[Senate Hearing 117-428]
[From the U.S. Government Publishing Office]
S. Hrg. 117-428
THE PRESIDENT'S FISCAL YEAR 2023 BUDGET
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
JUNE 7, 2022
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-411-- PDF WASHINGTON : 2024
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
.................................................................
ADMINISTRATION WITNESS
Yellen, Hon. Janet L., Secretary, Department of the Treasury,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 43
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 44
Yellen, Hon. Janet L.:
Testimony.................................................... 5
Prepared statement........................................... 45
Responses to questions from committee members................ 46
Communication
Center for Fiscal Equity......................................... 95
(III)
THE PRESIDENT'S FISCAL YEAR 2023 BUDGET
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TUESDAY, JUNE 7, 2022
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:03
a.m., in Room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Stabenow, Cantwell, Menendez, Carper,
Cardin, Brown, Bennet, Casey, Whitehouse, Hassan, Cortez Masto,
Warren, Crapo, Grassley, Cornyn, Thune, Portman, Toomey,
Cassidy, Lankford, Daines, Young, and Barrasso.
Also present: Democratic staff: Adam Carasso, Senior Tax
and Economic Advisor; Eric LoPresti, Detailee; and Tiffany
Smith, Chief Tax Counsel. Republican staff: Michael Quickel,
Policy Director; and Jeffrey Wrase, Deputy Staff Director and
Chief Economist.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order. This
morning the Finance Committee welcomes Treasury Secretary
Yellen to today's hearing on the budget. This is an important
opportunity to discuss big economic challenges, so that is
where I will begin.
I am coming off a string of town hall meetings across my
home State of Oregon. And, colleagues, everywhere I went, the
number one topic of discussion was inflation. People are
feeling it at the grocery store and at the gas pump. In Oregon,
a gallon of gas is going for $5.42. People are paying more in
rent, in shops, and at restaurants.
Now, this is taking place at the same time Americans
learned on Friday that unemployment is 3.6 percent. We are at
50-year lows, and wages have been rising steadily. Overall, the
job market is the strongest it has been in multiple
generations. But in terms of what our families are feeling on
the ground, inflation is causing real headaches.
The challenge is how to tackle it. There is no cure-all.
The focus in Congress has to be on finding real solutions to
drive down costs, to protect everybody's ability to get ahead,
and strengthen our economy for the long run.
A first example, Democrats on this committee are leading
the effort to bring down the cost of prescription medicine.
Americans are getting mugged with every visit to the pharmacy
window, and it is long past time to get them relief. Moreover,
it is also past time to cut the cost pushed off onto American
consumers by these middlemen in our economy in the prescription
area that are known as pharmacy benefit managers.
A second example is energy and climate. Americans are
spending huge amounts of money on gas and electricity. Putin's
genocidal war in Ukraine is driving prices even higher. Oil and
gas companies are making huge profits and handing out big
checks to executives and announcing stock buybacks that benefit
wealthy shareholders. All the while, the climate crisis grows
around us: bigger and hotter wildfires, stronger and wetter
hurricanes, and longer and more punishing droughts.
So, it is a one-two punch. Americans pay more for gas, and
they are paying more for the consequences of these unnatural
disasters. I bet a lot of Americans would be interested in a
plan that would lower their energy costs, make Putin poorer,
and prevent climate catastrophes all at the same time. That is
a big priority for Senate Democrats, beginning with the Clean
Energy for America Act which passed this committee. The bill
for the first time uses a
technology-neutral approach to taxes and would put our country
on a path to cut emissions in half by 2030.
One recent analysis found that our bill would save the
average household $500 per year. And the legislation, for the
first time in the history of the Finance Committee, stipulates
that the more you reduce carbon emissions, the bigger your tax
savings. We are also interested in ensuring that oil and gas
companies cannot game the tax code to pay next to nothing in
taxes, and that is far too common today.
Next, Senate Democrats want to lower the cost of renting or
owning a home. That means investing in new cost-effective
housing, as well as cutting red tape--which I visited with the
Secretary a little bit about before the hearing. That is the
approach Congress took years ago when it passed an electronic
signatures law that I was one of the authors of, that helped
buyers and sellers who are just making common transactions. The
bottom line is, Congress should not address our economic
challenges by making working families worse off.
Yet, regrettably, that is what Republicans want to do. The
big economic plan coming from the Republican Campaign Chief
Senator Rick Scott is to phase out Medicare and Social Security
in a matter of years. Now, Senator McConnell has gone to great
lengths to keep the Scott plan hush-hush. When he was asked
earlier this year what the Republicans' agenda would be if they
took back the Senate, he said, and I quote, ``That is a very
good question, and I'll let you know when we take it back,''
unquote.
Yet Senator Scott coughed up the truth, and he is standing
by his plan sunsetting those bedrock American programs for
seniors. You can bet the Republicans will want to hand a fresh
round of tax breaks to multinational corporations as well.
There is a long history of Republican monetary hawks rooting
for higher unemployment, flat wages, and cuts to basic programs
that help millions of families pay for child care, groceries,
and rent.
So there are clear contrasts in the approach to solving
inflation. We will have a lot to discuss this morning. I want
to thank Secretary Yellen--she has a very hectic schedule--for
joining us this morning. I look forward to our colleagues, and
of course we are interested in working with Senator Crapo and
our colleagues on the committee.
Senator Crapo?
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman. And, Secretary
Yellen, welcome to today's hearing. Thank you for being here.
Inflation is at the top of my statement as well. Inflation
is hurting American families and eroding wages. People are
adjusting spending, even on basic necessities, just to make
ends meet. They are being hammered at the gas pump and in the
grocery aisles, and across the economy. As wages rise to keep
up with inflation, odds of an inflationary wage-price spiral
rise.
Inflation became broad-based and accelerated last year
following the untargeted American Rescue Plan Act. That Act
poured $1.9 trillion of inflation fuel into an economy with
growing supply chain disruptions and households with elevated
disposable income and liquid savings.
Following that, Democrats pushed for trillions more in
reckless spending. The result, which many predicted, has been
inflation at highs not seen in 40 years. As prospects of a
recession and stagflation rise, this is no time to consider
raising taxes or resurrecting reckless spending proposals from
the House-passed Build Back Better bill.
The Congressional Budget Office's 10-year outlook is
another warning sign that our national debt, currently at $30.5
trillion, is another sign that we are on an unsustainable track
and headed to new record highs.
Inflation and accompanying higher interest rates mean
higher net interest costs to service the national debt,
crowding out other fiscal priorities. As the economy has been
in recovery from COVID-related shutdowns, revenue has been up
sharply under the tax system put into place before the
pandemic.
CBO expects revenue this year to rise to 20 percent of GDP,
the highest in more than 2 decades, and then average well above
the 50-year historical average. Nonetheless, Democrats appear
to want to raise taxes even more in the face of rising odds of
a recession.
One harmful policy is a minimum tax on financial statements
or book income, something so fundamentally flawed that both
parties abandoned the previously enacted version more than 30
years ago. This harmful policy would overwhelmingly hit
American manufacturers, as well as undercut investments in U.S.
innovation and emerging technologies.
This is not the only proposal from Democrats that would
harm the competitiveness of American companies. Another
prominent example is the international tax agreement that
Treasury has negotiated with the OECD. Under both pillars of
the agreement, Treasury has agreed to give foreign countries
sweeping new rights to tax U.S. companies. In an apparent
attempt to bind Congress, Treasury agreed to terms without
engaging in meaningful consultation with Congress.
For more than a year, my Republican colleagues and I have
repeatedly requested information on the agreement and its
potential effects. Treasury, however, has repeatedly declined
to provide any analysis of the effect of the agreement on U.S.
businesses or U.S. revenue, or the U.S. economy overall. And
from what we can see, that impact will be significant on U.S.
companies, making them less competitive globally.
We now know that Treasury's failure to share substantive
detail foreshadowed underlying flaws and a lack of coherent
principles in the agreement. It is increasingly clear that
terms agreed to by Treasury will harm U.S. businesses and
undermine tax provisions enacted by Congress to encourage
certain activities. The flaw with this approach is that the
agreement cannot be fully implemented without congressional
action. In many cases, the terms can only be properly carried
out with a multilateral treaty requiring a two-thirds vote by
the Senate.
By agreeing to sweeping changes of this nature without
bipartisan support, Treasury has put at risk tax certainty and
the prospect of a durable or longlasting agreement.
Beyond lack of information about the international tax
agreement, nothing more is known about a possible leak of
private taxpayer data from the IRS to the left-leaning group
ProPublica than we knew 1 year ago when it was first reported.
More work is also necessary to establish independent
oversight and financial controls over the $350-billion funding
to States and localities in the American Rescue Plan where no
meaningful oversight was established.
Treasury must also be willing to consult Congress on debt
management, which it has thus far only been comfortable doing
with Wall Street and the Federal Reserve. The committee, which
is Treasury's authorizing committee, deserves more transparency
and accountability from Treasury than we have been receiving.
Madam Secretary, I do appreciate your service, and I look
forward to hearing your testimony on these matters today. Thank
you.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo. We will be working
together as we always try to.
Our first witness will be Secretary Janet Yellen--our only
witness. Secretary Yellen is the 78th Secretary of the
Treasury. She is the first person to have led the White House
Counsel on Economic Advisors, the Federal Reserve, and the
Treasury Department.
Prior to leading Treasury and the Federal Reserve,
Secretary Yellen was a distinguished fellow in residence at the
Brookings Institution. She served as president of the American
Economic Association, and she is a member of the American
Academy of Arts and Sciences and the Council on Foreign
Relations. She also, in a matter of great interest to the
committee, was a founding member of the Climate Leadership
Council.
We are very glad to have you, Secretary Yellen.
Colleagues, today we are really going to be focused on
moving expeditiously. The Secretary has a hard stop at 12:45.
And please proceed, Secretary Yellen.
STATEMENT OF HON. JANET L. YELLEN, SECRETARY, DEPARTMENT OF THE
TREASURY, WASHINGTON, DC
Secretary Yellen. Thank you, Chairman Wyden, Ranking Member
Crapo, and members of the committee. Thank you for inviting me
to discuss the administration's budget proposals.
This budget prioritizes essential investments in education,
medical care, and affordable housing, alongside tax reforms,
deficit reduction--and prioritizes a fairer tax system.
Over the past year and a half, we have experienced a robust
recovery characterized by strong economic growth, historically
low unemployment, and high household saving rates. This rapid
broad-based recovery has been buttressed by the congressional
response to the challenges of the pandemic, particularly with
the CARES Act at the beginning of the pandemic, and continuing
with the Consolidated Appropriations Act of late 2020 and the
American Rescue Plan Act legislated at the beginning of 2021.
As President Biden said last week, we now are entering a
period of transition from one of historic recovery to one that
can be marked by stable and steady growth. Making the shift is
a central piece of the President's plan to get inflation under
control without sacrificing the economic gains we have made. We
also managed to avert the far worse outcomes that were forecast
at the beginning of the pandemic in 2020.
After the onset of the pandemic, CBO forecasted
unemployment would exceed 9 percent in 2021. Now we are
experiencing historically low unemployment. We are also
witnessing sharp reductions in the budget deficit, with CBO
recently forecasting the largest nominal reduction to the
Federal deficit in history.
According to their projections, the deficit as a share of
the economy this year will be at a lower level than CBO
projected before the American Rescue Plan Act passed. Still, we
currently face macroeconomic challenges, including unacceptable
levels of inflation, as well as the headwinds associated with
the disruptions caused by the pandemic's effect on supply
chains, and the effects of supply side disturbances to oil and
food markets, resulting from Russia's war in Ukraine.
To dampen inflationary pressures without undermining the
strength of the labor market, an appropriate budgetary stance
is needed to complement monetary policy actions by the Federal
Reserve. Moving forward, elements of the President's proposed
legislation, including the clean energy initiatives and plans
to reform the prescription drug market, will help to lower the
costs paid by American consumers.
Treasury has been actively working with Congress on many
challenges. Most important is our joint response to Russia's
illegal and unprovoked war against Ukraine. Treasury is
committed to doing what we can to ensure that Putin's brutal
war continues to be met with fierce resistance internationally.
Alongside 30 other partners abroad, accounting for more than
half of the world's economy, the U.S. Government has imposed
unprecedented financial pressure measures on Russia and its
leadership.
Today the Kremlin has been cut off from the global
financial system. The Russian economy is experiencing severe
contractions, with most analysts projecting a double-digit
decline in Russian GDP in 2022, and they are experiencing
sharply elevated inflation.
We are grateful for the strong support of Congress in this
endeavor, including its recent provision of $40 billion in
security, economic, and humanitarian aid to the people of
Ukraine--and true resolve is essential to supporting the people
of Ukraine against this brutal invasion of their homeland.
Over the past year and a half we have successfully
collaborated with Congress on the Bipartisan Infrastructure
Bill, a bill designed to do the hard generational work of
building a more dynamic, structurally sound economy by smartly
investing in the future. This law will rebuild America's roads,
bridges, and rails; expand access to clean drinking water;
ensure every American has access to high-speed Internet; and
invest in communities that often have been left behind.
Building a fair and stable tax system that promotes broadly
shared growth is important to both adequately funding
investments and to reducing deficits and debt.
I look forward to working with Congress to ensure that we
continue to make progress in this regard. In the
administration's fiscal 2023 budget, we suggest smart, fiscally
responsible investments, cutting deficits, and keeping the
economic burden of debt low.
The budget's investments are more than fully paid for
through tax code reforms requiring corporations and the
wealthiest Americans to pay their fair share, closing
loopholes, and improving tax administration.
Finally, it is no secret that I am keenly focused on moving
forward on the global agreement on the international tax
reform, including a global minimum tax that will level the
playing field and raise crucial revenues to benefit people
around the world. Last fall, 137 countries, representing nearly
95 percent of the world's GDP, agreed on a deal that will
stabilize our tax systems, provide resources to invest in
security and respond to crises like COVID-19, and ensure
corporations fairly share the burden of financing government. I
am hopeful that Congress will also implement this global
minimum tax as part of its legislative agenda.
Thank you, and I look forward to taking your questions.
[The prepared statement of Secretary Yellen appears in the
appendix.]
The Chairman. Thank you very much, Madam Secretary. And,
colleagues, let me just say in the beginning, we have many
members with questions, so this morning we are really going to
have to stick to the 5-minute rule.
Madam Secretary, let me start with cutting costs and
fighting inflation. Some of my Republican colleagues have
proposed increasing taxes on 75 million middle-class families
by almost $1,500 this year alone, and on nearly half of small
business owners. Instead of taking money out of these
taxpayers' pockets, President Biden and Democrats propose to
lower the cost of energy, health care and prescription
medicine, child care, and housing. We would also reduce cost
pressures by making the wealthy and large corporations pay
their fair share.
In particular, the President and I believe strongly that
billionaires should not be able to use current tax laws to pay
little or no taxes for years on end.
So my question, Madam Secretary, to start us off is, how
would these policies reduce costs for middle-income families?
Secretary Yellen. Thank you, Senator Wyden. The President
supports measures, Congress legislating measures that would
ease the burden on lower- and middle-income families. This
would involve, for example, continuation of the Child Tax
Credit, lowering the cost of prescription drugs, investing in
affordable housing, lowering the cost of health care, and the
energy investments that you referred to that could cut utility
bills significantly. And he would pay for those proposals
fully, and more than fully. The President believes we should
have deficit reduction, and the revenue-raising proposals
involve asking upper-income taxpayers and large corporations to
pay their fair share.
And so, we believe--I agree with President Biden--that
proposals like this would lower the costs and ease the price
pressures that low- and middle-income households are facing due
to rising energy and food costs and supply chain problems that
have been associated with the pandemic. And deficit reduction
would complement the work that the Federal Reserve is doing.
The Chairman. Let me get a couple of questions in on the
IRS. Secretary Yellen, IRS audit rates have fallen by more than
72 percent over the last decade, and by 86 percent for those
earning more than $5 million per year. This lack of oversight,
in effect, has given the high-flyers a free pass to cheat.
The IRS estimates that we are losing about $600 billion
each year from taxes that are owed but not paid. The IRS
Commissioner testified that our losses could be as high as $1
trillion a year.
The President is requesting $80 billion for the IRS over 10
years. According to the Congressional Budget Office, this
investment would raise over $200 billion in revenue, primarily
from high-
income tax cheats.
Can you talk a bit about why this is a smart investment,
and how it would help fight inflation?
Secretary Yellen. Well, tackling the $600-billion annual
tax gap is absolutely important in ensuring fiscal
responsibility. It would generate substantial revenue in a
manner that is efficient and fair. It would enable deficit
reduction and help ease price pressures by providing the
funding, part of the funding we need, for the urgent fiscal
priorities we discussed.
More broadly, the IRS is an agency that entered the
pandemic without the funding that was in any way needed to
navigate the challenges that they faced. It is remarkable that
they were able to perform as well as they did in getting out
the Child Tax Credit payments and the Economic Impact Payments.
But we absolutely have to invest in the IRS to close that tax
gap which reflects opaque sources of income, mainly by high-
income earners, that are not taxed. Wage payers who earn W-2
income really pay their fair share. And they need the resources
to serve taxpayers, to be able to answer their phones, to be
able to ensure that they receive the payments that they are
due, and they need to modernize their technology, which is
really the oldest, dating back to the 1960s, in the Federal
Government.
The Chairman. My time has expired, Madam Secretary. If my
colleagues have not asked it, I will ask it for the record, but
particularly this backlog situation. Oregonians who filed paper
returns this year are wondering if the IRS has lost them. Some
are desperately in need of that tax refund to pay bills. I will
talk to you about it further.
Senator Crapo?
Senator Crapo. Thank you, Mr. Chairman. And, Secretary
Yellen, you have heard from both Senator Wyden and me today
about the significant pain Americans are suffering because of
inflation that has accelerated and become broad-based following
the enactment of the American Rescue Plan last year.
Democrats are claiming that Republicans are trying to raise
taxes. Nothing could be further from the truth. The reality is
that, as we speak, the Democrats are trying to negotiate a new
massive plan that would raise taxes significantly.
Do you believe that it would be prudent fiscal policy to
increase taxes or engage in more stimulus spending with an
economy facing the prospects of stagflation?
Secretary Yellen. Senator Crapo, thank you for that
question. As I indicated in my response to Senator Wyden, I
believe there is a lot that Congress can do to ease the cost
burdens that households are experiencing.
With respect to energy, the administration has done
everything that they can to bring down energy costs, for
example through a historic release of a million barrels a day
from the Strategic Petroleum Reserve. And energy prices, gas
prices, while very high, have risen a lot, they would be higher
without that.
But the war in Ukraine is having impacts on energy and food
prices globally. We are not the only country that is
experiencing inflation. You can see that in virtually every
developed country around the world.
What Congress can do and what the Biden administration
would like to see is investments in programs like lowering
prescription drug costs; investing in clean energy and
renewables that would free our dependence on global oil markets
which are subject to geopolitical risk, and could bring down
utility bills; affordable housing; help for child-care expenses
that would enable higher labor force participation; and medical
costs. And these are ways that the Congress and the
administration can address and bring down some of the costs
that households face. And it is appropriate to pay for it, or
more than pay for it, to have deficit reduction. We are
supportive of deficit reduction. And asking high-income
taxpayers and corporations to pay their fair share is likely to
finance those investments.
Senator Crapo. What I heard you say is that it is okay to
raise taxes right now, and that it is proper to have more
stimulus spending to deal with this crisis. I just have to say
I disagree with you on that.
What I also did not hear you say was that we should
increase our production, our domestic energy production, rather
than depressing our domestic energy production. Do you continue
to believe that the President's policies with regard to
reducing our capacities to develop our own oil and gas reserves
and potential is the appropriate approach to this?
You mentioned taking from our Strategic Petroleum Reserves,
which I think weakens us, but you did not mention increasing
our domestic production of energy.
Secretary Yellen. Well, production in the United States
fell during the pandemic. I think that oil producers did not
anticipate the strength of the recovery and the fact that oil
prices would recover. And they certainly do have incentives now
to increase oil production. They are sitting on thousands of
leases on Federal lands that they have not yet drilled, and
they need to do so.
Senator Crapo. Proceeding on those leases is not being
facilitated. The President's executive orders have shut down
the XL Pipeline. They have stopped the issuance of more leases.
They have stopped the progress on the permitting of those
leases. They have stopped the offshore oil production.
The fact is, we were energy-independent, and now we are
not. And it is not the result of the failure of our capacity.
Secretary Yellen. We may be energy-independent. We are
actually exporting oil. But we are part of the global oil
markets which are subject to geopolitical influences. And given
the global nature of these markets, it is virtually impossible
for us to insulate ourselves from shocks like the ones that are
occurring in Russia that move global oil prices.
And for the medium term, the critical thing is that we have
become more dependent on the wind and the sun that are not
subject to geopolitical influences. And passing clean energy
credits that will boost renewables is, I think, really critical
to addressing climate change and our energy costs for
households going forward.
Senator Crapo. Madam Secretary, my time has expired, but I
wanted to get into the OECD information, and maybe either in
this hearing or following we will be able to have the
opportunity to discuss the fact that there are serious concerns
about the impact on our economy from those changes that are
being negotiated by Treasury.
The Chairman. Thank you, Senator Crapo.
Senator Stabenow?
Senator Stabenow. Well, good morning, Madam Secretary. We
are glad to have you with us. I would say, just on the issue of
the gas prices, after waiting for a long time to have enough
chips in this country to finally get my electric vehicle, I got
it and drove it from Michigan to here this last weekend and
went by every single gas station, and it didn't matter how high
it was. And so, I am looking forward to the opportunity for us
to move to vehicles that are not going to be dependent on the
whims of the oil companies and the international markets.
Madam Secretary, let me just back up a second because, when
President Biden came in, he really inherited a mess. And the
reality is that, even starting with the deficit, 30 percent of
the publicly held debt in the country was created during 4
years of President Trump, including the largest tax cut for
rich people and corporations.
And thank you for bringing that down. That deficit is now
coming down faster even than we would have hoped.
But there was no system for distributing vaccines. Children
were not in school. We did not have testing, let along home
testing. We did not have medicines. I mean, small businesses
and restaurants and theaters and everyone worried if we were
going to be able to save lives and get through this.
The good news is, we did. And a big piece of that was what
was done in the American Rescue Plan Act to make sure we had
vaccines and could help children get back in school, and help
our restaurants, and help people survive, and so on.
So, I want to just reiterate the fact that, based on all of
that effort, we have seen the U.S. add 8.7 million jobs since
President Biden took office, including 545,000 manufacturing
jobs, which I am particularly excited about. Business
investment is up 20 percent--more small business applications
in 2021 than in any previous year. That is the good news.
Here is the challenge that we know, and which we are all
talking about now. Despite all this great news, when you have a
global supply chain and we are not getting enough of those
chips for automobiles, and we have consolidation in the food
industry, and we have all these other issues, and people have
more savings, they want to buy things, but the things are not
there to buy. And that is due to supply chain breakdowns, and
that leads to inflation, which is where we are right now, which
is what we are all talking about, which is very real for
everyone.
The exact story is different in different parts of the
economy, but the bottom line is that people have more savings
to buy things and not enough things to buy. Prices go up, and
so here we are.
You did not create that. President Biden did not. We did
not. It was the result of what has happened in this global
economy, frankly, and I think we need to rectify that by
bringing jobs back home and making more things in America and
so on, which I appreciate the Biden administration doing.
So, could you just take a moment to speak a little bit more
about what you believe we need to be doing in Congress to help
bring those prices down? It is great political theater to just
point and say, ``Oh, prices are up,'' and my reaction is,
``Duh! They are up for everybody.'' The question is, what are
we going to do about it? And that is going to take bipartisan
support to get that done.
So, could you talk a little bit more about what we should
be doing to help bring those prices down?
Secretary Yellen. So let me say I think that bringing
inflation down should be our number one priority, and President
Biden, in an op-ed on inflation and in recent remarks, has
indicated that it is our top priority.
We do have to recognize that the Federal Reserve has an
important role to play, and they are committed to doing what it
takes to bring inflation down. And President Biden is strongly
supportive of the independence of the Fed and getting out of
the way and giving them the room to do what they need to do.
I think we can complement that by deficit reduction. But
beyond that, the President has done what we can to address
supply chain challenges. And as discussed with Senator Wyden,
Chair Wyden, I believe Congress, the President believes
Congress can do a lot to mitigate some of the most important
and burdensome costs that households face, whether it is that
they cannot find affordable housing, that prescription drug
prices are too high--and we can address that while also raising
revenue for the government. Whether it is high health-care
costs, or high energy costs, by making the investments in
renewables that are necessary to bring down utility bills and
shield us from geopolitical developments that provide shocks to
our economy, these are things that Congress can do. And in the
course of doing that, we will expand the supply side of our
economy because, while we know private investment is one
important investment we need to make to improve the economy's
potential, there are others. Infrastructure investment in
people and education and training, investment in child care and
early childhood education, and elder care would enable greater
labor force participation. All of that could help to bring down
inflation and lead to strong sustainable growth.
Senator Stabenow. Thank you.
The Chairman. Thank you, Senator Stabenow.
Our next three will be Senator Grassley, Senator Cantwell,
and Senator Portman. I believe Senator Grassley is coming back.
Senator Cantwell?
Senator Cantwell. Thank you. Thank you, Madam Secretary.
Thank you for your statement, particularly about inflation and
trying to tackle those issues.
I certainly believe that if we work together in a
bipartisan fashion now, there are things that we can do in all
those sectors that you mentioned. I think the information age
is giving us data and information, for example on PBMs, or on
transparency in oil markets, and various things.
But one thing I wanted to ask you specifically about is
this issue of a semiconductor shortage, the fact that we
basically now see a 40-percent increase in the price of used
cars. Our colleague here just said she is buying and getting
access to a new electric vehicle, but so many more Americans--
the price of everything has gone up. We have our trucking
industry saying that they cannot even build trucks because they
do not have the chips to put into the trucks.
So every aspect of our economy is now more expensive just
because shipping costs are going up. And so we are trying to
send a price signal in the competition/innovation bill to get
America's investments in semiconductors up to a level that will
show people that we are going to have a domestic supply, and
that we are going to be on the cutting edge of the next
generation of chips, while also dealing with the legacy
shortage that exists in automobiles.
The problem is that our colleagues here do not understand
the international competition and how fast they are moving to
make the same investments. How critical is it, do you think,
that we get this done in this work period, you know, to show--
otherwise, are we losing a much bigger race than just this
challenge of inflation?
Secretary Yellen. It is very important, I think, to pass
USICA and to make the investments in semiconductors that will
keep the United States in the lead in this critically important
industry, and to make sure we have the capacity to produce
advanced chips at home.
I think this is a national security issue, as well as an
economic issue. And I think USICA is a very important bill that
I would very much like to see pass. We found ourselves in an
almost unimaginable situation when the pandemic resulted in
such an explosion of demand for chips globally as people
switched increasingly to digital work in communications, that
our auto factories found themselves unable to get the chips.
And so, there you have something that has caused a
significant piece of the inflation we face that really results
from structural shifts induced by the pandemic, and
insufficient capacity at home to build semiconductors.
So, I think this a critically important investment.
Senator Cantwell. So just to be clear on that point, you
are saying the chip shortage has added to our inflation woes?
