, and for us that will definitely result in more jobs and more investment. Chairman CAMP. All right. I have a question for Ms. Hanlon and Mr. Neubig. In Congress, we measure revenue neutrality by looking at cash taxes over a 10-year period without using a discount rate. And that is very different how public companies calculate book earnings under GAAP, and it is even very different how public companies calculate cash flow benefits. But if this committee succeeds in designing tax reform legislation that is revenue neutral over a 10-year period the way Congress measures it but that in the aggregate increases companies book earnings, do you think that such a tax reform package would lead to more economic activity being located here in the United States and therefore more jobs for American workers? Ms. Hanlon, why don't I start with you? Ms. HANLON. I guess the main thing I would say to that is that if you would, you know, remove the mitigating effect of financial accounting there seems to be no negative effect that would come from that. So to the extent that doing the tax side of it would increase jobs and investment, then releasing the mitigating effect from accounting could only help those incentives. Chairman CAMP. All right. Mr. Neubig. Mr. NEUBIG. I think the companies are going to be looking at a lot of different measures of taxes. And you mentioned that although it might be revenue neutral over a 10-year period from a government scoring standpoint it might be actually higher total taxes on the corporate community. I think there would certainly be concern about that having some adverse effect. There are certainly lots of benefits from a lower corporate tax rate, but they are going to be looking at the total tax burden in the U.S. So they impact the other---- Chairman CAMP. I am sorry, we are having microphone problems. Mr. NEUBIG [continuing]. Other tax base issues. So it really is the whole tax reform package that they will be looking at. Chairman CAMP. And to the two of you again, some commentators say that cash is king and that investors are sophisticated enough to sort of look through the differences between cash flow and book earnings. And how do you respond to the arguments that investors look through book earnings and see only cash? Ms. Hanlon, why don't you start? Then I will go to Mr. Neubig, briefly. Ms. HANLON. This is a great question. It has been asked many times in accounting workshops when we present research on earnings management, for example. So I think the first thing to recognize is that accounting earnings are used for two purposes, both equity markets and contracting purposes. So, for example, debt contracts and compensation contracts and the extent to which those are written based on accounting numbers, you will see managers respond to those same incentives. And the equity markets and these contract writers they are not stupid or not savvy enough, I wouldn't say, in using accounting earnings, because accounting earnings is generally kind of like a scorecard. In other words, there is research that shows that accrual accounting earnings can predict future cash flows better than current cash flows. So it is reasonable for these people to use accounting earnings. And, finally, the other thing is that investors may be savvy, but they are still only human. So there is a long line of behavioral finance research that shows investors have limited attention and limited processing ability to process very complicated information like you would find in an annual report of a complicated company. Chairman CAMP. All right. Mr. NEUBIG. There are differences across the different companies. And accelerated depreciation and the cash flow---- Chairman CAMP. Maybe if you could borrow somebody else's microphone. Mr. NEUBIG [continuing]. Cash-constrained companies deal with an economic downturn. There are an awful lot of cash- constrained companies that can certainly benefit from the cash flow benefits from a number of the timing provisions. And so I think not all companies are alike. There are going to be a number of companies, as Dr. Hanlon noted, that do look specifically at the financial statement earnings and book earnings. I found that in terms of my discussions with a number of corporate executives. But, also, there are a number of corporations that do the type of project evaluations looking at the cash flow benefits. I would say that at the current time for companies that have access to capital markets interest rates are at a historic low. And to the extent that accelerated depreciation really is a zero interest rate loan from the Federal Government, the benefits of accelerated depreciation at the current time are modest for those that have access to capital. Chairman CAMP. All right. Thank you. And, Ms. Hanlon, just finally, you mention in your testimony the important point that some of the analysis that we have been talking about today doesn't really apply to closely held businesses. Could you just explain how closely held businesses might analyze tax reform differently than publicly held companies? Ms. HANLON. Yes. There is a long line of literature in the accounting research that examines this exact book-tax tradeoff. And often what we will find, if we can get the data, we will line up public companies and private companies and essentially find that private companies are much more responsive to the tax incentives and tax reporting incentives than are public companies. And the idea is that the public companies have this financial accounting constraint. So it is probably true that private companies will respond to these incentives more than public companies will. Chairman CAMP. Thank you very much. Mr. Levin is recognized. Mr. LEVIN. Except for the last few questions, we have been really discussing broader issues of tax reform and not book and tax accounting issues. We may be relieved by that, because we need to look at it. They are not easy issues, and you are going to have to, I think, have a few seminars with us on that subject as we look at these broader issues. So, it is really the broader issues that have been mostly discussed here, and let me just say a word about that. There is no doubt we need to look at tax reform. There is no need, as I said earlier, to look at it with care and not simply grab ahold of a specific figure without looking at its consequences. Because, according to the Joint Tax analysis, when we asked them, they said, if the rate were reduced to 28 percent, half of that reduction would come from ending accelerated depreciation. So when people say they want the rate dramatically reduced but not at the expense of--expense in accelerated depreciation, that doesn't really fit; and it was interesting in the testimony of the first two of you that you referred to that. For example, in testimony--you know this well, Mr. Fryt-- you said, our investors applaud capital incentives like expensing, because our after-tax cash flow on a new capital investment can be up to 35 percent less than it would be otherwise in the first year. And of course that evens out. But it is kind of a broad embrace of the importance of that. And then I just--Mr. Schichtel, your testimony, if I might--you know it well. I will just read it. Because this is important for us to have a full, intelligent discussion of this vital issue. And this is on page 3: Given the capital intensity of our business, however, we rely even more on--let me just read above. Like most companies, we are strongly influenced by tax incentives that improve our reporting metrics, such as our reported income, effective tax rate, and our earnings per share. Items like the research credit and the Section 199 domestic production incentives are differences that permanently reduce our taxes paid and concomitantly our effective tax rate, thereby encouraging new investments. And let me just indicate, I was looking as we were reading over your testimony last night at Marty Sullivan's analysis of winners and losers if there were a reduction in the rate to 30 percent with slower depreciation, repeal of the domestic production credit, and repeal of the research credit. This is his analysis, and I think all of us need to look at this and do other analyses. And it is really interesting, and it is not very surprising. The industries that benefit from that--and I will just read a few that apply to you, I guess--securities, insurance, retail trade--these are winners. Bank holding companies, real estate, other services, it diminishes as I am going down the line. Wholesale. Mining is essentially even, as is construction. And then those who are losers: food manufacturing, utilities, other manufacturing, chemicals, metals, minerals, and machinery manufacturing, transportation, Internet--I don't quite understand that but--agriculture, technical services, computer and electronics very dramatically. Transferred equipment very dramatically. And electrical products most dramatically. So I think since the testimony has really mostly focused on these larger issues and not on the technical stuff that was headlined in the announcement of our hearing, I think your testimony today does underline the importance of our looking deeply into this issue. When we say everything is on the table, that doesn't really settle what is left on the table, right? In a sense, it is somewhat easy to say, put everything on the table. We do that all the time here. And the real issue becomes what is taken off and what is left. So we welcome your testimony, and I hope that today's hearing is another step towards our comprehensively looking at these issues so that we can come out with a proposed revision of the Tax Code that very much keeps in mind what our objectives are. And I go back to what I said in the opening. I do think that with the return of understanding of the importance of manufacturing we need to look at tax reform in terms of how we promote a continued growth in services, in agriculture, and the like but also in the industrial sector of the United States. And, Mr. Heenan, that is where you come from; and I think that somewhat motivates your--I won't say hesitation. I think it is kind of a well-rounded response. Thank you. Chairman CAMP. Thank you. Mr. Johnson is recognized for 5 minutes. Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Fryt, how low would we have to get the rate before you guys could take over the Postal Service? Mr. FRYT. Do I have to answer that question? Mr. JOHNSON. Well, you are doing a good enough job right now. I have got a place out in New Mexico where you deliver to the door and the Postal Service doesn't even come. Mr. FRYT. Well, if you ever have a problem, just give me a call, please, and I'll help you. Mr. JOHNSON. In your testimony, you say the ideal reform would lower the rate to at least 25 percent, including incentives for investments such as bonus depreciation. However, you also say you are willing to put all base-broadeners on the table for a significantly simpler and reformed corporate Tax Code with a materially lower tax rate. What rate would that be if we were to give up all the other nicks? Mr. FRYT. It really depends, Mr. Johnson. It depends what is in the package. But, given our competition overseas, we think it would have to be something close to the OECD rate. If you get there, presuming that doesn't continue to decline, I think, as Chairman Camp asked earlier, I think it would be a good place to be. Mr. JOHNSON. Well, does that mean R&D tax credit and those kind of things would be--we could eliminate them if we got the rate low enough? Mr. FRYT. I am sorry, sir? Mr. JOHNSON. If we got the rate low enough, would you go along with that? Mr. FRYT. Yes, sir. Mr. JOHNSON. Okay. You know, I had a meeting with some of your guys in Dallas. They said 23 percent. Do you like that number better than 25? I bet you do. Mr. FRYT. I do like 23 better than 25. Yes, sir. If you can make that happen, that would be terrific. Mr. JOHNSON. Mr. Schichtel, given Time Warner is a capital- intensive business, would you care to comment on that as well? Mr. SCHICHTEL. Yes. Thank you. We care tremendously about timing issues like accelerated depreciation. For us, it is enormous. But I think when you-- well, we have crunched the numbers, and we have looked at all the different policy proposals that are out there. We clearly care about the impact on cash flow, and I think lowering the rate clearly does improve our cash flow over the long run. If you get to a low enough rate and I think somewhere around a rate that is consistent with the developed world, say 25 percent, I think it is a clear winner for us as well as the economy. Mr. JOHNSON. And you could get rid of all the other---- Mr. SCHICHTEL. Yes. Mr. JOHNSON [continuing]. Okay. I am glad to hear it. Mr. SCHICHTEL. I am not delighted to. I would love to keep accelerated depreciation, but I am a realist as well. Mr. JOHNSON. Ms. Hanlon, in his testimony, Mr. Heenan argues that promoting investment accelerated depreciation is perhaps a more powerful tool than lower overall tax rates. You, however, say with respect to targeted tax incentives such as bonus depreciation there is very little evidence that these policies have spurred any investment. Can you comment on that? Ms. HANLON. Yeah. My statement is based on the weight of the evidence in the literature. And, basically, there are papers that will show there is a timing effect. So firms will shift the purchase of equipment to a period that is earlier, say by in December instead of January. There is also evidence that firms will purchase a different class of asset. But what we can't tell in the literature and what is very difficult to parse out is whether these are--you know, part of it is just timing, part of it is just shifting, and some of it could just be a change in reporting. So that, in other words, when you say a certain class of asset gets a certain benefit, they might just now record different assets differently. We can't tell that in the literature, and the research that tries to look at aggregate effects really find very little. So it is just the weight of the evidence, a large sample. Mr. JOHNSON. Have you done any studies on eliminating all the incentives and just lowering the tax rate? Ms. HANLON. Not directly, no. Mr. JOHNSON. Thank you, Mr. Chairman. Chairman CAMP. Mr. Davis is recognized. Mr. DAVIS. Thank you, Mr. Chairman. I am very interested in this discussion on both counts, having worked for many years in manufacturing before coming to the House of Representatives. First I would like to preface my question with I agree with the macro concern that Professor Hanlon talked about that a rate reduction overall is certainly more beneficial in the long term and certainly support that. But I would like to come back into a manufacturing or operations/capital investment question on trying to balance this out inside of or underneath the umbrella of strategy. I worked with many clients, I was discussing earlier three in particular, before some of the bonus depreciation issues came out after 9/11 and in subsequent years where they were very reluctant due to market cycles to make investment in machine tool technology and other systems that would be very helpful to them. This is particularly smaller businesses, under $100 million manufacturing firms, but surprisingly a number of my clients in the Fortune 500 had that same experience on a reluctance-based on market cycle, particularly with shareholder expectations in the long term. I guess the question that I would like to understand is how we address this issue of depreciation from a strategic standpoint within the long term. Bringing the rates down is certainly important to me from a tax perspective, but also having this incentive for investment is a bigger question. I guess considering the long-term, if we were able to work out a mechanism, and I would like to hear thoughts from all of you, but specifically Professor Hanlon and Mr. Heenan on this, since you have both been talking about this the most, if we were able to adjust depreciation schedules within the intent of the overall tax strategy that would provide the ability, knowing that the tax liability would be the same to your company in the longer term, but to do it on a more proportional basis. When there is a great year and the well is full of water, the idea of let's go ahead and make this capital investment to be leaned up and ready for more difficult times, being able to control costs when you have got the ability to invest in those technologies, knowing that there will be a down cycle eventually. I am thinking heavy manufacturing, the energy industry, areas that I saw that were very reluctant to get involved and make these investments. Or, say, maybe if you had a great year, a small $50 million company can invest in a couple of $800,000 machine tools and write it off in one year but know they are going to take that. Certainly there would be a lower profit, but the idea of longer term is those jobs are protected and they become more competitive. Where this gets particularly challenging to me is looking at a lot of our international manufacturing. Contrary to a lot of the politics in Washington, we are very robust, very strong and competitive in manufacturing, but there is still this reluctance with many of the tier one and tier two producers to make these decisions, and if they could reduce it down, say, into a 2, 4, 7-year schedule, if they want to go to the longer term schedules, that is perfectly acceptable. But how would that work inside of this idea of rate reduction if we could manage that to keep things revenue neutral and what would the impact of that be from a wider standpoint? Mr. HEENAN. Just to get on your bonus comment and make sure I understand your question, were you saying, hey, maybe we slow down depreciation a little bit and then bring bonus in and out to help encourage investment? Mr. DAVIS. What I am talking about is allowing the manufacturing company who is getting ready to make these capital investments. And I am not talking about all asset classes. I think that would be a grave error and would just totally stir up the tax system. But some specific areas that are very critical to our strategic manufacturing economically is that the employer would simply have the ability to pick the schedule, or the company would pick the schedule that is most advantageous to them, and rather than have these kind of boom- and-bust cycles on policy, have that fit into the overall tax strategy, so that in a good year in one sector, say you can make the investment that maybe FedEx would not make based on what they are doing, or vice versa, but within those time frames. But coming back, how would you work that as well inside of the rate structure, keeping that lower rate because of the longer term implications? Mr. HEENAN. I think I understand your question. Just to focus on Praxair, we have, as I mentioned earlier, fairly large capital projects and these can take a couple of years before you start the process and finally sign somebody up and sell and implement it. So what we really need is a consistent process that we can follow, consistent rules. And, frankly, bonus has not been something that has been advantageous to us, because we have got--bonuses coming and going is not in the law today. We need something, whether it is the current system or another rate schedule, that we can depend on, because we have sort of a long cycle time and we have to think forward 2 and 3 years and make sure the law then is going to be the same as the law today. And if we can't, as with bonus, we are not going to model that. When we sit around the table and make our investment decisions, we are not going to put something and say, well, you know, they may re-up bonus in a couple years. Let's throw that in here in our decision on whether to invest. Mr. DAVIS. So that you are looking at predictability. Mr. HEENAN. We are looking for predictability. Accelerated depreciation has been a long time in our code, and it is in our sort of model today. Bonus is not. Mr. HERGER. [Presiding.] The gentleman's time has expired. Mr. Rangel is recognized for 5 minutes. Mr. RANGEL. Thank you, Mr. Chairman, and thank you all for coming down and giving us this testimony. One of you congratulated Chairman Camp for moving in this direction, and if he were here, I would congratulate him too, because what we are doing is keeping the idea alive. But it just seems to me with the outstanding representation from some of the nations and the world's most successful businesses, that while Chairman Camp has opened the door for reform, that it is going to be your responsibility to put your foot in that open door and don't let it close. It is absolutely no profile in courage for all of us to say reduce the corporate rates and expand the base, but not my base. I came down here as a tax reformer, and, believe me, Earned Income Tax Credit, Low Income Housing Credit, whatever we can do for our veterans, whatever it is, we have allowed probably a half a trillion dollars to get involved in what they call extenders. Is there anyone here who doesn't know what the extenders are? Or those tax provisions that expire, or at least we say they are going to expire, and all they want to do is to get them in the code. Someone said seeing tax law made is like seeing sausage made. You just don't want to see it. Now, what I am suggesting is that if this outstanding group of corporations that you have listed, how often do you meet, this group that--what is the name of it? Mr. FRYT. RATE, Reforming America's Taxes Equitably. Mr. RANGEL. Yes. Because our problem here is that the lobbyists represent the best tax interests of their clients. Reform is not on their agenda. If they came back to you vice- presidents and presidents and said, what a great talk I had with Ways and Means people, we will have to give up accelerated depreciation and a whole lot of other things, but wow, would this be a fairer system, they would get fired. Their job is to broaden the gap or to create one, temporarily, but never allow it to sunset. So what we do need are people that have the credibility that you guys have, and ladies, to get in the room and to find out what we can get away with as elected officials. Nobody is talking about getting rid of charitable organizations and churches for exemptions. There is a lot of money there. And, of course, if you talked about mortgages, you have got to narrow the amount of money, the number of deductions that are in there. Who is going to bite the bullet to get rid of them in order to have a fairer system? I am asking FedEx and Time Warner, what can you do to get people in a room to say we are not agreeing to anything, or we are saying this will be the impact economically. How can we take this the next step? Because we need a climate--I was here until 1986. We had Tip O'Neill. All he knew was how to get along with Republicans. Why, I don't know, but that was the way Tip