Hearing of the Senate Finance Committee - Statement on Corporate Integration

Hearing

This morning the Finance Committee will discuss the concept of corporate integration, which isn't
exactly a topic that comes up at summer picnics. But this issue is important to the tax reform debate,
and I want to thank Chairman Hatch and his staff for putting a whole lot of sweat equity into this topic.

I'm glad the committee will have this opportunity today to dig into the specifics. Today I want to begin
mostly with questions about what corporate integration would mean for middle class families and small
businesses looking for opportunities to get ahead.

Corporate integration is about eliminating what some people call double taxation, where income is
taxed once at the corporate level and again at the individual level. Once in place, this kind of tax change
would allow companies to write off payments they make to shareholders in the form of dividends. The
theory goes, the profit corporations bring in would go out as dividends, and corporate tax bills would
shrink. But to finance that big corporate tax cut, 35 percent of the money paid out in dividends and
bond interest would be withheld automatically by the Treasury.

Now this raises a question with respect to retirement savings.

It looks, on its face, like this proposal could go from double taxing corporate income to double taxing
retirement plans. Here's why. Today, most middle-class savers put their money into retirement plans
that are tax-deferred. It's a good deal for workers, and this country's savings crisis would probably be a
lot worse without it. Retirement plans invest in a lot of stocks and bonds. But under a corporate
integration plan, when you withhold a chunk of the dividends and interest payments that go to
retirement plans, suddenly they could get hit with a big, new tax bill for the first time. Their special taxdeferred
status -- which today is the key that unlocks opportunities to save for millions of Americans --
would go away.

Right now, most savers already face a tax bill when they take money out of their accounts. Corporate
integration could often add a second tax hit up front. So if you're an electrician in Medford or a teacher
in Salem and you've got an IRA or a 401(k), you'd have to wonder if this system says the dollar you
socked away is worth less than it used to be. If the math on retirement plans suddenly looks worse to
small business owners, there's a possibility they might think twice about offering a plan to their
employees.

There is another question whether corporate integration could wind up picking winners and losers in
how it affects businesses. Companies that run airlines and wind farms, which need capital to invest and
operate, would face higher costs if interest rates jump. And start-ups may not necessarily want to pay
dividends to shareholders because they need to turn their earnings into growth instead of dividends. A
corporate integration plan might look great to established companies with lots of cash, but not so hot to
the small businesses that dominate the economic landscape in Oregon and in hundreds of communities
across the country. These are big issues to discuss today.

I want to thank our witnesses for being here this morning and I look forward to hearing their testimony.

And before I conclude, I want to recognize one of our witnesses today, Judy Miller, who is retiring at the
end of the summer. Judy served as a senior pension advisor to this committee under Senator Baucus for
four and a half years. She's also testified before the committee a number of times. I'd like to
congratulate and thank Judy for her service and invaluable advice over the years and wish her well in the
future.

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