Hearing of the Senate Finance Committee

HEADLINE: HEARING OF THE SENATE FINANCE COMMITTEE
 
SUBJECT: AN EXAMINATION OF U.S. TAX POLICY AND ITS EFFECT ON THE INTERNATIONAL COMPETITIVENESS OF U.S.-OWNED FOREIGN OPERATIONS
 
CHAIRED BY: SENATOR CHARLES GRASSLEY (R-IA)
 
LOCATION: 215 DIRKSEN SENATE HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: PANEL ONE: SENATOR GEORGE ALLEN (R-VA);
 
SENATOR BARBARA BOXER (D-CA);
 
SENATOR JOHN ENSIGN (R-NV);
 
PANEL TWO: PAMELA OLSON, ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY;
 
PANEL THREE: H. DAVID ROSENBLOOM, CAPLIN & DRYSDALE;
 
PROFESSOR JAMES R. HINES, JR., UNIVERSITY OF MICHIGAN BUSINESS SCHOOL, OFFICE OF TAX POLICY RESEARCH;
 
DAN KOSTENBAUDER, VICE PRESIDENT TRANSACTION TAXES, HEWLETT-PACKARD COMPANY;
 
CHARLES J. HAHN, DIRECTOR OF TAXES, TAX DEPARTMENT, THE DOW CHEMICAL COMPANY;
 
MIKE GAFFNEY, CO-HEAD OF GLOBAL TAX, FIRST VICE PRESIDENT, MERRILL LYNCH;
 
STEPHEN E. SHAY, ESQ., PARTNER, ROPES & GRAY, LLP

BODY:
SEN. CHUCK GRASSLEY (R-IA): This is our second hearing on the international competitiveness in U.S. tax policy. Normally I don't start until Senator Baucus is here, but he's necessarily delayed and he told me to go around, so we're going to start our hearing.

Last week we focused on the international competitiveness of U.S. based businesses. Today we focus on international competitiveness of U.S. owned foreign operations. During this hearing we will examine what we mean by the term international competitiveness, understanding this term and particularly how this term is measured is very important in light of last week's testimony.

As many of you know, it has been suggested that we repeal FSC-ETI and use the proceeds to reform our international tax rules. Advocates of this approach claim that this is the best way to shore up our U.S. economy and create U.S. jobs. But during last week's hearing, our witnesses said that this approach would be a $50 billion tax increase on U.S. manufacturing and U.S. jobs base. Witnesses said that a tax increase of this size could force them to move their operations out of the United States, to remain in their words, "internationally competitive."

One witness with both foreign and U.S. operations candidly stated, and I quote, "You can reduce my foreign taxes if you want to, but I'll just move my U.S. operations there." end of quote. If we're forced to trade off a domestic tax increase against international tax reform, then we need to understand how international competitiveness will replace any job loss from the tax increase, what kind of jobs it will create and how it benefits the everyday working American.

Personally, I think this trade off is an unfortunate choice. Some refer to it as a false choice. International tax reform is long overdue. Our current system is based on a framework enacted during President Kennedy's administration. In an era of expanding global markets, falling trade barriers and technological innovations that melt away traditional notions of national borders, it is critical that our international tax laws keep pace with the new business realities.

Today we will hear that our international tax laws have not kept pace. Today we will hear some fresh and creative thinking on what we should do to reform our international provisions and yet remain globally competitive. We're fortunate to have several senators on this committed who are deeply committed to reforming our international tax laws. Senator Hatch and Senator Baucus have led the charge on this issue for many years.

In addition, during last July's hearing one year ago, Senator Graham of Florida expressed grave concerns about the problems about international tax laws. As a result, he and Senator Hatch formed an international tax reform working group within this committee to evaluate various international reforms and simplification measures, and I said last year in my floor remarks when Senator Baucus and I introduced an anti-inversion bill, that I recognize that the rising tide of corporate expatriations demonstrates that our international tax laws are deeply flawed.

