Congressional Budget for the United States Government for Fiscal Year 2008
Floor Speech
CONGRESSIONAL BUDGET FOR THE UNITED STATES GOVERNMENT FOR FISCAL YEAR 2008 -- (Senate - March 20, 2007)
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Mr. GRASSLEY. Madam President, a few minutes before the last speaker, you heard the chairman of the Senate Budget Committee say there is no tax increase in the budget that is before us.
Well, technically that is correct, if you consider allowing existing tax law to sunset on December 31, 2010. If you do that, we are going to have the biggest tax increase in the history of the country without a vote of Congress, without a vote of any of us, the biggest tax increase in the history of the country, January 1, 2011. This budget covers that period of time. I don't know how you can say there is no tax increase in this budget, if we are going to have the biggest tax increase in the history of the Congress without a vote of the people, if you have an opportunity to do something about it and keep taxes where they presently are. That is what is in this budget. There is not going to be an attempt to keep taxes where they are so the existing tax laws sunset and we have the biggest tax increase in the history of the country, January 1, 2011.
We have a budget by the majority party, the Democratic Party, before us because the people spoke in November. For the first time in 12 years, the Democrats are in the majority and, consequently, control the congressional budget process. As ranking Republican on the tax-writing Finance Committee, I was not consulted, nor did I expect to be, by the chairman of this year's budget resolution. Unfortunately, after reviewing this resolution, which was presented 5 days ago, it is abundantly clear it does not realistically address the possibilities of the Finance Committee carrying out what are its supposed responsibilities under this budget resolution.
Despite claims to the contrary, this budget does not provide for even 1 year of alternative minimum tax relief, let alone 2 years, or even a 1-year extension of provisions of various tax laws that expire from time to time and that we normally reinstitute. It does not provide for that as well. So this budget puts the burden on the Finance Committee to come up with the offsets to pay for the alternative minimum tax relief and for what we refer to as extenders, things that are normally extended by the Congress because they are things the economy demands be extended.
Press reports have largely echoed the defenders of this resolution on the needs of the Finance Committee. I strongly suggest the media folks take a very careful look at the claims of the Democratic leadership and see how they stack up against the cold, hard fiscal numbers and the operating history of the Finance Committee in these policy areas. They would find it does not square with the reality of what is possible for the Finance Committee.
I back up that statement with these numbers. Over the 5-year budget window going out to the year 2012, keeping existing policies in place will have a revenue effect of about $916 billion. This includes alternative minimum tax relief, extension of bipartisan 2001 and 2003 tax relief, and extending other broadly supported expiring provisions. In the aggregate, this budget provides no resources for extending these policies over the 5-year window. In so doing, we end up with the biggest tax increase in the history of the country without Congress voting for it. Yet somehow the chairman of the Senate Budget Committee can say there are no tax increases in this budget.
I go back to the grassroots. As a family farmer, which I am, I like to think we country folk can teach city folk a lesson or two by referring to the country's sayings and metaphors. Although I am going to be using numbers, you will recognize some rural touchstones in the chart I am using, which is this chart of a well where you get water. The first chart involves the method a lot of us farmers use to get our water, through the well on our family farm. You will see the well in this chart.
Here is the top of the well. My colleagues can see it is a long well and a very deep well. There is some water way down at the very bottom, but most of this well in between is very dry. At the top of the well we see the number that represents the rough--and it is probably a bit on the low side--amount of the revenue raisers in this budget, and it assumes we on the Finance Committee will be able to find $916 billion. That is revenue we would have to find offsets for over a 5-year period to pay for extending existing tax policies that expire during this period. If we don't do it, that is where I continue to make the point we are going to have the biggest tax increase in the history of the country.
Of course, this is talking about existing tax policy. It doesn't even include any new starters such as tax relief to encourage renewable energy which most Members of this body are talking about, or tax relief to help education which a lot of Members of this body, including this Senator, have talked about, and a lot of new starters such as providing tax benefits to help the health care problem. A lot of us in this body talk about that. It doesn't include renewable energy, education, and health care. So this budget assumes the well of revenue raisers is full to the brim. We can see it is not.
As a farmer, I know something about the predictability of wells. You hope
you will get a lot of rain and it will give you a decent level of water. As former chairman and now, because we Republicans are in the minority, ranking member of the Finance Committee, I think I know something about revenue raisers and how difficult or how easy it might be to raise a certain amount of revenue. I have been there. I have done that. When I was chairman of the Finance Committee, I aggressively led efforts to identify and enact sensible revenue raisers and at closing the tax gap and shutting down tax shelters. As ranking member, I continue to look for ways to shut off unintended tax benefits. I consider myself to be a credible authority on what is realistic when it comes to revenue raisers.