Secretary Yellen. Absolutely. I believe about a third of
U.S. inflation is new and used cars. And manufacturers have
been forced to actually cut production of cars when they are
facing absolutely record demand for those vehicles, and it is
all due to a shortage of semiconductors.
Senator Cantwell. Well, and since this market is so
strong--it gets a little confusing to people, but at $20
billion a pop to build a foundry, most companies do not have
$20 billion sitting around. And so, the international chase to
get that industry in those countries--I just do not know if you
think this is a seminal moment for us in this level of
investment. I just see what has transpired with us going down
in production over the last decade, and I now see how hungry
Europe is, and how hungry Asia is. How competitive is the
financing environment in other countries?
Secretary Yellen. Well, there have been subsidies in many
countries of semiconductor production, and certainly a
conscious drive in China and other places to boost
semiconductor production, and it has drifted away from the
United States. And I think we need to do more, and it is really
critical that we develop that capacity. And certainly, American
companies understand this and are looking to do it. But USICA
would make a difference to their ability to get that financing.
Senator Cantwell. Thank you.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Next would be Senator Cortez Masto. After her, Senator
Menendez. After him, Senator Toomey. After him, Senators
Carper, Lankford, Cardin, Daines, Brown, and Young.
Senator Cortez Masto?
Senator Cortez Masto. Thank you, Mr. Chairman. Madam
Secretary, thank you so much for always being so candid in
presenting today before the committee.
Let me start with affordable housing, because we are
lacking affordable housing in the State of Nevada and, quite
honestly, across the country. I do know that the State and
local fiscal relief funds that were provided in the American
Rescue Plan provided States with the ability to make historic
investments in desperately needed affordable housing in
communities across our country.
In Nevada, we expect to build and preserve at least 3,000
new affordable homes with these funds. It is very important
that the American Rescue Plan funds leverage the Nation's most
reliable and impactful affordable housing production
investment, which is the Low-Income Housing Tax Credit.
Here is my concern. I am concerned that in my State, and in
some of the States across the country, they are not able to use
the funds that were received through the State and local fiscal
relief funds to leverage those against the Low-Income Tax
Housing Credit.
So, my hope is that the administration, and particularly
the Treasury Department, will help us clarify to those States
that those funds can be used for that leverage. And I am just
curious about your thoughts on that process.
Secretary Yellen. Well, we are absolutely encouraging the
State and local relief funds to be used for affordable housing.
And actually, recently we published a fact sheet that explains
practices that we have found promising and highlights some of
the ways in which these funds are being used for this purpose.
But certainly we are strongly encouraging that these funds
be used to boost the affordable housing. And on the Low-Income
Housing Tax Credit, I know there has been an issue around
average income regulations. And that was something that
Congress intended to provide flexibility to entities that use
that credit. And it is our highest priority for our tax team to
make sure that those regulations captures that flexibility.
Senator Cortez Masto. Thank you.
I am hearing, just in my State, that by aligning the Low-
Income Housing Tax Credit with State and local fiscal relief
funds, that is the difference between building 3,000 units and
8,000 units in my State.
So, I have introduced the LIFELINE Act, and what this bill
really does is, it allows States and localities to loan the
State and local fiscal relief funds to the Low-Income Housing
Tax Credit projects. The loan authority is necessary because of
the obligation to spend all of the State and local fiscal
relief funds by 2026. That is my first priority, to pass that.
As you can see, there is a challenge in getting both sides,
Republicans and Democrats, onboard essential legislation to
lower costs for families, unfortunately. So, my next ask is
that I am hopeful that the Treasury Department clarifies this
in its final rule, and it allows those types of loans, whether
they are blended loans, or grants to nonprofits that provide
loans, just to clarify in your rules that those funds can be
used in that way. That would help us build these more
affordable homes in my State and across the country.
Secretary Yellen. I would be happy to work with you on
that, and I will make sure that my staff is in touch with yours
to make sure that we are addressing that.
Senator Cortez Masto. Thank you. I appreciate that.
Let me jump to the Social Security Administration. I
appreciated the recognition in the budget of the challenges
faced by many individuals in accessing the Social Security
Administration's services. Communities are still reeling from
the public health emergency and the economic impacts of the
pandemic, and in many cases the services and supports that the
Social Security Administration provides are key to helping
individuals recover.
Can you talk through the investments in the Social Security
Administration that you proposed in the budget? And how will
they help folks access their earned benefits when they need
them?
Secretary Yellen. I know that that is the purpose of those
investments. I will need to get back to you on the details.
Senator Cortez Masto. Please do. I was just in my home
State, and we were talking about the high cost we are seeing at
so many levels, and to the extent that we can work together to
lower costs at all levels for families, including those that
are relying on Social Security, will be beneficial not just in
Nevada, but across the country.
Madam Secretary, thank you again for being here.
The Chairman. I thank my colleague. I am very interested in
working with her on these housing issues that are so crucial.
Senator Toomey is next.
Senator Toomey. Thank you, Mr. Chairman. Madam Secretary,
welcome back to the committee.
I am going to talk a little bit about a subject on which
you and I disagree, which will not surprise you. But I think it
is important that we have a candid conversation about the tax
reform of 2017, and the danger that I associate with the
administration's attempts to really throw it out.
Let me just remind my colleagues. These are objective
facts. In the wake of the tax reform of 2017, say 2019, the
first year for which it was fully implemented, it was the best
economy of my lifetime. The lowest unemployment rate in 50
years. More job openings than people looking for jobs. Record
low poverty. Median household income at an all-time high.
Strong wage growth. And this is important: the wage growth was
faster than the rate of inflation. So American workers were
becoming more affluent. They were able to improve their
standard of living, contrary to today where the wage growth is
not keeping up with inflation, and so today's workers are
falling further and further behind under the current economic
circumstances.
But getting back to post-tax reform, corporate inversions
had stopped entirely. It was not that they slowed down. We have
not been able to identify a single corporate inversion since
our tax reform--which was designed in part to stop corporate
inversions--went into effect.
There was also a shift in the tax burden. Contrary to what
some of our colleagues like to suggest, the 2017 tax reform
shifted the tax burden even more to higher-income people. The
top 1 percent of wage earners paid a greater share of the total
tax burden as a result of the 2017 tax reform. The bottom 50
percent paid a lesser percentage. And today, the top 1 percent
makes about 20 percent of the income in America and pays about
40 percent of the taxes.
But what about Federal tax revenue? Oh, that surged. And
this year it looks like we are going to reach another record
high. The tax coming in so far this year is 22 percent higher
than last year, and last year was a record. For this year,
corporate tax revenue is on track to be at the highest level of
GDP since 2015.
So, the statistics are unbelievable. I do not know how you
could even conjure up a better economic outcome than what we
had right before the pandemic hit. Now you could suggest that,
oh, it is all a coincidence that the tax reform resulted in
exactly what some of us predicted and suggested might happen,
which is an acceleration of investment, strong economic growth,
repatriation of a huge amount of overseas money. That is pretty
improbable. The fact is, we had the best economy of my
lifetime, by far, and it was working best for low-income
Americans and ethnic minorities who historically have not had
as good an economic result as others.
And so, the Biden administration comes along and says,
``Let's look at all this data, and let's throw out the tax
reform.'' It is unbelievable! My understanding is that,
apparently, is still on the table, in part out of a concern
that if we do not do this two-pillar tax reform that I know you
have negotiated, Madam Secretary, we have what you characterize
as a ``race to the bottom,'' which to me is competition among
countries to have an attractive environment for investments.
Frankly, I think we should be looking to win that race, not
to prevent the race from taking place. But I understand that we
have this negotiation. What we have not seen is how this gets
implemented. So, two quick questions, and then I will let you
respond.
First, I am very concerned about the impact that the
proposal will have on American competitiveness. My
understanding is that the Treasury Department has run an
analysis, has data about the impact on American business if the
tax reform that you have proposed would go forward. So, I would
like to know when we can get access to that data. That is my
first point.
And the second is that, since Pillar One of your two-pillar
model requires modification of existing tax treaties, it seems
clear to me that has to come to the Senate for ratification. I
have not yet heard an agreement that that is in fact going to
happen, and in the absence of that, an explanation for why,
since the Constitution requires it, it should not.
And with that, I will yield to the Secretary.
Secretary Yellen. Just very quickly, with respect to access
to data, of course the data relating to Pillar Two is available
and that was included in the House-passed bill and scored by
JCT. So, I think you must be referring to Pillar One and the
impact that that would have.
And what I would say there is that it could go either way,
depending on the details which have not yet been decided in the
Pillar One negotiations. The impact on fiscal revenues will be
small. Pillar Two has a big impact. Pillar One will have a
small impact. We are a very large market economy. We will gain
revenue from our ability to tax foreign corporations that are
doing business in the United States where we consume those
services. We will lose some from revenue that taxing
authorities have reallocated to foreign countries' net. It
could be positive or negative depending on details that have
not yet been worked out, and that is why we have not provided
data. We will when those details are clear.
Senator Toomey. And the ratification process?
Secretary Yellen. And the ratification requires Congress's
approval. I think there is no doubt about it, but the form that
that needs to take is still to be determined.
Senator Toomey. Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Just so we are clear, one of the first things we stated at
the outset is, we have Senate Republicans now proposing to
increase taxes on 75 million middle-class families, around
$1,500 this year alone, and on nearly half of small business
owners.
Senator Carper?
Senator Carper. Thanks, Mr. Chairman.
Madam Secretary, welcome. So nice to see you. Thank you for
your service over the years.
I don't know what you were doing when you were 29 years
old. I was elected State Treasurer, and we had the worst credit
rating in the country, and we were dead last. I think we were
tied with Puerto Rico actually. We had no pension fund. We had
no cash management system. We had no cash. And I got to be
State Treasurer.
I have been a vocal advocate for a fair and well-
functioning tax system ever since that day, and I still am. One
way to achieve this goal is by making sure that the taxpayers
do not have to jump through hoops to file their taxes.
The IRS Free File program was established, as you know, for
this very purpose: to help low- and middle-income families file
their taxes easily and leave out unnecessary fees. However, the
program has not lived up to its potential, as you know. The
Free File program has faced a number of challenges that include
the withdrawal from the program of major providers, deceptive
marketing from providers, and a low participation rate among
eligible taxpayers.
A recent GAO report, one that I actually requested,
recommends that the IRS work with relevant stakeholders to
adopt additional options for free online filing of tax returns.
My question is this: what steps should we here in the
Congress and the IRS take to improve accessible and affordable
tax filing options for the American people?
Secretary Yellen. So let me say that I totally agree with
you that filing taxes can be costly, complicated, and time-
consuming for American families. And there is a study that
shows it takes 17 hours, on average, and costs about $230 to
complete a tax return. And it is very worthwhile, and we are
exploring options to reduce these burdens.
On top of that, I would like to add that what is also
important for American families is to be able to access
payments that they are entitled to, whether it is the EITC or
Child Tax Credits or Economic Impact Payments. That is another
way in which they interact with the IRS. And it is important
that we make tools available to make that easy and get those
payments to the families that are entitled to them.
But the fundamental problem we have here is that the IRS is
just tremendously under-resourced. I think it is miraculous
that----
Senator Carper. Say that again. That bears repeating. Just
say it again.
Secretary Yellen. The IRS is tremendously under-resourced.
It has fewer staff than it had, I believe, 40 years ago. And
our economy is growing in size. It is operating with technology
from the 1960s, using programming language that is no longer
taught in any school in the country.
And it does not have the resources it needs. And the
pandemic was a huge hit to it and left it with a huge backlog
of returns and information that had to be processed that is
really top priority.
We then asked them to get out three different Economic
Impact Payments, Child Tax Credit payments on a monthly basis,
and it is amazing that they were able to do it. So I think this
is important. We are looking at it.
I agree this is something that the IRS needs to do. But if
we want to ask it to do these things, given all the other
burdens, we really have to--I think it should be a very high
priority for Congress to give the IRS the resources it needs,
not to mention closing the tax gap.
Senator Carper. I am Tom Carper, and I approve this
message. [Laughter.]
Secretary Yellen. Thank you, Senator.
Senator Carper. My second question is short, Madam
Secretary. How can common-sense reforms to estate and gift
taxes make our tax code fairer and more fiscally responsible?
Secretary Yellen. I believe there are loopholes there that
should be closed. We put out a number of proposals related to
estate and gift taxation in the Green Book, and we are
exploring ideas where we believe that we can curtail some
techniques that are used that we can do under existing
authority. That is an area to be scrutinized.
Senator Carper. I am going to ask you to respond more fully
in writing. Thank you for that initial response to that. Thank
you for joining us today and for your work.
Secretary Yellen. Thank you.
The Chairman. Thank you, Senator Carper.
Senator Lankford is next.
Senator Lankford. Mr. Chairman, thank you.
Secretary Yellen, thanks for being here as well.
And this morning, I actually sent over a letter to you,
just because it is the 1-year anniversary of the ProPublica
release, actually, and the challenge we have is getting
information about taxpayer information and how it is kept
secure.
We have asked for just a hearing, just a briefing, just to
be able to sit down with you and your team and say, ``How is
taxpayer information being protected? What has changed in this
time period?''
We are not asking for the specific 6103 information. We are
not trying to get into the specifics of what is out there with
ProPublica; we know that there is an investigation. But at the
1-year anniversary, we just want a ``yes'' or ``no'' answer.
Can we get a briefing with you and with your team on how
taxpayer information is now being protected, and what has
changed?
Secretary Yellen. I will certainly ask my team about that
and have them get back to you, and we will try to arrange
something.
Let me just say, it is very high priority. Disclosure of
confidential and government information is illegal. It is
something we take very seriously. There are procedures and
controls in place----
Senator Lankford. We are just a year into it and have not
gotten the information on what has actually happened. So, we
have heard that, but we just don't know what is actually
happening behind the scenes. We just continue to hear and see
information leaked out over and over again. So we want to get
as much information as we can on it, and what is being done,
and how things have changed.
Secretary Yellen. Absolutely. I don't think that there is
information that is being leaked out over and over again, and
if there is, I am certainly not aware of it.
Senator Lankford. Thank you. We will follow up on that. We
would like that briefing time.
On the OECD, a question on this. This is a challenge for us
as we are just trying to keep the flow of information as well
of what is actually happening on it.
In this case--let me show you a map really quickly--in this
case, we have an American company. This American company has
done everything we have asked them to do based on tax policy.
Their jobs are here. Their intellectual property is here. Their
research and development is all being done here.
They have done all that according to our tax code that
Congress has passed to incentivize that. Now, all these
countries in the dark blue will have leverage over those
American companies that are following our tax law to be able to
determine how much they are going to now pay overseas.
So, if China or the UK gives a subsidy instead of actually
having R&D credits on it, then suddenly these American
companies following American law are now going to pay more. So
our concern on this OECD agreement that is happening is, it
seems to be structured to incentivize companies to move their
IP internationally, or to move their R&D internationally. That
would allow them to be able to balance out their tax portfolio.
Help me understand where I am wrong on this.
Secretary Yellen. I don't understand that. I mean, we are
the only country that imposes any minimum tax on the foreign
earnings of multinational corporations. It is currently at
10\1/2\ percent on a blended rather than a country-by-country
basis. No other country does this. And what this global deal is
going to do is, it will force every other country around the
world that signed up, 137 countries that have signed this
agreement, to impose a minimum tax on their corporations, on
their overseas earnings, of at least 15 percent.
Senator Lankford. Our understanding of this is that they
will impose that 15-percent minimum, and then they will
actually take out things like their subsidies, and our credits
that have been passed in law will not count on that, but the
subsidies will.
Secretary Yellen. Many of our credits will count on that.
Senator Lankford. But the subsidies won't. Yes.
Secretary Yellen. Well, it is structured so that direct
subsidies are not counted, whether we give them or they give
them. But on the tax side, it does count.
But we certainly would work with Congress to make sure that
the benefits that Congress intended, the business credits, are
structured so that they will be available.
Senator Lankford. So yes, that is reassuring to hear
because we have not had the sense of working with Congress
through this process. It seems to be a deal that is negotiated
everywhere else and is coming back to us last. Obviously,
according to the Constitution, revenue changes have to be done
through Congress.
Secretary Yellen. Yes.
Senator Lankford. And they have to be voted on here. There
seems to be an incentive to be able to move to something very
different. This is the same thing we are dealing with in the
foreign tax credit piece right now. The foreign tax credits,
the regulation was actually put out in January. A lot of
companies, including companies in my State in Oklahoma, are
really struggling to be able to understand that. We have had
folks from Treasury who have come in and said more guidance is
needed, but it seems to be the train is still moving and they
are still trying to figure out, only with an audit at some
future date, if they were following the rules or not on this
because the guidance has not actually come out on time.
So can you help me with the foreign tax credit piece to
know, is this going to be delayed? Or is it still going to be
implemented this year when there is not guidance but there has
been a change? And it has been a change that has been different
than what has happened for decades.
Secretary Yellen. Well, we have issued a regulation, but we
do understand that there are some issues that businesses have
around it. And we certainly wish to work with you to address
those.
Senator Lankford. Will it be delayed, the implementation,
until they get guidance?
The Chairman. The time of the gentleman has expired. Let's
get an answer to this.
Secretary Yellen. I do not think it will be delayed. We
will work to address issues with it.
The Chairman. I thank my colleague.
Senator Cassidy is next.
Senator Cassidy. Madam Chair, several things--Madam
Secretary, I'm sorry. Social Security is going insolvent. The
administration has not proposed anything to address the
insolvency. Is there going to be a plan coming forth from the
administration to address the Social Security insolvency, which
is, I think, 12 or 13 years away now, with all the implications
of further delay making it harder to address?
Secretary Yellen. Well, so we gained 1 year in terms of the
life of the Social Security Fund, how long it continues to fund
benefits. That was in the recent Social Security trustees
report.
Senator Cassidy. Yes, but if you take a 75-year scoring, we
have learned that there is going to be a $211-trillion--
trillion dollar--deficit over 75 years. So, saying that it is
going to be extended 1 to 2 years seems almost, you know,
silly. No offense.
Secretary Yellen. So, I do believe this is something--it is
certainly true that it is not sustainable on the 75-year basis,
and this is something that Congress and the administration
should address.
This is not news, I would say. We have known about this for
at least 30 years and have not taken steps to address it.
Senator Cassidy. So you agree it is important to take those
steps?
Secretary Yellen. I do believe it is something we should
do.
Senator Cassidy. Let me move on.
As regards inflation, one variable that we can potentially
impact is the price of oil and gas. Now, you have mentioned how
the international market--and there is some limit as to the
impact of what we do locally. But with that said, the
administration has proposed decreasing tax incentives for the
production of oil and gas.
Now, if you decrease tax incentives, you are going to have
less oil and gas produced. Now that is going to decrease supply
and contribute to that upward pressure. Does that make sense?
Secretary Yellen. Well, over the medium term, we absolutely
need to move to renewables----
Senator Cassidy. I am speaking about right now. If we
decrease the tax incentives to produce, that would decrease
supply. And if the administration is proposing to do that--
well, I will just make that point and then move on.
Indeed, if we are going to speak about--I have a quote
here--apparently one of the major problems with producing oil
and gas right now is the cost of oil field services. And here
is a quote from the CEO of Occidental. She says that, to
paraphrase, given how expensive drilling and oil field services
have gotten, it is almost value destruction if you try to
accelerate anything now.
Now, what would you think about increasing the tax
incentive to drill oil and gas, recognizing that the CEO of
Occidental says that the costs of oil field services are so
great it is value destruction to attempt to accelerate?
Secretary Yellen. Oil field prices are very high in part
because of--importantly, because of Russia's war on Ukraine,
and I believe the incentives are certainly there to boost
production, and that is something we need in the short run----
Senator Cassidy. So, if we could make the case--and I don't
mean to be rude, I'm sorry--if we could make the case that
increasing the incentive, increasing the tax credit for 3 to 5
years to offset the increased cost of oil field services and
increase production, would that be something that we should
entertain?
Secretary Yellen. Well, I think it is profitable like it
is. Prices have gone up a lot, and that helps to offset those
costs and helps oil companies cover them. And so the price
system is working and provides incentives.
Senator Cassidy. What we are trying to do is lower the
cost--let me just move on.
We are in a situation right now as regards Russia and the
price of oil in which, because of the restrictions on
purchasing Russian oil, the oil profits have increased. So they
are selling less but at a higher price. To say one more time,
Russia now makes more money from oil and gas sales than it did
before we began to apply sanctions.
Now, the Europeans have considered coming together as a
buying bloc to limit the price that we will pay--monopsony
power, if you will. We will pay the price of production, but no
more. And so therefore, we don't pay the higher price at the
pump, and they don't get the increased revenue.
Is the administration participating in this? Are we taking
the lead in this? Is this something that we would entertain?
Secretary Yellen. Absolutely. Our objective is----
Senator Cassidy. Absolutely we are involved in discussions
to come up with a buyers bloc where it will not be more than X
amount?
Secretary Yellen. Absolutely.
Senator Cassidy. Can you give a kind of assessment of where
those negotiations are?
Secretary Yellen. Extremely active. I think what we want to
do is keep Russian oil flowing into the global markets to hold
down global prices and try to avoid a spike that causes a
world-wide recession and drives up oil prices. But absolutely,
the objective is to limit the revenue going to Russia, and the
kind of strategy you suggest--there are different ways
technically of accomplishing that, but it is certainly a
desirable strategy.
The Chairman. The time of the gentleman has expired. I
thank my colleague.
Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman. Madam Secretary,
thank you for your service.
I first want to just concur with the comments of our chair,
Senator Wyden, and Senator Carper, in regards to needing
predictable, sustainable funding for the Internal Revenue
Service. The budget that the administration has supported does
that, but we need staying power here. I have been working with
Senator Portman since we were both in the House of
Representatives, trying to modernize the IRS through resources
for the level of service, for the fairness in enforcement, and
I just want to underscore that the commitment needs to be there
for a sustained period of time so the IRS can provide the level
of service that Americans expect, and provide the fairness in
our tax code.
I want to ask a question in regards to affordable housing.
Over this work period, I was on the Eastern Shore of Maryland
in Cambridge looking at some of the challenges we have there
for affordable housing. That is a rural area. We have been to
urban centers, rural areas, and we have affordable housing
issues.
And there are several provisions in the administration's
budget that I think are important that have bipartisan support.
We can talk about the historic tax credits which were used in
regards to Cambridge. We can talk about the New Markets Tax
Credits. Senator Blunt and I have introduced legislation that
would extend and make permanent the New Markets Tax Credits.
Low-income tax credits have been an issue that we have had
bipartisan support for, but I want to concentrate, if I might,
on the Neighborhood Homes Investment Act that Senator Portman
and I have introduced that is in the administration's budget
that deals with the appraisal gap.
There are neighborhoods in which you cannot refurbish homes
because the market price makes it impossible to put that
investment in. And the Neighborhood Homes Investment Act deals
with that appraisal gap by providing a credit so that we can
have a larger stock of affordable housing in communities that
today are being neglected.
So, can you just share with the committee the priority of
this administration in regards to affordable housing, and
specifically the Neighborhood Homes Investment Act?
Secretary Yellen. Well, we are certainly supportive of
that. Affordable housing, I think, is one of the most serious
and growing challenges we face in this country. And the
administration is trying to think of everything we really can
to promote the building of affordable housing: the Low-Income
Housing Tax Credit, the New Markets initiative, and other
things the administration can do internally to try to promote
affordable housing.
Senator Cardin. I would just underscore, as we talk about
American families struggling today because of increasing
pricing, housing is one of the key areas. We know we have a
shortage.
So I just hope that you would put a real priority on it. We
have bipartisan support. We need not only your support, but
your active engagement in order to get this to the finish line.
We have strong support on this committee, and I hope that we
will see it in one of the tax bills that make it to the
President's desk for signature.
I want to talk about another tax issue that is moving in
Congress. The House has taken action on retirement security, a
pretty comprehensive bill. Our chairman and ranking member,
Chairman Wyden and Ranking Member Crapo, are bringing all of us
together in regards to retirement security. I have worked with
Senator Portman for many years on these issues.
We are looking at how we can get people who have saved too
little in the past adequate incentives to save, and help for
small businesses to create saving opportunities for their
employees to provide more certainty and flexibility for
Americans in their retirement years. All of those are areas
that I think are not controversial but bipartisan.
But once again, if we are going to be able to have that
three-legged stool for retirement security--Social Security,
private savings, and retirement--we need to strengthen our
retirement security tax laws. We need your push here to get to
the finish line, because there are a lot of stakeholders, a lot
of interest groups, and we have to come together in a
relatively short period of time in order to get a bill passed.
Is the administration willing to help us get a retirement
security bill to the finish line?
Secretary Yellen. We will certainly look forward to working
with you on that. Our staffs can talk to one another about what
is needed, and we will be glad to work with you on that.
Senator Cardin. Well, I appreciate that. We are going to
need some priorities here from the administration to help us.
There are different views, and we have to reconcile different
committees here in the House and the Senate. I know there is a
lot on your plate, but I would urge you to give this a high
priority.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Cardin. And Senator Crapo
and I are going to give the retirement bill a very high
priority. Good work.
Senator Portman is next.
Senator Portman. Thank you, Mr. Chairman, and thank you for
your focus on the retirement policy front, as well as Ranking
Member Crapo, and thanks to Senator Cardin. Thank you for
asking the question, and I appreciate your willingness to
continue to provide technical assistance to us to get through
this. This is one of the great bipartisan opportunities we have
that can actually help the people we represent at a time when
people's savings are under more and more stress. During COVID,
a lot of people took money out of their savings. This will help
them save for their own retirement, and it deals with really
the four or five concerns that all of us have raised with
regard to the retirement system. So, thank you for working with
us on that. And thank you, Senator Cardin, for raising it.
On the issue of foreign tax credits, I am very concerned
with the new regulations, and particularly the lack of comment
that went into the final draft of that. It is a pretty simple
issue to me, because countries all around the world provide
foreign tax credits, so there is no double taxation. So, if a
U.S. company pays taxes overseas, you do not want to double up
and have them pay taxes here, because we want more U.S.
companies to do business overseas.
I will give you an example. In my home town of Cincinnati,
Procter & Gamble has over 10,000 employees; 40 percent of those
workers support global sales, international sales outside the
United States. So this is great for us. A lot of those are
service jobs, back-office jobs--high-paying jobs by the way--
white-collar jobs that help to strengthen our entire economy.
This happens all over the country.
And so my concern is that the interest in avoiding double
taxation is compromised when you look at these new regulations.
Post TCJA, which was 2017, we saw that if businesses were able
to compete and workers were able to compete, they did pretty
well. In fact, we had a lot more money come back into this
country because of that. And we stopped it altogether, and that
was something all of us were wringing our hands about and being
very concerned about companies literally becoming foreign
companies to avoid the tax laws here.
We stopped them, shut them down. So I think what you are
doing right now with these new regulations is pointing us in
the wrong direction and back to where we were not competitive.
So I appreciate you have indicated you want to make changes
to the cost recovery and royalty withholding portion of the
rules, but I also understand that you have indicated you will
not be amending the rules dealing with the ability to take
credits with regard to recording taxes on services. And again,
that is a lot of what we do in this country.
So my question to you would be, one, do you agree with me
that we want to have global companies here in America that are
expanding jobs here, and therefore taking advantage of what the
global community does, which is these tax credits, including
for services? Are we just on a different philosophical plane
here? So that would be helpful to know.
