Hearing of the Senate Finance Committee - The Foundation of International Tax Reform: Worldwide, Territorial and Something In Between

Statement

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SEN. RON WYDEN (D-OR): Chairman, thank you. And this has been an excellent hearing.

Mr. Dilworth, I especially liked your comments about how the tax code is overgrown with weeds, because you look at 16,000 tax breaks since '86 -- it comes to three for every working day. And I think it's extraordinarily important to clean out this clutter. I think that's key to holding down rates and keeping progressivity. That's what I tried to do with my proposal, the fair flat tax legislation, and I think it would be very helpful if you could give us, in your view, some specific examples of tax preferences that affect the foreign operations of U.S. companies that frankly we'd all be better off without.

MR. DILWORTH: Well, the preferences that would make us all better off if we got rid of them would probably require first that we drop our rates. I don't think we can start by abolishing the tax on foreign income rather than domestic income. But when I talk about the weeds, the weeds are the weeds that involve collecting information and tax on behavior that we don't actually want to discourage and in many cases have stopped collecting for more than 10 years. Much of the Subpart F provisions have been rendered largely inoperative by reason of various administrative law changes.

SEN. WYDEN: How about preferences that favor one sort of business over another in their foreign operations?

MR. DILWORTH: Well, I'm trying to be responsive, but I'm trying to think. The way I categorize the business activities of the companies I deal with, you have -- occasionally, you'll have a financial services company, and they have their own set of needs because of the way they conduct business. And so there is perennially before this committee the -- something called Section 954H, an exception from foreign base company income. If that is viewed as a preference, I suppose that you could increase the revenue, but I don't think you'd be better off necessarily by letting the provision lapse.

In the case of companies that exploit high-value intangibles, I suppose you could say, well, the transfer pricing system is broken; that's a common allegation. I'm not actually persuaded that it is. Everybody talks about the Microsoft problem, but in my written testimony, I refer you to the article in the same publication from some years earlier about the Xerox problem, where the transfer pricing system resulted in parking large losses in a tax haven jurisdiction.

So if the problem is that you are worried about risk-based allocations of income among related parties and groups, then I don't know that that is a clear-cut subsidy. It's complicated. I think -- my own impression is that collecting tax on the basis of hypothetical arms-length transactions is enormously time consuming, and I think I refer in my testimony to the war of expert witnesses.

SEN. WYDEN: So what would you give up to get the lower rates? I mean, that's the whole point is that, you know, at some point, you got to clean out something specific, and that was why I asked the question.

MR. DILWORTH: Sir, I'm going to try to stay --

SEN. WYDEN: Okay.

Let me see if I can get one other question and this deals with health care. If you look at the situation for American companies, you know, in global markets, our companies are paying more than the competition, and the competition often gets health care from the government. And I think we've got a pretty good example of what's at stake right now in this Boeing-Airbus debate. And you've seen many commentators say that Boeing, you know, really is up against it, because it's paying a lot more, you know, for health care.

So what we have tried to do in our bipartisan health legislation -- there are seven Democrats and seven Republicans on it -- is to modernize the system so that employers and employees will both have more tools to hold down costs than we have with the system that today isn't much different than it was in the 1940s. How do you all see tax reform fitting into this debate about health care?

And let's just see if we can go right down the row. Go ahead.

MR. HINES: I think you're absolutely right that reforming health care would improve the competitiveness of American businesses and probably help the American economy generally, and the issue is we're going to have to pay for it somehow. And that is an opportunity to think about some fundamental issues in tax reform, because that's where the money has to come from.

So one thing that we can do if we were to enact fundamental health reform that costs a lot of money is to think about embracing, you know, a bigger tax that people will understand they're getting benefits for, like a valued-added tax, you know, that most of the rest of the world has, and I think the American taxpayer will understand that they're getting, you know, high-quality health care in return for --

SEN. WYDEN: Senator Baucus is giving me extra time. I'll just say it doesn't have to break the bank, sir. If you look at the Congressional Budget Office analysis of our proposal, it's revenue- neutral. And it's revenue-neutral because we shift the incentives; we no longer subsidize the tax code inefficiency and start rewarding those who hold the costs down.

Mr. Chairman, you've given me a lot of time. Can these two just answer the question?

MR. SHAY: While I have not -- that's not been the subject of my testimony. It's very clear -- well, and I'm not an expert in health care -- it does seem to me that -- my understanding is that the incentives currently in the code do create distortive effects that are unhelpful and proposals that would -- and that should be a part of -- any comprehensive health care approach needs to deal with those current incentives. And my understanding is the incentives tend to promote over-investment in health care in ways that are inefficient and drive up costs. It is very clear -- and one thing that I agree with Jim -- that if we could bring down health care costs, it would allow American businesses to be more competitive.

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