worked. We had Ronald Reagan, and he was blinded by party lines. And they were able, we were able to get what we thought at the time was reform. It is difficult to talk about reform. It is a question of whose ox is being gored. So what doesn't surprise me that if you are paying 35 percent tax, what does surprise me is that you are not outraged. Outraged. Don't thank us. What are you going to do about it? Because you have got a great argument in terms of equity. But nobody is going to be out front saying that we are going to get rid of some of the darn things that we put in the code, some of which we have forgotten. And when we extend them, it is the whole package. And you can see some of the things that my colleagues are talking about just to pay for the holiday tax package. They have got imagination, but it is not good law. So, Mr. Chairman, I was trying to negotiate with you an extended time period. I know I wasn't persuasive. But could one of you just say what you could do in terms of taking this to the next step? Mr. FRYT. Absolutely, Mr. Rangel. First off, I would like to commend you and the efforts you have put forth in this whole effort. Mr. HERGER. The gentleman's time has expired. Maybe, Mr. Fryt, you could respond by letter. Mr. RANGEL. I would ask unanimous consent to let our guests---- Mr. HERGER. Mr. Nunes is recognized for 5 minutes. Mr. NUNES. Mr. Chairman, I yield the balance of my time to Mr. Tiberi. Mr. TIBERI. Thank you. Very interesting comments. I do want to point out just for the audience and for the record, when the former chairman mentioned that nobody is talking about getting rid of the charitable contribution, that actually in the President's prior three budgets, the President has capped the deduction on the charitable contribution at 28 percent. I just wanted to remind the gentleman from New York regarding the President's last three budgets and what he proposed. Obviously it wasn't adopted by the Congress, but there is one person in Washington who has talked about the issue in the context of reducing that charitable contribution. I wish Mr. Lewis were here, because he and I, as the chairmen of the Philanthropy Caucus, have both opposed that as co-chairmen of the Philanthropy Caucus. But to the witnesses today, starting on the left, those of you who are vice-presidents of companies dealing with tax issues, can you tell me who your major competitor is and how the current Tax Code causes you to make decisions based upon investments? Starting to my left. Mr. FRYT. Sure. Well, the United States Postal Service. They don't pay any tax. UPS. Their tax profile is fairly similar to ours. And we have several international competitors, DHL, TNT and others. As an example, DHL's reported ETR, its effective tax rates over the last 10 years, have hovered around 20 percent vis-a-vis our 36-37 percent. That is why I say us paying at what we are right now is a real competitive disadvantage because they have additional after-tax funds that they can continue to reinvest in their global networks that we don't have. Mr. TIBERI. And they compete with you here and abroad? Mr. FRYT. Yes, sir. Mr. SCHICHTEL. Well, our main competitors are the two big boys, AT&T and Verizon, as well as the satellite companies, Direct TV and Dish. And then obviously we compete globally in the capital markets for investments. And as far as the impact on the communications industry, I think Verizon and AT&T are much more similar to us than maybe even the satellite companies, although the difference isn't that large. We are all capital-intensive companies. And for us, tax reform is more about getting this economy stabilized and growing, because that is really where our growth is going to come from. Mr. TIBERI. So even though you don't compete--I am trying to get more of an answer from you. I don't want to put words in your mouth, but let me tell you what I am trying to do and then maybe you can answer. Even though you don't have a, quote-unquote, international competitor, you are competing internationally for capital. Mr. SCHICHTEL. Yes. Mr. TIBERI. So the Tax Code impacts you how with respect to that? Mr. SCHICHTEL. Well, I think if you look at some of the analysis and research that has been done, companies with lower effective tax rates do have an advantage when it comes to garnering investment from the global capital markets. So from our vantage point, that clearly is an issue. Also from just the perspective of raising capital and also being able to invest more and grow our business, an economy that is more robust is going to help us on both fronts. Mr. TIBERI. So because capital is fungible and it can go anywhere in the world, it is going to go where---- Mr. SCHICHTEL [continuing]. It is going to go where they believe the highest return is at. Mr. TIBERI. On their investment. Mr. SCHICHTEL. Yes. Mr. TIBERI. So even though you are a company that is investing in the United States in terms of jobs, and more jobs in Ohio--thank you very much, that was just announced--even though you are a domestic company, domestic jobs, that international competition in terms of tax rate is very important to the growth of your business in America. Mr. SCHICHTEL. It is. And it is also very important to our customers. Our highest growth area is in the commercial services arena and our customers, small, medium and large, they do compete intensively in the global markets, and our success is tied to their success. Mr. TIBERI. Thank you. Praxair? Mr. HEENAN. Good morning. You know, I think in the U.S. we have--we are competing against Air Products, a U.S.-based multinational. Outside the U.S. we have Air Liquide and Linde, French and German companies. And when we look at the U.S., we are all--when we are doing business here, we are all competing at the same rate, but, as you said, you know, capital can move. So when we look at the foreign projects, you know, what we really want and I think we have today, maybe not perfectly, is to have a level playing field on the tax rates offshore. So if we are looking at a project in Mexico or France or Germany, we want to be on a level playing field with our competitors so that we can win our share of those projects. We are headquartered in Danbury, Connecticut. We have our R&D in Tonawanda, New York. That offshore growth comes back here to the U.S. So it is important for us to remain competitive on the offshore projects. Mr. TIBERI. Thank you, Mr. Chairman. Mr. HERGER. Mr. Brady is recognized for 5 minutes. Mr. BRADY. Well, thank you all for being here today. First, I appreciate the chairman holding this hearing. Secondly, I think the draft proposal on territorial and lower rates, the way it was laid out, has been a very positive and helpful movement toward fundamental tax reform. All the witnesses today have really opened up a lot of questions on how we move forward in doing it, doing it with the most pro-growth impact, weighing both the book and the accounting and tax-type requirements you are under. So I could ask all of you about a dozen questions. I wanted to ask our two business representatives from FedEx and Time Warner, both of you rightly make the case that in addition to lowering the corporate tax rate, that there is a need for capital investment incentives. And you are willing to put everything on the table; but recognize, looking at the last 40 and 50 years, the single strongest correlating driver for new jobs is private business investment. You are building buildings, buying software, new equipment and technology, jobs along Main Street, growth. So my goal is at the end of the day, I want the lowest possible tax rate, but I want the strongest possible pro-growth Tax Code, one that allows us to have the largest economy in the world, not until China catches us or someone else, but for the next 100 years. So I want to ask, as you are willing to put everything on the table, which I think is very important, what are the strongest, looking at the cost of capital in investment, what is the strongest capital investment incentive that ought to be considered to remain in the Tax Code? Mr. FRYT. From our perspective, I think 100 percent expensing permanent, on a permanent basis, would be extremely strong. Investment tax credit can be crafted in a similar manner. There were some issues with that in the past. But expensing works quite well. It doesn't address the financial reporting-type issues that Ms. Hanlon was talking about earlier, but it still affects the cash flow, and it has a tremendous impact on our environment and other companies like us. Mr. BRADY. So 100 percent expensing would be the top. Mr. FRYT. Yes. Mr. BRADY. Mr. Schichtel. Mr. SCHICHTEL. For us the biggest driver when it comes to investments is a growing economy. So I think if we can get there, all else, all other problems will eventually improve and rectify and remedy. As far as immediate sort of short-term policy, clearly bonus depreciation expensing is tremendously important right now. We are being hit by the reversal of prior year benefits from bonus depreciation just as our economy is struggling to pick up a little bit of momentum. I think now is not the time to have those reversals take full effect. I think overall, if you can get to a low enough rate, it will encourage growth and it will more than make up for the loss of some of the tax incentives, including even accelerated depreciation. But that requires us getting to really a much more meaningfully lower rate, somewhere around 25 percent. Mr. BRADY. Clearly, we know what we can do to get to 28 percent. Getting down that final three points will be a thoughtful discussion. With what little time I have left, can I ask the other witnesses your thoughts on the strongest pro-growth Tax Code? Mr. HEENAN. Yes, just a little bit different than the profiles of some of the other companies. As I mentioned earlier, bonus depreciation really isn't helpful for us because it comes in and out. If it were to become a permanent fixture in the Tax Code, we would put that into our decisions. Mr. BRADY. Which is what we are seeking, permanent tax provisions rather than temporary ones. Mr. HEENAN. Right. But I think we recognize that that would be extraordinarily expensive and we need revenues. So the current provision like that is accelerated depreciation, so that would be the one I think that, practically speaking, you might be able to keep. If you go to a permanent bonus structure, you are going to have a very costly solution there. We would be happy to take it, but I think it would really cost too much for the country. Mr. BRADY. We are running short. Mr. NEUBIG. When tax policy analysts look at permanent bonus depreciation or permanent 100 percent first-year write off, they generally argue you would need to repeal the interest deduction in order to prevent negative effective tax rates. So you would need to think about not only expensing, but also the impact on the interest deduction. Mr. BRADY. Thank you. Mr. HERGER. Mr. McDermott is recognized. Mr. MCDERMOTT. Thank you, Mr. Chairman. I want the audience and the witnesses to recognize that this is a day in which we have all gathered here with sober faces for holy pictures. We are all for tax reform. Everybody in this room is for tax reform. We are on the Ways and Means Committee. We do tax reform, right? Now, Mr. Johnson has asked you, have you studied how low you could get the tax rate if you eliminated business tax expenditures, and none of the witnesses--all of the witnesses said they