In many cases those flaws seriously undermine an American company's ability to compete in the global marketplace. We need to bring our international tax system in line with our open market trade policies. Reform our international tax laws is necessary for our U.S. businesses to remain competitive in their global market-place.

More importantly, those U.S. companies that reject doing a corporate inversion, are left to struggle with the complexities in competitive impediments of our international tax law rules. This is an unjust result for companies that choose to remain in the United States of America, and I think we all need to be committed as I have said I am, to remedy the inequity.

Let me ask if Senator Bingaman is here, would like time to speak for the other side of the aisle?

SEN. JEFF BINGAMAN (D-NM): Mr. Chairman, I would like just a few minutes, if I could.

SEN. GRASSLEY: Yes.

SEN. BINGAMAN: Mr. Chairman. First, thank you for having this second hearing on international tax issues. I think it's very important that the committee focus on this subject and that we try to make some progress. I hope that out of these hearings will come a consensus that a major, probably the major, result and goal that we ought to be aiming for in any changes in this area, is to incentivize job creation in this country.

Clearly we have seen a dramatic reduction in the number of manufacturing jobs in this country. Here's a chart behind me that shows both unemployment rates and the unemployment rate in the manufacturing sector and you can see that the unemployment rate in the manufacturing sector which is the red line, is moving up much more quickly than the unemployment rate generally. They're both moving up which is not good but the employment rate in manufacturing is going up much more quickly than the unemployment rate generally.

We need to find ways in our consideration of these tax provisions where we can help reduce that trend and change that trend. The other chart I just want to show very briefly, relates to the trade deficit and it just makes the point, which I think we're all aware of to some extent, that according to the Commerce Department the trade deficit for May was $41.84 billion.

Now that is growing, has been growing, in spite of reports that some of our exporters are doing reasonably well. It's clear that much of what we are buying, a larger and larger portion of what we're buying, is produced abroad. That translates into loss of jobs here, a loss of jobs in the manufacturing sector, loss of jobs in the service sector and I hope that the Department of Treasury can give us some suggestions for ways they think this can be reversed.

If there are biases built into our Tax Code that incentivize companies to manufacture overseas or do service jobs overseas, then we need to correct that and I hope that that will be what comes out of this set of hearings and again, I thank you for having today's hearing. I hope that in the question and answer period we can get into some of these issues in more detail. Thank you.

SEN. GRASSLEY: We're joined by three of our outstanding colleagues to discuss legislation on international tax that they're concerned about. We first have Senator John Ensign of Nevada and Senator Barbara Boxer of California regarding the Homeland Investment Act and when he comes, Senator George Allen of Virginia to express his views on repealing FSC-ETI regime. Who would like to go first?

SEN. BARBARA BOXER (D-CA): Either way, whatever.

SEN. GRASSLEY: Okay then.

Senator Ensign.

SEN. JOHN ENSIGN (R-NV): Thank you, Mr. Chairman.

Mr. Chairman, I ask consent that my full statement be made part of the record and that may all save you some time.

SEN. GRASSLEY: Yes, and the same for Senator Boxer.

SEN. ENSIGN: And just summarize my remarks. The bill that we're here to talk about today was passed on the Senate floor 75 to 25, with a broad bipartisan support and just to summarize what it does. Currently, U.S. companies that have invested abroad, when they pay tax on those earnings, if they want to bring that cash back into the United States, the differential between the tax that they paid and the U.S. corporate tax of 35 percent, they will pay that again.

Consequently what they do is, most of the companies leave a huge amount of cash overseas. And as we have all seen, the U.S. economy while it looks like it's showing signs of recovery, it's certainly not what any of us would like to see. It's certainly not a robust recovery by any stretch of the imagination.