This budget is not realistic. From 2001 through 2006, Congress enacted over 100 offsets with combined revenue scores of $1.7 billion over 1 year, $51.5 billion over 5 years, and $157.9 billion over 10 years. That figure is reflected on this chart. That would be the figure of $51 billion enacted over a 5-year time frame.
To show I am not making this up, I ask unanimous consent to print in the Record a table that shows the track record on enacted offsets. These numbers are conservatively high because they include repeal of the FSC/ETI to comply with the ruling of the World Trade Organization which could not have been done without also providing tax relief with the manufacturing deduction.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
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Mr. GRASSLEY. The legislation that contains these provisions spans years so they don't correspond on a year-by- year basis. The point here is to look at what Congress was able to accomplish over a 6-year period as evidence of what it might be able to accomplish over the 5-year window of the budget resolution. Some might say it is comparing apples and oranges, because the House was under Republican control during that period. But as we are seeing, Democratic control does not seem to have changed the allergic reaction of the House of Representatives to revenue raisers. Because during the markup, while the chairman of the Budget Committee was holding up his chart, as he did today, with a picture of a German sewer system that U.S. companies are claiming phony depreciation deductions on through abusive leasing transactions, the chairman of the Ways and Means Committee in the other body was holding a hearing and somehow sympathizing with lobbyists about how it is bad tax policy to shut off these tax benefits.
The most significant package of revenue raisers over this period was in the American Jobs Creation Act of 2004. I took a lot of heat on those revenue raisers, as shown in the Congressional Daily article entitled ``Balance of Payments, A Closer Look at Tax Bill Losers.'' This article refers to the revenue raisers in the Senate passed JOBS bill as ``the most significant rollback of tax loopholes since 1986.''
I ask unanimous consent that that article be printed in the Record.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
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Mr. GRASSLEY. Looking then at the 5-year numbers, Congress has enacted $51 billion of revenue raisers since 2001. That happens to be only about 6 percent of the amount that is needed to make the budget we are debating now work, without regard to any new relief which will also have to be paid for.
What other revenue raisers have been identified and scored? Because we are always looking for them, because we are always getting scores for them, there is always going to be some need for them. The President's budget, for instance, contained a package of 16 tax gap measures that the Joint Committee on Taxation scores as raising $5.7 billion over 5 years. We can see that figure reflected on this chart. The Democrats have identified raisers that amount to $35.6 billion. So we have $42 billion of identified and scored revenue raisers. Let's look at how that figure compares to the budget before us. That is only about 5 percent of the amount that is needed to make this budget work. Based on these facts, the likelihood that the Finance Committee, the tax-writing committee of the Senate, will be able to come up with revenue raisers of this magnitude is remote at best.
If that is the case, what will then happen? The revenue side of the budget will be ignored, but the spending side will be followed. The net effect will be a massive tax increase, a bigger deficit, or both. I am letting my colleagues know the revenue-raising well is about 5 to 6 percent full, not 100 percent full, as it would take to do it. If we look at the Finance Committee tax staff's aggressive record on revenue raising as a guide, we might be able to fill the revenue of this well a little bit more, but there is no way we can get to where this budget purports to go.
In conclusion, this budget represents a dramatic step backward for the American taxpayer.
For the first time in 6 years, this budget is a barrier, not a path, for bipartisan tax relief for virtually every American taxpayer.
I have another chart that uses a farm analogy. We farmers are frequently visited by Canadian geese as they fly south down the Mississippi ``fly-away'' for the winter, and as they come north for the spring. Geese are not like chickens in that they do not hang around to lay eggs. Here is a chart with a goose on it. This chart shows that the budget guarantees a goose egg for tax relief.
City folks know the term ``goose egg'' means zero. For the first time in 6 years, that is what the American public is getting in guaranteed tax relief--a goose egg. That is what they are getting--zero, zip, nothing. So take a look at our track record. Take a look at the revenue offsets Senate Democrats have identified and scored. What you will see is a minimal amount, as the well chart showed. This budget, then, puts an unrealistic demand on the revenue offsets that are possible. The well of offsets cannot be filled to the level the budget assumes. It is so unrealistic as, in my judgment, to be fictitious. It means virtually every taxpayer gets a goose egg.
Now, for 6 years, we have heard the primary reason for partisan opposition to popular bipartisan tax relief is fiscal responsibility. Where is the fiscal responsibility on the spending side of the ledger in this budget? If you take a look, you will see that goose egg again.
