Creating American Jobs And Ending Offshoring Act Of 2010--Motion To Proceed

Floor Speech

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Mr. GRASSLEY. Mr. President, I wish to tell my colleagues why I think the bill before us, S. 3816, is not a good approach. This bill is being sold as somehow having the potential to create American jobs, but it would likely have the exact opposite effect. It would lead to a net decrease in American jobs. For that reason, I encourage my colleagues to vote against this bill.

The bill has three key aspects: a payroll tax holiday for employers hiring U.S. workers to replace foreign workers; a denial of business deduction for any costs associated with moving operations offshore; and lastly, ending deferral for income of foreign subsidiaries for importing goods into the United States. This last provision, according to my colleagues on the other side of the aisle, is the principal issue of the three, and from that standpoint, in my opposition, I agree. It certainly is the most dangerous, so that is the one I wish to address in detail.

To understand this partial repeal of deferral, it is best to consider the topic of deferral more generally and then we can consider this particular idea in context.

The term ``deferral'' refers to how U.S. corporations pay U.S. income taxes on foreign earnings of its foreign subsidiaries, only when those earnings are repatriated to the United States. That is, the U.S. tax is deferred until the earnings are paid by means of dividend back to the U.S. parent corporation. Deferral is not a new policy. Rather, it has been a feature of the tax law since 1918.

President Kennedy proposed outright repeal of deferral, but the then-Democratic Congress did not agree with him. Instead, the Congress and the President compromised. The compromise was this: For the passive kinds of income such as interest, dividends, royalties, and the like earned by a foreign subsidiary, the U.S. parent company would pay immediate U.S. tax whether or not the foreign subsidiary sent the earnings back to the parent. However, for active business income of the foreign subsidiary, there would be no U.S. tax until the foreign subsidiary sent such money to the parent corporation.

In short, the compromise during the Kennedy era was this: For passive income, deferral was repealed. For active income, deferral was still allowed. That compromise is embodied in subpart (f) of the Internal Revenue Code. That compromise was hammered out in 1962 and, with slight tweaks at the margin, that compromise has stayed in place for the last 48 years.

The compromise struck in the John F. Kennedy administration was the right one. Passive income is easy to move from one jurisdiction to another. If a U.S. corporation had a lot of interest income, it was very easy to instead have the foreign subsidiary earn such interest income in a low tax jurisdiction. So when interest income was earned by a foreign subsidiary of a U.S. parent corporation, there was a high likelihood that it was earned in the foreign jurisdiction out of motivation for the sole purpose of avoiding the U.S. tax. But with active business income, there are usually legitimate nontax business reasons for the income to be earned overseas. The reason a U.S. car company sells cars in Hong Kong is not out of some desire to avoid U.S. tax but, rather, out of a desire to sell cars to customers that live in Hong Kong.

So the underlying rationale to the subpart (f) compromise is this: If there is a high likelihood that a particular type of income is earned overseas out of a desire to avoid U.S. tax, then deferral will not be allowed. If there is not a significant likelihood of that, then deferral will still be allowed.

This is a very sensible rationale that was agreed to during President Kennedy's administration in the 1960s, because one of the most fundamental tax principles of all this is transactions should not be tax motivated but should be motivated by business or other nontax reasons. Tax motivated transactions should not be allowed the benefits of the favorable tax treatment sought. This fundamental tax principle prevents the tax laws from distorting decisionmaking and from distorting the economy. And the bill that is now before the Senate called the ``runaway plant'' bill cannot be justified by any similar rationale. They say they want to repeal deferral for foreign subsidiaries having income from importing goods back into the United States. But are they claiming that when a foreign subsidiary of a U.S. company imports back into the United States, there is a high likelihood that the production of the good would have been in the United States but for the motivation to avoid U.S. tax? They would have to be claiming that, if they wanted to be consistent with a half century of reasons why certain specific limitations on deferral have been justified.