haven't. So I just want to enter--I am going to ask unanimous consent to enter into the record the study from Joint Tax, dated 27 October, 2011, which talks about what you would really have to do if you are serious here. [The information follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Mr. MCDERMOTT. Now, that study suggests that roughly half of the cost of a 7-point reduction, that is from 35 down to 28, would come from the repeal of accelerated depreciation. Yet all the companies have said this is very important, don't take away our accelerated depreciation. So you want to retain that. So that means you can only finance about a 3 percent reduction, 3.5 percent. This report says that if you are going to bring it down to 28 percent, you are going to have to come up with $960 billion, of which $506 billion comes from the depreciation reduction. And I wonder what you would actually support, because, as Mr. Rangel suggested, tax reform in 1986 occurred after Ronald Reagan came in in 1981 and played golf with Tip O'Neill and Rostenkowski for 5 years, and it was before the global economy had really taken hold. So we are talking about a new world that we are trying to reform now than the one they were reforming in 1980. So give me your views of what we should do. What are the things that are most important that you are willing to give up or shift off on to somebody else? Mr. NEUBIG. Yes, Congressman McDermott. We looked at the Joint Committee on Taxation's revenue estimate from October and we looked at the provisions they estimated and scored in terms of base broadening, and they represented $209 billion out of the total corporate tax expenditures of $545 billion. So it was only 40 percent that they actually scored. There was another $185 billion of non expiring non-international corporate tax expenditures that they had not yet estimated. So I am actually relatively optimistic that when you really take a hard look, that you can get down to 28 percent and even possibly 25 percent. When I look at the 1986 Tax Reform Act and I look at the base broadening that occurred from tax expenditures, it was only 60 percent of the base broadening. Forty percent of the corporate base broadening in 1986 was not from tax expenditures. I think the tax staffs at Treasury and elsewhere, if they look hard, will be able to find additional base broadeners beyond just the tax expenditure list. Mr. MCDERMOTT. Do you have that list, that 189 billion you talk about? Can you tell me what are the pieces in there we would have to get rid of? Mr. NEUBIG. I can't. I don't have those with me. But we have gone through the entire JCT revenue estimating list, and they have lots of provisions that are not yet estimated and we have linked that to the tax expenditure list, and 40 percent of the estimated tax expenditures have not yet been estimated. Mr. MCDERMOTT. I would appreciate and I think everybody on the committee would appreciate if you would give us what your estimate is. Anybody else have any ideas how to do this? Mr. HEENAN. I think I would just like to maybe echo Member Levin's comments. Sort of a quick-fix answer is difficult to give. I do think we have to look line-by-line at each of the expenditures and balance that. We need to weigh it against the benefits of a tax rate reduction. And certain expenditures are going to be more important towards growth, and that will equal jobs, and we will want to retain those. And others I think we can look at and throw away. So I think everything should be on the table, and we have to have a very serious conversation about which ones we want to take out and which ones we want to keep. Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. HERGER. Mr. Reichert is recognized. Mr. REICHERT. Thank you, Mr. Chairman. I want to try and get three quick questions in, so no speeches, I will just start with the questions. Try to think of these questions in terms of jobs. We all want tax reform and we want to energize the economy, but we want to get people jobs here, of course, in the United States. So Ms. Hanlon and Mr. Neubig, there are numerous provisions in the Tax Code that have the effect of providing preferential treatment to particular business behaviors or particular sectors of the economy. Do you agree that the primary objective of tax reform should be to address these kinds of distortions in tax law? Mr. NEUBIG. Well, I think tax reform really should have the goal of trying to make our tax system much more pro-growth, simpler and fairer. In 2010, the House as part of the expiring provisions included a provision, that was not ultimately enacted, that required the Joint Committee on Taxation to look at all of the expiring tax provisions and do an analysis in terms of the cost-benefit analysis, and who the beneficiaries were. And I think it is that type of analysis that really is important in terms of looking at all these provisions that Congress has previously enacted. Some of them very well may be worth keeping as part of tax reform. Others, if a thorough analysis has been done, may be outdated and should be eliminated. Ms. HANLON. I agree with Tom. I think the fairer, simpler approach would be the best approach to take. And what I hear most companies saying actually is that they are willing to make these trade-offs, they are willing to put things on the table. They would rather not, but they are willing to do it if it would get them to a lower rate. We conducted a survey of tax executives and we asked them point blank, we said, does the U.S. corporate tax rate hinder your competitiveness? And almost 80 percent of them said ``yes,'' unequivocally. So I think these things are very important, and I think a permanent lower rate, a stable tax structure that is predictable, I think that is the best way to go. Mr. REICHERT. So the cost-benefit analysis, a thorough review of pro-growth policies, a simpler Tax Code and a fairer Tax Code equals jobs. Would that be accurate? I see nodding heads, but I see Ms. Hanlon hesitating. Ms. HANLON. I am not hesitating. Mr. REICHERT. Just say ``yes.'' Ms. HANLON. It certainly wouldn't hurt job creation. That is for sure. Mr. REICHERT. Okay. The second question, according to Mr. Fryt's written testimony, since 95 percent of the world's population and 70 percent of its purchasing power is today outside the United States, it goes without saying that global markets are a critical component of the future growth and success of the United States businesses. How does the success of U.S. global businesses impact jobs in the United States? Mr. FRYT. I think we are a great example of that, Mr. Reichert. Also in my written testimony I included some statistics about our growth since 1989 when we first got into the international--started growing our global network in earnest, and our U.S. team member count, for example, has grown from 56,000 members to 245,000 members today. It is symbiotic. Our global growth and U.S. growth have increased in tandem as our global network has grown, and we have seen that with our customers as well. As you pointed out, 75 percent of the world's purchasing power is outside the United States today. That is a huge market and it is increasing. And that seems to me to be something that we need to tap into very effectively in this country to address even some of our revenue issues. Mr. REICHERT. Anyone else like to comment? Mr. HEENAN. Yes. I would reiterate those comments. Praxair, as I mentioned earlier, our headquarters are in Danbury, Connecticut, our R&D is in Tonawanda New York. When we grow globally, when we win projects globally, we get jobs here. Those folks are working on those projects. It is not as good as a project here in the U.S. in terms of how many more jobs you get, but it is adding jobs. So global competitiveness is critically important. Mr. REICHERT. One of the things we struggle with here in this committee and Congress is we want to see United States trade, right? Ninety-five percent of our market, as we said, is outside this country. We can't all buy American here in the United States. We want other countries to buy American. My time is up but I want to ask your help. Please deliver the message that trade is good for our global economy. The global economy good for the United States economy, equals jobs. Thank you. I yield back. Mr. HERGER. Mr. Boustany is recognized. Mr. BOUSTANY. Thank you, Mr. Chairman. I want to clarify something that came up during Dr. McDermott's line of questioning, and that is the Joint Tax analysis that was done. Mr. Neubig pointed a couple things out, but I think this bears emphasis, reemphasizing these facts about that specific report. First and foremost, the estimates are not complete, and, secondly, they are not comprehensive. In fact, only 60 out of 150 measures have been scored, and those are preliminary, and that gets us to a rate of 28 percent. So I am optimistic that we can actually get to a lower rate once we have a full analysis of all these measures. So I think we need to keep that in mind, that the Joint Tax analysis is not comprehensive at this stage, and incomplete, and our committee will have to continue to work to get to that point. Professor Hanlon, we have all been very concerned about the vast number of temporary provisions in the Tax Code and the uncertainty it has created. Oftentimes these get renewed retroactively. It creates a lot of problems certainly from a compliance standpoint. But I would like you to elaborate on how do you deal from a financial accounting standpoint with these, and talk about some of the problems that therein lie with these temporary measures. Ms. HANLON. The temporary provisions I think cause similar difficulties on the tax side and the book side in a way that they are just unpredictable. So it is hard for companies to plan. It is hard for them to make long-term investments given these fits and starts in the Tax Code. And the accounting just will fall out in the sense accounting just accounts for whatever happens. But, again, it is hard for them to predict what that effective tax rate will be, and they are benchmarked often on that effective tax rate to other companies and so forth. So I think it is just unpredictable for them. It is hard to make investment decisions when things are in flux like that. Mr. BOUSTANY. Thank you. And, gentlemen, you all are looking at this from the private sector. You have to deal with this. Could you comment on investment decisions and just the general uncertainty that arises as a result of these temporary provisions? Mr. SCHICHTEL. Uncertainty is definitely a huge impediment to investment and to I think rational growth and overall development of the economy. It is very difficult for my boss, Irene Esteves, the CFO, and for our COO and CEO to figure out what we are going to do over the long term, and try to figure out how to analyze the impact of tax policy from both a book and tax perspective, much less explain it to our investors and our analysts. So it is always an issue that is brought up each quarter on our earning calls, and it is always brought up by the analysts when our investment relations folks are meeting with them. Mr. MCDERMOTT. Would the gentleman yield? Mr. BOUSTANY. I will yield to you. Mr. MCDERMOTT. My understanding that the Joint Tax study that I talked about and that you responded to, the chairman said that they should only analyze domestic tax expenditures, not international ones, because he intended to use the international ones for reform of international