And second, would you be willing to take a look at these
regulations as they relate to services in particular, to help
protect jobs here, and look at further modifications for
reporting taxes on services?
Secretary Yellen. Let me say first, of course we will look
at any concrete suggestions that you have, and work with you.
We understand that there are concerns about these regulations,
and we certainly will revisit them and look at comments.
But philosophically, what we said is, we think that these
regulations are very important to protect interests critical to
the United States. And the fundamental principle is that we
should allow a credit for foreign taxes only where the foreign
taxing jurisdiction has the primary right to tax the income.
And what we are seeing around the world are new kinds of
taxes, like digital service taxes, where foreign countries are
essentially trying to expand their taxing jurisdiction through
extraterritorial-type taxes. And these are taxes that should
not be entitled to take the foreign tax credit. And if we grant
it, we are just encouraging countries to impose taxes that we
think--in the case of digital service taxes--will be found to
be unfair trade practices----
Senator Portman. Madam Secretary, let me interrupt just for
a second, because I have limited time. I don't disagree with
you on the digital services taxes. That is not the issue here,
and I understand your position on that, and I tend to share
your position that American companies have been unfairly
targeted with respect to digital services taxes. I am talking
about withholding taxes with regard to services.
And I think it is important that we have final regulations
that have received notice and comment from American workers,
from American companies, because it is very different than the
initial regulations in that regard. So that is the issue I am
focused on today.
Secretary Yellen. We certainly will work with you on that,
and we are reaching out and understanding what the concerns are
about these rules.
Senator Portman. One idea that has been suggested is a 1-
year delay to give us a chance to actually get the notice and
comment and understand it better, and I hope you would consider
that.
The Chairman. The time of my friend has expired. Did you
want to respond to that, Secretary Yellen?
Secretary Yellen. I was just going to say that if there are
changes, they could be applied on a retroactive basis.
The Chairman. Very good. Thank you.
Senator Daines is next, and then I very much hope we can
get to Senator Casey, who has been so patient. And we will have
to see who else is coming.
Senator Daines?
Senator Daines. Mr. Chairman, thank you. Secretary Yellen,
thanks for being here today.
I do want to talk about inflation, because that is what
everybody is talking about back home. The chairman mentioned
that in his opening remarks. It is truly remarkable what is
happening with the inflationary hurricane-force winds that are
blowing today.
It is in the minds of the people that I serve, everyday
Montanans. Every day, they see it at the gas pump. They see it
at the grocery store. They see it in fertilizer prices for our
farmers.
The Biden administration has attributed, though, this
broad-based rapid inflation that began last year to Putin,
attributed it to greed, attributed it to exploitation, to
profiteering. But the one thing we have not heard the
administration say is that there may have been a contributing
factor with the $1.9-trillion spending package that was passed
in March of 2021 by this Congress while we were calling out the
concerns of the inflationary pressures that it would create in
the economy. Even former Obama administration officials--and we
saw that with Larry Summers, who was the Director of the
National Economic Council under Obama, who was also President
Clinton's Secretary of Treasury. He warned this would spark
inflation. He was exactly right.
In fact, in a recent Federal Reserve Bank of San Francisco
research paper titled, quote, ``Why Is U.S. Inflation Higher
Than in Other Countries?'', analysts confirmed the strong
connection between heightened U.S. inflation and the government
spending that was occurring earlier last year.
A large portion of that spending was in that $1.9-trillion
package. By the way, there was over a trillion dollars in
unspent COVID dollars coming in December of 2020. We warned
everybody up here, you can't spend another $1.9 trillion,
because it will have inflationary effects. I have not heard
this administration say anything about that, but I do want to
allow you to have the opportunity to set that record straight.
My question is, Madam Secretary, do you agree with the San
Francisco Fed that the nearly $2-trillion March spending
package was a significant causal factor in the high,
increasingly broad-based inflation that we observed this past
year?
Secretary Yellen. Senator, we are seeing high inflation in
almost all developed countries around the world. And they have
very different fiscal policies. So it can't be the case that
the bulk of the inflation that we are experiencing reflects the
impact of the ARP.
Senator Daines. So was it a causal factor? Would you say
that $2 trillion, when we had a trillion dollars unspent--doing
the quick math here, it is about $3 trillion that was put into
this economy from December through March of 2021.
Secretary Yellen. I guess the way I see it is, when
President Biden was inaugurated, he inherited an economy with
very high unemployment, and the Congressional Budget Office's
forecasters were envisioning that this could last for a very
long time. And we had to address the possibility that this
could be a downturn that would match the Great Recession.
And so, in designing a policy, there are various risks that
need to be taken into account. Of course inflation was one of
them. But the overwhelming risk was that Americans would be
scarred by a deep and long recession, and that they would be in
over their heads and not be able to feed their families----
Senator Daines. Right, well I respectfully--I mean, if
there was a forecaster who was worried about the high
unemployment rates, that forecast was, I think, massively off,
and we are seeing now the biggest challenge of course is just
families cannot afford to buy food and fuel.
Secretary Yellen. Well, inflation is the number one issue--
there is no question. I don't disagree.
Senator Daines. I want to talk about the OECD for a moment
here and China's compliance. We have seen China's recent
history of noncompliance with international agreements. I am
concerned that China is not going to play by the rules with
this agreement. Whether they will ever play by the rules
becomes a question.
Here is the question: what makes you confident that China
will not simply stonewall efforts under the OECD agreement to
determine whether Chinese companies are in compliance? And this
gets back to the SEC issues and so forth.
Secretary Yellen. So China agreed, was one of 137 countries
that agreed to comply with these rules, and we expect it to do
so. But if it fails to do so, this agreement contains an
enforcement mechanism that will allow the United States, or any
other country that has adopted the global minimum tax, to
impose taxes on China's companies that would be the same as if
China had complied.
So there is a tough enforcement mechanism in the deal, and
if China does not comply, then the U.S. and other countries
where Chinese firms do business would be allowed to collect the
taxes on those Chinese firms on their business outside China,
that China hypothetically refuses to collect itself.
The Chairman. The time of the gentleman has expired.
Senator Grassley, you are next. I was hoping we could get
Senator Grassley and Senator Casey in, but we have had a number
of colleagues coming in.
Let me ask my colleague from Indiana, have you voted
already?
Senator Young. I have not, Mr. Chairman.
Senator Grassley. I have not, either.
The Chairman. All right; we will go with Senator Grassley,
and then we will go back to the regular order.
Senator Grassley. I cannot remember that you have said
anything about corporate greed being a cause of inflation, but
several members of your political party have. And yet we have
mainstream Democratic economists who reject the greed theory.
Jason Furman called it a side show. Larry Summers said it was
diversionary. Benjamin Page said it was a red herring. And
Catherine Rampell, for The Washington Post, referred to it as
an inflation conspiracy theory.
What is your opinion? Does corporate greed explain the
broad-based price increases consumers are currently facing?
Secretary Yellen. Well, I guess I see the bulk of inflation
as reflecting demand and supply factors. And on the supply
side, we have had huge supply chain issues due to the pandemic,
and shifts in the pattern of consumption away from services and
toward goods.
We have had enormous increases in food and energy prices,
partly reflecting Russia's War on Ukraine, and----
Senator Grassley. I think you are answering the question in
a way that I am glad you answered it, because I think that
rejects--your answer rejects the corporate greed argument that
we have been hearing.
Next question. My concern with the current focus on so-
called corporate greed is that it risks taking us down the
failed roads of the 1970s where we had price controls and
windfall profit taxes. These policies led to rampant shortages,
gas lines around the block. Do you agree that neither price
controls nor windfall profit taxes are viable solutions to
inflation and would have serious negative consequences?
Secretary Yellen. Well, I do believe in a strong antitrust
policy, and that is something that has been a priority of the
Biden administration. Having active competition in markets, I
think, is critical to innovation and to consumer well-being.
And so enforcing a strong antitrust policy, I think, is
important.
But with respect to the broader inflationary trends, the
Fed has to play a critical role. I think deficit reduction
deserves a complementary role. And we have discussed earlier in
this hearing ways in which Congress can bring down many of the
costs, possibly not on food and energy, but costs that are
really burdening American households, whether it is
prescription drugs, lack of affordable housing----
Senator Grassley. I think I take your answer as, with all
the reasons you have given, that you are not advocating or
thinking that price controls or windfall profit taxes would
have anything to do with fighting inflation.
I am going to yield back my time because I have to go over
and vote. I will put some questions in for the record.
The Chairman. I am going to say to my colleagues, just so
we are clear for the record, the Clean Energy for America Act,
passed in this committee, according to independent analysts
will save families $500.
Okay, let's see. Next we have, in order of appearance,
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Madam Secretary, our country is suffering from a mass
shooting epidemic. This year alone there have been more mass
shootings than days in the year. Twenty-two schools have come
under gunfire already this year, including Robb Elementary
School in Uvalde, TX, where 19 children were killed in cold
blood in their classroom, along with two teachers, with an
assault rifle.
According to The Washington Post, more than 311,000
children at 331 schools have experienced gun violence at school
since the 1999 Columbine shooting. After decades of Republican
obstruction to Democratic efforts to address this epidemic of
school shootings, we are now learning the long-term cost of
this trauma.
Researchers at Northwestern University found that students
who are survivors of gun violence at school are less likely to
graduate high school, and they are less likely to attend and/or
graduate from college. These survivors are also less likely to
be employed as adults than their peers. And if they are
employed, they are likely to earn less over the course of their
lives.
So, Secretary Yellen, what is the economic costs of
allowing the trauma of unabated gun violence in our communities
and schools to continue unaddressed?
Secretary Yellen. Senator Menendez, let me first say I am
also horrified by gun violence, what we have seen in recent
weeks and over many years, and I do hope that the Congress will
take long-overdue action and put in place common-sense measures
to reduce gun violence.
I am not an expert at all on the psychological impact of
gun violence on student learning, or human capital
accumulation--and I am not knowledgeable of the study that you
mentioned--but I do know that there is a large literature in
economics that documents that events that take place in early
life, in childhood, can have a lifelong impact on life
outcomes, on labor market outcomes, on psychological well-
being.
And so it only stands to reason that the threat of violence
at schools keeps our kids from learning.
Senator Menendez. So let me just ask you from an economic
standpoint. I know you are not a psychologist, but if the
Northwestern University study found that students who are
survivors of gun violence are less likely to graduate high
school, less likely to graduate from college, and more likely
to earn less over the course of their lives, doesn't that have
an economic impact?
Secretary Yellen. Of course, it has a negative impact on
these individuals, and on our economy. And I don't know what
the aggregate size of that is, but it certainly has a negative
impact.
Senator Menendez. Let me ask you something on a different
topic. The Washington Post reported 2 weeks ago that the
administration was considering canceling $10,000 of Federal
student loan debt for borrowers with incomes under $150,000.
The same article stated that, quote, ``It was unclear whether
the administration will simultaneously require interest on
payments to resume at the end of August when the current pause
is scheduled to lapse.''
The Consumer Financial Protection Bureau issued a report in
April of this year finding that 15 million borrowers, or 60
percent of all borrowers that have had their loans on pause
since March 2020, may have difficulty resuming their student
loan payments when the pause is over.
Are you concerned about the economic impact on borrowers if
we turn student loan payments on prematurely?
Secretary Yellen. Well, this is something that the
administration is weighing to see what the right policies are
here. And we are in the middle of deliberations on it. It is a
very important topic. Student debt has----
Senator Menendez. If people are called upon to pay, and
cannot, and default, that has a real consequence. As well as in
their lives, it has a real consequence to our whole world
economy. That is why we have been urging the President to
seriously consider loan forgiveness.
Finally, a study published by the Washington Center for
Equitable Growth found that over 118 million homeowners across
the United States, Black and Hispanic homeowners, face an
average 10- to 13-percent higher property tax burden when
compared to similarly situated White homeowners.
Would you agree that our Federal SALT deduction is an
important tool to reduce the effects of regressive tax policy
through property tax relief?
Secretary Yellen. I am not aware of that study. I will have
a look at it. That's something I need to look into, Senator.
Senator Menendez. On a broader proposition, if I give
people property tax relief, and I have a disproportionate
number of the universe of property tax owners who ultimately
face a greater consequence of higher burdens, then I assume
that helping them with that burden gives the type of relief
that enures to the benefit not only of those families, but to
communities as a whole.
Secretary Yellen. That certainly seems logical.
The Chairman. The time of the gentleman has expired.
I do not know what this does to the Brown-Casey friendship,
but Senator Brown is next. Senator Casey has been so patient.
Senator Brown?
Senator Brown. He is a patient man. So thank you.
One quick reference to Senator Grassley's comments about
corporate greed. We know that, while the Secretary is not
saying that it is the main driver of inflation, we know that a
number of American industries--oil, pharmaceuticals, shipping
companies, and others--have used the pandemic and used the war
of Russia to raise prices, and we have seen gargantuan profits
from a number of those industries, not by accident. So we know
that.
Let me move to one of our favorite topics, Madam Secretary,
that is, the Child Tax Credit and the Earned Income Tax Credit,
the work you did. Again, I compliment you every time I am in a
public forum, what you and Commissioner Rettig did with
Chairman Wyden's involvement to get the IRS Advance CTC
payments ready to go in just 3 months. I sit next to--on the
floor, next to Senator Casey. We talked about the excitement of
that bill passing in March of 2021. By July, those checks were
going out to the families of 60 million children.
We should celebrate that perhaps more than we did. We know
it slashed hunger rates by one-third, cut child poverty by 40
percent. That is why I am fighting, alongside Chairman Wyden
and Senator Bennet and others, to make sure this gets extended,
because it is so, so important for our country.
Tell us, in your view--some have criticized the Child Tax
Credit for all kinds of things. Would extending the Child Tax
Credit to families--they will say CTC is a primary driver of
inflation. Comment on that. And then answer the question, if
you would, would extending the expansion help families keep up
with rising costs?
Secretary Yellen. Well absolutely, of course it would. You
know, the aid that was provided through the Child Tax Credit
during the pandemic, as you mentioned, did reduce poverty by
almost a half. And all the evidence we have suggests that the
CTC reduced inequality.
It did increase demand somewhat. U.S. food consumption in
2021 was above the pre-pandemic level. But what that means is
that families were using the additional resources that they got
from the CTC to feed their children.
Did it have some marginal impact on food prices? Possibly.
But what is important is that fewer kids went hungry. And this
is just not a significant factor, the Child Tax Credit, in
impacting inflation. There are a lot of things driving
inflation. We have had multiple COVID variants when we early on
expected the pandemic would ease and we would get back to life
as normal.
We have had ongoing supply bottlenecks. There are COVID-
related shutdowns all around the world, including China. On
food prices, Russia's invasion of Ukraine is having a dramatic
impact on food prices that has utterly nothing to do with the
Child Tax Credit. It was a relatively small expenditure. It was
spent out over the full year of 2021, and it resulted in a
dramatic reduction in childhood poverty and financial
insecurity for American families, and it contributed literally
nothing to inflation.
Senator Brown. Thank you. It is hard to call it anything
but an unqualified success, showing that government can do the
right thing and did do the right thing quickly and efficiently.
Let me shift briefly in my last minute or so, Mr. Chairman,
to the international tax. A year ago I teamed up with the
chairman and with Senator Warner on an international tax
framework that would put Americans first. It would get rid of
incentives in the tax code that reward companies for moving
overseas and ensure that multinational companies paid their
fair share.
You did a very good job rallying the rest of the world
around a plan that would stop this global race to the bottom
and put workers first. I commend you and your very apt team on
that.
Why is it important for Congress to take action this year
on the international tax issue? Why would American workers be
worse off if the rest of the world moved forward and the U.S.
was left out?
Secretary Yellen. Well, I think that this is an extremely
important initiative. As one of the leading economies in the
globe, and given that it is an initiative that we spearheaded,
I believe that we should do it. I think we need the revenues.
It will raise considerable revenues.
I think deficit reduction is important, but we also need
revenues to spend on a wide array of programs, whether it is
affordable housing, or making health insurance more affordable,
energy investments that will bring down utility bills over
time. We need the revenue to support these investments, and to
support investments in people, and making our economy more
productive by lowering the burdens that households face.
Senator Brown. Thank you, Mr. Chairman; thank you.
The Chairman. Thank you, Senator Brown. Thank you,
particularly for Senator Warner and me, for leading this
effort. I thank you for it.
Senator Casey?
Senator Casey. Mr. Chairman, thanks very much.
I want to start, Secretary Yellen, by thanking you for your
enduring commitment to public service, yet again taking on a
tough job, and we are grateful for that, and your presence here
today, and the work you have done.
I want to thank the chairman and Senator Brown as well for
the work they did to make it possible for us to have the Child
Tax Credit and the enhanced version of that in place. In my
home State of Pennsylvania, 2.2 million families benefited from
that reduction in poverty. And that reduction occurred as much
in rural areas as it did in urban areas. So we are grateful for
that.
I want to talk to you about workers and ask one or two
questions about the tax code and workers. When you compare what
the tax code has done as it relates most recently to workers
compared to corporations, we know in 2017 that the corporate
rate went way down from 35 to 21 percent. That 14-point drop is
about $1.4 trillion over 10 years.
But what is not talked about a lot is what workers lost in
that tax bill. They lost their ability to deduct moving
expenses when a job forces them to relocate. They also lost, if
they were a member of a union, the deduction for the cost of
their union dues. Workers cannot deduct the cost of their union
dues, but corporations are still permitted to deduct the cost
of running anti-union campaigns. This is an insult to American
workers, and should be an insult to every American. But it is
also an insult to, and I think in direct contravention of, the
1935 National Labor Relations Act.
Earlier this year, the President's Task Force on Worker
Organizing and Empowerment spoke to these issues. I have two
bills. One bill is to restore the tax deduction, but I also
have another bill to crack down on union busting.
Madam Secretary, I would ask you to respond to this
question: do you agree that we need to restore and improve the
union dues tax deduction that the 2017 tax bill took away, and
repeal the taxpayer subsidization of the anti-union campaigns
by corporations?
Secretary Yellen. I do. And let me say that we strongly
support the work that the Worker Empowerment Task Force is
doing. We look forward to working with you and other members of
Congress to develop legislative provisions in support of that
mission.
Secretary Casey. Thanks very much.
The last question I have is about the Code, again. In 2017,
corporations had their rates cut by that 14 percent, as I
mentioned. Business owners also got a 20-percent write-off on
their personal taxes, but that same cut was not available to
their workers.
The IRS just reported that by 2017, it had all but stopped
auditing the taxes of wealthy private business owners. Less
than .02 percent of pass-through businesses were audited in
2017. So, while they were getting huge tax cuts, no one was
checking to see if they were paying the taxes that they already
owe.
Yet we know that the EITC, the Earned Income Tax Credit,
recipients were five times more likely to be audited than the
pass-through business owners. It is hard to comprehend that.
So, people making $40,000 or less were five times more likely
to be audited.
Madam Secretary, can you speak to the steps the
administration has taken to make sure that wealthy business
owners pay their fair share in taxes?
Secretary Yellen. It is an appalling set of statistics,
Senator, that you cite there. We have an enormous tax gap.
Workers who receive W-2 income pay what is owned. The error
rates are absolutely tiny. And most of the tax gap has to do
with high-income taxpayers, including those who benefit from
pass-throughs that have opaque sources of income we know less
about.
And the resources of the IRS have been cut to the point
where they have largely cut back on the complicated audits, the
ones that are harder, of high-income taxpayers. And the fact
that such a large share of those audits are for the EITC is
very unfair.
I strongly urge Congress to approve the $80 billion that we
have requested for the IRS to be able to make sure that people
are paying the taxes that are due. And it is very unfair to
workers in low-income households the way things work now.
Senator Casey. Thank you, Secretary Yellen.
The Chairman. Senator Casey, you and the Secretary have
just given a little teach-in about this double standard in
America with respect to audits, and it is time to change it,
because everybody ought to be held accountable, and it has got
to be done in a fair way. And the point you have made, and the
Secretary has made, is that that is not being done today at the
expense of people with modest means.
Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. Thank you for
holding the hearing and giving me the chance to ask questions.
Secretary Yellen, thank you for your service and for being here
today.
Speaking of horrible statistics, this country is 38th out
of 41 industrialized countries in the world in terms of the
scale of our childhood poverty. The poorest people living in
the United States are our children. And for one brief, shining
moment for 6 months, thanks to your efforts and the efforts of
your employees at Treasury, we expanded the Child Tax Credit,
based on the bill that I wrote with Senator Brown, that cut
childhood poverty in this country almost in half, benefited 90
percent of the kids in this country, and reduced hunger in the
United States by 25 percent.
It is hard to think of anything, Mr. Chairman, that we have
done here in generations that has made more of a difference for
working families. And, tragically, we let it expire.
Now there were people on the front end of this who said
that this is a terrible idea. It is going to disincentivize
people from working; that people are going to abuse the money
for all kinds of illicit purposes.
I can tell you, Madam Secretary, people in Colorado spent
the money on their kids. And the list is long, from school
supplies, to lessons on instruments, to back-to-school
clothing. But the one thing that everybody has in common, when
I asked them what their experience was with the Child Tax
Credit, it is the amount of stress that it relieved from their
family. Because after all, people in Colorado live in the same
economy that the entire country lives in. It is an economy that
for 50 years had worked really well for the top 10 percent of
Americans, and has not worked for anybody else.
Washington's response over that period of time? It has
actually been to make worse our income inequality by cutting
taxes to the tune of about $8 trillion since 2001. Almost all
who benefited from that were among the wealthiest people in the
country. It made our deficits worse. It made our income
inequality worse. It is staggering that that is what we would
do.
And finally, finally, we did something for working people
with the enhanced Child Tax Credit and the enhanced Earned
Income Tax Credit. And at the end of the year, we turned our
backs on the poor children in America who benefited from this,
the 90 percent of kids who had the benefit of this.
I have been here year after year after year, Madam
Secretary, at midnight on New Year's Eve, or on Christmas Eve,
when we did not have any trouble extending tax cuts for the
wealthiest people in this country. We did not have any trouble
extending tax cuts for the biggest corporations in America. But
when we had actually lifted kids out of poverty, when all the
studies that I have seen--and this is what I am going to ask
you about, Madam Secretary--all the studies that I have seen
have demonstrated that the tax credit worked as it was intended
and did not disincentivize anybody from working, we cut it off,
at a time of rising inflation.
Families were getting $450 on average a month, and my
understanding is that inflation has caused about $300 a month
of additional cost for families. That was more than covered by
the tax credit.
So in the last minute and a half, Madam Secretary, let me
say, first of all, how grateful I am for your effort and for
the IRS's effort, and for the employees who work for you, the
heroic effort that they put in place to build a system to
demonstrate that we do not have to accept these rates of
childhood poverty as a permanent feature of our economy, or a
permanent feature of our democracy. And that was thanks to the
work that your folks did.
So I would love to hear your reflections as an economist
and a policymaker on the effects of the expanded monthly Child
Tax Credit on children and families, and what is your sort of
general reaction to all of this?
Secretary Yellen. Senator, you have spoken eloquently about
the benefits of the Child Tax Credit. I completely agree with
your comments. It cut childhood poverty dramatically. It
enabled families to get a little bit of breathing room, and to
help their kids afford nutritious food and clothing and back-
to-school supplies, and it really played a critical role. I
think you noted that the President has repeatedly said that he
strongly supports extension. We would love to see Congress
enact that. It has made a huge difference to inequality. It was
a very important initiative. I feel very proud. I appreciate
your comments. I feel very proud of the work that Treasury, and
particularly the IRS, was able to do to get this money out, and
to do everything we possibly could to ensure that non-filers,
all the many households who were not required to file tax
returns, to make sure that they received the credit as well.
I would love to see--and we have been talking about
investments in the IRS. One thing that investments in the IRS
would do is make sure the IRS has the modern tools it needs
when we have tax credits like that, to make sure they go to the
families that deserve it, whether they file taxes or not.
Senator Bennet. Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
The Secretary has a hard stop of 12:45. I think we are in
good shape to achieve that.
Next in line will be Senator Warren. And I am going to run
and vote and come back. And if Senator Hassan could chair in my
absence, that would be great, and I think we will all be able
to get to the second vote eventually as well.
Senator Warren, you are recognized.
Senator Warren. Thank you, Mr. Chairman, and thank you for
being with us today, Madam Secretary.
Today's hearing focuses on the Treasury Department's
budget. I want to talk for just a minute about money for the
IRS. Thanks to a one-two punch from Republican budget cuts, and
lobbying from corporations and rich people who do not want to
be audited, the IRS today is stuck with 1970s computers and
staffing levels, unable to do its job and unable to audit
wealthy tax cheats.
That underfunding also causes honest, hardworking Americans
a lot of grief. According to the IRS, the average American
spends about 13 hours and $240 every year just to file their
taxes--13 hours, $240. And sure, some people have complicated
taxes that take time, but maybe about half of Americans' taxes
could be as easy as looking at a form the IRS has already
filled out, showing your W-2 and 1099 income, and using the
standard deduction and common tax credits to calculate how much
you owe, or how big your refund will be. If you do not agree,
check ``no,'' and fill out your own form. If you do agree,
check ``yes,'' and you are done. Easy peasy.
But the IRS does not have that kind of easy peasy program.
Instead, years ago the IRS cut a deal to send taxpayers to
companies like Intuit and H&R Block to figure out what they
owe. And in return these companies were supposed to make free
tax filings for 70 percent of American taxpayers through the
Free File program.
Secretary Yellen, what percentage of taxpayers actually use
Free File right now?
Secretary Yellen. I believe that last year about 4
percent----
Senator Warren. About 4 percent?
Secretary Yellen. Yes.
Senator Warren. That's right. So, it was supposed to be 70
percent; it turns out it was 4 percent. And you know that is
not an accident. These companies deliberately sabotaged the
Free File program and steered people to products that they
could charge for.
Now, companies like Intuit used misleading advertising and
hid free products from Google search results, all so that
taxpayers had to spend more money to figure out how much they
owed.
The Federal Trade Commission has now sued Intuit over its
bogus advertising of free tax filing software, and last month
the State Attorneys General extracted a $141-million settlement
from Intuit for these scams.
Now, these swindles are just one reason why the GAO
recently recommended that the IRS develop its own alternative
to Free File, stating, quote, ``The IRS faces mounting risk by
continuing to rely on the tax prep industry to provide free tax
filing services,'' end quote.
So, Secretary Yellen, it sounds like Free File has worked
out great for corporations like Intuit, which raked in billions
of dollars, but would you agree with the GAO that the current
system is not working for American taxpayers, and that it is
time for the IRS to develop a real Free File program? Or let me
just ask this more directly. If we can get you the resources,
will you commit to developing a Free File program that actually
works for American taxpayers?
Secretary Yellen. So, look, I absolutely agree with the
comments that you made about Free File. It has not worked. We
need to develop a new system. There is no reason in the world
that a modern economy should not have a system that makes it
easy for such a large group of taxpayers to file their returns.
Beyond that, I would also add that it is important that
households be able to access the benefits that Congress often
wants to provide, like the Earned Income Tax Credit, the Child
Tax Credit when that was available, the Economic Impact
Payments. And for individuals who do not have to file tax
returns, this can be extremely difficult. We have to develop
software to do that.
Senator Warren. So, I am loving everything you are saying,
but I am still listening for the part that says, if we can get
you the resources, you will commit that the IRS will build its
own Free File program and make this available to Americans
across the country.