But that simply can't be. There are numerous nontax reasons for having a foreign subsidiary of a U.S. parent company import goods into the United States, and I will mention a few. One reason could be that there is only small demand for the product back in the United States as compared to the overseas markets. For example, diesel engine cars are very popular in Europe, comprising 50 percent of all car sales. Here in the United States, diesel engine cars are well less than 10 percent of all car sales. So there is a very good reason for having diesel engine cars made in Europe and not here. Nonetheless, the bill before the Senate acts as if the reason these cars are not made here is because of our tax laws.

It may be that some items simply aren't found in appreciable quantities in the United States. For example, there is no diamond mining or chromium mining to speak of in the United States. A U.S. parent mining corporation with a foreign subsidiary engaged in diamond mining or chromium mining where such diamonds or chrome are imported into the United States may find deferral repealed. This could be true to the extent that the parent had any domestic restructuring at the same time it started up any foreign operations. But obviously the reason for the diamond and chrome mining outside the United States is not tax avoidance. The reason is those minerals are not found here within the United States. So I wish the sponsors of this bill to make clear whether minerals not found in the United States and imported into the United States would be included in this proposal.

I wish also to know whether this proposal would have applied to the Ford Motor Company's ownership of Volvo. Ford owned Volvo cars from 1999 to 2008. During that time, many Volvos were made in Sweden and imported into the United States for sale. If the acquisition had happened after the date of enactment, deferral would be denied in this situation, at least to the extent that Ford may have been shutting down any plants in the United States. However, no one can seriously claim that the reason the cars were made in Sweden rather than in the United States was from the desire to avoid U.S. taxes.

Keep in mind that another foreign car company--let's say Volkswagen--would not be treated the same way Ford's Volvo car income would be treated. Volkswagen would be better off taxwise on competing auto sales into the United States market over Ford's Volvo, thanks to this bill, if it were to pass.

There are lots of nontax reasons for having foreign subsidiaries of U.S. companies import into the United States. But it seems that the bill before the Senate does not recognize that fact, or maybe it doesn't care. Perhaps the bill is motivated not by a desire to curb tax-motivated transactions but by something else. Perhaps the bill has an anti-free trade motivation. Perhaps the bill is attempting to make it more difficult for American companies to conduct business outside of our country. Whatever the case, the bill's sponsors should make the rationale clear--is it to curb tax avoidance or something else?

Perhaps the bill's sponsors will admit that the bill has nothing to do with curbing U.S. tax avoidance. Perhaps they will say that it instead has to do with preserving and creating U.S. jobs. But if that is their position, that cannot be right. In some limited circumstances, perhaps it would increase employment in the United States, although probably mostly for tax lawyers than anybody else. But whatever the case, the net effect would be to decrease employment in the United States.

Allow me to explain why the net effect of the bill would be to decrease U.S. employment.

First of all, if a U.S. parent company has a foreign subsidiary, then this creates managerial headquarters jobs in the United States that would otherwise not be here. The bill before us might encourage American companies to simply sell off their foreign subsidiaries. This would, in turn, mean laying off employees in management positions at the American headquarters.

A bigger way this bill would hurt employment in the United States would be to discourage assembly jobs in the United States. A U.S. parent company could have foreign subsidiaries engage in manufacturing parts that are shipped back to the U.S. parent. The U.S. parent, in turn, might assemble those parts here in the United States into a finished product. So, yes, maybe this bill would encourage the company to repatriate the parts production, but it is just as easy to imagine that this bill would encourage the company to expatriate the assembly jobs. So this bill is an unacceptable gamble with American jobs.

In the words of the late Senator Moynihan, who preceded me and Senator Baucus as chairman of the Senate Finance Committee--he spoke in opposition to this proposal 14 years ago, so this issue has been around this body for a period of time. He said this: ``Investment abroad that is not tax driven is good for the United States.''

Senator Baucus's concern that this would put the United States at a competitive disadvantage is exactly right. I don't have the exact quote of Senator Baucus, but it was in Congress Daily recently. I am sorry I don't have that quote for my colleagues.