tax structure. I don't know that there is a single domestic tax expenditure still left on the table, unless you do. Mr. BOUSTANY. We need to recognize that we have incomplete information at this time, and just to proceed cautiously based on that. Thank you. Mr. Neubig, in your testimony you pointed out in the growth of intangible assets, and this is clearly a new area or an expanding area that we need to be looking at as we go forward, clearly lowering the corporate tax rate would bring down effective rates for both classes of assets, tangible and intangible. Elaborate a little bit on the difficulties in applying appropriate tax policies to intangible assets. Can you further elaborate on that? Mr. NEUBIG. Well, I think the economy has clearly changed from 1986. In addition to globalization, what we have seen is a very significant increase in the amount of intangibles in terms of the programming, the copyrights, the patents, the R&D. Recent Federal Reserve Board economic studies showed that investments in intangible assets were as large as the investments in property, plant and equipment. When you look at the companies, they are concerned about both intangible investments and their tangible investments. So a lower corporate tax rate is a positive effect for both of those investments. In fact, the really high returns that are earned by the U.S. companies that are doing that type of R&D, they will benefit significantly from a lower corporate tax rate. It has also the benefit of trying to keep those intangibles in the U.S. versus offshore. Mr. BOUSTANY. Thank you. Anybody else want to comment on that issue? Mr. HERGER. The gentleman's time has expired. Mr. Neal is recognized. Mr. NEAL. Thank you very much, Mr. Chairman. The common theme this morning of the testimony that has been offered is really twofold. You are certainly asking for a lower rate, but, just as importantly, you are asking for greater certainty on how we go forward. I just have been reading Bruce Bartlett's book, and I always find how liberating it is for former staffers to leave the Hill and then to write what they deem to be a more truthful version of events. And David Stockman, as we all know, has taken the same position, divorcing himself from what commonly happens here in terms of embracing theology as opposed to the reality of trying to administer government. Mr. Schichtel, you indicated that the U.S. has lost 46 Fortune Global 500 company headquarters between 2000 and 2011. Why do you think those companies specifically moved outside of the United States? And perhaps just as importantly, were tax considerations the only reason for those companies leaving? Mr. SCHICHTEL. I don't think taxes are the only factor or the only driver. I do believe that lower tax jurisdictions and the ability to produce greater returns for their shareholders have played a huge role in driving a lot of companies overseas. Mr. NEAL. And the other panelists? Mr. NEUBIG. Congressman Neal, I was the author of that analysis of the Fortune Global 500. I don't think we found any U.S. companies actually leaving the U.S. That is talking about the number of companies that happen to be in the top 500 around the globe. What we are seeing is there are an awful lot of large companies from the BRIC countries that now are among the top 500, and they are now larger than a number of U.S. companies. So it wasn't that companies were actually leaving, at least in terms of this particular study. It is that we are definitely in a global environment where our U.S. companies are competing much more with companies from other countries, not only in Europe, but also in China, Brazil and India. Mr. NEAL. All right. Production can happen anywhere now, right? How about the other panelists? Mr. FRYT. Mr. Neal, I know there have been instances. I think the Chrysler merger a few years ago with Daimler-Benz was driven at least in part by tax considerations, and, as you know, that was one company that did end up with headquarters overseas. And certainly in the nineties, early 2000s, we saw some expatriations. Some of that was driven by tax considerations. Perhaps not all of it, but I do think it was a major consideration. Mr. NEAL. Mr. Heenan? Mr. HEENAN. I echo the comments. The rules now in terms of leaving the United States are pretty harsh. I think Congress has taken care of that movement for tax purposes offshore, and it is more, as Mr. Neubig said, you just have offshore companies are getting bigger is what you are seeing. Mr. NEAL. Ms. Hanlon? Ms. HANLON. I would agree with all these things. I think tax is one factor. The research is quite clear that investment is attracted to lower tax rates, but it is only one factor. There are a lot of other things that companies consider. Acquisitions do happen generally where the foreign acquirer will acquire the U.S. company. Oftentimes because of the tax considerations you wouldn't want to acquire--a U.S. company wouldn't want to acquire a foreign--it would be hard for them to acquire a foreign company and then pull that foreign company into the U.S. tax system. And this also depends on the type of business, what is the investment, how much tax drives where the investment goes based on the tax rates. Some companies just have to go where their customers are, but more intangible-based companies can move around more easily. So taxes will be a more important driver for those types of companies. Mr. NEAL. Mr. Neubig, maybe you could speak to the phenomena of Japan in the sense that stagnation has paralyzed that economy for decades. If we were sitting here just 15 years ago, the argument we are currently making about China would have been the argument that we were making about Japan. Are you arguing that it is their tax rates that have kept them from growth? Mr. NEUBIG. There are a lot of similarities. In the 1980s, Congress was facing not only intense competition from Japan, but also large deficits. I was impressed in 1982 and 1984 leading up to the 1986 Tax Reform Act, that Congress did address the deficits. It did show that there could be some tax increases, which set up I think the right dynamic for a revenue-neutral corporate and individual tax reform in 1986. Clearly Japan's high corporate tax rate, that now is going to fall below the U.S. as of April 1st, I think was a factor in terms of the Japanese companies not being as successful in the world markets, in addition to all the other problems that occurred in their lost decade. I think a lower corporate tax rate can definitely be helpful in terms of economic growth. But when I look at the top 50 economies in the world, the U.S. as of April 1st will have the highest combined corporate tax rate. Mr. HERGER. The gentleman's time has expired. Mr. Price is recognized. Mr. PRICE. Thank you, Mr. Chairman. We are all here interested in not just tinkering with the number to tinker with the number. We are interested in getting our economy growing as rapidly as possible so that people can get back to work and realize the benefits of their labor and their own dream. I would suggest that the deficit spending at the current level is a huge drag on the economy, but that is not the topic for the discussion today. The topic is tax policy. And I want to focus on hopefully three issues very quickly. One is the rate, two is the cost of compliance, and three on a potential alternative. We talk about the corporate rate being the highest in the industrialized world after April 1st. That is just astounding. All we are doing is punishing businesses who are trying their best just to stay in business here. So that is a disincentive to expand or to create a business here. I am not so certain that getting to 25 or 28 percent or whatever the OECD average is, isn't just a break even, isn't just a wash. If folks are looking at their balance sheet and they are saying well, if it is 25-28 percent, and that is the average of OECD countries, industrialized nations, then everything else being equal doesn't make a whole lot of difference. Wouldn't it be better for us to have a much lower rate than the average of the OECD countries, Mr. Fryt? Mr. FRYT. I couldn't agree with you more, Mr. Price. Actually the most destructive tax that can be levied from an economic growth standpoint is the corporate income tax. OECD has a good study on that. In an ideal state, you just take it to zero. You would get rid of it. Make the business community more productive. But to your point of 25 percent, if that is what it was, you know, you have to add to that the State rate as well, 3 to 4 percent, so you are at 28-29. But at least it is a lot closer than where we are today. Maybe good old American ingenuity can bridge that gap. I don't know. But it is a fair point. Mr. PRICE. I have great faith in American ingenuity if we don't stifle it from here, and that is one of the concerns that I have. Isn't zero percent really the greatest pro-growth rate for business and job creation? Mr. FRYT. I would argue it is. Mr. SCHICHTEL. I agree. Mr. PRICE. Come on down. MIT? Ms. HANLON. Yes, I think the lower the better. Mr. PRICE. And zero percent would be the most pro-growth policy we could have as it relates to business. Ms. HANLON. Yes. Mr. NEUBIG. I think there are important government services that are provided--the highways, the airports, defense--and so I am not so sure a zero rate is what would necessarily be the best. Mr. PRICE. But for pro-growth policies as it relates to businesses, isn't zero percent the best? Mr. NEUBIG. Again, I think businesses are looking at more than just the tax rate. They are looking at all the factors that will make the American economy successful. So I guess I am not convinced that a zero rate is the optimal rate. Mr. PRICE. Well, let me ask you then about the cost of compliance, the cost of compliance of our current code. Do you have any sense about what that is and how that challenges you in your business? Mr. NEUBIG. It clearly is very significant. And in addition to the 39.1 percent marginal statutory rate, you have also got to factor in the very high cost of compliance and the cost of uncertainty in our current U.S. tax system. I don't have the exact figures. I know some other academics have made those estimates. But you clearly have a benefit by simplifying and making more certain the code, that in combination with a lower corporate tax rate and those simplifications, could be very significant. Mr. PRICE. Do you have a sense about the magnitude of the cost of compliance? Is it another percent? Is it another 10 percent? Mr. NEUBIG. I have seen some estimates that the efficiency costs, including compliance costs, could be as large as the entire corporate income tax. Mr. PRICE. As large as the tax itself. Astounding. So which brings me to the alternative. What would a consumption tax, doing away with the business tax, what would a consumption tax do for your businesses and for job creation and the economy? Mr. Fryt, do you have any thoughts on that? Mr. FRYT. From a very high level, I think a consumption tax is probably preferred to the corporate income tax because the corporate income tax in effect penalizes work, productivity. A consumption tax penalizes consumption. Whether it is realistic or not is a different---- Mr. PRICE [continuing]. Or incentivizes savings and allows consumers to make their own choices, things like that. Mr. FRYT. Correct. Mr. SCHICHTEL. I agree with Mike's overall statement, but I think it requires a great deal of study and analysis because