What we have -- in listening to people, there is a huge amount of cash sitting overseas that companies would like to bring back into this country but because of the effect of tax rates those companies frankly, just will not bring back that money and you can argue whether it's the right tax policy, whatever you want to argue. The bottom line is that they will leave the money overseas if we do not enact this piece of legislation that Senator Boxer, myself, Senator Allen and others have sponsored.

What the bill will do is set an effective tax rate of about three and half percent, when it's all said and done, on the money that they will bring back in. JPMorgan has done a study and said that about $300 billion will come back into this country in that 12 month period. Now $300 billion is a lot of money even to the size of the U.S. economy. When we're looking for an economic stimulus, I mean, this is -- truly would be an economic stimulus.

Just anecdotally, I have talked to many companies even since we had the bill on the floor and what's interesting is that these are companies, several of these were companies who are not part of the coalition pushing the bill. As you know, the entire package that you have before you is fairly controversial on some of the provisions. Some are going to be winners, some are going to be losers, when we're trying to fix some of the FSC provisions. Because of that, a lot of the companies don't want to look like they're getting something with the Invest in the U.S.A. Act, because they may be a winner or a loser depending on which side on foreign sales corporation side that they come down on.

But anecdotally, just three companies that I talked to, $28 billion would come back into the United States. Three companies that are not part of the coalition, $28 billion, just three companies. The numbers are so staggering on what will come back in, it truly is amazing and, Mr. Chairman, and members of the committee, when I was talking to Treasury Department because they raised some concerns over this bill, you know, they said well there's no guarantee because money's fungible.

What will happen to the money? And it's pretty obvious what will happen to the money because everybody agrees that the money's fungible but some companies will pay down debt. Well, last time I checked, that's actually good healthy for companies to pay down debt.

Some amount is going to be invested. There's no question that some amount will be invested and it creates though and somewhat, by the way, will be given in dividends. I mean we just passed the dividends tax cut because we know that that will help stimulate the stock market and this is one of the ways that we can get money churning in the stock market providing capital for other companies.

So, I think that there are great benefits to the Invest in the USA Act. It's the reason that I sponsored the bill. I think it's one of the most important economic stimulus tools that we have before us today and, Mr. Chairman, and members of the committee, I'm hoping that it doesn't get bogged down in the controversy over the legislation before us.

I know that there's a lot of people, a lot of good people, on both sides of the other pieces of the legislation that are before you, but I'm hoping that this thing will actually be able to make it into law because if we want to have a good, robust, you know, if we want to see those jobs that are being lost right now, actually start being created, this is the type of legislation that we need to enact to create jobs in the United States to say, you know what? We don't like the fact that, necessarily, that the money was invested overseas but let's at least bring that money back into the United States and put it to work here so that we create jobs in the United States, and I thank you for this opportunity to testify.

SEN. GRASSLEY: Senator Boxer.

SEN. BOXER: Thank you so much. I would be very brief here because my colleague has covered a lot of ground.

Well called this the Invest in the USA Act of 2003 and that's exactly its purpose. Its purpose is not to give executive pay raises. As a matter of fact, Senator Ensign and I would like to see our bill strengthened a little bit on that point. The idea is for these funds to be used to create jobs and create product.

I was really rather stunned when the House decided they didn't want this because, after all, when do we see something passed 75 25 in the United States Senate, something that is without any -- I don't see -- it is probably the best stimulus we could have right now.

I want to show you a chart, Mr. Chairman, to explain what we're talking about here. Could you move it up a little bit away from that corner? Mr. Chairman, can you see this or is this too small for you? That chart, can you read that chart?

SEN. GRASSLEY: Yes, I can.

SEN. BOXER: Oh great, because you see, the easy thing right now, we tax profits when they're earned abroad at 35 percent and we're suggesting 5.25 percent for just one year, that's all. Now Senator Ensign has said the economic stimulus effect is $300 billion and he is quoting the private sector. Is it Morgan Stanley that came up with that? Yes.

SEN. GRASSLEY: JPMorgan.