Senator Baucus very rightly states it. Phil Morrison, the Treasury Department's international tax counsel, criticized this proposal in congressional testimony 19 years ago. Mr. Morrison noted that the bill would be very hard to administer and that it departed from the traditional focus of the limited areas where deferral is denied.

As President Clinton's international tax counsel, Joe Guttentag, explained in 1995, during the Clinton administration:

Current U.S. tax policy generally strikes a reasonable balance between deferral and current taxation in order to ensure that our tax laws do not interfere with the ability of our companies to be competitive with their foreign-based counterparts.

This proposal has been made year after year for 20 years. I ask that my colleagues again reject it, in an effort to keep American companies globally competitive, to protect American jobs, and to preserve the underlying rationale of why deferral should only be denied in limited circumstances.

Finally, I wish to briefly comment on one other aspect of the bill--the payroll tax holiday. This, too, has provisions that will be difficult to administer. For example, do foreign workers actually have to be fired to have their employer get the payroll tax holiday in the United States or do they need only to be reassigned job roles?

This provision only scores, according to the Joint Committee on Taxation, as costing $1 billion. Let's make sure we are clear on this point. The other side is seriously considering raising taxes on small businesses--the lead creator of jobs--by tens of billions of dollars by letting top individual tax rates go back up in the year 2011. But in an effort to support job creation, they offer this $1 billion payroll tax holiday.

According to the Joint Committee on Taxation, 50 percent of small business flowthrough income will be hit by a marginal tax hike of somewhere between 17 percent, on the low end, and 24 percent, on the high end. That tax increase is scheduled to hit these job-creating small businesses in just a little over 3 months. Finance Committee Republican tax staff calculates the effect of that tax hike to be 50 times the benefit provided by this bill. On our side, we don't see the logic of raising $50 in taxes and providing a complicated tax benefit of just $1.

Why aren't we dealing with the real problem for the folks responsible for creating 70 percent of American jobs? Of course, that is small business. We ought to take time out on the tax hit that is coming to small business this December. That is what we ought to be debating on the Senate floor.

But the Democratic leadership would rather spend valuable time talking about a bill that is artfully politically labeled a jobs bill. Given that the bill will lead to a net loss in American jobs, it seems there might be a truth-in-labeling claim against the Democratic leadership.

Let's have votes on real job creation incentives and get out of this gamesmanship. Let's do the people's business and forestall the big tax hike coming at American small business.

I also wish to take some time to address the issue of the estate tax, which is going to expire at the end of this year, at the very same time.

The majority party has had control of the Senate since January 3, 2007. That is 3 years, 8 months, and 24 days ago.

During the 3 1/2 years of Democratic control, my colleagues have had an opportunity to address the death tax.

More pointedly, the Democratic leadership had a duty to provide certainty in the law as it relates to the estate tax.

My colleagues have had the duty to address the fact that this ill-conceived tax will snap back to pre-2001 law on January 1, 2011.

That is only a little over 3 months away. To be exact, it is 3 months and 5 days from now.

Unfortunately, as this chart shows, the estate tax is not the only piece of long overdue tax legislation.

Mr. President, the practice of ``good government'' is providing certainty in the law.

What I mean is, our country is made up of law-abiding citizens. As legislators, we were hired by these law-abiding citizens to make the law.

When we fail to provide certainty in the law, we fail to do our jobs.

But despite the fact that the Democratic leadership has not acted in over 3 1/2 years we still have 3 months before the estate tax reverts back to a 55-percent tax rate and a $1 million exemption amount. So Congress still has time to act.

But I am skeptical that the Democratic leadership will indeed act.

Why? Because when my friends on the other side of the aisle were in the minority earlier in this decade, they blocked--let me repeat blocked--Republican efforts to make permanent an estate tax law that law-abiding citizens all across America could rely on.

The first effort was made in 2002. Specifically, on June 12, 2002, the Democratic leadership blocked legislation that would have permanently repealed the estate tax.