Secretary Yellen. We are certainly looking into it. But I
want to make a point, which is that the IRS is under siege. It
is suffering from huge under-investments. It has massive
problems that it is dealing with.
Right now, our number one priority is dealing with the
backlog, a huge backlog, of tax returns. The IRS right now does
not have the authority to hire the people it needs to deal with
the backlogs, and it doesn't have the technology that it
needs----
Senator Warren. Madam Secretary, look, I am not someone who
is attacking the IRS. I am trying to get you the resources that
the IRS needs so it can go after wealthy tax cheats. But what I
would like to know is, if we are going to fight for the
resources, to get them over to you, and the resources are
available, will you commit to build the Free File program?
Secretary Yellen. It is definitely a priority. It is
definitely something we should do, and when the IRS is
adequately resourced, it is something that will happen.
Senator Warren. Oh, I think it is something we need to do.
Look, I have a bill, the Tax Filing Simplification Act--I am
going to reintroduce it--that would require you to do this. But
I just want to make clear, you could do this, if we get you the
money. I would really like to see this happen. The Treasury has
the authority now and needs to use it.
Thank you.
Senator Hassan [presiding]. Thank you, Senator Warren.
Senator Thune, I am going to defer to you.
Senator Thune. Thank you, Madam Chair.
Madam Secretary, welcome to the committee.
As you know, President Biden recently wrote a Wall Street
Journal op-ed that tackling inflation is the, quote, ``top
economic priority.'' And I think that is a welcome development
for the President to acknowledge that inflation is a problem.
It was not that long ago that President Biden and his top
economic officials were claiming an extraordinary increase in
Americans' cost of living was merely transitory.
I know you have responded to some questions on this subject
already, but do you still view inflation, which remains near a
40-year high, as transitory, or do you expect an extended
period of raised inflation?
Secretary Yellen. Well, when I said that inflation would be
transitory, what I was not anticipating was a scenario in which
we would end up contending with multiple variants of COVIDs
that would scramble our economy and global supply chains, and I
was not envisioning the impacts on food and energy prices we
have seen from Russia's invasion of Ukraine.
So, as Chair Powell indicated himself, both of us probably
could have used a better term than ``transitory.'' There is no
question that we have huge inflation pressures, and inflation
is really our top economic problem at this point, and it is
critical that we address it.
So I do expect inflation to remain high, although I very
much hope that it will be coming down now.
Senator Thune. And the President's budget, on that point,
projects inflation at 4.7 percent for 2022, which seems to be
an entirely unrealistic assumption, given that inflation in the
first half of this year has been well above that rate.
Have the administration's 4.7-percent inflation assumptions
proved accurate for 2022? Or has that number been revised
higher?
Secretary Yellen. We are in the process of producing a new
forecast for the mid-session review. The numbers are not locked
in, but it is likely to be higher.
Senator Thune. Well, hopefully we will not have to wait
long for that, right? I mean, when does that review come out?
Secretary Yellen. I am not sure what the date is.
Senator Thune. So let me just say too, there are a couple
of things that--the President has obviously suggested that the
inflationary numbers are a result of Ukraine, and clearly, if
you look at the CPI inflation data that was largely collected
before the Russian invasion of Ukraine, was the President wrong
to blame the preexisting inflation on the Russian invasion of
Ukraine? And do you think that it is at all attributable to the
overheated economy that was accelerated by last year's $1.9-
trillion partisan spending bill?
Secretary Yellen. Look, when President Biden took office,
the United States faced a really horrendous problem in that it
was projected that unemployment would stay extremely high for
many years. CBO projected unemployment in excess of 9 percent.
And he had to decide what was an appropriate policy to address
what all of us thought at that time was the greatest risk
facing our country, which was that we were seeing cars line up
at food banks, people going hungry, people beginning to lose
the roofs over their heads, worrying that they would not be
able to get jobs, and that we would have a generation that was
scarred by high unemployment.
And we put in place some designs, a program in the ARP that
not only was intended to address those risks, but succeeded in
doing so better than anyone could have anticipated.
Right now we have about the lowest unemployment rate we
have had in close to our history. In a recent Federal Reserve
survey, more households than ever have described their
financial situation as strong. And the question about, could
you manage to pay an unexpected $400 expense? A record number
of people since that survey started said they could.
So we have accomplished a lot. We have the fastest recovery
of any developed country. There is no question that inflation
is too high, and it has to be addressed. But we are starting to
do that from a situation of strength.
And of course it is important to bring inflation down.
Senator Thune. Mr. Chairman, my time has expired, but I
would just say the economic crisis the American people are
feeling right now is this extraordinarily high inflation rate
which, again--to the degree that there may have been jobs
created and wage increases, these have been completely eaten
up.
The American people are getting a de facto pay cut because
of inflation. And it just does not seem like--and gas prices
are contributing largely to that, and I see no strategy out of
the administration to do anything to deal with rising gas
prices.
And I think that there is no question that the $2-trillion
bill last year overheated the economy, and it is why we have
the mess that we have today.
So, Mr. Chairman, thank you.
Senator Crapo [presiding]. Thank you, Senator.
Senator Hassan?
Senator Hassan. Thank you, Mr. Chair. And good afternoon,
Secretary Yellen, and welcome.
Inflation is the number one economic issue I hear about
from Granite Staters. Supply chain challenges and Putin's
invasion of Ukraine have driven up costs across the economy,
and these higher prices are straining the budgets of families
and small businesses. As one way to help lower costs for
families, I have led bipartisan legislation to cut taxes for
homeowners who upgrade to more energy efficient appliances.
The administration has been supportive of passing clean
energy tax cuts that would help lower energy costs for
Americans. Do you agree that passing clean energy tax cuts as
proposed in my bipartisan bill would help lower costs for
Granite Staters?
Secretary Yellen. Senator Hassan, yes, I do. I think
various incentives and tax credits that would support clean
energy are critical ways in which we can help lower- and
middle-income families cut their costs and offset price
pressures that they face, address climate change, and over the
medium term, reduce our dependence on fossil fuels and on
global oil markets, where geopolitical risks are often causing
spikes in oil prices that, if we were more dependent on the sun
and the wind, we would not face.
Senator Hassan. Thank you.
In 2020, I helped lead a successful bipartisan effort to
ensure that all small businesses struggling during the pandemic
had access to tax cuts through the Employee Retention Tax
Credit. However, I have heard from small businesses in New
Hampshire, such as Smuttynose Brewing in Hampton, that are
still waiting on Treasury to send their full Employee Retention
Tax Credit payments.
Madam Secretary, what is Treasury doing to clear the
backlog of Employee Retention Tax Credit claims and ensure that
small businesses receive this tax relief as soon as they can?
Secretary Yellen. Senator, I am aware of this problem, and
what I can tell you is that IRS is working as diligently as it
possibly can to clear what is a huge pandemic-related backlog.
And things that are filed in paper--the IRS is still in the
process of opening these. I think a lot of these Employee
Retention Tax Credit filings were paper filings that are part
of this backlog. And so I think that is partly responsible for
the delays.
You know, I think there will not be penalties for
situations that arise where additional income tax may be owed
and the taxpayer is waiting for this refund payment to be able
to pay taxes owed. Penalties will be waived.
I know that the IRS has issued some guidance, and told
these filers that they may be eligible for relief. It was a
very regrettable situation, and IRS is working as rapidly as
they can to solve it.
Senator Hassan. Well--and I thank you for that response. I
will keep encouraging IRS to work as quickly as they can, and
in the long term, we all have to make sure that the systems are
modernized and IRS has the staffing it needs, because obviously
this is not an acceptable situation.
Secretary Yellen. Thank you. This is really a reflection of
decades of underfunding. And it is frankly amazing that the IRS
is able to do as much as they can, giving out the Child Tax
Credit payments and the Economic Impact Payments.
Senator Hassan. I do understand that, but I will continue
to push on this, because I just was talking with a small
business on Saturday that is really kind of on the edge here
and waiting for this credit.
So let me talk about one other thing, which is Russian gold
reserves. Vladimir Putin has stockpiled billions of dollars in
gold in an attempt to insulate the Russian economy from
international sanctions. I would like to thank Treasury for
heeding calls earlier this year from a bipartisan group of
Senators, including myself and Senator Cornyn, to ensure that
U.S. sanctions freeze Russian gold assets.
Can you update us on Treasury's ongoing efforts to combat
any attempts by Putin to prop up Russia's economy by selling
off his gold stockpile?
Secretary Yellen. Yes. This is an important matter, and we
have issued guidance that gold-related transactions involving
Russia may be sanctionable under the President's executive
order. And we are closely monitoring any efforts that we can
see to circumvent our Russia-related sanctions through the use
of gold.
Senator Hassan. Thank you very much.
Thank you, Mr. Chair.
The Chairman. Senator Barrasso is next.
Senator Barrasso. Thank you, Mr. Chairman.
Thank you, Madam Secretary. I appreciate you being here to
testify today.
Things have gotten a lot worse since the last time you
testified before this committee. Inflation is at a 40-year
high. It is impacting Americans with higher prices across the
board.
When President Biden took office, the price of a gallon of
gas was $2.38 a gallon. Today, it is $4.92 a gallon. This past
Memorial Day was very expensive for people to travel. In my
home State of Wyoming, rural areas, people who volunteered to
drive for Meals on Wheels to deliver meals to shut-ins have had
to stop volunteering, not because they do not have the time or
the commitment or the open heart, but they do not have the
money for the gas. That is the number one issue affecting the
American people.
A few weeks ago, we had the Interior Secretary testifying
before the Energy Committee. I asked her if she thought that
gas prices were too high? She could not come up with--she did
not think it was an easy question. She could not come up with
an answer. Of course they are too high.
But I ask you. Do you think that the gas prices are too
high?
Secretary Yellen. Absolutely.
Senator Barrasso. Thank you. The people in Wyoming and the
vast majority of Americans agree with you on that point, and
the question is, what are we going to do about it?
Well, in your fiscal year budget and revenue proposals as
part of the proposed tax hikes, you specifically target U.S.
energy production with tax hikes. On top of your tax hikes, the
administration is doing everything it can to end oil and gas
exploration and production on Federal lands.
Just last week, the administration announced a sue and
settle agreement with environmental extremists which calls into
question millions of acres of oil and natural gas leases in the
West, including 2,000 specific leases in my home State of
Wyoming. Some of these leases have been let from 2015 all the
way up to the end of the last administration.
The President had his op-ed in The Wall Street Journal that
talked about gas prices. He said, well, we need to take every
practical step to make things more affordable. But it seems to
me that tax hikes and other decisions like this are not going
to help and are actually going to make matters worse.
Making it more expensive to produce American energy would
simply lead to higher prices for consumers. And once that
energy is produced, it needs to be transported to refineries,
and eventually to gas stations. Well, pipelines are an
important piece of that transportation. But on CNBC last week,
you specifically suggested pipelines don't matter.
On the one hand, both you and the President say gas prices
are too high, to which I agree. But on the other, you are
targeting American energy with taxes, and this is going to
result in higher costs for Americans.
So, since you agree that prices are too high, can you
please explain the inconsistencies with the policies of the
Department of Treasury and the administration?
Secretary Yellen. Well, I would say that as a medium-term
matter, the way to reduce energy prices for Americans is to
promote credits, energy policies that boost the production of
renewables that will reduce our dependence on global oil
markets--where geopolitical factors can cause energy prices to
spike, as we are seeing with Russia and Ukraine--and can lower
utility prices for Americans.
In the short run, before that happens, high prices--we have
very high prices, as you pointed out, for oil. I believe that
producers are sitting on 37 million acres of land under lease
from which they can drill and produce additional oil, and high
prices are a motivation to do that.
So we do need additional oil. The prices that Americans pay
are influenced by what happens in global markets. And so,
promoting the production of additional global oil will help to
relieve supply shortages in the global market. But it will not
completely insulate Americans from global oil market pressures
in the short run.
Senator Barrasso. Well, I would point out that, in addition
to the leases, you actually need the permission to drill. And
this administration has blocked all of that. And this sue and
settle agreement by the administration last week is taking many
of those acres that you just described and freezing those so
they cannot be used.
And with $5 gas, what we see today is the President calling
on using the Defense Production Act, not to go after this, but
to build solar panels. And that, it seems to me, is the wrong
place to be using that act.
I would just point out, Mr. Chairman, finally, yesterday's
USA Today, a front-page story, a picture, Madam Secretary, of
you and the President of the United States, yesterday's USA
Today headlines, ``Small Risk of Inflation Swelled to a Global
Threat.'' Underneath, ``White House Waived Off Economists'
Warnings.'' And they quote you from ABC, March of 2021, ``Is
there a risk of inflation?'' You responded, ``I think there's a
small risk.'' This is with regard to signing the American
Rescue Plan. You said, ``And I think it is manageable.''
Given that, it makes me wonder why Americans should put any
confidence in your pronouncements and decisions and
recommendations today?
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Whitehouse?
Senator Whitehouse. Thank you very much.
Madam Secretary, it is good to have you with us. I know it
has been the end of a long morning for you.
In January of 2021, more than a year ago, we passed the
beneficial ownership legislation that Senator Crapo, among
others, was a champion of, and that was passed with strong
bipartisan support.
A lot of time has gone by, and we are still waiting for the
rule to come out of Treasury. I just helped you get $22 million
in additional FinCEN funding to help accomplish that. In the
meantime, because there is no rule, Tax Justice has just put
America at the top of the financial secrecy index, number one.
This is not an index on which we want to be number one.
Can you tell us anything about when you are going to be
done with the beneficial ownership rule? It has been over a
year.
Secretary Yellen. Well, last December, FinCEN did publich a
notice of proposed rulemaking to implement the beneficial
ownership reporting requirements, and that is the first
rulemaking. The second will govern access to the beneficial
ownership information system, and that will be published
certainly this year.
So, all I can tell you is that we appreciate the extra
funding, but to fully implement this rule in fiscal 2023, we
need full funding for building of this database. But we
appreciate the funds that were in the Ukraine supplemental.
Effective implementation of the Corporate Transparency Act is
really a top priority, and is getting our full attention.
Senator Whitehouse. Well, if you could instruct your people
to pick up the pace, I think that would be helpful. It has been
quite a while since the law passed. It has been a year since
the regs were supposed to be accomplished. There are three
different rules that are necessary to implement it. Only one
has even been proposed.
So, there is a lot of room for improvement in the
rulemaking process, and I hope you will see to that.
The other topic that we talk about often, you and I, is the
problem of the 501(c)s. You have indicated that the political
dark money that they facilitate is a problem for our country.
And you have said that you will give it serious review and
serious study. And I just want to flag it for you because,
again, I am not seeing either the serious review or the serious
study.
The problems are quite specific, and I want to flag them
for you.
One is, you have a (c)3 and a (c)4 that are
indistinguishable. They have the same office. They have the
same staff. They have the same board. They have the same, you
know, chief executive. And it is just a fanciful distinction.
In my world, you call that piercing the corporate veil. This is
a corporate veil you could pierce with a banana. This is not
legit. And to look into that, I think is well worth doing.
The other issue has to do with the so-called 50-percent
limit. The 50-percent limit is ignored by circles of affiliated
nominal corporations so that if somebody makes a donation to
one, it can then spend 50 percent of it on politics and put the
other 50 percent to an affiliated organization, which then
spends 50 percent of it on politics, and puts the remainder to
another affiliated organization.
If you have just four of those organizations working in
concert together, you have over 90 percent of the donor's money
going for political advertising. And that is not what the 50-
percent rule intended, either. And I think that the IRS is
simply not looking at these essentially phony setups that are
allowing these anonymous folks to get around both the letter
and the intent of the law.
So again, please give this serious review and serious study
that I think are in order. What we have had in the meantime has
been a completely false narrative, blown up by your own
Inspector General, that this was all a wicked effort to target
conservatives. That narrative got legs because an enormous
propaganda effort was done to push it.
It was debunked by the Inspector General, who has been
living with the aftermath of that, and nobody is telling the
truth from the Treasury Department about what really happened,
about how the system is being gamed by indistinguishable
501(c)3s and 501(c)4s, and by these coordinated efforts to
spend the money through affiliated groups so that you can end
up spending it all on politics instead of the nominal 50
percent.
So, if you could please, please look at that, I would be
grateful.
The Chairman. I thank my colleague.
Senator Whitehouse. Could she just quickly answer that?
The Chairman. Oh, of course. Please.
Senator Whitehouse. I know my time is up.
The Chairman. Madam Secretary, please?
Secretary Yellen. I understand the importance of this issue
and agree with you that we absolutely need to get that money
out of politics. We will work with you to try to do that.
Senator Whitehouse. Great. If you can look at those
specific things, that would be helpful.
The Chairman. I thank my colleague.
Members have a week to submit written questions. And, Madam
Secretary, we are going to have you out the door actually
early. And just one thought in closing.
It seems to me we are closing where we began, which is that
the Congress has a big role to play in cutting costs, which
helps to cut inflation. We talked about prescription drugs for
example, and that is key. Medical expenses are gobbling up
everything in sight. And most of the areas that we are talking
about mean that you also have to tackle some very entrenched
interests.
But it seems to me that nobody in America that I meet is
saying, ``Gee, Medicare should not negotiate to hold down the
cost of medicine.'' The Biden administration, colleagues on
this side of the aisle, have said, of course you ought to
negotiate for these expensive drugs, the cancer drugs for
example. The same is true about clean energy for America.
What we have said on this committee, Madam Secretary, to
hold down energy costs is, we are going to take those 45
provisions in the tax code on energy and basically throw them
in the trash can and say that, for the future, it will be about
clean energy, clean transportation, energy efficiency. And then
we will have a
technology-neutral market-oriented system where the more that
you reduce carbon emissions, the bigger your savings.
But in both health care and energy, you are going to have
to take on some big, powerful interests to bring costs down.
And that is why I am so glad that you kept putting it right
back at us, because I think that is what we have to focus on,
and everything needs to be on the table.
We have already talked, you and I, about some
administrative overhead that can be cut. I saw, over the break,
people in the housing business say that would be beneficial.
And I want to thank you for just being out there day after day
after day saying, ``Look, everybody has got to be part of this
effort.''
The executive branch, the Biden administration will be. You
told Congress, ``You can show up every day and help cut
costs.'' I want to say, as you leave, I am all in and look
forward to working with you. And we will excuse you at this
time.
Secretary Yellen. Thank you, Chairman Wyden. I look forward
to working with you.
The Chairman. Thank you, Madam Secretary.
[Whereupon, at 12:32 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Secretary Yellen, welcome to today's hearing.
Inflation is hurting American families and eroding wages. People
are adjusting spending, even on basic necessities, to make ends meet.
They are being hammered at the gas pump and in the grocery aisles and
across the economy. As wages rise to keep up with inflation, odds of an
inflationary wage-price spiral rise.
Inflation became broad-based and accelerated last year following
the untargeted American Rescue Plan Act. That act poured $1.9 trillion
of inflation fuel into an economy with growing supply-chain disruptions
and households with elevated disposable incomes and liquid savings.
Following that, Democrats pushed for trillions more in reckless
spending. The result, which many predicted, has been inflation at highs
not seen in 40 years.
As prospects of recession and stagflation rise, this is no time to
consider raising taxes or resurrecting reckless spending proposals from
the House-passed Build Back Better bill. The Congressional Budget
Office's 10-year outlook is another warning sign that our national
debt, currently at $30.5 trillion, is on an unsustainable track, headed
to new record highs.
Inflation and accompanying higher interest rates mean higher net
interest costs to service the national debt, crowding out other fiscal
priorities. As the economy has been in recovery from COVID-related
shutdowns, revenue has been up sharply under the tax system put in
place before the pandemic. CBO expects revenue this year to rise to 20
percent of GDP, the highest in more than 2 decades, and then average
well above the 50-year historical average.
Nonetheless, Democrats appear to want to raise taxes more in the
face of rising odds of recession. One harmful policy is a minimum tax
on financial statement, or ``book,'' income, something so fundamentally
flawed that both parties abandoned a previously enacted version more
than 30 years ago. This harmful policy would overwhelmingly hit
American manufacturers, as well as undercut investments in U.S.
innovation and emerging technologies.
This is not the only proposal from Democrats that would harm the
competitiveness of American companies. Another prominent example is the
international tax agreement Treasury has negotiated at the OECD. Under
both pillars of the agreement, Treasury has agreed to give foreign
countries sweeping new rights to tax U.S. companies.
In an apparent attempt to bind Congress, Treasury agreed to terms
without engaging in meaningful consultation with Congress. For more
than a year, my Republican colleagues and I have repeatedly requested
information on the agreement and its potential effects. Treasury has,
however, repeatedly declined to provide any analysis of the effect of
the agreement on U.S. businesses or U.S. revenue or the U.S. economy
overall. From what we can see, that impact will be significant on U.S.
companies, making them less competitive globally. We now know
Treasury's failure to share substantive detail foreshadowed underlying
flaws and a lack of coherent principles in the agreement.
It is increasingly clear that terms agreed to by Treasury will harm
U.S. businesses and undermine tax provisions enacted by Congress to
encourage certain activities. The flaw with this approach is that the
agreement cannot be fully implemented without congressional action. In
many cases, the terms can only be properly carried out with a
multilateral treaty, requiring a two-thirds vote by the Senate. By
agreeing to sweeping changes of this nature without bipartisan support,
Treasury has put at risk tax certainty and the prospect of a durable or
longlasting agreement.
Beyond lack of information about the international tax agreement,
nothing more is known about a possible leak of private taxpayer data
from the IRS to the left-leaning group ProPublica than we knew 1 year
ago when it was first reported. More work is also necessary to
establish independent oversight and financial controls over the $350-
billion funding to States and localities in the American Rescue Plan,
where no meaningful oversight was established.
Treasury must also be willing to consult Congress on debt
management, which it has thus far only been comfortable doing with Wall
Street and the Federal Reserve.
This committee, which is Treasury's authorizing committee, deserves
more transparency and accountability from Treasury than we have been
receiving.
Madame Secretary, I do appreciate your service, and look forward to
hearing your testimony.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
This morning the Finance Committee welcomes Treasury Secretary
Yellen for a hearing on the budget. This is an important opportunity to
discuss big economic challenges, so that's where I'll begin.
I'm coming off a string of town hall meetings across my home State
of Oregon, and everywhere I went, the number one topic of discussion
was inflation. People are feeling it at the grocery store and at the
pump. In Oregon a gallon of gas is going for $5.42. People are paying
more in rent, in shops, and at restaurants. Americans learned on Friday
that unemployment is 3.6 percent, near its 50-year lows, and wages have
been rising steadily. Overall, the job market is the strongest it's
been in multiple generations. But in terms of what typical families are
really feeling on the ground, inflation is causing real headaches.
The question is what to do about it. There's no cure-all to
inflation, but the focus in Congress must be on finding real solutions
to drive costs down, protecting everybody's ability to get ahead, and
solidifying our economy in the long run.
A first example: Democrats on this committee are leading the effort
to bring down the cost of prescription drugs. Americans are getting
mugged with every visit to the pharmacy window, and it's long past time
to get them some relief. Moreover, it's also past time to cut costs
pushed off onto consumers by the middlemen known as pharmacy benefit
managers.
A second example is energy and climate. People are spending huge
amounts of money on gas and electricity. Putin's genocidal war in
Ukraine is driving prices even higher. Oil and gas companies are raking
in huge profits and handing out big checks to executives and announcing
stock buybacks benefiting wealthy shareholders.
All the while, the climate crisis is growing around us. Bigger and
hotter wildfires, stronger and wetter hurricanes, and longer and more
punishing droughts. So, it's a one-two punch--Americans are paying more
for gas, and they're paying more for the consequences of these
unnatural disasters.
I bet a lot of Americans would be interested in a plan that would
lower their energy costs, make Putin poorer, and prevent climate
catastrophes all at the same time. That's another big priority for
Senate Democrats, beginning with the Clean Energy for America Act,
which passed this committee. That bill, using a technology-neutral
approach to tax policies, would put the country on a path to cut
emissions in half by 2030. One recent analysis found that would save
the average household $500 per year. The bill, for the first time in
the history of this committee, would stipulate that the more you reduce
carbon emissions, the bigger your tax savings.
There's also interest in ensuring that oil and gas companies can't
game the tax code to pay next to nothing in taxes, which is far too
common today.
Third, Senate Democrats want to lower the cost of renting or owning
a home. That means investing in new cost-effective housing, as well as
cutting red tape, which is the approach Congress took years ago when it
passed an electronic signature law I wrote that helped buyers and
sellers making common transactions.
The bottom line is that Congress shouldn't address our economic
challenges by making people worse off. That's precisely what
Republicans want to do. The big economic plan coming from the
Republican campaign chief, Senator Rick Scott, is to phase out Medicare
and Social Security in a matter of a few years.
Senator McConnell has gone to great lengths to keep that Scott plan
hush-hush. When he was asked earlier this year what the Republican
agenda would be if they took back the Senate, he said, ``That is a very
good question, and I'll let you know when we take it back.''
But Senator Scott coughed up the truth, and he's standing by his
plan sunsetting those bedrock American programs for seniors. You can
bet that Republicans will want to hand a fresh round of tax handouts to
corporations as well. And there's a long history of Republican monetary
hawks rooting for higher unemployment, flat wages, and cuts to basic
programs that help millions of families pay for child care, groceries,
rent, and other necessities.
There are clear contrasts in the approaches to solving this
inflation challenge. That will give us a lot to discuss this morning. I
want to thank Secretary Yellen for joining us, and I look forward to
Q&A.
______
Prepared Statement of Hon. Janet L. Yellen,
Secretary, Department of the Treasury
Chairman Wyden, Ranking Member Crapo, thank you for inviting me to
discuss the administration's budget proposals. This budget prioritizes
essential investments in education, medical care, and affordable
housing, alongside tax reforms that enable deficit reduction and
prioritize a fairer tax system.
Over the past year and a half, we have experienced a robust
recovery characterized by strong economic growth, historically low
unemployment, and high household savings rates. This rapid, broad-based
recovery has been buttressed by the congressional response to the
challenges of the pandemic--beginning with the CARES Act at the
beginning of the pandemic, and continuing with the Consolidated
Appropriations Act in late 2020, and the American Rescue Plan
legislated at the beginning of 2021. As President Biden said last week,
we now are entering a period of transition from one of historic
recovery to one that can be marked by stable and steady growth. Making
this shift is a central piece of the President's plan to get inflation
under control without sacrificing the economic gains we've made.
We also managed to avert the far worse outcomes that were forecast
at the beginning of the pandemic in 2020. After the onset of the
pandemic, CBO forecast that unemployment would exceed 9 percent in
2021; now, we are experiencing historically low unemployment. We are
also witnessing sharp reductions in the budget deficit, with CBO
recently forecasting the largest nominal reduction to the Federal
deficit in history. According to their projections, the deficit as a
share of the economy this year will be a lower level than CBO projected
before the American Rescue Plan passed.
Still, we currently face macroeconomic challenges, including
unacceptable levels of inflation as well as the headwinds associated
with the disruptions caused by the pandemic's effect on supply chains,
and the effects of supply side disturbances to oil and food markets
resulting from Russia's war in Ukraine. To dampen inflationary
pressures without undermining the strength of the labor market, an
appropriate budgetary stance is needed to complement monetary policy
actions by the Federal Reserve. Moving forward, elements of the
President's proposed legislation--including the clean energy
initiatives and plans to reform the prescription drug market--can help
lower the costs paid by American consumers.