of the impact on prices and the impact on consumers, consumers that have limited discretionary income to buy our services as well as others. Also there is an element of regressivity that would need to be addressed. But overall it certainly should be something that is considered. Mr. PRICE. Thank you, Mr. Chairman. Mr. HERGER. Mr. Smith is recognized. Mr. SMITH. Thank you, Mr. Chairman, and thank you to our panel today. It is always interesting as we try to work with these issues, I don't think anyone is pretending that they are simple or that we have got an easy answer here. But I do want to reflect a little bit on, I guess, the interrelated nature of a lot of these businesses. I won't ask whether Time Warner uses FedEx or UPS. That is not what I am getting at here. Mr. SCHICHTEL. We do use FedEx. Mr. SMITH. You do. Okay. Nonetheless, is there any concern--knowing that FedEx, for example, is a consumer of manufactured products and that the manufacturing industry domestically has a bias in favor of the R&D tax credit, I would understand--is there any concern that maybe the products or services that you use within your own companies and outside your own companies would have an adverse impact if we don't get this right? Mr. FRYT. Absolutely, Mr. Smith, and I think you have put your finger right on one of the pressure points here, is that our current Tax Code has so many different provisions that attempt to direct economic activity one way or another. My personal feeling is we leave it up to the economy and the business community and try and minimize that as much as possible. You mentioned about manufacturing having R&D or 199. In effect, FedEx is part of the manufacturing business as well, but we are not generally categorized as a manufacturer. But we are in the distribution chains for a lot of manufacturers, but we don't qualify for 199, for example. Why did that line get drawn quite that way? But it is those kinds of issues, I think you are exactly right. Mr. SMITH. Anyone else? Mr. SCHICHTEL. I think you are right. I mean, all of our businesses are interconnected in one fashion or another. It just depends on the degree of separation. That being said, I agree with Mike here as far as the complexity and the inability to predict what is going to come from all these various different tax policies, and also a very real concern as far as fairness. You have a situation here, if we can move away from this level of complexity and all of the different provisions, you can have a situation where fairness really fits in nicely with the overall free enterprise market and let the economy decide, let markets decide where things should go. Mr. SMITH. Mr. Heenan. Mr. HEENAN. I think our sole focus should be about growth and how do we get growth and jobs. So I think sometimes there is a difference between equal and fair, and we should be focusing on growth. So while I think lower tax rate certainly for us would put more cash in our pocket to spend on new investments, some of the targeted tax expenditures that are out there may have a bit more leverage than a lower tax rate. So we have to look at that very closely and we ought to do it. What is right, I think, is what promotes growth and jobs, and that might not be equal, but it is probably fair for the country overall. Mr. SMITH. Okay. Thank you. I yield back. Mr. HERGER. Mr. Kind is recognized. Mr. KIND. Thank you, Mr. Chairman. I want to thank the panelists for your testimony today. It is always very illuminating and interesting. Let me just raise a couple of concerns and get your reaction on a few things. Sometimes we are not really comparing apples to apples. I think everyone is in agreement that the goal should be to try to expand the base, lower the rates, and simplify the Tax Code. And if the goal is 25 percent, according to the OECD countries, that doesn't take into consideration the VAT systems that they have in place right now to supplement lost revenue from the lower corporate rates. There is no discussion about a possible VAT in this country in order to obtain that lower level. So if we are going to do this in a deficit-neutral fashion, we are going to need a way to pay for it as well. Here is one of the concerns I have been raising consistently. The best we can do on the corporate side, eliminating every tax expenditure, every tax credit, is moving from 35 to 28 percent rate. Would that be sufficient, Mr. Fryt and Mr. Schichtel, a 28 percent rate and eliminate every expenditure on the corporate side? Would that be enough to make us more competitive globally? Mr. FRYT. I don't think it would, Mr. Kind. Mr. KIND. Mr. Schichtel. Mr. SCHICHTEL. I agree with Mike. Mr. KIND. Well, then we are going to need to figure out a way to pay for the additional 3 percent to get to 25. If the proposition here is that we are going to go to the pass-through side, where a majority of entities are structured in this country, I don't think they are going to be that enthusiastic for pass-through entities, small business owners, S corps, individuals, to pay a higher tax rate in order to pay for lower corporate tax rates in this country. That ain't going to sell politically in this country. So we are going to have to find a different revenue source, then, in order to get to the 25 percent rate if the goal is to make this deficit neutral. That is where it is going to get difficult. And that is why you don't have a detailed plan from the majority on what specifically they are proposing, because they know they are going to have to get into those weeds immediately overnight and the political push-back is going to be tremendous. Now, I wanted to pick up on what Mr. Price was addressing, because I think it is very intriguing. Here are the numbers from last year. The Federal Government collected total revenue of roughly $2.3 trillion from all the revenue sources. Of that, $181 billion was on the corporation side. Roughly 7 percent of Federal revenue was collected on the C side. That is roughly 1.2 percent of GDP. So we are tying ourselves up into knots trying to figure out a way to lower the rates when we are talking about roughly 7 percent of total Federal revenue to begin with. Maybe we should explore further, just eliminating the corporate rate entirely. But we are going to have to pay for it, and that again is going to be the rub of how we do it. Mr. Price talked about the consumption tax. I don't want to do it in a regressive fashion. My fear is that a consumption tax is going to be very regressive. It is going to hurt low- income families that have to spend every dollar that they earn through that consumption tax. So maybe there is a different way that we could maintain progressivity and pay for it through some form of wealth tax. I don't know how many of you had a chance to see the New York Times op-ed page today, but David Miller I thought wrote a very interesting article. Did anyone see Mr. Miller's article today? It is called ``The Zuckerberg Tax.'' Now, Zuckerberg, obviously, is going to get about $28 billion worth of shares, most of which he will never pay a dime of tax on. And what Mr. Miller is advocating is why not mark to market those shares a given year and have him pay taxes on it, rather than waiting until it is realized, which may never occur in his lifetime, and if he passes it on to his heirs, they may never realize those gains from the shares. This I think is one of the reasons why we have huge wealth disparity in our country, because it favors those who are accumulating wealth through shares primarily that never get realized. They are able to borrow off those shares in order to maintain their living standards. So maybe there is a way for us to explore trying to eliminate the corporate tax rate entirely, given the small percentage of revenue it ultimately brings to the country, helping our country be more competitive, but keep progressivity in the Tax Code and make it fair, and start exploring ways to tax wealth to a greater extent to pay for lower or no corporate tax rates in this country. Now, what I am recommending would probably put you guys out of business. You guys would lose your jobs as far as corporate tax is concerned. But what I am hearing from you is the lower the better, and maybe zero might be ideal. That would be a real game-changer around here, rather than us going through this kabuki dance with these hearings with no detailed proposals because of what that is ultimately going to look like. And then further my last concern is, listen, if we even get to 28 percent by eliminating all the expenditures on the C side, what is that going to do to domestic manufacturing, who rely very heavily on depreciation for R&D, for 199 manufacturing tax credit. Is that going to help domestic manufacturing or hurt domestic manufacturing if we take those expenditures away from them, and will that leave us less competitive in our ability to make things and invent things and create things and to grow things in our own country here? So those are some of the issues that we are raising. And maybe you guys can help us try to figure out a way of supplementing lost corporate tax revenue and get to a zero rate, but let's keep it progressive and fair ultimately. Chairman CAMP. The gentleman's time has expired. Ms. Jenkins is recognized. Ms. JENKINS. Thank you, Mr. Chairman, and thank you for holding this hearing. As a CPA who used to practice in this area, this has been a real delight to have you all here this morning. I am not sure I have had this much fun in the year that I have been on the panel. So thank you. Chairman CAMP. I am glad the gentlewoman is redefining fun. Ms. JENKINS. This is good stuff. And since the focus of the hearing has been on those areas of book and tax differences and where they diverge, do you all have some suggestions as far as reform goes to address that, because it appears what we have been talking about to this point has been to move towards having less differences in book tax, and you all have touched on it briefly. So can everyone on the panel just let me know your thoughts on the idea of book tax conformity? Mr. FRYT. To some degree I think there is some benefit there. I would caution about going to the extreme and putting control of the tax revenues in the hands of accountants, FASBs, with all due deference to the CPA, ma'am. But to the extent you get simplification out of that process, yes, I would agree with that. Ms. JENKINS. Okay. Mr. SCHICHTEL. I agree that I certainly wouldn't want to see control ceded to the FASB as well as efforts to achieve conformity with GAAP and international standards, because I don't think they are necessarily reflective of real economic lives. I think when you look at different industries and different classes of assets, the lives that we have for tax purposes are much more consistent with reality than what you see from a GAAP reporting perspective. Mr. SCHICHTEL. But I do believe that if we move towards greater reform in a low enough tax rate that some of the differences--the large differences between book and tax would have to be eliminated in order to fund that. And that consistency probably would be beneficial overall. Ms. HANLON. This is a great question. I think one thing to notice is that book-tax differences, when we talk about them in this arena, it is not that all of them cause problems, it is just that the permanent kind are better than the temporary kind because that allows you also to increase your accounting earnings. I have done a lot of