So after 6 years of fiscal responsibility arguments, you would think if the American taxpayer was going to get a goose egg in tax relief, the party in power would show us more than a goose egg on the spending restraint side. Not so. As a matter of fact, spending goes up several hundred billion dollars.
As ranking member of the Finance Committee, I am sorry to say this budget does not even attempt to mesh the demands of the Finance Committee with the numbers in this budget. From my Finance Committee perspective, we might as well demand we have 60-vote bills. That is the only way you can ignore the budget resolution. There is no way for offsets of the size that is demanded here that are possible.
I hope deficit hawks on both sides of the aisle pay close attention. The only thing certain is new spending is going to occur. That is the only thing that is going to happen. The deficit impact of not realistically dealing with the tax, trade, and health policy priorities of the Finance Committee disguises the deficit built into this budget.
I am going to have more to say on this disconnect between the Finance Committee policies and this budget as we continue this debate in coming days. Today, I merely wished to show the Senate how the numbers on the revenue side do not work. As we take up amendments, I am hopeful we can make this budget mesh with what is possible for the Finance Committee to do and the policy demands before that committee.
I also wish to discuss another thing that is going to be heavily discussed, in fact to some extent has already been discussed with this budget; that is, the sources of revenue the chairman of the Budget Committee claims will help offset the 5-year $916 billion cost of extending existing tax policy. That happens to be something I like to talk about because I like to do things in this area--shutting down offshore tax havens.
I have been aggressive in combating abusive tax shelters offshore and otherwise. As chairman of the Finance Committee, I worked hard to shut down offshore tax evaders. I already referred in my remarks today to the 2004 JOBS bill, shutting down the tax benefits for companies that enter into corporate inversion transactions and abusive domestic and cross-border leasing transactions.
Mr. GREGG. Will the Senator yield for a question?
Mr. GRASSLEY. Yes.
Mr. GREGG. On the issue of loopholes, the Senator is a leading expert in this Chamber. Mr. Conrad, the Senator from North Dakota, the chairman of the committee, has, on a number of occasions, said as to offshore tax planning, when you go on Google and put in ``offshore tax planning,'' you get 1.2 million hits on Google for sites you would go to to find out how to game the tax system.
I was wondering if the Senator was aware, when you put ``Democratic tax increases'' into Google, you get 1.5 million hits.
Mr. GRASSLEY. Well, I could imagine so because they are a party that enjoys increasing taxes. So I can understand that.
Mr. GREGG. I thank the Senator for answering the question.
Mr. CONRAD. Will the Senator yield for a question on this issue?
I was going to ask the Senator, was this on the Republican National Committee Web site?
Mr. GRASSLEY. Of course not. It is on the real Web site.
Well, I referred to this 2004 JOBS bill before in my remarks, shutting down the tax benefits for companies that enter into corporate inversion transactions and abusive domestic and cross-border leasing transactions.
The JOBS bill also contains a package of 21 antitax shelter provisions. That has been law since 2004.
As ranking member of the Finance Committee, I saw to it that the minimum wage and small business tax relief package also contained antitax loophole provisions--and that stuff is still before the Senate--including shutting off tax benefits for corporations that inverted after Senator Baucus and I issued a public warning that legislation would stop these deals, shutting off tax benefits from abusive foreign leasing transactions that were not caught by the JOBS bill, and doubling penalties and interest for offshore financial arrangements.
But again, I refer to the Democratic chairman of the tax-writing committee in the other body, the Ways and Means Committee, who does not appear to be supportive of these provisions based upon a hearing he had last week, even though--even though--the same Member of the other body voted for many of them in the public JOBS conference in 2004.
So having studied these issues and having legislated in this area, I consider my views on tax policy directed at tax shelters and tax havens to be credible. From what I can tell, the distinguished chairman of the Budget Committee in the Senate views the problem of offshore tax havens in two categories: One, the ability of U.S. multinationals to shift income to these tax havens; and, two, tax evasion by U.S. individuals who hide assets and income in tax havens.
We have seen Democratic Senators, including the chairman of the Budget Committee, hold up a picture of the Ugland House, a law firm's office building in the Cayman Islands, as home to 12,748 corporations. I would like to give Senators some background on where that picture comes from and at what issue it is aimed.
That picture comes from an article published in Bloomberg Markets in August 2004, and it is titled ``The $150 Billion Shell Game.'' The article focused on the ability of U.S. multinationals to shift income to low-tax jurisdictions through transfer pricing. Transfer pricing is a term for how affiliated corporations set the prices for transactions between them. Transfer pricing is important because it determines how much profit is subject to tax in different jurisdictions involved in related party transactions.