Treasury has been actively working with Congress on many
challenges. Most important is our joint response to Russia's illegal
and unprovoked war against Ukraine. Treasury is committed to doing what
we can to ensure that Putin's brutal war continues to be met with
fierce resistance internationally. Alongside more than 30 other
partners abroad accounting for more than half the world's economy, the
U.S. Government has imposed unprecedented financial pressure measures
on Russia and its leadership. Today, the Kremlin has been cut off from
the global financial system, the Russian economy is experiencing severe
contraction with most analysts projecting a double-digit decline in
Russian GDP in 2022, and they are experiencing sharply elevated
inflation.
We are grateful for the strong support of Congress in this
endeavor, including its recent provision of $40 billion in security,
economic, and humanitarian aid to the people of Ukraine. Our joint
resolve is essential to supporting the people of Ukraine against this
brutal invasion of their homeland.
Over the past year and a half, we have successfully collaborated
with Congress on the bipartisan infrastructure bill, a bill designed to
do the hard, generational work of building a more dynamic, structurally
sound economy by smartly investing in the future. This law will rebuild
America's roads, bridges, and rails; expand access to clean drinking
water; ensure every American has access to high-speed Internet; and
invest in communities that have too often been left behind. However,
our work isn't done. Building a fair and stable tax system that
promotes broadly shared growth is important to both adequately funding
investments and to reducing deficits and debt. I look forward to
working with Congress to ensure that we continue to make progress in
this regard.
In the administration's FY 2023 budget, we suggest smart, fiscally
responsible investments--cutting deficits and keeping the economic
burden of debt low. The budget's investments are more than fully paid
for through tax code reforms requiring corporations and the wealthiest
Americans to pay their fair share, closing loopholes, and improving tax
administration.
Finally, it is no secret that I am keenly focused on moving forward
on the global agreement on international tax reform, including a global
minimum tax that will level the playing field and raise crucial
revenues to benefit people around the world. Last fall, 137 countries--
representing nearly 95 percent of the world's GDP--agreed on a deal
that will stabilize our tax systems, provide resources to invest in
security and respond to crises like COVID-19, and ensure corporations
fairly share the burden of financing government. I am hopeful that
Congress will also implement this global minimum tax as part of its
legislative agenda.
Thank you, and I look forward to taking your questions.
______
Questions Submitted for the Record to Hon. Janet L. Yellen
Questions Submitted by Hon. Ron Wyden
Question. The IRS still has a backlog of over 15 million
unprocessed returns. Oregonians who filed paper returns this year are
wondering if the IRS has lost them. Some desperately need their tax
refund to pay their bills.
When these constituents call my office, we would normally work with
the Taxpayer Advocate Service (TAS) to help. But the IRS hasn't agreed
to let TAS help taxpayers with 2021 returns because checking on one
person's return slows the whole process down. That makes sense, but we
still need to help taxpayers who are experiencing significant hardships
because of processing delays.
Can the Treasury Department work with the IRS to ensure that TAS
can help those with the greatest need?
Answer. Taxpayers deserve to have their tax refunds returned on
time, and the Taxpayer Advocate Service plays a critical role in the
IRS and helping address the inventory backlog. In the 2021 year-end
report, the Taxpayer Advocate Service made 88 recommendations for the
IRS, of which the majority have begun to be implemented. Last filing
season, the Taxpayer Advocate Service answered 46 million additional
calls through new tools, support that ultimately ensures those who need
help receive the service they deserve. TAS plays an important role
helping American taxpayers and will continue to work with the IRS and
Treasury to serve those in need.
Question. Because tax revenues increased in 2021, some of my
Republican colleagues are claiming that their 2017 tax cuts for
corporations and wealthy individuals paid for themselves. The numbers
tell a different story. The actual amount of revenue collected in 2018
was significantly lower than the CBO projected--to the tune of $275
billion \1\ or over 7 percent of the revenues that CBO expected before
the tax cuts were enacted. Given that the economy grew, and in the
absence of another policy that could have caused a large revenue loss,
the data show that the cuts reduced revenues.
---------------------------------------------------------------------------
\1\ https://www.brookings.edu/policy2020/votervital/did-the-2017-
tax-cut-the-tax-cuts-and-jobs-act-pay-for-itself/.
Some economists think the 2021 tax revenue increases are due to a
booming stock market, a booming housing market, and pandemic relief.
Others think that wealthy investors accelerated gains last year to beat
---------------------------------------------------------------------------
proposed tax rate increases in BBBA they thought might apply for 2022.
Do you think the 2017 tax cuts for corporations and wealthy
individuals paid for themselves?
Why do you think tax revenue increased in 2021?
Answer. The Tax Cuts and Jobs Act (TCJA) is not the explanation for
the recent increase in corporate tax receipts. In fact, CBO's February
2021 forecast of corporate tax receipts showed corporate tax receipts
were projected to be less than the pre-TCJA projections.
The effect of TCJA on corporate receipts is better measured by
examining the cumulative change in revenues since its passage in
December 2017, rather than just 1 year. By this measure, the TCJA
produced a large decline in corporate tax revenues.
A better explanation is that the strong economy and pandemic relief
legislation increased wages, corporate profits, and taxes. In
particular, the economy grew at its fastest pace in 3 decades in 2021.
The U.S. economy entered 2022 in a strong position. U.S. economic
growth was the fastest in 40 years. Since the start of the
administration, the United States has added 7.4 million jobs and the
unemployment rate has fallen from 6.7 percent to 3.6 percent--the
fastest calendar year decline in the unemployment rate. GDP growth was
5.7 percent in 2021. This growth is contributing to higher receipts.
Question. The IRS's return processing backlog is due to the fact
that IRS employees have to transcribe paper returns manually. The IRS
does not use automated scanning technology like many States. If you
fill out your Oregon State tax return on your computer and then mail
it, the return will print with a barcode that the Department of Revenue
can scan like a box of cereal at the grocery store. Nobody has to
transcribe anything. Oregon has been doing this since 2006.
Another technology called optical character recognition (OCR)
transcribes returns, even if they don't have a barcode. This technology
makes some mistakes, but humans make even more. The IRS Commissioner
testified that he was still evaluating these upgrades. I agree with my
Republican colleagues that the IRS can't go through another filing
season with the same backlogs and delays that we have seen over the
last 2 years. It needs this technology now.
Can the Treasury Department make sure that the IRS starts using
both of these technologies to transcribe individual income tax returns
without delay?
Answer. In 2021, the IRS announced the start of its IRS Pilot
program, an effort to use technology like optical character recognition
and scanning-as-a-service to securely and efficiently process taxpayer
documents. The IRS is currently in the final phase for several
solutions in the Pilot program. The IRS has already begun implementing
some of the new technology. For example, the IRS began using OCR
software to better serve taxpayers, As of January 1, 2022, the system
has already been fully integrated with OCR. In the future, the IRS will
continue to work to find ways to use technology to improve tax return
processing.
______
Questions Submitted by Hon. Mike Crapo
inflation
Question. Three days after your Senate Finance Committee hearing,
the Bureau of Labor Statistics (BLS), on June 10th, identified that
inflation in the consumer price index (CPI-U) was 8.6 percent on a
year-over-year basis in May, a high not seen since 1981.
BLS data on consumer price inflation across a broad range of
consumer expenditure categories showed broad-based inflation that is
not limited merely to energy and related goods.
Broad-based consumer price inflation became evident following
passage of the partisan American Rescue Plan Act, and was well
established before Russia's invasion of Ukraine.
Do you believe that the Biden administration is out of tools to
address inflation, and it is now primarily the Federal Reserve's job to
clean up the inflation damage that has been partly fueled by the
American Rescue Plan?
If not, please explain in detail what the administration, including
Treasury, intends to do.
Answer. The primary responsibility for maintaining price stability
lies with the Federal Reserve, which is taking actions to address
unacceptably high levels of inflation. The administration is also
taking actions to reduce price pressures. The administration released a
historic volume from the Strategic Petroleum Reserve to counteract the
disruption to oil markets from Russia's invasion of Ukraine. The
administration is also working with the private sector to ease supply
bottlenecks--for example, reducing congestion at our ports and
increasing the supply of chips to automakers. Congress has an important
role here: the administration has made proposals to lower the price of
prescription drugs, increase affordable housing, reduce the deficit,
and bolstering energy security by transitioning away from fossil fuels
in the long term, the price of which is too often subject to
geopolitical shocks.
Question. Gas prices at the pump have been at record highs for a
large number of consecutive days and the national average price per
gallon of regular gas has risen above $5.00 according to AAA; the
national average price per gallon of diesel is above $5.76, a direct
blow to truckers, distributors, and ultimately consumers and
businesses.
The President, in early May, has been quoted as stating that:
``Here's the situation. And when it comes to the gas prices, we're
going through an incredible transition that is taking place that, God
willing, when it's over, we'll be stronger and the world will be
stronger and less reliant on fossil fuels when this is over.''
In the Senate Finance Committee hearing with you on June 7th, you
similarly suggested that while inflation and high gas prices need to
somehow be addressed, in the ``medium term'' more incentives for
renewables are needed to address climate change and U.S. reliance on
global oil markets.
Your testimony identified that you believe that U.S. energy
producers are partly responsible for current elevated gas prices
because they are sitting on leases in which they could produce more
energy in the face of high prices. Do you believe that producers are
foregoing opportunities to profitably produce, or are there regulatory
impediments in place?
Answer. Consumption of gasoline and fuels is currently at lower
than pre-
pandemic levels. Domestic refinery capacity and oil production have
declined. Oil and natural gas producers did not anticipate the strength
of the recovery in the economy and did not increase supply to match
increased demand. Higher prices should induce producers to increase
supplies over time.
The administration is taking ongoing action to bring down energy
prices. The President announced the release of a record 1 million
barrels per day from the Strategic Petroleum Reserve and has rallied
international partners to join the United States, releasing a combined
210 million barrels of oil on the market. The administration has
expanded access to biofuels like E15 to increase supply and lower
prices at thousands of gas stations.
The administration understands that our efforts to increase energy
production in the near term must be coupled with medium- and long-term
efforts to transition our economy away from fossil fuels produced by
autocrats and toward clean energy.
Question. Do you agree with the President that, when it comes to
high gas prices, we are going through a transition to become less
reliant on fossil fuels, and do you believe that such a transition will
require that Americans simply work through the pain of high gas and
diesel prices until the medium term arrives where renewables can come
on line to replace fossil fuel usage? If so, how long will it take to
get to such replacement, which would be a period during which Americans
potentially continue to suffer through a painfully costly transition?
Answer. The administration is taking ongoing action to bring down
current energy prices. The President announced the release of a record
1 million barrels per day from the Strategic Petroleum Reserve and has
rallied international partners to join the United States, releasing a
combined 210 million barrels of oil on the market. The administration
has expanded access to biofuels like E15 to increase supply and lower
prices at thousands of gas stations.
Long-term, incentives for clean energy proposed by the
administration are critical ways by which we can help lower- and
middle-income families cut their costs, offset price pressures that
they face, address climate change, and--over the medium term--reduce
our dependence on fossil fuels and on global oil markets where
geopolitical risks are often causing spikes in oil prices.
taxes and spending
Question. During the hearing, you seem to have argued for increased
taxes, more stimulus spending, and deficit reduction through increased
taxes, in the interest of taxpayers paying their ``fair share,'' which
no one in the administration will clearly define.
What theory and evidence do you rely upon to recommend raising
taxes, the incidence of which will fall partly on workers and those
earning less than $400,000, and raising Federal spending in the face of
rising odds of recession and stagflation?
Answer. The tax policy reforms included in the administration's
budget proposal would strengthen the taxation of high-income taxpayers
and close several loopholes used by high-income taxpayers to avoid
income, estate, and gift taxation. Reformed taxation of capital income
would even the tax treatment of labor and capital income and eliminate
a loophole that allows some capital gains income to escape taxation
forever. For extremely wealthy taxpayers, a minimum income tax would
require prepayment of taxes on unrealized capital gains, such that
liquid taxpayers would be taxed at a rate of at least 20 percent on
their income including unrealized gains. These reforms are targeted to
raise revenue from those with income above $400,000.
The budget proposals build on recent reductions in the budget
deficit to further improve fiscal stability and to provide a solid
foundation for stable economic growth. Over the past year and a half,
we have experienced a robust recovery characterized by strong economic
growth, historically low unemployment, and high household savings
rates. This rapid, broad-based recovery has been buttressed by the
congressional response to the challenges of the pandemic. Now, we are
experiencing historically low unemployment, alongside sharp reductions
in the budget deficit. Still, we currently face difficult macroeconomic
challenges, including unacceptable levels of inflation as well as the
headwinds associated with the disruptions caused by the pandemic's
effect on supply chains, and the effects of supply side disturbances to
oil and food markets resulting from Russia's invasion of Ukraine. This
situation calls for prudent macroeconomic actions by the Federal
Reserve and for an appropriate budgetary stance in order to dampen
inflationary pressures without undermining economic growth or the labor
market. Legislation has a key role to play in reducing deficits and
debts in the time ahead.
international trade negotiations
Question. After repeated requests, Treasury still has not provided
detailed information on the potential effects of the OECD agreement on
U.S. businesses and revenue. The way Treasury has negotiated this
agreement raises fundamental questions about how the administration
views the role of Congress on issues of taxation, over which Congress
has sole constitutional authority.
If the administration negotiates an international tax agreement
requiring changes in our tax laws, or cedes to other countries our
right to tax American businesses if our laws are not changed, do you
believe Congress should have the opportunity to weigh in on the terms
of the agreement?
Answer. Yes. We have briefed members of Congress and their staff
numerous times on the OECD agreement. It has always been the position
of the administration that implementing the two pillars of the
agreement will require congressional action.
Question. For Congress to weigh in on the terms of the agreement,
do you believe Congress should be able to fully understand the
potential impacts on American businesses and revenue--including by
having timely access to the analysis and evidence that's before
Treasury?
Answer. Yes. Details and estimates of our proposals implementing
Pillar Two can be found in the Greenbook. Once Treasury has sufficient
information regarding the parameters of Pillar One and the Office of
Tax Analysis model captures the novel questions presented by the
parameters, we will be in a position to share such information.
Question. Given the amount of work that remains to be done on both
pillars, the terms of this agreement clearly are not final. Can you
commit to a consultation process on both pillars, and not merely staff-
level briefings that have yet to be substantive, that would allow
Congress to instruct the Treasury on what can and cannot be enacted
into law?
Answer. Treasury has provided briefings more frequently to
congressional staff on the OECD/G20 international tax deal than on any
other international tax question in recent memory.
Pillar Two was negotiated in light of the administration's
commitments to reform GILTI to eliminate the profit-shifting and
offshore incentives in current law, and the technical building blocks
of Pillar Two have been in the public discourse since the 2020
blueprint was released. Implementing Pillar Two is of course a matter
of congressional prerogative. We have repeatedly done deep dives on
specific components of Pillar One and Pillar Two with a large
bipartisan, bicameral staff group, and have repeatedly asked for input.
We continue to undertake a consultation process on the substantive
building blocks of Pillar One.
Question. The United States enacted the first global minimum tax in
2017 when Congress enacted the Global Intangible Low-Taxed Income or
``GILTI'' tax. Five years later, we remain the only country with a
global minimum tax. Instead of defending the United States as a first-
mover on a global minimum tax and arguing for our current law to be
treated as compliant with the OECD agreement, this administration
agreed to rules that would make GILTI even harsher for U.S. companies
even though no other country has a global minimum tax.
Why did Treasury agree to terms that would require Congress to make
changes to domestic law? You stated during the hearing that the
undertaxed profits rule (UTPR) is a tough enforcement mechanism that
will allow countries that have implemented Pillar Two to impose tax on
companies located in countries that have not complied with Pillar Two.
Does that not mean Treasury has similarly agreed to allow foreign
countries to tax U.S. companies if the U.S. does not make changes to
domestic law?
Answer. Under the global tax deal, the United States may enact
legislation as it wishes. Pillar Two is a common approach, and no
country is required to enact it. Moreover, the United States negotiated
a special carve-out allowing Congress to take its own path, not enact
the Pillar Two income inclusion rule, remain with a foreign tax credit-
based system modeled after our GILTI, and still be considered to have a
deemed-compliant Pillar Two regime.
At the same time, we have worked collaboratively and multilaterally
to develop multilateral guidance documents that would, for the first
time, end profit shifting, create a more level playing field for U.S.
business, and end the 4-decade long race to the bottom on corporate tax
rates. Although our multilateral tax agenda has been more ambitious
than any prior administration, the basic approach--working on
multilateral guidance documents via the OECD--has been pursued by every
U.S. administration since the Kennedy administration. In that sense,
the basic process we have pursued is neither new nor novel, and
respects the traditional prerogatives of the administration and
Congress, respectively.
With respect to the relevant multilateral guidance documents,
Treasury negotiated Pillar Two in line with the President's campaign
commitments to reform GILTI to a per-country system at a robust rate.
Moreover, if Congress does not reform GILTI to align with Pillar Two,
it would be treated as a CFC regime and would still be taken into
account in determining the effective tax rate of the CFC jurisdiction
for purposes of the UTPR rule.
Question. It seems some foreign countries also have concerns with
the substance and timing of this agreement. The timing in the EU has
already slipped by at least a year, and, even with that proposed
delayed implementation, the EU was again unsuccessful in reaching an
agreement at the end of May.
If the EU cannot reach unanimity, do you propose that the United
States move forward with making the U.S. global minimum tax even
harsher, even though other countries are clearly hitting roadblocks in
taking the first steps to enact a global minimum tax?
Answer. Other countries are already taking the steps required to
implement the global tax deal, and we should too. We cannot lose this
opportunity to stabilize the international tax system and make it
fairer.
Moreover, once other countries act, the Chamber of Commerce has
said that it would be ``nonsensical'' for the United States not to
change its law in accordance with Pillar Two since doing so ``might not
increase taxes companies owe but would instead ensure the United States
gets the tax revenue rather than other nations.'' For the same reason,
if the United States were to act first, we would create pressure on
others to conform their laws to Pillar Two.
Question. The EU Directive, which still does not have unanimous
support by EU countries, confirms an implementation date of December
31, 2023, effectively 2024, for implementation of the global minimum
tax. Are you similarly proposing that the United States make the GILTI
changes effective beginning in 2024? And if not, why not?
Answer. We agree that 2024 would be an appropriate effective date
for reforming GILTI into a country-by-country system. Even without the
global deal, it makes good policy sense to reform GILTI, because doing
so decreases incentives to shift profits and jobs offshore. It also
makes sense to reform GILTI to apply on a country-by-country basis
because current GILTI allows companies to blend high and low tax
streams of income together, thereby escaping tax liability. Current law
often creates incentives to earn income anywhere but the United States.
Question. Press reports have highlighted your recent trip to Poland
and your objective to exert additional pressure in the EU to implement
Pillar Two of the OECD deal. Yet, even after repeated requests, you
haven't provided the substantive information this committee has
requested regarding the agreement, including the legislative and treaty
actions that would need to be taken to implement it. You have also only
briefed us once on the agreement, even though you have said the
agreement is one of the administration's biggest accomplishments. And,
while certain staff have been provided after-the-fact, non-substantive
briefings, periodic briefings for staff are not the same as engaging
the members of this committee.
Given Congress would have to enact legislation and approve treaty
changes to implement this deal in the United States, why are you not
providing Congress with regular, substantive briefings on the agreement
and being consulted on the many issues that need to be resolved on both
pillars? Do you believe the single briefing you provided to this
committee was sufficient consultation given the scope of this
agreement?
Answer. We strongly dispute the premise that we have not provided
Congress and congressional staff with regular, substantive briefings on
the OECD/G20 negotiations and deal. We have strived to be open and
transparent, including with respect to the international tax
negotiations. The first bipartisan briefing of congressional staff on
our positions on the global minimum tax negotiations came 2 days after
I gave a speech in April of 2021 where I expressed my support for a
global minimum tax deal. Since then, Treasury has provided briefings
more frequently to congressional staff on the OECD/G20 international
tax deal than on any other international tax question in recent memory.
The international tax negotiations have been a regular subject of
discussion in hearings before the committee in addition to these
discussions. Beyond that, we have not only sought out the counsel of
members and staff, we have made Treasury staff available for individual
briefings as well and several bipartisan bicameral briefings.
Additionally, we have shared OECD documents in short order after
receipt and have appreciated the constructive conversations we have had
throughout the course of these negotiations, with both majority and
minority members and staff.
Question. The Green Book includes a proposal for an under-taxed
profits rule (UTPR) consistent with Pillar Two of the OECD agreement.
This proposal has changed significantly since it was first proposed.
The UTPR was originally inspired by the U.S. Base-Erosion Anti-abuse
Tax (or BEAT) by effectively disallowing deductions for certain
payments from companies to their foreign affiliates. The UTPR
negotiated by this Treasury department is far broader. Now, it would
allow foreign countries to tax U.S. companies' worldwide profits, even
their U.S. profits--and, if U.S. companies have taken advantage of
nonrefundable tax credits specifically enacted by Congress for a
certain purpose, like the R&D tax credit, they are even more likely to
be subject to tax by foreign countries.
Whether to enact tax provisions that encourage certain behavior is
squarely within Congress's authority under the U.S. Constitution. Why
has Treasury agreed to rules that would limit the benefit of
nonrefundable tax credits enacted by Congress, while agreeing to give
preferential treatment to refundable tax credits and subsidies that are
generally favored by foreign countries? Why didn't you or your staff
consult with members on this issue before agreeing to curtail
Congress's taxing authority?
Answer. The distinction between refundable and non-refundable
credits in Pillar Two of the OECD/G20 international tax agreement was
initially negotiated in the prior administration and has been a matter
of public record since October 2020, when it appeared in the Pillar Two
blueprint. As negotiated by the prior administration, refundable tax
credits are treated as income rather than a direct reduction in the
taxpayer's effective tax rate. This general rule carries over into the
recently released model rules and its commentary.
Under the Pillar Two model rules and commentary, tax credits
generally reduce a taxpayer's tax expense and thus their effective tax
rate. That general rule was necessary, given the goal of Pillar Two to
level the playing field for American businesses and end the race to the
bottom for corporate effective tax rates. Failure to account for
credits and other incentives would render the minimum tax meaningless.
The Pillar Two model rules thus follow financial accounting treatment,
meaning that non-refundable credits reduce tax expense, while
refundable credits are treated as income.
Treasury has worked with the OECD to clarify the treatment of
general business credits under the Pillar Two minimum tax. We are
confident that the value of many of our general business credits is
preserved under the OECD rules, and we have established a process with
the OECD for working towards additional clarifications. Moreover,
because of the way investments that give rise to credits, such the low-
income housing tax credit, are structured and treated for financial
accounting purposes (i.e., under the equity method), the income or loss
and the income tax consequences of those investment typically will be
excluded from the effective tax rate calculation for Pillar Two
purposes. For those credits that are impacted by the Pillar Two model
rules, as noted in the FY 2023 Greenbook, the Biden administration
remains committed to working with Congress to ensure that taxpayers
continue to benefit from important tax incentives that provide U.S.
jobs and investment, in a manner consistent with the framework outlined
by the Pillar Two model rules and commentary.
irs oversight
Question. The IRS faces an unprecedented backlog of paper tax
returns and correspondence. Many of the backlogged tax returns are
taxpayers' owed refunds that are significantly delayed. The refunds
would help offset the effects of inflation and provide American
businesses with the capital needed to recover from the pandemic.
Taxpayers' lives are being upended by the IRS not processing returns in
a timely manner. We must put an end to the backlog and get the IRS back
to timely processing tax returns.
During hearings, government executives stated the backlog would be
``eliminated'' or ``cleared'' by December 31, 2022; other times the
testimony was the backlog will be at a ``healthy level'' entering into
the 2023 tax filing season. Shifting from an objective standard of no
backlog to a vague standard of a ``healthy'' backlog is concerning.
Will the paper return and document backlog be cleared or at a
healthy level by December 31, 2022?
Answer. As of June 10, 2022, the agency has worked to process over
143 million returns. Although there has been substantial progress, the
backlog is still causing delays.
Question. If a healthy level, what specifically does that mean and
what can taxpayers expect when the backlog reaches a ``healthy level''?
Answer. As of June, 2022, millions of taxpayers are awaiting their
returns, and the hardworking staff at the IRS are dedicated to ensuring
taxpayers receive the service they deserve. Because the IRS receives
tax returns and taxpayer correspondence throughout the year, there is
always some inventory that is being processed. For example, the IRS
typically enters filing season with under 1 million pieces of
inventory. A healthy level of inventory can be processed in a timely
fashion without negatively impacting other IRS processes.
Question. Does ``healthy level'' mean taxpayers will receive their
refunds for the 2022 tax year in the timely, pre-pandemic, time frame
of less than 3 weeks for e-filed returns and 6-8 weeks for paper
returns?
Answer. The IRS continues to work to address the unprecedented
backlog of returns. For example, it plans to hire thousands of new
employees, create surge teams dedicated to processing returns, and
provide additional help for taxpayers by improving automation. These
investments will improve how fast the IRS processes returns, both this
year and for years to come. As an example of how important these
investments are, during the last filing season, any error on a tax
return needed to be manually reviewed. Now, the new automated tools the
IRS integrated processes electronically filed returns at an approximate
rate of 1,000 returns per hour. The IRS is committed to serving
taxpayers and is working to ensure that the average timeframe it takes
to process returns can be shortened even more.
Question. The 2022 tax filing season introduced Schedules K-2 and
K-3. Many in the tax professional community voiced strong opinions the
compliance obligations brought on by Schedules K-2 and K-3 were overly
broad, created a massive new compliance burden, and many times did not
provide any pertinent information to the IRS.
Is the Treasury taking action to assess the tax professional
community's criticisms? If yes, will the results of this assessment be
made public?
Answer. As always, Treasury and the IRS are engaged with taxpayers
and practitioners on their concerns. The IRS provided guidance for
taxpayers who make a good faith effort to comply with the new schedules
for this tax year and said they would not be assessed penalties.
The new Schedules K-2 and K-3 accommodate the complex international
tax provisions enacted by the TCJA. TCJA required a significant
increase in the amount and types of information needed to calculate the
U.S. tax liability with respect to items of international tax
relevance. Having worked through changes to other forms, the IRS made
similar changes to flow-through returns to ensure that investors, the
ultimate taxpayers in the case of flow-through entities, have the
information to accurately complete their returns. The IRS observed in
the years following TCJA that items of international tax relevance were
not always reported in a clear and standard format on Schedules K and
K-1 attachments. Having clear and consistent forms and instructions
will ultimately help partnerships and S corporations report in an
efficient manner.
The greater certainty also enables the IRS to verify that
partnership and S corporation items are properly reported on partners'
and shareholders' returns. This should reduce the burden on both
taxpayers and the IRS by reducing unnecessary inquiries and
examinations that may arise due to inconsistent reporting of
partnership and S corporation items.
Question. Is the Treasury considering reducing the number of
taxpayers who must file Schedules K-2 and K-3 for the 2023 tax filing
season? If no, why not?
