Hearing of the House Ways and Means Committee: the President's Fiscal Year 2005 Budget

HEADLINE: HEARING OF THE HOUSE WAYS AND MEANS COMMITTEE

SUBJECT: THE PRESIDENT'S FISCAL YEAR 2005 BUDGET

CHAIRED BY: REPRESENTATIVE WILLIAM M. THOMAS (R-CA)

LOCATION: 1100 LONGWORTH HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:

PAMELA F. OLSON, ASSISTANT SECRETARY FOR TAX POLICY, UNITED STATES DEPARTMENT OF THE TREASURY

BODY:
REP. RICHARD E. NEAL: Thank you very much, Minister.

(Laughter.)

I'm going to suggest where we can get $5 billion pretty quickly. Again, as other members of this committee have said, thanks very much. You are particularly helpful on a couple of constituent issues that appeared to be lost causes. You and your staff did a great job of really helping out on an individual basis and I have not lost sight of that and am indeed most grateful for your efforts.

MS. OLSON: Thank you, Mr. Neal.

REP. NEAL: You're welcome but I still can't let you off the hook on AMT. (Laughter.) All right. Is it fair to argue that the tax cuts of the last three years have exacerbated the AMT situation?

MS. OLSON: The lower tax rate, because of the way that the AMT functions, the lower tax rate, in effect, become a preference. But that's been the case since the rates were increased back in 1993.

REP. NEAL: Right.

MS. OLSON: I can recall meetings with my predecessors back in the '90s and the complaint that we got at the time was that there were too many AMT forms being filed and we, at the time, said this is your future. You need to do something to address the fact that the AMT is not indexed and the problem is going to continue to grow worse and grow worse faster because of the increase in the rates. We still haven't done it. We need to do it. You're absolutely right.

REP. THOMAS: Will the gentleman yield briefly on that point?

REP. NEAL: Yes. Yes.

REP. THOMAS: The reason I don't believe we've exacerbated the AMT is because every time we've passed a tax bill, we have (rented ?) the whole harmless aspect of the AMT and it has been tens of billions of dollars to try to not have the problem that you are concerned about happen. So I believe we have held them harmless but at an enormous cost to tread water. And this won't come off the gentleman's time.

REP. NEAL: Thank you, Mr. Chairman. But obviously there is a difference of opinion, as it relates to this issue, between the administration and the chairman's perspective on this. But let me take this a step further and maybe make reference to the chairman's opening comment as well. I accept the responsibility on our side for what happened in '86 and '93. But can we not make the argument that the majority has now been in charge of this institution for 10 years and trying to get around to fixing this issue ought to have priority status? I mean, it strikes me that it was so easy to proceed with tax cutting but not to address the attending issue of what tax cutting has done.

I heard members speak earlier today of the notion of what are we going to do to take care of the marriage penalty down the road and what are we going to do to take care of a couple of other items that have such sex appeal here. And the problem is, for many taxpayers, as they begin to take advantage of these other opportunities in the Tax Code, what we give to them on one hand with some tax preference, we're going to ask back to the Treasury because of AMT. Is that a fair statement?

MS. OLSON: For some part of the population, yes.

REP. NEAL: Yeah, exactly. That's the point that I'm trying to make and I would suggest that, as much as we talk about this-and I understand the chairman's sentiments that we do provide that patchwork-but it doesn't escape notice here that the problem still gets worse.

MS. OLSON: And it hasn't escaped notice at the Treasury Department either and I can assure you that we have been looking very long and very hard at this. We have not-and that is why there is another one-year patch as opposed to a permanent patch. We think that we need to look at more significant structural changes for the income tax because we don't think that leaving the AMT in place is necessarily the right thing to do. We're not sure that it serves the purpose for which it was initially enacted. And so we think we need to take a harder structural look at the income tax and then come to you with a proposed solution.

REP. NEAL: Well, I appreciate the sentiments you offer and you do share my conclusion if not some of the other information that I've put forward. But, if we continue down the road of making the Bush tax cuts permanent, we don't do anything with the AMT, then we end up with doubling the problem over the next decade. And my hunch is, as sincere as you might be today, I think you're going to be back with another one-year fix next year and another one-year fix the year after.

The chairman stated again that he thought it was very important to talk about how we might raise some revenue from time to time in a fair assessment. The most annoying problem I have had perhaps in the 12 years that I've been on this committee is the whole issue of Bermuda. I mean, for us to have 134,000 troops in Iraq and to let these folks off the hook who for a $25,000 or $27,000 post office box address, they are allowed to escape supporting these troops, the men and women who have performed brilliantly. It strikes me as just being odd that that would not be one of the things that we would come up with a firm recommendation on. They should be paying their fair share and I've had estimates by Joint Tax and others here that suggest that we could pick up $5 billion if we would simply close the Bermuda loophole.

MS. OLSON: Well, we certainly agree with you that we need to take steps in that regard. I assume you're referring to the inversion activity in particular.

REP. NEAL: Safe assumption.

MS. OLSON: The issue that we saw when we did our inversion study two years ago that was really driving people offshore was the ability to reduce their U.S. taxes, taxes on U.S. earned income by leveraging those operations. And we've put forward a legislative proposal and I know this committee has passed the legislative proposal that would take the juice out of those transactions. We've also acted on the regulatory front in two different ways.

We've issued regulations providing for information reporting on these transactions because our belief was that some of the transactions were going forward without the shareholders recognizing that they had a tax liability as a consequence of the transaction and that tax liability might not be paid and we've also gone forward with changes to the section 482 regulations, which would be another way for companies to move intangibles offshore and then charge royalties back to the U.S., which would again reduce the U.S. taxable income of these companies.

So we've gone forward with changes to the 482 regulations that begin to address those issues and then we've been working hard on the treaty front as well. As I think you know, there's one treaty in particular that has been used not to eliminate double taxation but rather to eliminate all taxation. And we have been working hard to get that treaty reformed as well.

REP. NEAL: Last question, Ms. Olson, as you depart from what has been a great performance. Do you believe that Tyco is a Bermuda-based company or do you believe that Tyco is an American corporation?

MS. OLSON: I'm not sufficiently familiar with the Tyco structure to know where they belong.

REP. NEAL: They're incorporated in Bermuda. Do you believe they are a Bermuda company?

MS. OLSON: I'm aware that they are incorporated in Bermuda. I don't know enough else about the structure.

But, you know, one of the things that we have to consider in these is that the transaction of moving offshore are taxable transactions. They are going to be taxed either at the corporate level or the shareholder level.

If the transactions go forward on that basis, then we have to give some recognition to what's occurred. We shouldn't be taxing the company or the shareholders. We should just be saying you didn't leave, you're still here. I know that's some of the things that you've been thinking about. It's also some of the things that we've given very serious consideration to as well.

REP. NEAL: Thank you.

Thank you, Mr. Chairman.