SEN. BOXER: JPMorgan. Our own joint committee on taxation puts it at $140 billion, so if you figure somewhere in the middle, it's one of the best, I think, economic stimulus's we could have here. The beneficial effect on revenue the first year is $3.9 billion because these monies will be brought back in, so it's actually for the first year, it's a revenue raiser.

After that the 10 year cost is only $3.8 billion when all is said and done.

Bottom line is, if you're concerned as, and I know you are as we all are, that we've seen three million jobs lost and a economic recovery which if it is happening at all, it hasn't hit my state quite yet and my state as the largest state in the Union is pretty important to what happens. We're talking about 6.6 percent unemployment in California.

This is the way that we could really do something to help move things along. So that's really my message to you. I think that sometimes we do some very interesting things, some obtuse things, to stimulate growth. This is something that is pretty direct.

Funds are sitting out there away from this country, we want to bring the back. The legislation is very clear that the purpose is to be used for putting people to work, producing products, hiring, training and the rest, and it will be stimulative to this economy and I believe this economy needs that stimulus. So I thank you very much for the opportunity to appear before you today.

SEN. GRASSLEY: Thank you, Senator Boxer.

Now, Senator Allen, welcome to the committee and I've already announced that you are going to speak about the repeal of FSC-ETI. I hope I'm right.

SEN. GEORGE ALLEN (R-VA): Yes, you are right and I will make a few positive remarks about this subject as well, Mr. Chairman. Thank you so much for allowing me to appear before this committee. It's good to see Mr. Chairman, Senator Kyl, Thomas, Bunning and Breaux and I know that it's a very important issue and I want to comment on this ongoing debate on how to effectively comply with WTO obligations relative to the Extraterritorial Income Tax Exclusion Act of 2000, without adversely affecting U.S. jobs and business.

ETI and its predecessors, the Foreign Sales Corporation and the Domestic Sales Corporation Acts were originally enacted to ensure U.S. exporters were competing on a level playing field internationally. At the time, high U.S. taxes were forcing United States companies to make difficult choices on how and where to establish manufacturing and production facilities. Congress, wisely, crafted the program to encourage production here in the United States. Today, the threat of American companies and jobs going overseas remain, not necessarily just on tax policies but for a variety of competitive factor, that threat still continues.

Now, while ETI provides tax benefits of over $400 billion a year on exported goods for eligible companies, it's been asserted that ETI also supports over three and a half million American jobs, three and a half million American jobs directly and indirectly. If ETI is simply repealed without enactment of sound legislation in its place, these benefits will be lost to U.S. companies and to U.S. workers at a time when they are most needed.

You know the statistics, you've seen them over these most recent months and over the years. In fact over the last two years, 2.6 million manufacturing jobs have been lost in this country. More jobs have been lost in the manufacturing sector than in any other economic sector, in fact all of them combined.

Mr. Chairman, repealing ETI without an alternative will unfortunately encourage U.S. based exporters with significant sales abroad to move their operations and also their jobs outside of the United States. Legislation repealing ETI must include tax treatment that accords some alternative provisions for U.S. exporters with primarily domestic production.

In my state, the Commonwealth of Virginia, we rank 16th in exports amongst all the states. So Virginians are especially concerned about the impact of the ETI repeal. With a simple repeal of ETI, for example, in Virginia, we would stand to lose up to 20 -- excuse me, lose up to 82,600 export related jobs. And this is not unique to Virginia. You'll find this in a variety of ways across the whole country and this will harm good hardworking Virginians and Americans across the country in the manufacturing sector and deliver a serious blow to related industries.

The changes, as you well know, in the manufacturing sector, whether they're good or bad, reverberate throughout our economy. ETI's repeal without anything to take its place will amount to a tax increase of over $50 billion over the next 10 years on U.S. manufacturing jobs whose base is now covered by ETI.