research on book-tax conformity, actually, and I think it is a bad idea. The first thing is accounting is very conservative in their rules, so that means we make expenses, we accrue expenses very early before they actually happen in cash flow, for example, bad debt expense and so forth; and I think the Tax Code generally has not favored such treatment. Also, there is a lot of evidence in the literature that book-tax conformity would reduce the information that is contained in financial accounting earnings. The rules are set up for two different purposes, and basically accounting earnings are made--the rules are set in order to inform stakeholders. And the evidence based on the 1986 Tax Reform Act, when a certain set of reforms were required to increase their conformity, the international evidence and several other studies basically show that the information that is in accounting earnings will go down if you conform those earnings. I also share the concern about who would make the rules after the conformity would happen, if it would be Congress, FASB, or the International Accounting Standards Board; and I think that would be very hard for the U.S. to handle, the International Accounting Standards Board determining our tax base. So I think there is a lot of reasons why book-tax conformity wholesale is a bad idea. I think there are certain things that are different between book and tax that we could look at, but I think wholesale book-tax conformity is not a good idea. Mr. NEUBIG. I would agree with Dr. Hanlon's comments. Just as an example, the discussion about moving to IFRS has impacted in terms of some of the discussions about U.S. tax reform. Because if you move to IFRS then LIFO would not be allowed, and so it would automatically eliminate the current ability of some firms to use last-in, first-out accounting. There clearly are different goals for the accounting rules. As the tax writing committee you have different goals, including revenue, that are your objectives. Mr. HEENAN. I agree with most of what was said before me. I think really the accounting rules are there for something completely different than what our tax rules should be there for, our tax rules. It is to get revenue, but it should be done in a manner that promotes growth, investment, jobs, and those are just two completely different worlds, and so I would encourage us to keep them separate. Ms. JENKINS. Okay. I have just a few seconds left, so could businesses just quickly talk about--we talked about reforms and the challenges to reforms. Could you just briefly talk about if we do nothing the cost of inaction to your business if we keep the status quo? Mr. FRYT. Personally, I don't think that is a good option. I don't think the status quo is where we want to be. Mr. SCHICHTEL. I think we are seeing the results in the economy as far as what happens if you do nothing. I think taxes, although it is not going to be the only factor that drives economic growth, it is tremendously important. And I think our lackluster growth and difficulty in coming out of the recession are in part due to our overall tax structure and lack of competitiveness. Ms. JENKINS. Thank you. I yield back. Chairman CAMP. Mr. Paulsen, is recognized for 5 minutes. Mr. PAULSEN. Thank you, Mr. Chairman. I have really enjoyed the testimony this morning, and I think it just follows on the heels of a full year of hearings we have had on tax reform. And the message has been pretty clear from the folks here today, as well as the folks that have testified in the past, about the need to provide certainty for companies that are investing their capital on a 5-year and a 10-year and a longer horizon, rather than dealing with these temporary tax extensions or provisions or extenders that can create a lot of difficulties not only for the companies planning but the accounting side of the equation as well. And the U.S. is trying to play catch-up now to make sure we have got a Tax Code that is competitive along with a fairness and a simplicity component. And it is important to focus on the competitive side and the pro-growth side. So here is my question. I know that the United Kingdom in particular is moving with tax reform as well. Other countries are doing this. They have kind of staggered, kind of moved forward slowly, lowering their tax rates. Are we better off to sort of just rip the Band-Aid off, do this fast, lay out where we are going to be in the long term and take the pain, if you will, of what might be the effect in the short term of a year of some of the changes that will be out there? Or should we phase it in? Should it be gradual, as the United Kingdom or other countries might be doing? Which is the way to go? Mr. FRYT. I think there is a tension there from a business perspective, from my business's perspective. And I think from our economy's perspective it is better off doing it quickly, making a large-scale reduction in a corporate rate. There are some arguments to the other side that you save some revenues by ratcheting it down slowly over time, and maybe that helps you get to a revenue-neutral equation or solution. Mr. PAULSEN. Mr. Schichtel. Mr. SCHICHTEL. I agree. I think resetting the baseline, do it once and then move forward provides the predictability. There may be some items that you want to look at as far as transition rules, but I think overall it is time to just do it and do it now. Mr. PAULSEN. Mr. Heenan. Mr. HEENAN. I mentioned earlier we spend $2 billion in capital. We look at our projects; and, if we miss, it is a big deal. If we spend $2 million in the wrong place, it is a big deal. I commend Chairman Camp for taking on this difficult task. I would just say this is a big deal, and if we miss on how we do this we are going to regret it. So I agree that we should move quickly, but I think we really have to be cautious in looking at the specific expenditures and the specific way we do this. We don't want to miss on this one as a country. Mr. PAULSEN. Mr. Neubig. Mr. NEUBIG. I guess two points. Phasing down the corporate tax rate is what has been done in Canada and the United Kingdom. If the alternative is not doing a lower corporate tax rate I think phasing down would be much preferable. In the case of the United Kingdom, they have a parliamentary system; and they have announced that they are going to get to a 23 percent corporate tax rate by 2014, 2015. One interaction in terms of the financial accounting rules is they have not officially enacted the 23 percent rate. They are doing the reduction from 28 to 26 and now to 25 in the current year on an annual basis; and part of that is an interaction with the book accounting. Because when you lower the corporate tax rate there are effects in terms of deferred tax assets and deferred tax liabilities. It is a benefit in terms of companies with deferred tax liabilities. A majority of the top 50 companies have deferred tax liabilities, so they would benefit. There are some companies that have deferred tax assets from loss carry forwards and some types of compensation. A lower corporate tax rate would reduce the value of those deferred tax assets. And so they have decided instead of you going from 28 to 23 in one fell swoop they were going to announce it, but they are going to enact it through Parliament over the next 4 years. Mr. HEENAN. If I could just add one quick comment that just came to mind. You know, one of the things about a--if we announced today a phased-in process, I think we have to be cautious about is does it really give us certainty. Other countries have announced phase-ins and the economy turns south or the revenues aren't there and the phase-in becomes a freeze. So going back to the certainty theme, the challenge of a phase-in is are we going to be convinced as businesses that that is going to be there in 2, 3, 4, 5 years? Will the phase- in really happen or will we sort of put it on hold when revenue needs overweigh the tax reduction? Mr. PAULSEN. Mr. Schichtel, did you want to close? Mr. SCHICHTEL. I think the one-time, non-cash impact from repricing our deferred tax liabilities and deferred tax assets will be largely a nonevent from the investor and market perspective. What they will look at is the long-term impact on cash flows and operations. Mr. PAULSEN. Thank you, Mr. Chairman. I yield back. Chairman CAMP. Thank you. Mr. Stark is recognized. Mr. STARK. Thank you, Mr. Chairman. Thank you for the hearing, and thank the witnesses very much for their participation. I wanted to ask Professor Hanlon if she knew how much she and I had in common. Ms. HANLON. No I don't, but I would like to hear it. Mr. STARK. Well, you will. If you dig out the 1953--long before you were born--catalog of the Sloan School you will find at the very bottom of the list my name as a teaching assistant. Now, you got there through a resume that is of accomplishment in academia that is outstanding. I got there in a somewhat different manner. Up until 1953, MIT had a perfect record of placing its graduates with General Motors and General Electric and all the companies. But they came to the end of the list in about September, and one Stark was still unemployed. Well, they solved that problem. They said, we will make him a teacher. And I must say you have improved the appearance of the Sloan School magnificently and made accounting look a lot more attractive than I remember it being from whatever was next to the window. And I want to thank you. But, in some more seriousness, I am concerned about some of the issues that we create tax expenditures for and their usefulness. And I am going to ask you--you may not know now, but you may know someplace in your literature--has anybody done any study as to the usefulness of whatever is created through these tax expenditures? And I give as the example the idea that Orville Redenbacher got the R&D tax credit to develop microwave popcorn. Now, you could make a case if it doesn't stick in your teeth that maybe that was a good help to society. But, in all seriousness, I would love it if you know of or could dig out in the accounting research if anybody has done a study on what the actual usefulness, seriously, to society has been in many of these tax expenditure areas. And if you would be willing to spend a few minutes of your spare time and dig out something like that, I would sure love to have it. Ms. HANLON. I can certainly look at that for you. But I think the one thing that has been looked at in the literature is in an R&D study, for example, when they look at the data they might see what looks like an increase in spending. But what has been looked at is, is that really more R&D that results in more products or is it, say, a rise in the input prices. And there is actually one study that shows that all the increase in R&D spending actually goes to salaries R&D. So it is not more R&D. It is just paying the engineers more. You know, whether the input providers actually demand a higher price for the inputs when they know that the other party has an R&D credit. So that part has been looked at, and there is some mixed evidence on it. But I don't know of a study, because that would take a researcher, you know---- Mr. STARK. Okay. I just thought you might have come across it. I would add that there are people who I think would have advantage of it. I hung around in the tax area with a guy named Steve Jobs probably before you were born, and he didn't really pay much attention. I mean, he would take advantage, and he came to this committee