In 2004, Republicans in the House of Representatives approved a bill that would have permanently repealed the estate tax. But due to maneuvering by the Democratic leadership, a vote in the Senate was never allowed to occur.

Finally, in 2006, Republicans offered a compromise proposal on the estate tax. Under that compromise, the estate tax unified credit exemption would have gradually been increased to $5 million. The rate would have also been phased in to a 30-percent tax rate.

But again, the Democratic leadership filibustered the proposal to its death.

Mr. President, I believe on our side were practicing good government as it relates to the estate tax.

We were doing our jobs, and providing certainty in the law.

Yet the Democratic leadership stymied the practice of good government.

To this day, the Democratic leadership continues to stymie efforts to provide certainty in the law.

So why is the estate tax being held hostage?

Because a number of liberal leaning Senators would be satisfied if the estate tax reverted back to pre-2001 law--that is, a 55-percent tax rate and a $1 million unified credit exemption amount.

And why wouldn't they? There is $233 billion in extra revenue to spend.

Also, in this hyperpartisan environment that is plaguing the Senate, many policymakers are politicizing the estate tax issue.

What do I mean?

A number of Senators have taken to the Senate floor and characterized a reasonable estate tax rate as a ``give-away'' to the rich.

These Senators also argue that if the estate tax is ratcheted up to a 55-percent tax rate, we could use that revenue to reduce the deficit.

I respect every Senator's opinion, but I question whether these members are actually going to use this revenue to reduce the deficit.

Unfortunately, we have seen my friends' desire to spend, spend, spend. Increasing the deficit one dollar at a time. Not the other way around.

I will acknowledge that due to the budget rules that we must live by here in the Senate, making permanent an estate tax regime at a tax rate lower than a 55 percent will result in revenue loss to the government.

For example, my friend Congressman Pomeroy--a Democratic Congressman from North Dakota--sponsored a bill to make permanent the estate tax at a 45-percent tax rate and a $3.5 million unified credit exemption amount.

When you compare this proposal against what the estate tax would revert to in 2011--a 55 percent tax rate and $1 million exemption--you find that this change in the law would cost around $233 billion over 10 years.

Now, when you compare $233 billion to the $2.5 trillion health care reform bill that was recently signed into law, it is a drop in the bucket.

Also, compare this to our $13 trillion national debt.

But $233 billion is nothing to sneeze at.

While it could be used to reduce the deficit, my colleagues on the other side of the aisle have made every indication that they will simply spend this money.

My colleagues on the other side will gloss over their plans to spend, and instead attack any proposal that includes a tax rate lower than 55-percent as a ``give-away'' to the rich.

I have some news for my colleagues. A large number of Americans who
would be impacted by a 55-percent tax rate and a $1 million unified credit exemption are not ``rich.''

Let me repeat that. Those taxpayers that would be impacted by the estate tax if it reverted back to pre-2001 levels are not wealthy people.

I would like to take a moment and provide my colleagues with a real world example of an Iowan who would not consider herself ``rich.''

Recently, I received an email from Landi McFarland, who is a sixth generation Iowa farmer.

This is what Landi had to say about the impact of the estate tax and her ability to continue the family farm:

..... As a 6th generation Iowa farmer whose family homesteaded land in Union county 154 years ago, I have concerns about current estate tax law. I am 26 years old and have a dream of pursuing a future in agriculture, the same as the generations that have come before me.

I currently raise Angus cattle with my parents and grandparents, where we are tax-paying citizens and supporters of our local economy and schools. My grandparents are both 84 years old, and own about 90 percent of the land, cattle, and equipment on our farm. Their combined estates will total approximately $7 million (the vast majority of this being farm assets like land and cattle). Recent land values have escalated the values of my grandparents' estate.

This rise in land values, however, does not increase the value of what the land produces (Angus cattle sell for the same price no matter if the land is valued at $1000 or $4000 per acre).

If my grandparents pass away AFTER 2010, and current estate tax laws are not fixed, my family will not be able to afford to pay the estate taxes without liquidating the herd and selling a large portion of the farm ground. This will put an end to our business that we love, and hence and end to our support of local businesses through daily business operations.