So the bottom line, Mr. Chairman, the bottom line principle is that tax reform ought to be promoting the creation and retention of jobs in America and this tax reform should enhance, enhance the competitiveness of U.S. based companies not penalize them. And I know you, Mr. Chairman, and members of this committee agree with these principles and will be working in that light.

I would also like to briefly comment on the other topic of discussion, the Homeland Investment Act. Now this legislation, in my view, Mr. Chairman and members of the committee, would really be a complement to the job growth and tax relief package we just recently passed in Congress. Temporarily reducing the tax burden associated with bringing back or repatriating accumulated foreign earnings of U.S. companies will provide an incentive, bringing back at least $140 billion back into the United States. The net result of these temporary changes -- temporary change in tax policy will be greater investment in capital and in personnel and most importantly, it's going to create more U.S. jobs.

So the Senate and, Mr. Chairman, all of our folks here in the Senate already have acted on this. Unfortunately, the House has not been able to act on it. But as you're looking at foreign investment and U.S. companies that invest abroad, we want them to be investing in this country with American jobs competing on a level playing field and let's back any impediments that harm U.S. companies from re-investing back in this country.

So, Mr. Chairman, thank you for the opportunity to appear before this very important committee and I look forward to working with you and your members in the months to come to get this economy moving stronger for American jobs. I thank you.

SEN. GRASSLEY: Okay. I have no questions of this panel. Do any of my colleagues -- rather than call off names, if you have a question just jump in.

Okay. Thank you both very much.

SEN. ALLEN: Thank you, Mr. Chairman.

SEN. GRASSLEY: Our next witness is Ms. Pam Olson, assistant secretary for Tax Policy, Department of Treasury. Welcome, Ms. Olson, Secretary Olson.

MS. PAMELA OLSON: Thank you, Mr. Chairman.

SEN. GRASSLEY: And your entire statement as well will be put in the record and I appreciate your summary and I appreciate your being here. Thank you.

MS. OLSON: Thank you. Mr. Chairman, distinguished members of the committee, I appreciate the opportunity to appear here this morning. I applaud the committee for examining the effects of U.S. tax policy on the international competitiveness of U.S. owned foreign operations. The importance of our international tax rules to the competitiveness of U.S. businesses and workers is well known to this committee as evidenced by the fact that the committee has previously approved legislation addressing many issues in the international area.

Unfortunately, this committee's good work on these issues in previous sessions has not resulted in enacted legislation. Nevertheless, the need for changes such as the changes previously approved by this committee continues. Indeed, with the growing importance of international competitiveness to the U.S. economy, the need is even more immediate. Many areas of our tax law are in need of reform to ensure that our tax system does not impede the efficient, effective and successful operation of U.S. companies and the American workers they employ in today's global marketplace. I have enumerated a few of them in my written statement but in keeping with the focus of today's hearing, I will address my remarks this morning to the tax policy issues specific to U.S. based companies competing in markets around the world.

The concern this committee faces today is that our Tax Code has not kept pace with the changes in the worldwide economy.

From the vantage point of the increasingly global marketplace in which U.S. companies compete, our tax rules are outmoded at best and punitive of U.S. economic interests at worst. Most other developed countries of the world are concerned with setting a competitiveness policy that permits their workers to benefit from globalization. As former deputy secretary Dam observed last year, we, by contrast, appear to have based our international tax policy on the principle that we should tax our competitive advantages.

We made significant changes to the international area of the Tax Code in 1962 and again in 1986. Those rules, particularly the subpart F changes in 1962 have not advanced with advances in the economy. Many of the 1986 changes had dubious economic underpinnings in 1986. That has not changed as the years have passed. The significance of the internationalization of the U.S. economy since the enact of subpart F is apparent from the statistics of international trade and investment.