to get some tax relief for giving computers away, but that didn't stop him from developing the iPhone and all these gadgets my kids want regardless of whether or not he got the investment tax credit. He was just an innovative guy. And I suspect that is true of most innovators. They are going to go ahead and develop these things whether or not they get the R&D tax credit, so that perhaps we are not getting much bang for our buck in that area. Thank you, Mr. Chairman. Chairman CAMP. Thank you. Mr. Berg is recognized. Mr. BERG. Thank you, Mr. Chairman. One of the most frustrating things for me out here is the uncertainty. And it seems like there is a lot of taxes that are short term. In fact, we miss a lot of deadlines and go back and reinstate tax incentives, et cetera, et cetera. So just to make sure I am not the only one that feels that way, my question for Ms. Hanlon is, do you think this instability in the Tax Code creates a problem, both a book and a tax problem? Ms. HANLON. Yes, I would agree that unpredictability and the uncertainty creates a lot of problems for companies when they try to make these long-term investments. I think a stable tax policy would be a lot better from both the tax and the accounting side. Mr. BERG. Well, I think I heard kind of those comments. I mean, whatever it is, if it is fair, if it is reasonable, hopefully lower, flatter, keep it there, and then we can make business decisions around that. So--and I know this has been a long hearing. My question, maybe if we could just go through and if there are some specifics that you could relate to the committee where you see the temporary nature of taxes creating a problem or the fact that certain incentives have expired and then gone back in and reinstated, if there is any specifics that anyone on the panel would have. Mr. Fryt, could you? Mr. FRYT. I think the biggest one in that regard right now for us, some of these extender--we actually have several of the extenders that apply to us, but the biggest one is probably expensing bonus depreciation, and that does have an impact. You know, if we had that in there permanently, or any of these-- permanency and certainty I agree with you is almost paramount, as long as it is a good code, but it is very important to us. Beyond that, I don't know that I would have any further comment. Mr. BERG. Again, I am just kind of looking for other examples that you see day in and day out that, again, are--you know, as we talked about, may be creating more cost and problems than really the incentive or disincentive was worth in the first place. Mr. SCHICHTEL. Definitely. It comes up all the time. I had a conversation with my old boss, who is now our president and chief operating officer, about some activities that do qualify for the Section 199 domestic production credit; and he was absolutely delighted and said, fantastic, we are going to bake this into our investment analysis and the return analysis. And I had to caution him and say, wait a minute. I think we need to be careful. You probably can count on it for the next couple of years. Beyond that, I am not so certain. Those types of issues come up all the time. Whatever we do, it needs to be permanent and consistent to allow my boss and the CEO and the rest of the team to make business decisions that are based on something that they can understand and count on. Mr. BERG. I believe that is one of the reasons why there is a lot of money sitting on the sidelines right now. People run their analysis, but they can only see clearly 1 year out or 2 years out and so have to put so much risk in the remaining 8 years or however long they do their analysis that it drives it from being a potential good investment to too much uncertainty. Mr. NEUBIG. Well, it is not just on the business side. A number of commentators have commented that we really have almost an entirely temporary tax system with so much expiring at the end of 2012, tax rates not only for the top income earners but throughout the entire tax schedule, including number of tax credits that are also going to be significantly changed. So it is a very important issue. When there was the possible expiration at the end of 2010 there was clearly activity that was occurring in late 2010 in anticipation of the rates and other things might be changing. Mr. HEENAN. I just echo all the same comments. I mean, certainty is going to help us a lot. Mr. BERG. I just have a rhetorical question. Is it better to address those issues that are coming up December, 2012, sooner or December 31st of 2012? You don't need to answer that. I am assuming done in a logical process where people can engage in the debate makes more sense. I will yield back, Mr. Chairman. Chairman CAMP. Thank you. Mrs. Black is recognized. Mrs. BLACK. Thank you, Mr. Chairman. Now that all the questions have been asked and people have said how much fun they have had, I do start to question some of my colleagues about what their definition of fun is. But it has been very educational to have you all here today. Mr. Berg has been running in and out, in and out, and he comes in and asks my question last minute. Since I am the last one here, Mr. Chairman, it does not seem fair. But, anyway, all that aside, this has really been very helpful, and much of your written testimony has also been helpful. But I do want to add or just tag on to what Mr. Berg has said about the stability; and I want to go to one of the statements that you made, Mr. Fryt, that I thought was really very interesting. You said you wanted to compete on the merits of business and not on the Tax Code. So let me just take that a little further and ask you, with these temporary tax incentives, how you see those as affecting competitiveness. Because I will say, just as a sidebar, between the hearings that we have had in this committee this year, which have been very, very helpful, and then those business roundtables that we have had, I have a number of businesses say that, because of the complexity of the Tax Code, that not always are they aware of maybe some of those opportunities that they could possibly have and, therefore, they are not as competitive with someone else because either there isn't that competition naturally in there for them or they don't know about it. Could you talk about, especially since you have made that statement, Mr. Fryt, about how the temporary tax incentives do affect competitiveness? Mr. FRYT. You have hit a hot-button issue in our company. I cannot tell you how many times my CEO, CFO, and others in the executive management decisionmakers have lamented what my CEO likes to call an arcane Tax Code with all of these temporary extenders that come in and out and special provisions here that apply to us or maybe don't apply to us and apply to others. Overall, there is no question in my mind they would like to be unburdened from all of that, do their business, conduct their business, take all of those, if we can, reduce the tax rate as far as we can, so that they don't have to pay attention to any of that, pay the revenue that is appropriate, whatever is decided, and move on. That is our feeling. Mrs. BLACK. Thank you. Mr. Schichtel. Mr. SCHICHTEL. I agree. My title really could be changed to chief tax translator. It is a big part of what all tax directors do. And I think the complexity becomes even more of a challenge for medium-sized companies that may not have all of the resources that we have. Clearly, from a financial perspective, the compliance burden, the difficulty in dealing with all of it are a huge drag. I just went through another budget season, and it is always painful. And everyone is frustrated that we have to spend so much just to comply with the law, not even optimizing, I am just talking basic compliance. And then every time we have a transaction the level of risk and uncertainty and complexity in the law, it is just enormous. And, really, should tax be a high-risk area just because of the complexity and difficulty in applying laws? It certainly makes doing transactions more difficult, and I can't imagine what it is like for companies that don't have the kind of resources that we have. Mrs. BLACK. Ms. Hanlon. Ms. HANLON. I would agree with all these statements. I think the complexity takes a lot of time. As Tom was saying earlier with the compliance costs, they are very high. And I also agree with the small business. I think small businesses have a very hard time with complexity. They don't have the internal tax departments. And what they really should be doing is focusing on their business, but instead they spend a lot of time worrying about how should they compensate themselves, how should they structure their business, where should they structure their business, in the U.S. or somewhere else, because of the Tax Code. And I think making a more simple, more fair system would help the U.S. Mrs. BLACK. Thank you. Mr. Neubig, do you have a comment? Mr. NEUBIG. Well, again, I think this is another example of where oftentimes the economists don't give lower corporate tax rates the full benefit that would happen if there was a broader base and lower corporate tax rate. That uncertainty, complexity, and how lower corporate tax rates affect so many different business decisions really is very powerful. So when people talk about the bang for the buck in terms of a lower corporate tax rate, sometimes they worry about a lower corporate tax rate applying to old capital. But I think they really are missing so much of the power of a lower corporate tax rate that would also be simpler and more predictable. Mrs. BLACK. Thank you, Mr. Chairman; and if I just may make one final comment, since there are very few of us. What I continue to think about as we look at the complexity and the costs of the business, I think about how the service or the product--the cost of the service or the product is raised because of this complexity, and how ultimately it is the end user that has the cost borne. Thank you. Thank you, Mr. Chairman. Chairman CAMP. Thank you. Well, I very much want to thank all of our witnesses for a very good hearing this morning and for all of your time, all of your effort, all of your testimony. I appreciate it very much. I do just want to clear up a couple of items. There has been some question about a Joint Committee on Taxation estimate. I just for the record want to note I did not request the estimate. And, also, of the 90 remaining items, virtually all of them are domestic items. I just think we want to have the record to be clear on that. But, again, thank all of you for being here. This hearing is now adjourned. [Whereupon, at 11:30 a.m., the committee was adjourned.] [Member Submissions for the Record follows:] INSERT MISSING MEMBER SUBMISSION HERE [Submissions for the Record follows:] American Council for Capital Formation [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] American Enterprise Institute [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Association for Financial Professionals [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Center for Fiscal Equity [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Equipment Leasing and Finance Association [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Fiscal Associates [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Institute for Research on the Economics of Taxation [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] United States Steel Corporation [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]