The $150 billion figure is an academic estimate of the annual amount of profit that corporations shift outside the United States with improper transfer pricing. That is what the $150 billion figure is. Let me make that clear. It is an estimate of the annual amount of profit that corporations shift outside the United States with improper transfer pricing.
So this article is aimed at U.S. corporations that artificially shift their income to low-tax jurisdictions through improper transfer pricing practices. To illustrate this point, I have produced a few quotes from that article. The first one says:
Under U.S. law, U.S. companies can use Cayman subsidiaries and transfer pricing rules to shift sales and profits from other countries, thus reducing their overall tax burden.
Another quote:
A practice called transfer pricing may be the key to how U.S. corporations avoid taxes in the U.S. and other countries.
That last quote is from my colleague, the Senator from North Dakota, Mr. Dorgan.
One of the Democrats' revenue raisers, then, that is still on the shelf purports to target this transfer pricing problem. But you would not know it by looking at the language of the proposal because it does not make any changes to our transfer pricing rules. Instead, the proposal would eliminate deferral for income of any U.S. multinational's foreign subsidiaries incorporated in certain black-listed jurisdictions. It is called the tax haven controlled foreign corporate proposal. I am going to call it CFC for short.
Part of our Tax Code since 1918, ``deferral'' means that U.S. multinationals do not pay tax on active income of their foreign subsidiaries until that income is repatriated to the United States. Passive income is subject to tax on a current basis. Deferral only applies to active income.
I agree with the premise of this proposal that U.S. multinationals should pay their fair share of U.S. taxes. U.S. multinationals that use improper transfer pricing do so to obtain the benefits of deferral on profits that, economically, should be subject to tax in the United States on a current basis. Here is my quote from the Bloomberg article:
We have to get on top of corporate accounting and manipulation of corporate books for the sole purpose of reducing taxes.
Nobody is going to disagree with that.
So my view is that stronger transfer pricing rules and stronger enforcement of those rules is the right way to target this problem in our current international tax system. The Internal Revenue Service is taking steps to tighten our transfer pricing rules.
In 2005, that agency proposed regulations that would overhaul the rules for so-called cost-sharing arrangements. These are arrangements by which U.S. multinationals are able to transfer intangible property to subsidiaries in low-tax jurisdictions. Based on the volume of complaining I have seen lobbyists level at the Treasury and the IRS, the proposed IRS regulations would go a long way to prevent artificial income shifting. I hope to see these regulations finalized very soon.
Others have different views. They would eliminate deferrals altogether. So another quote in the Bloomberg article succinctly states this view. This is a quote from Jason Furman, a former aide to Senator Kerry of Massachusetts. It says:
American companies should pay taxes on their profits in the same way whether they earn them in Bangalore or Buffalo.
Now, that might sound simple enough, but that is where these proposals to eliminate or curtail deferrals on a piecemeal basis are headed--headed in a way that is going to be harmful, to completely eliminate deferral for U.S. multinationals. Without a significant corporate tax rate reduction--and I would be in favor of doing that--eliminating deferrals would have the effect of exporting our high tax rates and putting U.S. multinationals at a competitive disadvantage in the global marketplace.
When I said I would be in favor of reducing our corporate tax rates, that is because other countries are doing it and if we don't soon do something along that line, we are going to lose a lot of business and particularly a lot of manufacturing here in the United States.
The Senate is on record as wanting to protect the competitiveness of U.S. businesses in the global marketplace. That is what the American Jobs Creation Act of 2004--an act I referred to several times today which contains several international simplification provisions, and with a vote of 69 Senators, including 24 Democrats, we passed that bill. The Senate version of the JOBS bill passed with a more bipartisan majority--92 Senators, including 44 Democrats.
There has been a longstanding debate about whether our international tax system should be fundamentally changed. Some advocate taxing all foreign income on a current basis; others argue for completely exempting active foreign income under a territorial system, as many of our trading partners do. If we want to have that debate, that is a very fair debate to have, but piecemeal cutbacks on deferral for active foreign income would do nothing but complicate the Tax Code and create opportunities for tax planning around those cutbacks.
The other offshore issue identified by the chairman of the Budget Committee is U.S. tax evasion by individual taxpayers who hide their assets and income in foreign bank accounts and foreign corporations. Since 1913, our Tax Code has subjected U.S. citizens to taxes on their worldwide income. No matter what the Internet purveyors of tax evasion say, this principle cannot be avoided by putting passive assets and income into a foreign corporation. The Tax Code has rules to prevent this. Taxpayers who do that willingly violate these rules and, of course, are guilty of tax fraud and, in some instances, may even be guilty of criminal fraud.