In the last four years, my family has worked on estate planning to try to help ease the burden of estate tax. This includes taking advantage of the $12,000 tax-free gifting each grandparent can do per person per year.

However, this only amounts to a total gifting of $48,000 per year, a drop in the bucket for a combined $7 million estate.

We are one of the oldest Angus operations in the country, and is all we wish to do is continue our family business that has been built with our own blood, sweat and tears over the past years. If current estate tax laws are not fixed, there will be thousands of small family businesses like ours put out of business. We need a SENSIBLE and PERMANENT fix.

Thanks for your help,

--Landi

Mr. President, Landi's story is not unique to her. There are more farmers like her in Iowa and around the country.

I want to talk more broadly now about how failing to address the estate tax sunset will affect Iowa farmers.

Over the past few years, farm prices have been escalating dramatically. According to the U.S. Department of Agriculture, U.S. farm prices have nearly doubled in the last decade.

While recent economic troubles have led to home prices dropping, this has not been the case for farmland. In fact, as reported in a recent LA Times article, Wall Street investors have actually turned to purchasing farmland in hopes of finding refuge from an unstable stock market. This in turn has pushed farm prices higher. Based on a recent survey by the Federal Reserve Bank of Chicago, Iowa farm prices are up 8 percent in the past year alone.

Why is this discussion of escalating farm prices significant?

Because this means that should the estate tax law revert to 2001 law, many farmers are going to be surprised to discover they will be considered ``rich.''

Now, I am not talking about wealthy corporate farmers, I am talking about many family farmers, just like Landi, who are taking over a farm that has been passed down for generations.

Mr. President, let me walk my friends through some data.

In 2007, the U.S. Department of Agriculture reported that there were 92,800 farms in Iowa.

In 2007, the average Iowa farm was 331 acres.

According to a survey conducted by Iowa State University, in 2009 the average acre was worth $4,371.

Let's do some simple math. If we multiplied the average acreage of an Iowa farm--which was 331 acres as reported in 2007--by the average cost per acre in 2009--which was $4,371 in 2009--we find that the average Iowa farm is worth $1.4 million.

Mr. President, $1.4 million exceeds the $1 million unified credit exemption amount that would be in place on January 1, 2011, if Congress does not act.

Admittedly, the value of a farmer's farmland does not tell us conclusively whether or not the farmer will be subject to the estate tax.

Farmers sometimes carry debt. That would reduce the value of the farm. But they also have assets, including equipment and bank accounts, that would increase the value of the estate.

Let me shift gears and provide my friends with some national statistics.

The Joint Committee on Taxation has told us out of 92,700 estates of people dying in 2011, 49,000 of these estates would be taxable under the 55-percent rate and $1 million exemption. If the law were changed to a 35-percent tax rate and $5 million exemption amount, for example, 3,900 estates would be taxable. That is a ratio of 13 to 1.

For every one estate that would be taxable under a 35-percent and $5 million estate tax regime, a whopping 13 estates would be taxable if the law reverted to a 55-percent rate and $1 million exemption.

Even if the rate were set at 45 percent and an exemption amount of $3.5 million, this ratio is 8 to 1. That is, for every one estate that would be taxed under the 45-percent rate, with the $3.5 million exemption, eight estates would be taxable under the 55-percent rate and $1 million exemption if we do not change the law.

I will conclude this way. Let's now look at farmers who would be affected. Based on the Joint Committee on Taxation in 2011, 3,200 farms would be taxed if the law included a $1 million exemption amount. Compare that to 300 farms that would be taxable if the exemption was $3.5 million.

That means the result of no action will be that 10 times as many family farms will be hit by the death tax. The time for action on the estate tax is now, not a month from now or 3 months from now. We owe it to the farmers and small business owners and their young heirs to give them certainty. We need to give to the tax lawyers and consultants who advise people on their estate planning some certainty.

I yield the floor.

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