Answer. The IRS is still engaged in the current tax filing season
and processing returns. Treasury and the IRS are open to hearing from
taxpayers, and we consider comments on the Schedule K-2 and K-3 forms
and instructions on a regular basis. Any modifications the IRS might
make would be reflected in draft instructions published later this
year.
______
Questions Submitted by Hon. John Barrasso
Question. The bipartisan objective that justified entering the
Organisation for Economic Co-operation and Development (OECD) tax
negotiations was the elimination of unilateral measures by foreign
governments unfairly targeting U.S. companies, such as digital service
taxes (DSTs).
But this administration made the OECD agreement a partisan issue
when it began pushing the administration's objectives on the global
stage. Press reports highlighted your recent trip to Poland in an
attempt to put additional pressure on Poland to implement Pillar Two of
the OECD deal--the global minimum tax.
Even after repeated requests, you have not provided the substantive
information this committee has requested regarding the agreement,
including the legislative and treaty actions needed to implement it.
You have also only briefed the members of this committee once on the
agreement, even though you have said the agreement is one of the
administration's biggest accomplishments.
The lack of consultation with Congress is especially concerning
because this deal you have agreed to cedes some of Congress's
constitutional power to tax to unelected foreign bureaucrats.
Given Congress would have to enact legislation and approve treaty
changes to implement any deal in the United States, why are you
spending time pressuring foreign governments when you have not received
buy-in from Congress? Will you commit to providing regular, substantive
briefings on the agreement and consult with members of this committee
on the many issues that need to be resolved on both pillars?
Answer. Treasury has received strong support from many members of
Congress, in both chambers, for our approach to these historic
negotiations. We also provided Congress and congressional staff with
regular, substantive briefings on the OECD/G20 negotiations and deal.
In that regard we have strived to be one of the most open and
transparent Treasury administrations. The first bipartisan briefing of
congressional staff on our positions on the global minimum tax
negotiations came 2 days after a speech I gave stating support for a
global minimum tax, in April of 2021. Since then, Treasury has provided
briefings more frequently to congressional staff on the OECD/G20
international tax deal than on any other international tax question in
recent memory, by any administration of either party. And the
international tax negotiations have been a regular subject of
discussion in hearings before the committee in addition to these
discussions. Beyond that, we have not only sought out the counsel of
members and staff, we have made the Treasury team available for
individual briefings as well and several bipartisan bicameral
briefings. Additionally, we have shared OECD documents in short order
after receipt and have appreciated the constructive conversations we
have had throughout the course of these negotiations, with both
majority and minority members and staff.
We continue to ask for input from Congress on these negotiations,
and look forward to ongoing discussions.
Question. The Infrastructure Investment and Jobs Act, signed into
law last November, included new reporting requirements for
cryptocurrency transactions. The Treasury Department specifically
requested these reporting requirements.
While these requirements do not go into effect until January 2024,
the information supplied will be for the 2023 tax year. Brokers will be
required to track transactions starting on January 1, 2023, less than 6
months away.
I understand that the Treasury Department is currently drafting
proposed regulations to implement these requirements. The release of
the regulations has been expected for a while now.
Can you provide an update on the timing of the release of these
regulations to help businesses comply with the reporting requirements?
Answer. The Treasury Department views the development of proposed
regulations implementing information reporting by brokers of digital
assets to be a priority. Treasury is currently developing a notice of
proposed rulemaking to solicit public comments. We expect the proposal
to be published in the near future.
______
Questions Submitted by Hon. Maria Cantwell
Question. I want to discuss an issue that I know is of serious
concern to both of us--our growing affordable housing crisis and the
need to build millions more housing units in Washington State and
nationwide.
As you know, I have been working with Senator Young, along with the
chairman and Senator Portman, to expand and strengthen the Low-Income
Housing Tax Credit. The housing credit is responsible for building 90
percent of all affordable housing nationwide, so it's vital we expand
the credit to address this crisis.
Our legislation includes several critical increases to housing
credit resources and improvements to the program: a 50-percent
allocation increase for the credit overall, a reduction of the current
50-percent bond threshold to 25 percent so projects can more easily
access much-needed housing credit equity. It also includes important
basis boosts to help extremely low-income populations as well as high-
need areas including rural and Tribal communities.
This is something we have been able to make incremental progress
on, most recently in December 2020 with the enactment of the 4-percent
floor. But as we recover from the pandemic, now more than ever families
need access to more affordable housing. We have much more to do here.
So I was pleased to see that the President's budget includes support
for an expansion of LIHTC along the lines of what I pushed to be
included in the Build Back Better package, which would build an
estimated 812,000 units nationwide. I look forward to working with you
to get that enacted in to law this Congress.
As you know, the 12.5-percent State allocation increase of the Low-
Income Housing Tax Credit expired at the end of 2021. This means we're
actually now seeing a cut to the production of affordable housing
during a nationwide housing shortage--55,000 fewer units will be built
over the next 10 years. Will you commit to supporting the restoration
of the 12.5-percent increase, and support an expansion of LIHTC as
myself and Senator Young have advocated for?
Answer. We enthusiastically support strengthening the LIHTC tax
incentive, and we share your concern about the decline in allocated
LIHTCs as a result of the expiration of the temporary 12.5-percent
increase in State allocations. The administration's revenue proposals
for FY 2022 would have increased State allocations for 5 years by many
times the effective reduction from that expiration.
Question. I've been hearing concerns from a number of housing
organizations about the potential impact that the Pillar Two OECD
reforms will have on the Low-Income Housing Tax Credit, potentially
disincentivizing much of the equity financing that underpins affordable
housing projects. I know you and the Department are working to address
these concerns. Will you commit to making sure we preserve the full
effectiveness of LIHTC as the administration works to implement the
Pillar Two reforms?
Answer. Treasury has worked with the OECD to clarify the treatment
of general business credits under the Pillar Two minimum tax. We are
confident that the value of many of our general business credits is
preserved under the OECD rules, and we have established a process with
the OECD for working towards additional clarifications. Moreover,
because of the way investments that give rise to credits such the low-
income housing tax credit are structured and treated for financial
accounting purposes (i.e., under the equity method), the income or loss
and the income tax consequences of those investment typically will be
excluded from the effective tax rate calculation for Pillar Two
purposes.
Question. As you are aware, financial institutions that provide
banking services to legitimate marijuana businesses are vulnerable to
criminal prosecution. As a result, few banks and credit unions are
willing to risk providing services to
marijuana-related businesses. This leaves many businesses cut off by
financial institutions and unable to accept credit cards, deposit
revenues, or write checks to meet payroll or pay taxes.
With only access to limited financial services, cannabis businesses
must operate using large amounts of cash which creates a serious safety
risk for these businesses and the neighboring community. I have heard
from many of my constituents about the need for reforms so marijuana
businesses can bank with financial institutions. So far this year,
there have been over 80 armed robberies at dispensaries in Washington
State, one of which resulted in an employee being fatally shot. This is
a major public safety crisis in my State, and we must ensure that these
businesses are not targets of violence.
I appreciate your support for the House-passed SAFE Banking Act. In
your view, how would this legislation benefit the cannabis industry and
their contributions to the economy?
Answer. We believe that these issues are best resolved through
legislation, which should provide clarity to marijuana businesses,
their service providers, and financial institutions. We are broadly
supportive of the SAFE Banking Act and would be happy to work with you
and your staff to provide technical assistance.
Question. How would providing access to the banking system for
marijuana businesses improve the ability of the IRS to collect taxes
from these businesses?
Answer. Without speaking to the large questions surrounding
cannabis businesses, allowing access to the banking system and
providing the ability to make electronic payments may reduce burdens on
the IRS and improve collections.
Question. Trade is an essential element for economic growth for my
State and for the Nation. At this point in time, our trade policy ties
into the cost of goods, businesses ability to grow--and inflation. The
Biden administration has been slow to roll back tariffs, particularly
section 301 tariffs on Chinese goods, that are ineffective in changing
the behaviors of the targeted countries, and at the same time are
contributing to inflation.
I have businesses in my State, many are small businesses, which are
being squeezed because of the cost of tariffs to their business and on
their products. The payment of tariffs is reducing available cash on
hand to grow their business, and in at least one case, making it
impossible for the company to invest in the on-
shoring of manufacturing. At the same time, tariffs increase the cost
of manufacturing, making these products more expensive for the
consumer, adding to inflation.
Can you offer your thoughts on the impact of the 301 tariffs on the
cost of goods for American consumers and how important it is to the
economy to align our tariff policy with our economic policy, and the
need to reduce costs to get control of inflation?
Answer. Tariff policy is not the primary tool to deal with high
inflation, although reductions in some tariffs could help bring down
prices that are burdensome for consumers. The administration is
currently reviewing the China section 301 tariffs and, subject to
applicable legal requirements, is looking to reconfigure them in a way
that would effectively advance U.S. interests.
______
Questions Submitted by Hon. Benjamin L. Cardin
Question. One of the challenges facing our tax system currently is
the phenomenon of ``ghost preparers,'' meaning individuals who are paid
to prepare tax returns but do not identify themselves on the return by
including a PTIN. I am pleased that Treasury's proposals this year in
the Greenbook include a new penalty on filers who fail to disclose the
use of a paid tax return preparer, which the proposal asserts will
discourage reliance on incompetent and dishonest tax return preparers
and promote compliance.
Given the importance of closing the tax gap by ensuring that
taxpayers have access to competent tax return preparers, has Treasury
developed data on how prevalent ghost preparation is and how much it is
contributing to the tax gap? If not, is this an area that Treasury
intends to examine in more detail as you rightly focus on how
unscrupulous tax return preparers may be harming both taxpayers and the
overall tax system?
Answer. Taxpayers often use unregulated ``ghost preparers'' who do
not have the credentials to provide accurate tax assistance. Treasury
is concerned that these ghost preparers submit more tax returns than
all other preparers combined, and defrauding taxpayers hurts both
regular Americans and compliance standards. The President's plan calls
for the IRS to be granted legal authority to implement safeguards on
the tax preparation industry and includes penalties on ghost preparers.
Treasury will continue to support efforts to curtail unregulated tax
preparation.
Question. I appreciate Treasury's inclusion in the Greenbook this
year of enhanced penalties for unethical tax return preparation
practices, such as appropriation of PTINs, EFINs and the failure of
taxpayers to disclose that they are using ghost preparers. I agree that
better enforcement in these areas can improve the taxpayer experience
as well as help to close the tax gap.
Has Treasury examined how much of the tax gap could be attributable
to these practices? If not, do you expect to do so?
Answer. Better enforcement both improves the taxpayer experience in
America and helps close the tax gap. Treasury routinely studies and
examines the tax gap and will continue to do so in the future.
Question. As I have stated before at different hearings and in
letters to the Department of Treasury, entities cannot seek, accept, or
solicit payments from designers in exchange for providing section 179D
allocation letters. The Treasury Department has already confirmed the
Finance committee's intent.
The issuance of a section 179D allocation letter shall not be used
as leverage to request a payment from a designer; allocation letters
should be duly issued once the applicable design services have been
performed.
The Senate Finance Committee appreciates the comments regarding
this issue that Senator Crapo and I received last Congress on our Tax
Task Forces, making clear that industry is concerned by the behavior of
some State and local government entities, asking for return cash
benefits in order for them to issue the allocation letter.
These actions run counter to the intent of Sec. 179D(d)(4)'s
express direction to allow the allocation of the section 179D deduction
``. . . to the person primarily responsible for designing the property
in lieu of the owner of such property.''
Consistent with congressional intent, the section 179D allocation
letters are administrative in nature and serve to formalize the
allocation of the tax deduction to the eligible designer. It's an issue
that doesn't seem to go away and I want to get your help to stand
behind the intent of Congress and work with us to address this problem.
Answer. We welcome the opportunity to work with you on this and to
help ensure that business practices are in line with congressional
intent. I know your office has highlighted this issue and talked to
Treasury staff about it. I understand from the staff that a project was
added to the IRS priority guidance list last year that is intended to
address issues in this area.
______
Question Submitted by Hon. Thomas R. Carper
Question. An issue I've worked on for years is strengthening our
tax system by reforming the estate and gift taxes. Today, many assets
of wealthy families are passed down from generation to generation
largely tax-free. This reality makes our tax system less fair and less
fiscally responsible. For example, the first $11.7 million an estate
passed down in 2021 would be untouched by the estate tax. And assets
above that exemption level are often inherited tax-free thanks to
significant loopholes in the gift tax. We can find a more reasonable
approach here, one that protects family farms and small businesses
while ensuring that the wealthiest Americans pay their fair share.
What sort of common-sense reforms to estate and gift taxes can make
our tax code fairer and more fiscally responsible?
Answer. I agree that reform of estate and gift taxes should be a
priority. This year's Treasury Greenbook included a number of proposals
that we believe would shut down some common abuses in this space and
make the overall tax system more equitable. The proposals included
rules to better regulate grantor trusts; rules requiring consistent
valuation of promissory notes, which are often used to manipulate
estate tax liability; and rules that would limit the duration of
generation-skipping transfer tax exemptions. We would welcome a
conversation between Treasury's Office of Tax Policy and your staff to
discuss these and other ideas.
______
Questions Submitted by Hon. Catherine Cortez Masto
Question. The State and Local Fiscal Relief Funds provided in the
American Rescue Plan provided States the ability to make an historic
investment in desperately needed affordable housing in communities
across our country. It's very important that these American Rescue Plan
funds leverage the Nation's most reliable and impactful affordable
housing production investment, the Low Income Housing Tax Credit.
Will the Treasury Department provide updated guidance to grantees
providing flexibility for developments to use the American Rescue
Plan's State and Local Fiscal Relief Funds and leverage the Low-Income
Housing Tax Credit?
Answer. Treasury shares your deep concern about the severity and
consequences of the shortage of affordable housing in the United
States, which is why, as you note, we continue to urge State, local,
and Tribal governments to dedicate more of their State and Local Fiscal
Recovery Funds (SLFRF) provided through the American Rescue Plan (ARP)
to build and preserve affordable housing to decrease costs for families
and individuals. The pandemic exacerbated housing affordability
challenges, as millions of households fell behind on their rent and
surging home prices put homeownership out of reach for many. Treasury
is heartened to see that addressing housing needs has emerged as one of
the most common priorities, and largest uses of funds, for States,
localities, and Tribes in the SLFRF. Treasury recently provided updated
SLFRF final rule FAQs on loans to fund investments in affordable
housing projects and eligible affordable housing uses.
We understand that the Low-Income Housing Tax Credit (LIHTC) is the
primary Federal resource available to finance affordable housing
production. We have carefully considered the numerous important
questions from recipients and affordable housing stakeholders about the
application of the SLFRF final rule and the eligibility of specific
uses of SLFRF funds to develop affordable housing, and in response have
updated the SLFRF final rule FAQs relevant to affordable housing and
loans to promote clarity and administrability in the use of these funds
in several significant ways.
Treasury has determined that features of loans to finance
affordable housing investments significantly mitigate concerns about
funds being deployed for purposes of recycling funds, potentially for
ineligible uses, following the SLFRF program's expenditure deadline.
Treasury has heard from members of Congress, State, local, and Tribal
Governments, and affordable housing advocates that limiting recipients'
ability to use SLFRF for long-term loans creates a significant obstacle
to using SLFRF for affordable housing investments. In response to these
concerns, Treasury has analyzed the issue and has adjusted SLFRF
guidance to allow recipients to use SLFRF funds to make loans to
finance affordable housing projects, funding the full principal amount
of the loan, if the loan term and affordability period is at least 20
years, among other conditions. In addition, Treasury has expanded its
category of presumptively eligible affordable housing uses to include
alignment to requirements in a number of Federal programs, including
LIHTC, to increase administrability and clarity in the use of SLFRF for
affordable housing purposes. These updates are also expected to
decrease the transaction costs associated with layering SLFRF funds
with LIHTC projects.
Moreover, to protect affordability, the owners of any properties
receiving SLFRF loans which also receive financing from LIHTC must
agree to waive their right to request a qualified contract as defined
in section 42(h)(6)(F) of the Internal Revenue Code and repay any
loaned funds if the property becomes noncompliant.
For additional details, please see Treasury's updated SLFRF final
rule FAQs on loans to fund investments in affordable housing projects
and eligible affordable housing uses.
Question. It is our understanding that the HOME program requires
developers and owners to follow 2 CFR part 200 (this code replaced 24
CFR 85.) The code is cited in HOME agreements with the different
participating jurisdictions (example: States, counties, municipalities)
that partner with Nevada's nonprofits.
The HOME regulations require following 2 CFR part 200 in several
sections but the most applicable in 24 CFR part 92.505 Applicability of
uniform administrative requirements.
The requirements of 2 CFR part 200 apply to participating
jurisdictions, State recipients, and subrecipients receiving
HOME funds except for the following provisions: 200.306 (cost
sharing or matching); 200.307 (program income); 200.308 (not
applicable to participating jurisdictions) (revision of budget
and program plans); 200.311 (except as provided in 92.257)
(real property); 200.312 (federally owned and exempt property);
200.329 (monitoring and reporting program performance); 200.333
(fixed amount subawards); and 200.334 (retention requirements
for records).
The provisions of 2 CFR part 200.305 apply as modified by
92.502.c (disbursement of HOME funds).
If there is a conflict between the definitions in 2 CFR part
200 and 24 CFR part 92 (HOME regulations), the definitions in
24 CFR part 92 govern.
However, the definition of Subrecipient found in 24 CFR part 92.2
(HOME regulations) states:
Subrecipient means a public agency or nonprofit organization
selected by the participating jurisdiction to administer all or
some of the participating jurisdiction's HOME program to
produce affordable housing, provide down payment assistance, or
provide tenant-based rental assistance. A public agency or
nonprofit organization that receives HOME funds solely as a
developer or owners of a housing project is not a subrecipient.
The participating jurisdiction's selection of a subrecipient is
not subject to the procurement procedures and requirements.
Therefore, it seems a public agency and nonprofit organizations
that receive HOME funds solely as a developer or owners of a housing
project is not a subrecipient and is therefore not required to comply
with most parts of 2 CFR part 200.
Can we clarify that the uniform administrative requirements
(including procurement and conflict of interest) in 2 CFR part 200 that
works for the HOME program will work the same with the SLFRF?
This would mean that nonprofit developer and public agencies would
be exempted from the rules regarding subrecipients, correct?
Will the Treasury Department publish guidance to clarify that the
HOME rules that exempts nonprofit developers and public agencies from
the rules regarding subrecipients also applies to SLFRF used for
housing?
Answer. Treasury strongly encourages the use of SLFRF funds for
affordable housing uses. Unless stated otherwise, SLFRF is subject to
the Uniform Administrative Requirements, Cost Principles, and Audit
Requirements for Federal Awards set forth in 2 CFR part 200. The
requirements of other Federal programs generally are distinct from
Treasury's administration of SLFRF funds unless stated otherwise.
Recipients have flexibility to fund a project with both SLFRF funds
and other sources of funding (e.g., blending, braiding, or other
pairing funding sources), as discussed in SLFRF final rule FAQ 4.8. In
that case, costs must be eligible costs under each source program and
must be compliant with all other related statutory and regulatory
requirements and policies.
Recipients also have flexibility in how they administer their
programs within SLFRF's application of 2 CFR part 200, the SLFRF final
rule, and other program requirements. For instance, it is at a
recipient's discretion to deploy SLFRF funding in the form of subawards
to subrecipients, contracts to contractors, or directly to benefit an
individual or entity as a beneficiary. Treasury staff are happy to
provide more details on these requirements.
Question. Our affordable housing developers estimate that aligning
the SLFRF with LIHTC is the difference in our State between 3,000
affordable homes and 8,000 affordable homes. The LIHTC provides the
leverage to build more homes.
Can grantees such as State housing finance agencies make non-
forgivable loans with SLFRF directly to LIHTC partnerships per the
Treatment of Loans as described in 31 CFR part 35, Final Rule, section
IV.F, pgs. 366-368?
Answer. Treasury strongly encourages recipients to use SLFRF to
expand affordable housing. SLFRF funds may be used to make loans,
provided that the loan supports an activity that is an eligible use of
funds and complies with other program requirements. Recipients also may
transfer funds to an entity to carry out, as a subrecipient, an
eligible activity on behalf of the SLFRF recipient, as long as they
comply with the SLFRF Award Terms and Conditions and other applicable
requirements. For more information on how recipients may utilize loans,
please see SLFRF final rule FAQ 4.9, available here: https://
home.treasury.gov/system/files/136/SLFRF-Final-Rule-FAQ.pdf.
Question. If a loan is made, per the above Treatment of Loans,
would the conflict of interest rules and procurement rules per 2 CFR
200 apply?
Answer. Unless stated otherwise, the provisions of the Uniform
Guidance (2 CFR part 200) generally apply to the SLFRF program,
including its conflict of interest and procurement provisions.
Recipients can refer to the section 13 of the SLFRF final rule FAQs
discussing the Uniform Guidance for more information about procurement
requirements, available here: https://home.treasury.gov/system/files/
136/SLFRF-Final-Rule-FAQ.pdf (see section 13).
Question. Can grantees such as State housing finance agencies, make
a grant to a nonprofit who, in turn, makes a non-forgivable loan with
SLFRF directly to LIHTC partnerships per the Treatment of Loans as
described in 31 CFR part 35, Final Rule, section IV.F, pgs. 366-368?
Answer. Non-profits may receive SLFRF funds from a recipient as a
subrecipient, beneficiary, or through a contract with a recipient or
subrecipient.
Recipients may transfer funds to any entity to carry out, as a
subrecipient, an eligible activity on behalf of the SLFRF recipient, as
long as they comply with the SLFRF Award Terms and Conditions and other
applicable requirements. SLFRF funds may be used to make loans,
provided that the loan supports an activity that is an eligible use of
funds and complies with other program requirements. For more
information on how recipients may utilize loans, please see SLFRF final
rule FAQ 4.9, available here: https://home.treasury.gov/system/files/
136/SLFRF-Final-Rule-FAQ.pdf.
Additionally, a recipient can provide funds to an entity, including
a nonprofit organization, for the purpose of directly benefitting the
entity as a result of the entity experiencing a public health impact or
negative economic impact of the pandemic. In this instance, these
entities will be considered beneficiaries, not subrecipients, and will
not be expected to comply with subrecipient reporting requirements.
Beneficiary reporting requirements will apply. For more information on
subrecipients and beneficiaries, please see SLFRF final rule FAQ 1.8.
Recipients may also execute agreements with entities as
contractors. For more information on contracts and subawards, please
see SLFRF final rule FAQ 13.9.
Question. If a loan is made by the nonprofit, per the above
Treatment of Loans, would the conflict of interest rules and
procurement rules per 2 CFR 200 apply to the partnership/borrower of
the loan funds?
Answer. SLFRF funds may be used to make loans, provided that the
loan supports an activity that is an eligible use of funds and complies
with other program requirements, as discussed further in SLFRF final
rule FAQ 4.9. Unless stated otherwise, the provisions of the Uniform
Guidance (2 CFR part 200) generally apply to the SLFRF program,
including its conflict of interest and procurement provisions.
Recipients can refer to the section 13 of the SLFRF final rule FAQs
discussing the Uniform Guidance for more information about procurement
requirements, available here: https://home.treasury.gov/system/files/
136/SLFRF-Final-Rule-FAQ.pdf (see section 13).
______
Questions Submitted by Hon. Steve Daines
Question. I want to thank you for including my bill with Senator
Stabenow in Treasury's 2023 budget. According to the IRS, 990 pass-
through entities, mainly partnerships, took $28.2 billion in deductions
for tax years 2016 through 2019. That means the average deduction size
for each entity was $28.4 million, and many were significantly larger.
We know that shutting down these tax shelters will require an act
of Congress. Will you commit to helping Senator Stabenow, Senator
Grassley, Chairman Wyden, and myself get this legislation enacted into
law this year?
Answer. Treasury appreciates the bipartisan support for a
legislative solution to this issue. Treasury, along with our IRS
colleagues, has been working with Congress for years to arrive at a fix
that would shut down the abusive practices in this space and leave in
place the important incentives for real conservation. We are standing
by to provide any additional help that we can.
Question. I was pleased to support the Taxpayer First Act, which
became law in July 2019. As you know, section 2201 of the act requires
the IRS to update the system it currently operates that allows
financial institutions to request tax transcript data when underwriting
a loan. The law requires the IRS to implement an online process that
provides transcripts in as near to real time as possible, making the
loan process faster and more efficient for consumers and lenders. The
process today (called the Income Verification Express Service,
``IVES'') relies successfully on lenders to verify the identity of the
borrower--something they are already required to do by law. I am
concerned by the IRS's plan to abandon that process and assume the role
of customer identity authenticator, which will add friction to the
underwriting process and is counter to the intent of section 2201.
During the process of implementing the IVES, the IRS collected $72
million from the lending industry to assist in funding the development
of the IVES functionally. It is my understanding the user base of this
system has communicated to the IRS that the proposed identity
verification process will prevent them from using the system due to the
increased friction for their customers. I am concerned the IRS has been
resistant to partnering with the IVES user community to find a workable
solution.
Are you aware of the IRS's plans to spend $72 million collected
from the IVES user community on a system that has been called into
question for workability?
Answer. Section 2201 helps ensure we have a more efficient credit
system that works for both taxpayers and lenders. Under 6103(c) of the
Internal Revenue Code of 1986, borrowers can approve the IRS to release
their income and creditworthiness to lenders. Before 2021, the process
was conducted manually, often delaying the income verification
necessary for taxpayers and lenders to provide mortgage loans. With the
new IVES system under section 2201 of the Taxpayer First Act, a faster,
more efficient system ensures that borrowers and lenders can facilitate
necessary loans more efficiently. Since borrowers must provide their
express approval to the IRS before any income information is released,
this allows the IRS to facilitate and secure system that works best for
taxpayers in America.
Question. Will you commit to encouraging the IRS to work with the
IVES user community on a workable solution before the change in
identification verification is made?
Answer. The change in identification verification was made on
January 1, 2022. Prior to the change, the IRS worked with the IVES user
community to ensure that forms were processed by rerouting forms with
mistakes to a manual processing team.
Question. Has Treasury or the IRS conducted any impact analysis on
the use of the IVES system if the new identify verification changes are
instituted?
Answer. IVES is a secure and time-tested system within the IRS. The
previous system was a fully manual process, which caused additional
delays during the loan approval process. IVES began implementing
processing modernization in 2021, bringing a much needed automated
component that complements existing manual processing. The IRS alerted
taxpayers and organizations of the new IVES modernizing changes in
advance of the expected live date in October, 2021. The primary change
is the inclusion of optical character recognition software, which more
quickly processes tax forms. Before January 1, 2022, when the OCR was
unable to read an approval form, forms were routed to the manual
processing team. Effective January 1, 2022, the system has been fully
integrated with OCR, ensuring a faster and more efficient process for
American taxpayers.
______
Questions Submitted by Hon. Chuck Grassley
Question. There has been a great deal of talk about canceling
student loan debt. During the last election, this policy was pitched by
progressives as a way to stimulate the economy and cause borrowers to
go out and spend money. Now, in the face of an overheated economy and
rampant inflation, the administration is talking about forgiving
$10,000 of student debt per borrower, and many Democrats in Congress
are urging the administration to forgive $50,000 or more.
Larry Summers has said that student debt cancellation would be
``regressive, uncertainty creating, untargeted, and inappropriate at a
time when the economy is overheated.'' With inflation near a 40-year
high, why is the administration considering unilaterally forgiving
student loan debt at the risk further fueling inflation?