In 1960, trade in goods to and from the U.S. represented just over six percent of GDP. Today, trade in goods to and from the U.S. represents over 20 percent of GDP, a three-fold increase while trade in goods and services represents more than 25 percent of GDP today. Cross-border investment, both inflows and outflows, also has grown dramatically in the last 40 years. In 1960, cross-border investment represented just over one percent of GDP. In 2001, it was more than 11 percent of GDP, representing annual cross-border flows of more than $1.1 trillion. U.S. multinational corporations are now responsible for more than one-quarter of U.S. output and about 15 percent of U.S. employment. Those same multinational corporations produce between one-half and three-quarters of U.S. exports annually.

As a general rule, the ideal tax system should seek to minimize the sources for trade and investment relative to what would occur in a world without taxes. It is impossible and indeed it would be undesirable for the U.S. to try to level all playing fields. But we can ensure that our own rules minimize the barriers to the free flows of capital that globalization necessitates. Unfortunately, we have often done the opposite by erecting costly barriers to the free flows of capital that would maximize our international competitiveness, sometimes in the name of leveling the playing field.

As the committee considers reforms to our international tax rules, I would urge you to consider three things. First, changes to subpart F. The target of the subpart F rules is intended to be passive investment type income earned abroad through a foreign subsidiary. However, our subpart F rules extend to some forms of active income from foreign business operations, an extension no other country has undertaken. In other words, in seeking to capture as much passive foreign income as possible, subpart F captures a large share of active income as well, putting U.S. companies that earn this active income at a distinct competitive disadvantage to companies organized elsewhere.

For example, a U.S. company that uses a centralized foreign distribution company to handle sales of its products in foreign markets is subject to current U.S. tax on the income of that foreign distribution subsidiary. The effect of this rule is the imposition of current U.S. tax on income from active marketing operations abroad. Consequently, U.S. companies seeking more efficient foreign distribution facilities face a tax penalty that is not imposed on their foreign competitors.

Another example is that the subpart F rules impose current taxation on income on certain services transactions performed abroad. Given the importance of the service sector to our economy today, this rule is particularly in need of reconsideration. While the purpose of these rules is to differentiate passive or mobile income from active business income, they operate to tax currently some classes of active income arising from business operations structured and located in a particular country for business reasons wholly unrelated to tax considerations.

Second, changes to the foreign tax credit limitation. The foreign tax credit may be used to offset U.S. tax on foreign source income but not to offset U.S. tax on U.S. source income. The rules for determining and applying this limitation are detailed, complex and can have the effect of subjecting U.S. based companies to double taxation on their income earned abroad. The current U.S. foreign tax credit regime also requires that the rules be applied separately to separate categories or baskets of income.

Foreign tax is paid with respect to income in a particular basket may be used only to offset the U.S. tax and income from that same basket. Computations of foreign and domestic source income, allocable expenses and foreign taxes paid must be made separately for each of these separate foreign tax credit baskets, further adding to the complexity of the system.

Interest expense is allocated pursuant to an arbitrary formula that results in an over-allocation to foreign income. A restriction tied to an overall foreign loss gives rise to the potential for double taxation when the U.S. company's business cycle for its U.S. operations does not match the business cycle for its foreign operations.

Finally, changes to reduce complexity. We have given the complexity of the rules totally inadequate consideration. When the international rules were first developed, they affected relatively few taxpayers and relatively few transactions. Today, there is hardly a U.S. company that is not faced with applying the U.S. international tax rules to some aspect of its business. It has been observed that it is difficult to predict the future of an economy in which it takes more brains to figure out the tax on their income than it does to earn it. That is the situation we face.

Our tax laws are extraordinarily complex and that complexity is nowhere more evident than in our international tax rules. The challenge for businesses trying to comply with the law or the U.S. trying to administer and enforce it is enormous. As we move forward, simplifying our international tax rules should be a paramount goal.

Thank you, Mr. Chairman. I'll be pleased to answer any questions.

SEN. GRASSLEY: Thank you very much and I have four questions, if we can get through them since we only have time for one round of questions, I will submit the others for answer in writing.