So the problem of offshore tax evasion isn't that our laws permit it; the problem is there are some taxpayers who are intent on cheating, intent on hiding their income from the Internal Revenue Service. The Service has been successful in catching many of these, but more can be done, and I will help do it.
The Service has difficulty detecting tax evasion and obtaining the information necessary to enforce our laws. One important tool for the IRS is information exchange with other jurisdictions. Our double tax treaties contain an article on information exchange designed to help the IRS obtain quality information to enforce our tax laws. In addition, administrations past and present have entered into over 20 tax information exchange agreements with jurisdictions that are often referred to as tax havens. Sensible solutions to this problem should aim to improve on our tax information exchange network and not put it at risk.
Underreported income is the largest piece of the tax gap. We should keep in mind that hiding assets and income from the IRS isn't just an offshore tax haven problem; it may also be an onshore problem. A recent article in USA Today noted that there is:
A thriving mini-industry that has capitalized on real or perceived gaps in domestic incorporation laws and virtually nonexistent government oversight to promote some U.S. States as secrecy rivals of offshore havens.
The picture of the Ugland House in the Cayman Islands makes for good grandstanding, yes, but there are also office buildings in some States that are listed as addresses for thousands of companies which are incorporated in those States for similar reasons as corporations may be incorporated in the Cayman Islands; that is, secrecy of ownership and a permissive regulatory environment.
Whatever additional solutions the Finance Committee comes up with to shine sunlight on tax evaders will need to consider both offshore as well as onshore evasion.
To conclude, I wish to emphasize that I am all for shutting off inappropriate tax benefits from offshore arenas. The chairman has said he thinks we could get $100 billion a year from this source. I haven't seen any proposals scored by the Joint Committee on Taxation that come even close to bringing in that kind of money. The last score I have seen for the tax havens CFC proposal is $7.7 billion over 5 years. Senators Levin, Coleman, and Obama have recently introduced a bill which contains several proposals aimed at offshore tax havens, but I haven't seen a Joint Committee on Taxation score on it yet.
So once again, it will be the Finance Committee's responsibility to come up with real, sensible, effective proposals to combat offshore and onshore tax havens, and I am glad to do it, as I have over the last several years. But the likelihood that they will be scored by the Joint Committee on Taxation to bring in the kind of money assumed in this budget resolution is remote at best, and it borders on, I believe, blue smoke.
I yield the floor.
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Mr. GRASSLEY. Those are 10-year figures.
Mr. CONRAD. I understand, 10-year numbers. But we are talking about 5-year numbers of $439 billion. Let me say, if they can do that, these extraordinary numbers, and we combine not only tax gap with tax havens and with abusive tax shelters, I believe we could easily get that $439 billion. Again, the President said his budget would produce $14.8 trillion in revenue. We are saying $15 trillion. That is a 1.2-percent difference.
Finally, this is from the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations:
Experts have estimated that the total loss to the Treasury from offshore tax evasion alone approaches $100 billion per year.
I rest my case.
The PRESIDING OFFICER. The Senator from New Hampshire.
Mr. GREGG. I know the Senator from Massachusetts is waiting patiently, and I just have a couple of quick questions I wanted to ask the recent chairman, now ranking member, of the Finance Committee, who I think is regarded as an expert in the area of how we get at these people who are avoiding our tax system. He has obviously studied this issue.
Could the Senator from Iowa give us his thoughts as to how much you could raise relative to loophole closing that is legitimate--I mean versus a stated number, which can always be fairly high? But what is the real number one could actually generate over the next 5 years, in the Senator's experience and as a result of his studying this issue?
Mr. GRASSLEY. I am glad to answer that question because I think, if you look at what this budget assumes, raising this much money--
Mr. GREGG. Madam President, $434 billion minimum; $900 billion, actually.
Mr. GRASSLEY. I think it is about like this, maybe $30 billion, $35 billion at best.
Mr. GREGG. That would be a 5-year number?
Mr. GRASSLEY. Five-year number, yes.
Let me say, if I could raise the amount of money which is assumed to be raised here, I would have done away with the alternative minimum tax a long time ago because you need that kind of offset to get that job done over the long haul.
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Mr. GRASSLEY. I agree, yes. I emphasize that we are told by the chairman of the Budget Committee time after time that there is no tax increase in this budget. But if you do nothing--and doing nothing is not an excuse to have the biggest tax increase in the history of this country go in without even a vote of Congress. If you are going to raise taxes, you ought to at least vote them up, it seems to me, so you can be held responsible. It seems to me to be very irresponsible to say that you can have the biggest tax increase in the history of the country and not think you can do economic harm and strike a blow against economic freedom for individuals.
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