Answer. The administration considered several options with respect
to student debt relief. The economic impacts, including on inflation,
must be fully considered; we must also recognize the burden of high
student debt on households and its impact on the ability of these
households to own a house, start a family, or choose the right job.
Finally, it is worth reiterating that the primary responsibility for
price stability lies with the Federal Reserve.
Question. It has been reported that in a forthcoming biography of
you written by Owen Ullman, that you asked the Biden administration to
decrease the size of the $1.9-trillion American Rescue Plan due to
concerns the full package would contribute to the out-of-control
inflation we are seeing now. I understand you have denied this claim
saying that you ``never urged the adoption of a smaller American Rescue
Plan package.'' While you claim you did not urge the adoption of a
smaller package, this does not necessarily mean you did not express
concerns that the package may be inflationary. Leading up to its
enactment into law, did you express any concerns to the administration
about the potential inflationary effects of the American Rescue Plan?
Answer. When President Biden assumed office, the Nation was facing
acute economic challenges. It was a time of great economic uncertainty,
with legitimate risks of a downturn that could match the Great
Depression. I believe that ARP played a central role in driving strong
growth throughout 2021 and afterwards, with the United States' real GDP
growth outpacing other advanced economies and our labor market
recovering faster relative to historical experience. The rapid recovery
and support provided by the ARP has meant diminished economic scarring,
less human suffering, and better ability to weather shocks to our
economy like Russia's war in Ukraine and successive waves of COVID-19.
We are committed to addressing elevated inflation, which is the
administration's number one economic priority. First, we've committed
to respect the independence of the Federal Reserve and give them the
space to act. Additionally, we are also using policy tools we have to
address
supply-side bottlenecks and urging Congress to act to lower some of the
high costs facing Americans, in areas such as prescription drugs. We
also support reducing the deficit to ease inflationary pressures.
Question. Nearly a year ago, the news organization ProPublica began
publishing stories that it claims are based on ``a vast trove of
Internal Revenue Service data on the tax returns of thousands of the
Nation's wealthiest people, covering more than 15 years.'' I've
repeatedly asked you, the IRS, and Federal law enforcement agencies for
information on the apparent hack or leak of taxpayer information.
However, we haven't received a substantive response from any agency.
According to the IRS, as of May 20, 2022, it had received more than
145 million tax returns in the current filing season. How can these
taxpayers be certain that their tax returns are secure in the hands of
the IRS when the government can't answer basic questions as to how
apparent confidential IRS tax data ended up in the hands of a news
organization?
Answer. An unauthorized disclosure of taxpayer information in
violation of the law would be illegal and would need to be taken very
seriously. I am deeply concerned about this matter and, in an effort to
get to the bottom of what happened, ensured that it was immediately
referred to the appropriate authorities, including the Office of
Inspector General, the Treasury Inspector General for Tax
Administration, and the Department of Justice.
Question. What is the status of current investigations into the
source of the information obtained by ProPublica and when can taxpayers
expect a conclusion?
Answer. I continue to be deeply concerned about this matter, as I
have stated publicly. I ensured that this matter was immediately
referred to the appropriate authorities, including the Office of
Inspector General, the Treasury Inspector General for Tax
Administration, and the Department of Justice. These authorities
conduct their investigations independently.
Question. You've argued a global minimum tax is necessary to end a
``global race to the bottom'' for lower corporate tax rates. However,
I'm concerned the international agreement Treasury negotiated could
spur a global race to provide larger corporate handouts. Under the
agreement's model rules, a foreign country may subject U.S. businesses
to additional tax if their tax rate falls below 15 percent. This
applies whether their low tax rate results from a low statutory tax
rate or a tax credit. However, cash subsidies and refundable credits
receive special treatment that make them less likely trigger the tax.
Nearly all U.S. business tax credits are nonrefundable. This means
U.S. companies may be subject to a tax a foreign competitor is not. In
particular, U.S. companies would be disadvantaged compared to companies
located in countries, such as China, that heavily subsidize certain
industries.
Why did Treasury negotiate an agreement that denies U.S. companies
tax benefits while providing preferential treatment for direct cash
subsidies and refundable credits offered to companies by foreign
countries?
Answer. The distinction between refundable and non-refundable
credits in Pillar Two of the OECD/G20 international tax agreement was
initially negotiated in the prior administration and has been a matter
of public record since October 2020, when it appeared in the Pillar Two
blueprint. As negotiated by the prior administration, refundable tax
credits are treated as income rather than a direct reduction in the
taxpayer's effective tax rate. This general rule carries over into the
recently released model rules and its commentary.
Under the Pillar Two model rules and commentary, tax credits
generally reduce a taxpayer's tax expense and thus effective tax rate.
That general rule was necessary, given the goal of Pillar Two to level
the playing field for American businesses and end the race to the
bottom for corporate effective tax rates. Failure to account for
credits and other incentives would render the minimum tax meaningless.
The Pillar Two model rules thus follow financial accounting treatment,
meaning that non-refundable credits reduce tax expense, while
refundable credits are treated as income.
The Office of Tax Policy has worked with the OECD to clarify the
treatment of general business credits under the Pillar Two minimum tax.
We are confident that the value of many of our general business credits
is preserved under the OECD rules, and we have established a process
with the OECD for working towards additional clarifications. Moreover,
because of the way investments that give rise to credits such the low-
income housing tax credit are structured and treated for financial
accounting purposes (i.e., under the equity method), the income or loss
and the income tax consequences of those investment typically will be
excluded from the effective tax rate calculation for Pillar Two
purposes. For those credits that are impacted by the Pillar Two model
rules, as noted in the FY 2023 Greenbook, the Biden administration
remains committed to working with Congress to ensure that taxpayers
continue to benefit from important tax incentives that provide U.S.
jobs and investment, in a manner consistent with the framework outlined
by the Pillar Two model rules and commentary.
Question. In your opinion, are direct cash subsidies or refundable
credits more desirable than overall lower tax rates or non-refundable
tax credits? If so, do you support Congress making all business tax
credits refundable?
Answer. As noted in the prior answer, the Pillar Two model rules
follow financial accounting treatment for credits. Nonrefundable
credits reduce tax expense, while refundable tax credits are treated as
income, because they are more like a grant or subsidy from the
perspective of both the taxpayer and the government. Pillar Two is a
minimum tax and is not and has never been intended to prevent
governments from incentivizing behavior through grants or subsidies.
Question. The President has often voiced concerns about
corporations paying zero tax. Are you concerned that moving to
refundable business credits could result in profitable corporations
paying no tax or receiving a tax refund in excess of any taxes paid?
Answer. There are several policy considerations that are relevant
to the design of incentives like the research and experimentation
credit. Similarly, there are different design elements that affect how
a credit is treated for Pillar Two purposes. We are committed to
working with Congress to ensure that taxpayers continue to benefit from
important incentives like the research and experimentation credit while
also protecting revenue and other important policy considerations.
Question. Recently, President Biden has taken to portraying himself
as a deficit hawk by touting a projected $1.5-trillion drop in the
deficit over last year. While it's true the Congressional Budget Office
(CBO) projects declining deficits this year and next as COVID spending
ends, the 10-year debt and deficit numbers are actually increasing.
According to CBO, cumulative deficits over the next 10 years will total
$2.4 trillion more than it projected last July.
If the President's policies are responsible for reducing near-term
deficits, are they also to blame for worsening the long-term budget
outlook?
Answer. The latest CBO projections show marked decline in the debt-
to-GDP ratio in the near-term due to faster than expected recovery from
the pandemic. The United States had the fastest decline in the
unemployment rate in a calendar year in 2021 and the fastest real GDP
growth in 4 decades. As a result, the publicly held debt-to-GDP ratio
is projected by the CBO to be 4.1 percentage points lower in 2022 and
6.0 percentage points lower in 2023. Over the longer-term, the debt-to-
GDP ratio remains on an upward trajectory due to the aging of
population and long-term imbalances from tax cuts. However, the
differences between the 2021 and 2022 CBO projection for the debt-to-
GDP ratio in 2031 are small (just 0.3 percentage points). Moreover, the
CBO projections do not include the impact from the administration's
proposals to bolster tax compliance, lower prescription drug prices,
and reform corporate taxes. The CBO baseline projections that you cite
also do not include the cost of extending the Trump administration's
tax cuts that would reduce revenue by over $2 trillion during the 10-
year window.
Question. In an October 26, 2021, letter to Senate Finance
Committee members, including myself, Health and Human Services
Secretary Xavier Becerra stated, ``CMS has taken a number of other
steps to reduce the [advanced premium tax credit (APTC)] to potential
improper payments,'' and also confirmed that applicants to the
Affordable Care Act (ACA) marketplace have household income ``verified
against trusted data sources like the IRS, Social Security
Administration, and the Department of Homeland Security.''
A 2021 Treasury Inspector General for Tax Administration report
found 27.4 percent of total net premium tax credit payments, also known
as Obamacare subsidies, were improper. Recently, a May 2022 Treasury
Inspector General for Tax Administration report found that the IRS is
``not requiring documentation to support a taxpayer's claim that they
received or, more importantly, were approved to receive unemployment
compensation when it is the sole basis for their PTC claim.'' Also, a
separate May 2022 Treasury Inspector General for Tax Administration
report found that the latest net premium tax credits payment amounts
and rates are still not included in the most recent Treasury
Department's Agency Financial Report.
I remained concerned about the verification of the APTC data, the
lack of recent transparency, and how taxpayer dollars continued to be
improperly spent. Given the Biden administration supports for extending
APTCs to high-income earners that is estimated to cost the taxpayers
$220 billion over the next decade if Congress takes action, it is
critical Congress have the latest data and information about APTCs.
Will the Treasury Department publish the net premium tax credits
payment amounts and rates in 2022? If so, when? If not, why?
Answer. The Treasury Department is committed to program integrity
among all of its programs, including the premium tax credit. We will
publish the net premium tax credit improper payment amount and rate in
Treasury's Annual Financial Report for FY 2022.
Question. Given that the latest data suggests that more than one in
four total net premium tax credit payments are improper, what
additional steps has the administration taken since January 2021 to
reduce this improper rate to zero? Please document the specific work
HHS and IRS have taken collaboratively based on Secretary Becerra's
October 2021 letter to me stating the ACA marketplace verifies
household income ``against trusted data sources like the IRS.''
Answer. The IRS reports risk assessments and improper payment
estimates for refundable tax credits, which can be found in the
Treasury Annual Financial Report (AFR), consistent with requirements of
the Payment Integrity Information Act of 2019 (PIIA).
The IRS has a robust compliance program for its refundable tax
credits which consist of examinations and audits, math error notices,
and document matching. The IRS's risk assessments on refundable tax
credits have consistently concluded that overclaims are not rooted in
internal control deficiencies, but instead are due to the complexities
of verifying eligibility, including unavailability of relevant third-
party data, for refundable tax credits within the time periods
prescribed by the tax system. Consequently, errors are not the result
of internal control weaknesses that can be remediated internally but
are, in fact, the result of factors beyond IRS's control under current
law and existing authority.
It is important to note HHS's and IRS's different roles in
administering the advance payment of the premium tax credit (APTC).
Eligibility determinations for APTC are not within the purview of the
IRS. Under the ACA, the marketplace is responsible for determining the
amount of APTC for which individuals are eligible based on their
projected family sizes and household incomes for the year reported to
the marketplace. Later this year, HHS plans to report in its annual
Agency Financial Report, for the first time, measurements of improper
payment rates of APTC for the federally facilitated exchange; an
improper payment measurement program for State-based exchanges remains
under development.
The IRS supports the household income and family size verification
process by disclosing certain available items of Federal tax
information after an individual submits an application for financial
assistance in obtaining health coverage to a marketplace. The items
disclosed are described under Internal Revenue Code section
6103(l)(21)(A) and the regulations issued under that section. This data
exchange has been in place since 2013. The IRS also processes tax
returns to determine the final amount of the PTC that taxpayers are
entitled to receive based on actual household incomes and family sizes
reported on their tax return and recovering APTC overpayments.
______
Question Submitted by Hon. Maggie Hassan
Question. Treasury recently released regulations changing rules
around foreign tax credits, which prevent double taxation of U.S.
businesses that operate abroad. One change removed the ability of U.S.
businesses to claim foreign tax credits in certain cases when foreign
countries impose withholding taxes on the services provided by U.S.-
based employees. It's essential that tax law changes protect U.S. jobs
and avoid any unintended incentives to move U.S.-based jobs abroad.
What analysis has Treasury undertaken to ensure that recent changes
to foreign tax credit rules protect jobs based in the U.S., and will
Treasury commit to making any changes necessary to ensure that these
rules do not create unintended consequences to move U.S. jobs abroad?
Answer. The final foreign tax credit regulations protect the
interests of the United States by allowing a credit for foreign taxes
only when the foreign jurisdiction has the primary right to tax the
income. In the case of income from services, the Internal Revenue Code
retains for the United States the primary right to tax income from
services rendered in the United States by treating that income as
derived from U.S. sources. As a result of this U.S. sourcing rule, a
foreign tax credit cannot be claimed against that income. Treasury,
however, is evaluating whether clarifications and possible changes to
the final regulations may be appropriate.
______
Questions Submitted by Hon. James Lankford
inflation
Question. Inflation has risen to highs not seen in more than 40
years. Year-over-year inflation in the Consumer Price Index for All
Urban Consumers (CPI-U) rose 8.6 percent in the month of May. These
increases are broad-based and persistent, as families continue to
contend with increasing prices for homes, gasoline, and food.
The administration has continuously contributed this rapid and
broad inflation to Putin; however, year-over-year inflation measures in
the Consumer Price Index have drastically accelerated from 1.4 percent
in January of last year to 7.5 percent in January of 2022--before the
invasion of Ukraine even occurred. It is clear that this broad-based,
record-high inflation began before Russia's invasion of Ukraine.
Do you agree that it is incorrect to attribute this preexisting
inflation on the war in Ukraine?
Answer. As the President and I have said, inflation is unacceptably
high and has been compounded in recent months by Russia's invasion of
Ukraine. The inflation seen in 2021 was a result of multiple factors:
continued waves of COVID that depressed labor force participation, shut
down manufacturing, and disrupted supply chains; decisions by
businesses to scale back capacity during the pandemic, including among
energy producers to reduce both crude oil production and refining
capacity; strong demand for goods due to changes in consumer behavior
over the pandemic; and household finances strengthened through
bipartisan fiscal relief.
Question. Obama administration officials Steven Rattner and Larry
Summers warned that, in the words of Rattner, ``shoveling an
unprecedented amount of spending into an economy already on the road to
recovery would mean too much money chasing too few goods.'' As such,
they have characterized the $1.9-trillion American Rescue Plan as ``the
original sin'' (Rattner) and the ``least responsible'' economic policy
in 40 years (Summers).
Do you agree that over-stimulating the economy with an influx of
$1.9 trillion unnecessary, untargeted dollars has contributed to the
economy's overheating and thus, the sky-rocketing inflation that we now
face?
Answer. The attribution of the inflation we are experiencing to the
American Rescue Plan is misplaced in my view. First, approximately one-
third of the inflation we have experienced in the last 18 months is
energy. There is no evidence that spending on gasoline or home heating
has surged because households received stimulus checks or unemployment
insurance. American households are consuming less gasoline in 2021 and
2022 than projected pre-pandemic. The reality is that oil producers and
refiners responded to a sharp fall in demand in 2020 by curtailing
production and taking refining capacity off line. These business
decisions--exacerbated by Russia's invasion of Ukraine--led to tight
market conditions and rapidly rising prices for energy. Second, food
accounts directly for another 10 percent of inflation over this period.
Embedded energy is a large fraction of the cost of producing and
distributing food; high energy prices therefore also explain a
substantial fraction of food inflation. Third, business decisions to
cut capacity have impacted prices outside of energy. Take airlines, for
example, which received substantial assistance during the pandemic to
pay their workers. Airlines nevertheless encouraged pilots and other
staff to take early retirement and are now scrambling to meet demand
that is at 2019 levels. These reductions in capacity account for a
substantial share of inflation. As other advanced economies reopen more
fully from the pandemic this spring and summer, we are seeing core
inflation rise quickly in those economies as well.
Question. Do you agree with the Federal Reserve Bank of San
Francisco's recent paper, which noted that ``income transfers may have
contributed to an increase in inflation of about 3 percentage points by
the fourth quarter of 2021''?
Answer. Their analysis does not separate the impacts of the
American Rescue Plan from previous rounds of fiscal relief and, by
design, cannot disentangle other differences across countries in
monetary policy response or COVID-19 response that may account for
differences in the speed of recovery or the rise in inflation. For the
reasons articulated in my previous answer, I think the attribution of
inflation to the American Rescue Plan is misplaced.
Question. Many administration officials claim that to get a handle
on inflation, Congress should pass the multitrillion-dollar ``Build
Back Better'' bill and raise taxes.
Do you believe it is prudent fiscal policy to increase taxes or
engage in additional deficit spending at this time?
Answer. The Federal Reserve has primary responsibility for price
stability, but Congress can take actions that lower price pressures by
reducing the deficit and making supply-side investments in affordable
housing and clean energy. Raising tax by closing loopholes, equalizing
tax treatment for multinational companies, and improving tax compliance
do not raise marginal tax rates, which, in any case, have only modest
impacts on business investment decisions. A far more direct way of
reducing prices is by directly lowering the cost of prescription drugs.
For instance, the relatively low rate of inflation pre-pandemic was due
to a slowdown in price increases in health-care driven, in part, by
cost containment measures in the Affordable Care Act. Targeted savings
in health care along with investments in housing, clean energy, and the
labor force can ease price pressures in the long term.
Question. With runaway inflation, a first-quarter decline in GDP,
and increasing odds of a recession, are you concerned that tax
increases could risk killing jobs?
Answer. A modest tax increase that only impacts high earners and
large corporations that reduces the deficit would have little impact on
economic growth or the labor market. The expiration of the Bush tax
cuts for upper-income households in 2012 and tax increases in 1993 did
not result in job losses or a weakening of the labor market.
Question. You recently stated that your comments last year
suggesting that inflation would be transitory were incorrect. You've
also stated that ``inflation is really our top economic problem at this
point'' and that ``it's critical that we address it.''
How long do you expect our period of record-high inflation to last?
Answer. Like other private forecasters, I expect core inflation to
gradually ease through 2022 and into 2023. The Federal Reserve has
primary responsibility for price stability, and its actions will
largely determine the pace at which core inflation eases. Food and
energy prices--and hence overall inflation--are less predictable given
the possibility of additional geopolitical shocks that could raise
prices. We are taking steps to try to avoid a further supply shock to
energy markets by pursing a price exemption to the sanctions adopted by
the European Union.
Question. What has changed regarding your estimation methodology
since last year?
Answer. As discussed in previous answers, a set of unanticipated
supply disruptions accounts for a substantial share of inflation
experienced in the United States and around the world. Shocks, by
definition, are unanticipated and their duration is uncertain. We
continue to revise our projections based on our best assessment of
incoming data and benchmark those assessments against those of external
forecasters and the projections of the Federal Reserve.
Question. The average weekly national average for regular gasoline
was $2.38 per gallon the week of January 18, 2021, just as President
Biden took office. Last week, average gas prices reached $5 per gallon.
Yet, this administration's budget proposal for FY 2023 proposes a
litany of tax hikes, specifically targeting U.S. energy production.
Do you believe that making it more expensive to produce American
energy would lead to even higher gas prices?
Answer. As you correctly noted, oil producers and refiners are
making record profits due to strong demand, exacerbated by increased
prices due to Russia's invasion of Ukraine. The market is providing
plenty of financial incentives to increase crude oil production and to
maintain or expand domestic refining capacity.
Question. How would targeting traditional domestic energy producers
with tax increases provide relief to Americans feeling pain at the
pump?
Answer. The objective of the administration's proposed adjustments
is to bring the tax treatment of oil, gas, and coal producers back in
line with other firms. These fossil fuel subsidies are inconsistent
with the administration's policy of supporting a clean energy economy
and reducing carbon emissions in the next decade. Moreover, the
subsidies must ultimately be financed with taxes that result in other
distortions, like reductions in investment in other, potentially more
productive, areas of the economy.
Oil prices are set in a global market and subject to global forces.
The same is largely true for gasoline prices. This is the reason why
U.S. gasoline prices have risen due to Russia's invasion despite the
U.S. being a net exporter of oil and petroleum products. Reducing these
subsidies for U.S. energy producers would not materially impact their
strong market incentive to increase production and would not
significantly impact a price that is largely determined by global
factors.
Question. What impact would you expect these tax hikes to have on
the Biden administration's commitment to supply an additional 15
billion cubic meters of liquefied natural gas (LNG) to Europe through
the remainder of 2022?
Answer. As you note, Russia's invasion of Ukraine will ensure
strong export demand for U.S. LNG. There is no need to subsidize
natural gas producers at a time of record profits and strong demand.
Question. Do you estimate these tax hikes would affect the price of
natural gas for home heating, which has already seen abnormal price
increases over the past 2 years?
Answer. The rise in natural gas prices reflects the fast recovery
from the pandemic and strong demand for U.S. LNG exports due to
Europe's need to shift away from Russian natural gas. Again, current
prices and demand for LNG will provide ample incentive for domestic gas
production without the need for taxpayer subsidies.
Question. Our national debt is over $30.5 trillion. Inflation and
the higher interest rates that accompany it mean higher net interest
costs to service that national debt. According to CBO's most recent
economic projections, rising interest rates and increasing debt will
cause net interest outlays to double as a percentage of GDP over the
coming decade. CBO estimates that Federal debt held by the public will
increase by $1.9 trillion in FY 2022 and will grow to 185 percent of
GDP in 2052.
In the Ways and Means Committee hearing on June 8th, you stated
that ``I think the most important measure of the burden of the debt on
the U.S. is the real net interest that we have to pay.''
Given that statement, what is your reaction to CBO's most recent
projections that net interest outlays will double as a percentage of
GDP in the coming decade, reaching 3.3 percent in 2032?
Answer. Under the CBO's projection, real net interest remains under
2 percent of GDP--one threshold that we use to judge fiscal
sustainability. More broadly, the speed of the recovery has reduced
projected debt-to-GDP ratios in the near term. Over the medium term,
more actions will need to be taken to reduce deficits and stabilize the
debt-to-GDP ratio.
Question. Do you agree that the burden of our skyrocketing debt is
significant?
Answer. I disagree with your characterization of the debt as
skyrocketing. The debt-to-GDP ratio has fallen over the last year as
the U.S. economy has recovered quickly. The administration and CBO
projections for the debt-to-GDP ratio and interest burden suggest that
our debt levels continue to be manageable. Over the long term, further
actions are likely needed to lower deficits and place our entitlement
programs on a stronger footing.
Question. Are you concerned about the impact of inflation on our
net interest payments?
Answer. Our budget projections recognize that interest rates are
likely to rise as the Federal Reserve has indicated. Longer-term
Treasury yields suggest that inflation is expected to return to target,
and longer-term real interest rates remain low. Of course, in the short
term, high inflation actually reduces our debt burden by lowering real
interest payments.
Question. At what point will you be concerned about the Federal
Government's ability to simultaneously service existing debt, fund
entitlement programs, and finance discretionary programs?
Answer. I think it is prudent to keep the debt-to-GDP ratio on a
stable or downward trajectory and real interest payments at or below 2
percent of GDP. The administration's revenue proposals would
meaningfully improve the fiscal outlook for the U.S., particularly over
the medium and long term. Further rounds of tax cuts for corporations
and wealthy Americans would weaken our fiscal outlook.
abortion and the economy
Question. Last month, during a Senate Banking Committee hearing,
you said that abortion was good for the economy.
Can you explain why you believe babies being born are damaging to
the U.S. economy?
Answer. That is a mischaracterization of my comments and views. The
overturning of Roe v. Wade takes away from women the personal choice of
when to start a family. The progress made since the 1970s in increasing
women's educational attainment and boosting women's labor force
participation has had immense benefits for the U.S. economy and the
welfare and opportunity of women. The United States was once a leader
among advanced economies in these dimensions. I would note that the
administration also recognizes the importance of supporting children
and working families. That's why we proposed an increased access to
health care, expanded Child Tax Credit, paid family leave, universal
pre-K, and grants for child care.
propublica
Question. On June 8, 2021, the media outlet ProPublica published an
article titled ``The Secret IRS Files: Trove of Never-Before-Seen
Records Reveal how the Wealthiest Avoid Income Tax.'' It has been over
a year since that first politically motivated article, which stated
that ProPublica had obtained a ``vast trove'' of IRS data on the
returns of thousands of Americans covering more than 15 years, was
published.
To date, the Treasury Department has been unable to provide the
members of this committee or the American public with any update
regarding how this breach occurred and what steps have been taken to
ensure that taxpayer information is protected.
In a June 8th, 2022 hearing before the House Ways and Means
Committee, you stated that ``[w]e don't know how that information got
into the public domain.'' You also stated that you have received no
update regarding the investigations.
Can you confirm that after an entire year of investigations, you
are still without any idea how this confidential, legally protected,
taxpayer data was made public?
Have you asked investigators for an update on their investigations?
What tangible steps has the Department taken to determine how this
occurred?
What tangible steps has the Department and the IRS taken to ensure
that taxpayer information in its possession is safe?
Answer. The Treasury Department is committed to protecting taxpayer
privacy and cares deeply about safeguarding taxpayer information. I
continue to be deeply concerned about this matter, as I have stated
publicly. I ensured that this matter was immediately referred to the
appropriate authorities, including the Office of Inspector General, the
Treasury Inspector General for Tax Administration, and the Department
of Justice. These authorities conduct their investigations
independently.
Question. The unauthorized disclosure of returns or return
information is a felony under 26 U.S.C. Sec. 7213(a)(1), and (2). It is
also a felony under Federal law to publish returns or return
information that were disclosed to the publisher by someone else under
26 U.S.C. Sec. 7213(a)(3).
How has the Department sought to enforce Federal law on those
publishing this protected, taxpayer information?
Answer. The Treasury Department is committed to protecting taxpayer
privacy and cares deeply about safeguarding taxpayer information. An
unauthorized disclosure of taxpayer information in violation of the law
would be illegal and must be taken extremely seriously. I continue to
be deeply concerned about this matter, as I have stated publicly. I
ensured that this matter was immediately referred to the appropriate
authorities, including the Office of Inspector General, the Treasury
Inspector General for Tax Administration, and the Department of
Justice. These authorities conduct their investigations independently.
Question. On June 7, 2022, I sent you a letter requesting that you
brief the members of this committee on how the IRS is protecting
taxpayer information, the security and safety protocols that are being
implemented, and where shortfalls exist. When asking for a briefing in
our FY 2023 budget hearing later that day, you said that we would try
to arrange something.
Can you commit to briefing our members on security protocols
underway at the IRS to keep taxpayer data safe?
Answer. The Treasury Department is committed to protecting taxpayer
privacy and cares deeply about safeguarding taxpayer information. My
staff is available to discuss this issue with you at any time.
Question. On May 19, 2022, the Government Accountability Office
(GAO) released a report providing an overview of cases of willful
unauthorized access, attempted access, inspection, and disclosure of
Federal tax information by IRS employees. That report indicates that
the IRS investigated and closed 1,694 cases from FY 2012 to FY 2021,
and that 27 percent of those cases were found to be violations and 22
percent were unresolved.