This is asking you maybe to plough ground twice but I think, even though it is an elementary question, it's very important for our consideration of this. For some sort of explanation, particularly from your position, of the international competitiveness and the increase in U.S. jobs, what kind of jobs it creates and benefits to the average American and not just necessarily to the worker.

MS. OLSON: Well, there is considerable economic evidence that any kind of international growth actually adds to our domestic economy. There is one study that indicates that for every job we produce abroad, we produce two jobs at home. Moreover, those jobs tend to be higher paying jobs. There are jobs in things like research and development, engineering and so forth that can be put to very productive employment to the extent that the benefits of this undertaking can be applied abroad as well as domestically.

SEN. GRASSLEY: We've heard repealing of the foreign base company sales and service rules will put great pressure on transfer pricing regulations and the IRS' ability to enforce them. I need your reaction to that.

MS. OLSON: Certainly, the -- part of the reason for the foreign base company sales and service rules was to backstop transfer pricing rules. In the last couple of decades, we've made significant advances in the transfer pricing rules. We have requirements for immediate documentation. We have increased penalties for failure to comply and we have a much greater level of cooperation among our foreign trading partners and ourselves in determining what the proper pricing should be. So it's not as great a concern as it was when the rules were first enacted.

SEN. GRASSLEY: Your testimony has many references to the R&D credit, depreciation proposals, corporate AMT and net operating loss carry-backs. I'm curious why you included these items in a hearing as this one is concentrating on international tax reform. With the exception of R&D, you then include these items in the administration's Fiscal Year 2004 revenue proposals. Are you laying down a market on what you would want to do with the proceeds of the FSC-ETI repeal, which is about $50 billion?

MS. OLSON: Actually, some of those changes, those other changes are in the budget as well. For example, the AMT NOL limitation. There are a number of things that we could do that would improve the competitiveness of U.S. companies operating here in the U.S. as well as U.S. companies operating abroad.

Anything we can do to improve the competitiveness of U.S. companies is going to inure to the benefit of the U.S. economy and U.S. workers.

SEN. GRASSLEY: Okay. I think you were here when we had Senator Ensign and Senator Boxer discuss Homeland Investment Bill. I need the administration's and/or your view on the Homeland Investment Bill.

MS. OLSON: Let me give you mine since I'm not sure that the administration's position is entirely ironed out on that. We think that the bill addresses one of the oddities of our tax rules, which is that we have a worldwide tax system with foreign tax credit systems with a lot of limitations which means that a lot of income is subject to double taxation and the provision would reduce the tax rate on those untaxed, foreign tax, foreign earnings for one year basis. We don't think that a tax holiday like that is the best way to address the issues in our international tax rules. I think we'd be far better to do something on a long-term permanent basis that would improve the competitiveness of U.S. businesses.

SEN. GRASSLEY: Are you reputing the fact that, even though it is as you described it, that -- are you saying that it would not be the shot in the arm to the economy, immediate shot in the arm to the economy that the sponsors of it say it will be?

MS. OLSON: We have some doubts about whether or not it would have the stimulative effect that has been suggested.

SEN. GRASSLEY: I've voted for and I've expressed my approval of it and I promised Senator Ensign we'll have it on the agenda shortly. So you need to be prepared for that if the administration doesn't like it. We have more international tax reform proposals than we can pay for. So I need some prioritization on your part as part of my last question. If you were prioritizing international reforms, what would you address first?

MS. OLSON: I think that we definitely need to address the limitations on the foreign tax credits. The one that comes to mind first is the interest allocation rules which didn't make any sense in '86 and don't make any sense today. I think we ought to take a serious look at the foreign base company sales and service rules as well, given the development of the service sector in our economy.

SEN. GRASSLEY: Okay, thank you very much.

Now I'm calling on Senator Baucus and in this order then Kyl, Bingaman, Bunning, Conrad, Thomas, Breaux, Hatch and Nickles. Go ahead.