What are the Treasury Department and the IRS doing to ensure that
employees and contractors who inappropriately and illegally access
taxpayer information are held responsible?
Answer. The Treasury Department is committed to protecting taxpayer
privacy and cares deeply about safeguarding taxpayer information. An
unauthorized disclosure of taxpayer information in violation of the law
would be illegal and must be taken extremely seriously. I continue to
be deeply concerned about this matter, as I have stated publicly. I
ensured that this matter was immediately referred to the appropriate
authorities, including the Office of Inspector General, the Treasury
Inspector General for Tax Administration, and the Department of
Justice. These authorities conduct their investigations independently.
oecd
Question. Under the OECD agreement that you brokered, U.S.-
headquartered companies participating in activities that Congress
incentivized, such as R&D, could actively face higher rates of tax in
other jurisdictions where they operate. The under-taxed profits rule
(UTPR) as agreed to by your Department at the OECD would effectively
give other countries power over U.S. taxing authority and the U.S.
fisc--allowing these jurisdictions to look at U.S. headquartered
companies--partaking in the activity that Congress allowed--and if
there's a determination that that U.S. operation isn't paying enough
tax in the U.S. on their U.S. income, based on a standard determined
not by Congress, this deal permits that foreign country to tax that
company's U.S. profits.
This company is doing what Congress wanted to encourage companies
to do domestically, but yet, they could face higher tax rates,
threatening jobs and discouraging operations in the U.S.
Do you have a concern that this agreement relinquishes Congress's
taxing authority to foreign governments, OECD bureaucrats, and
unelected financial regulators?
Answer. Pillar Two recognizes that each jurisdiction sets its own
tax policy, and that multiple jurisdictions may assert taxing claims
over multinational businesses. Pillar Two levels the playing field for
U.S. multinationals, because it ensures that other countries'
multinationals are also subject to at least a minimum rate of tax on
their foreign earnings. It also includes a strong backstop rule to
ensure that other countries' multinationals do not have a competitive
advantage if their headquarters jurisdiction does not implement the
deal.
Under the global tax deal, Congress may enact legislation as it
wishes. Pillar Two is a common approach, and no country is required to
enact it. At the same time, we have worked collaboratively and
multilaterally to develop multilateral guidance documents that would,
for the first time, end profit shifting, create a more level playing
field for U.S. business, and end the 4-decade long race to the bottom
on corporate tax rates. Although our multilateral tax agenda has been
more ambitious than that of prior administrations, the basic approach--
working on multilateral guidance documents via the OECD--has been
pursued by every U.S. administration since the Kennedy administration.
Question. Do you believe that this agreement could undermine
Congress's exclusive taxing authority?
Answer. No. Congress will continue to have exclusive taxing
authority in the United States.
Question. Are you concerned that this agreement will make the U.S.
a less competitive place to do business?
Answer. No. In fact, Pillar Two levels the playing field for U.S.
multinationals by ensuring that other countries' multinationals are
also subject to at least a minimum rate of tax on their foreign
earnings.
Question. Under the Pillar Two model rules, U.S. companies relying
on congressionally enacted incentives in the tax code, such as
nonrefundable tax credits, will be put at competitive disadvantage
compared to their international counterparts because this agreement
treats subsidies more favorably than nonrefundable tax credits, which
permeate our tax code. Under this agreement, international companies
receiving a check from their government will be better off than our
U.S. companies.
Did the Treasury Department, on behalf of the United States,
negotiate to protect the U.S.'s current law tax incentives?
Answer. The distinction between refundable and non-refundable
credits in Pillar Two of the OECD/G20 international tax agreement was
initially negotiated in the prior administration and has been a matter
of public record since October 2020, when it appeared in the Pillar Two
blueprint. As negotiated by the prior administration, refundable tax
credits are treated as income rather than a direct reduction in the
taxpayer's effective tax rate. This general rule follows financial
accounting and carries over into the recently released model rules and
its commentary.
Under the Pillar Two model rules and commentary, tax credits
generally reduce a taxpayer's tax expense and thus effective tax rate.
That general rule was necessary, given the goal of Pillar Two to level
the playing field for American businesses and end the race to the
bottom for corporate effective tax rates. Failure to account for
credits and other incentives would render the minimum tax meaningless.
The Pillar Two model rules thus follow financial accounting treatment,
meaning that non-refundable credits reduce tax expense, while
refundable credits are treated as income.
The Office of Tax Policy has worked with the OECD to clarify the
treatment of general business credits under the Pillar Two minimum tax.
We are confident that the value of many of our general business credits
is preserved under the OECD rules, and we have established a process
with the OECD for working towards additional clarifications. Moreover,
because of the way investments that give rise to credits such the low-
income housing tax credit are structured and treated for financial
accounting purposes (i.e., under the equity method), the income or loss
and the income tax consequences of those investment typically will be
excluded from the effective tax rate calculation for Pillar Two
purposes. For those credits that are impacted by the Pillar Two model
rules, as noted in the FY 2023 Greenbook, the Biden administration
remains committed to working with Congress to ensure that taxpayers
continue to benefit from important tax incentives that provide U.S.
jobs and investment, in a manner consistent with the framework outlined
by the Pillar Two model rules and commentary.
Question. Are you concerned that the Pillar Two model rules create
an advantage for countries that provide direct taxpayer subsidies?
Answer. Pillar Two is a minimum tax. It is not and never has been
about preventing jurisdictions from incentivizing behavior through
other means, including grants and subsidies.
Question. How is this consistent with your stated effort to ensure
that countries, as you say, ``pay their fair share''?
Answer. Pillar Two is about leveling the playing field and ending
the race to the bottom on corporate tax rates. It therefore ensures
that multinational businesses pay their fair share, reduces incentives
to shift profits out of the United States, and protects the corporate
income tax base.
Question. Can you commit to protecting all congressionally enacted
provisions at OECD negotiations in a manner that does not hold Congress
hostage to make required legislative changes?
Answer. Treasury has worked with the OECD to clarify the treatment
of general business credits under the Pillar Two minimum tax. We are
confident that the value of many of our general business credits is
preserved under the OECD rules, and we have established a process with
the OECD for working towards additional clarifications. Moreover,
because of the way investments that give rise to credits such the low-
income housing tax credit are structured and treated for financial
accounting purposes (i.e., under the equity method), the income or loss
and the income tax consequences of those investment typically will be
excluded from the effective tax rate calculation for Pillar Two
purposes. For those credits that are impacted by the Pillar Two model
rules, as noted in the FY 2023 Greenbook, the Biden administration
remains committed to working with Congress to ensure that taxpayers
continue to benefit from important tax incentives that provide U.S.
jobs and investment, in a manner consistent with the framework outlined
by the Pillar Two model rules and commentary.
Question. You recognized this result during our hearing on June
7th, stating that the OECD agreement is ``structured so that direct
subsidies aren't counted whether we give them or they give them.'' You
continued on to say that ``we certainly would work with Congress to
make sure that the benefits Congress intended, the business credits,
are structured so that they will be available.''
Are you suggesting that we modify congressionally enacted tax
incentives into refundable credits or grants directly from the
government?
Answer. There are several policy considerations that are relevant
to the design of incentives like the research and experimentation
credit. Similarly, there are different design elements that affect how
a credit is treated for Pillar Two purposes. We are committed to
working with Congress to ensure that taxpayers continue to benefit from
important incentives like the research and experimentation credit while
also protecting revenue and other important policy considerations.
Question. Do you believe this would create a ``race to the bottom''
on government subsidies?
Answer. Pillar Two is a minimum tax. It is not and never has been
about preventing jurisdictions from incentivizing behavior through
other means, including grants and subsidies.
Question. Do you believe that companies not paying tax to the
government should receive additional payments from the government?
Answer. It is up to Congress to decide both the tax laws and what
grants and subsidies it should provide to incentivize particular
behavior.
Question. It is my understanding that the Department has recently
turned to the manner in which credits are treated for financial
accounting purposes to try to determine their outcome under the Pillar
Two model rules. This does not fully address the negative results of
Pillar Two, nor does it rely on distinguishable tax policy principles
as determined by the U.S. Congress.
Do you believe that unelected financial accounting regulators
should have the authority to determine the fate of domestic tax
incentives under the OECD agreement?
Answer. Pillar Two recognizes that each jurisdiction sets its own
tax policy, and that multiple jurisdictions may assert taxing claims
over multinational businesses. Pillar Two levels the playing field for
U.S. multinationals, because it ensures that other countries'
multinationals are also subject to at least a minimum rate of tax on
their foreign earnings. It also includes a strong backstop rule to
ensure that other countries' multinationals do not have a competitive
advantage if their headquarters jurisdiction does not implement the
deal.
Question. What assurances have you received from foreign
governments that they will accept accounting methods such as the
``equity method'' of accounting?
Answer. The treatment of investments accounted for under the equity
method of accounting is a fundamental design feature of Pillar Two. The
Pillar Two model rules only treat as part of the group those ownership
interests that are consolidated for financial accounting purposes. The
income or loss from investments that are accounted for under the equity
method, as well as the tax consequences of the investment, typically
are excluded in determining the effective tax rate.
Question. You have stated that the OECD agreement should have
bipartisan support; however, to date, you have briefed the members of
this committee on a bipartisan basis one time. Meanwhile, the
administration continues to push changes to our international system in
partisan, one-sided reconciliation proposals.
There is a difference between after-the-fact briefings and good-
faith consultation, which this department has continuously failed to
do.
Given that implementation of any deal would require both tax
legislation and treaty ratification, when can you commit to having your
chief negotiators appear before the members of the committee to present
key open issues and ask for congressional input before those open
issues are actually decided?
Answer. To be open and transparent, we have not only sought out the
counsel of members and staff, we have made the Treasury team available
for individual briefings as well and several bipartisan, bicameral
briefings. Additionally, we have shared OECD documents in short order
after receipt and have appreciated the constructive conversations we
have had throughout the course of these negotiations, with both
majority and minority members and staff. The OECD Secretariat recently
released a progress report that provides a comprehensive overview of
where the negotiations stand.
We would be happy to work with committee staff on any invitation
they might extend to Treasury officials to present to committee
members.
Question. Please provide a date for that briefing.
Answer. See above.
Question. In response to my questions during our June 7th hearing,
you said, ``I mean, we are the only country that imposes any minimum
tax on the foreign earnings of our multinational corporations.'' That
is true.
Given that we already have a global minimum tax and are the only
country with one, and the EU's recent recognition that they aren't
planning to fully implement Pillar Two until 2024 at the earliest, do
you still hold the view that the U.S. needs to move first on this
agreement?
Answer. Yes.
Question. If so, for what reason?
Answer. Even without the global deal, it makes good policy sense to
reform GILTI, and preferably sooner rather than later, because doing so
decreases incentives to shift profits and jobs offshore. It makes sense
to raise the GILTI rate on foreign income so that it is closer to the
headline corporate rate on domestic income. Otherwise, firms get a deep
discount on what they earn abroad, incentivizing them to move profits
and jobs overseas. It also makes sense to reform GILTI to apply on a
country-by-country basis because current GILTI allows companies to
blend high and low tax streams of income together, thereby escaping
minimum tax liability. This creates incentives to earn income anywhere
but the United States.
Question. In response to questions from Senator Toomey at our June
7th hearing, you stated that the fiscal impact of Pillar One ``could go
either way depending on the details, which have not been decided in the
Pillar One negotiations.'' You continued to say ``[n]et, it could be
positive or negative, depending on the details that have not yet been
worked out, and that's why we've not provided data.''
Will you keep Congress, including the members of the Senate Finance
and House Ways and Means Committees, apprised of those negotiations and
assure they have an active role in the decision making and outstanding
details that you've referenced?
Answer. We have strived to be open and transparent. We have not
only sought out the counsel of congressional members and staff, we have
made the Treasury team available for individual briefings as well and
several bipartisan, bicameral briefings. Additionally, we have shared
OECD documents in short order after receipt and have appreciated the
constructive conversations we have had throughout the course of these
negotiations, with both majority and minority members and staff.
Question. With respect to the economic impact of Pillar Two, you
stated that ``of course the data relating to Pillar Two is available,
and that was included in the House-passed bill and scored by JCT.'' My
understanding is that JCT does not anticipate or assume future action
on behalf of foreign governments in their scoring calculations. Given
that, it seems that there are two circumstances that could play out:
(1) no other country implements Pillar Two and all of JCT's revenue
projections are correct, or (2) countries enact Pillar Two and the JCT
projections are much too high due to declining amounts of GILTI tax
that will be owed.
Do you believe no other country will enact Pillar Two?
Answer. No; the revenue estimates follow a scoring convention that
assumes no changes in the behavior of other governments.
Question. What is the revenue effect of Pillar Two for the United
States if other countries enact Pillar Two, including qualified
domestic minimum top-up taxes (QDMTT's), and begin taxing U.S.
companies' foreign subsidiaries?
Answer. As noted, revenue estimating conventions require that the
JCT assume no changes in the behavior of other governments. If other
countries implement Pillar Two, the JCT estimate for GILTI in the House
passed bill would likely be reduced, since some of the revenue that
would have been collected by the United States under the no Pillar Two
adoption assumption, could now be collected by foreign governments that
adopt Pillar Two. However, the estimate would not be reduced to zero.
If every jurisdiction implements Pillar Two, that would significantly
reduce the incentives to shift profits out of the United States,
because profits in every jurisdiction would be subject to at least a
15-percent effective tax rate. As a result, more corporate income
should be booked in the United States. In addition, the deal would
level the playing field for U.S. businesses, and we believe on that
level playing field, U.S. businesses can compete and win. Indeed, a
level playing field has been the single most commonly articulated
policy request of the U.S. MNC community for a generation--and that is
what the global agreement delivers.
Question. As mentioned above, the Pillar Two model rules released
last December drastically changed the scope of the UTPR from an
``under-taxed payments rule'' to an ``under-taxed profits rule.'' In
light of these changes:
Has Treasury modeled the revenue impact of other countries' ability
to tax U.S. companies' U.S. profits under the UTPR, including where
U.S. companies have utilized U.S. tax incentives that may reduce their
effective tax rate under Pillar Two?
Answer. The UTPR rules released in December 2021 are in most
respects consistent with the Blueprint released in October 2020 and
negotiated by the prior administration. Specific changes were made in
response to congressional and U.S. business input that the Pillar Two
rules must not allow our most significant competitors to provide their
multinationals with a competitive advantage by reducing the effective
tax rate in the parent jurisdiction. The UTPR now prevents that.
The administration's recent Greenbook proposal precludes foreign
governments from collecting tax on U.S. companies through the UTPR
mechanism, because the United States would enact the qualified domestic
minimum top-up tax (QDMTT), which would make all U.S. companies face at
least a 15-percent minimum tax rate (as defined by Pillar Two rules) on
their U.S. income. The administration has also committed to upholding
the important tax incentives provided by key general business credits
by providing for refundability (as defined for UTPR purposes), thus
ensuring that taxpayers can continue to benefit from these important
incentives under the UTPR framework.
Question. What is the revenue impact from Treasury's model?
Answer. Under standard revenue scoring assumptions, no foreign
legislative action is assumed. Since the assumption is that no other
countries would adopt Pillar Two, the Greenbook revenue estimate does
not reflect foreign countries' ability to tax U.S. companies' U.S.
profits under the UTPR.
foreign tax credit regulations
Question. In late December, days before the end of the year, your
department released final regulations pertaining to foreign tax
credits. These regulations were published in the Federal Register on
January 4, 2022, and in a number of instances, are effective
immediately, meaning these regulations are already impacting business
decisions and financial statements.
We've heard a number of concerns from taxpayers regarding these
regulations, including their significant departure from precedent
without any congressional direction, and the broad impact they will
have on the creditability of certain taxes that have been creditable
for decades under established case law.
U.S. businesses have reached out to us concerned about the
regulations' impact on their ability to compete and grow
internationally, which would result in fewer jobs here in the U.S. Your
own department officials have acknowledged that there are significant
issues with these regulations and that guidance is needed, stating that
taxpayers ``want certainty'' and that ``they want to be able to rely''
on guidance. At the same time, your officials recognize that guidance
will take months, will be in proposed form, and will not address all
issues that taxpayers are facing.
If your tax policy officials know that guidance is needed, how can
you reasonably expect taxpayers to comply with these rules as they
currently stand, which are already effective?
Answer. The final regulations released in December 2021 took the
same basic approach as the proposed rules, while incorporating changes
made after careful consideration of the numerous comments submitted
through a public process. Since the final regulations were released, my
staff has engaged with numerous stakeholders and is considering whether
any further changes or clarifications would be warranted.
Question. Should investors rely on corporate financial statements
detailing the impact of the regulations when your department has
signaled changes to those regulations?
Answer. Treasury has the ability to clarify concerns that some
taxpayers have raised and confirm the appropriate reading of the text
of the rules. If Treasury issues a notice of proposed rulemaking to
consider making changes made to the final regulations, interested
parties will be able to submit comments or otherwise participate in the
rulemaking process.
Question. At our June 7th hearing, when asked whether the
regulations' effective date may be delayed to accommodate the need for
guidance and the clear host of issues surrounding the regulations, you
said you ``don't think it will be delayed.''
What is the rationale behind this decision?
Answer. The final regulations released in December 2021 took the
same basic approach as the proposed rules, while incorporating changes
made after careful consideration of the numerous comments submitted
through a public process. Since the final regulations were released, my
staff has engaged with numerous stakeholders and is considering whether
any further changes or clarifications would be warranted.
Question. Please explain why the effective date for the rules in
Puerto Rico was delayed for a year, while in other jurisdictions that
will require legislative changes to bring their tax systems into
compliance with the new rules (e.g., Brazil), the rules are effective
immediately?
Answer. Puerto Rico's unique status as a U.S. territory and an
outstanding IRS notice stating that taxpayers will not be challenged on
the creditability of an excise tax imposed by Puerto Rico under its Act
154 distinguish Puerto Rico from foreign jurisdictions that are not
similarly situated. Further, Treasury's Office of Tax Policy has been
providing technical assistance to the Puerto Rico Treasury Department
in developing tax legislation that would generally replace Act 154 and
that would satisfy the requirements under the final tax regulations.
Question. In response to Senator Portman, you noted that guidance
may be ``retroactive,'' however, these regulations are already
impacting business decisions and financial statements.
How do you expect U.S. companies to make decisions today--decisions
that impact U.S. operations and U.S. jobs--under the pretense that
guidance is forthcoming, but the contents of which are uncertain?
Answer. The final regulations released in December 2021 took the
same basic approach as the proposed rules, while incorporating changes
made after careful consideration of the numerous comments submitted
through a public process. Since the final regulations were released, my
staff has engaged with numerous stakeholders and is considering whether
any further changes or clarifications would be warranted.
social security and medicare trust funds
Question. On June 2, 2022, the 2022 OASDI trustees report,
officially titled ``The 2022 Annual Report of the Board of Trustees of
the Federal Old-Age and Survivors Insurance and the Federal Disability
Insurance Trust Funds,'' was released. This report comes well after the
statutory deadline of April 1st.
Both members of the Senate Finance Committee and the Government
Accountability Office (GAO) have requested explanations for the lack of
timeliness with respect to the reports, as well as adequate notice to
Congress in advance of a late report. Unfortunately, such explanations
have not been provided.
As managing trustee of the reports, can you please explain the
cause of the over 2-month delay in the last report's publication?
Answer. The delay in the publication of the Social Security and
Medicare trustees reports was due to both late delivery of the first
drafts by the actuaries' offices (about 1 month) and challenges with
scheduling the trustees meeting (about 1 month).
energy
Question. At the FY 2023 Treasury Department budget hearing, you
stated that releases from the Strategic Petroleum Reserve have provided
a meaningful downward pressure on gas prices. However, energy analysts
have pointed out that the releases amount to only about 5 percent of
daily oil consumption in the U.S., and argue these releases are
unlikely to have much impact. In fact, one analyst was quoted as
saying, ``it might give you a little bit of short-term relief the same
way that taking some Advil will give you temporary relief from a
headache. But the root cause of the headache is probably still going to
be there, and that's going to be sticking around long after the
medicine's worn off.''
What data do you have to support your statement that SPR releases
have aided in keeping gas prices down, or preventing them from rising
higher?
Answer. President Biden announced the largest-ever release of oil
from the Strategic Petroleum Reserve, which committed to put 1 million
additional barrels on the market per day on average--every day--for 6
months. The release will provide a record amount of supply to the
market until the end of the year, when domestic production is expected
to increase by 1 million barrels per day. Research by the staff at the
Dallas Federal Reserve has shown that historically, these Strategic
Petroleum Reserve policy interventions have stabilized prices during
times of supply disruptions. This historic Strategic Petroleum Reserve
release will also aid families facing high gasoline prices. Current
market circumstances are unique, however, so the administration will
continue to examine the effect of the Strategic Petroleum Reserve
release going forward.
Question. SPR releases are, at best, a temporary measure. What is
the Treasury Department, and the administration more broadly, doing to
address the ``root cause'' of high prices, which is demand outpacing
supply?
Answer. In addition to the release of oil form the Strategic
Petroleum Reserve, the administration announced that the Environmental
Protection Agency issued an emergency waiver allowing E15 gasoline,
gasoline that uses a 15-percent ethanol blend, to be sold this summer.
The emergency waiver can help increase fuel supplies and provide energy
savings to families.
Consumption of gasoline and fuel are currently at lower than pre-
pandemic levels. Domestic refinery capacity and oil production have
declined. Oil and natural gas producers did not anticipate the strength
of the recovery in the economy and did not increase supply to match
increased demand. Higher prices should induce producers to increase
supplies over time.
The administration understands that its efforts to increase energy
production in the near term must be coupled with medium- and long-term
efforts to transition our economy away from fossil fuels produced by
autocrats and toward clean energy.
Question. At the hearing, you stated that with regards to energy
prices, ``over the medium term the critical thing is that we become
more dependent on the wind and the sun that are not subject to
geopolitical influences. . . .'' The U.S. is dependent on China for 80
percent of our rare earth elements, and is dependent on that Nation for
a variety of other critical minerals. These materials are necessary to
support wind and solar projects, in addition to many other renewable
energy technologies. In 2010, China cut off rare earth exports to Japan
over a territory dispute, demonstrating that the Nation is willing to
use export of these materials as a political weapon.
Do you believe that increasing wind and solar deployment reduces
our geopolitical risks, as you stated in the hearing?
Answer. The global economy has become too vulnerable to countries
using their market positions in raw materials, technologies, or
products to exercise geopolitical leverage or disrupt markets for their
own gain. For example, the development of dependence on Russian oil and
gas favored cost and convenience over concentration risk and
considerations of security. Due to the nature of global energy markets,
the global economy is held hostage to the hostile actions of those who
produce fossil fuels. This will happen again if we don't redouble our
efforts on clean and renewable energy, which rely on plentiful, secure
sources like solar and wind to operate. Over the medium term, we need
to dramatically ramp up renewables, invest in new technologies, and
increase support for energy efficiency measures to reduce energy demand
and increase energy security.
Question. Has the Treasury Department performed any risk
assessments or analyses of dependence on China for critical minerals,
which are essential components in renewable energy technologies you
have supported?
Answer. On February 24, 2021, the President signed Executive Order
14017, directing a whole-of-government approach to assessing
vulnerabilities in, and strengthening the resilience of, critical
supply chains, including critical minerals. Building off of the 100-day
supply chain reviews released in June 2021, the February 2022 reports
by the Departments of Energy and Defense identified vulnerabilities and
multiyear strategies for critical mineral supply chains. Numerous
actions are being taken across the administration in response to the
reports produced as a result of the executive order.
Question. You talked a lot about implementing energy policies that
reduce geopolitical risk at the recent budget hearing. The Biden
administration has agreed to allow some Venezuelan oil resources to be
shipped to Europe in contravention of U.S. sanctions. Iran is already
exporting 1 million barrels of oil per day, 70 percent of which goes to
China, and the administration has taken no action to crack down or
enforce existing sanctions. There are also reports that the
administration may allow even more Iranian oil onto the world market
absent a nuclear deal in an effort to relieve pressure on prices.
Do you believe these actions reduce geopolitical risks and enhance
our national security?
Are you concerned about the liquidity boost that these oil exports
will provide to Maduro in Venezuela and Raisi in Iran, and their
support for terrorism or drug trafficking in their respective regions?
Answer. Treasury remains very concerned about both Iran's and the
Maduro regime's destabilizing activities. We will continue to use our
sanctions authorities and target those who provide support to these
regimes.
With regard to Iran, the U.S. government took recent actions to
target Iran's exports of oil as well as petrochemicals, another source
of revenue for the Iranian regime. On June 16th, Treasury sanctioned a
network of Iranian petrochemical producers, as well as front companies
in the China and the United Arab Emirates (UAE) that support Iranian
entities instrumental in brokering the sale of Iranian petrochemicals
abroad.
With regard to Venezuela, Treasury continues to enforce sanctions
on multiple sectors of the Venezuelan economy, the Venezuelan Central
Bank, and many high-ranking Maduro regime officials. These sanctions
are intended to prevent the Maduro regime from using the Venezuelan
economy to enrich corrupt insiders while holding accountable those
responsible for Venezuela's tragic decline.
Question. Conversation continues around greatly extending and
expanding tax incentives for renewable energy technologies. Sustained
high government spending over the past 2 years has fueled out-of-
control inflation that registered at a staggering 8.6 percent in the
year through May 2022.
Has the Treasury Department performed any studies about the impact
a significant expansion in energy tax credits would have on inflation?
Answer. The administration's FY 2023 budget proposed to fully pay
for incentives for clean energy. The incentives are paid for by asking
more from large corporations and the wealthiest Americans. The 2017 tax
cut delivered a windfall to them, and this would help reverse that.
Combined with these proposals, the energy incentives would lower
inflation.
Incentives for clean energy proposed by the administration are
critical ways in which we can help lower and middle-income families cut
their costs, offset price pressures that they face, and address climate
change, and over the medium-term, reduce our dependence on fossil fuels
and on global oil markets where geopolitical risks are often causing
spikes in oil prices.
Question. The administration recently announced it would use
emergency powers under the 1930 Tariff Act to allow solar projects to
source solar modules and cells from the four countries that are the
target of a Commerce Department anti-
circumvention investigation. The administration also announced the
designation of five types of clean energy infrastructure that are
critical to national security; this list includes solar panels.
Please explain how these conflicting proposals enhance our national
security.
Answer. In recent years, the vast majority of solar modules
installed in the United States were imported, with those from Southeast
Asia making up approximately three-quarters of imported modules in
2020. Recently, however, the United States has been unable to import
solar modules in sufficient quantities to meet market demand. This
acute shortage of solar modules and module components has abruptly put
at risk near-term solar capacity additions that could otherwise have
the potential to help ensure the sufficiency of electricity generation
to meet customer electricity demand. Roughly half of the domestic
deployment of solar modules that had been anticipated over the next
year is currently in jeopardy as a result of insufficient supply.
Across the country, solar projects are being postponed or canceled.
The Federal Government is working with the private sector to
promote the expansion of domestic solar manufacturing capacity,
including our capacity to manufacture modules and other inputs in the
solar supply chain, but building that capacity will take time.
Immediate action is needed so that in the interim the United States has
access to a sufficient supply of solar modules to assist in meeting our
electricity generation needs.
banking
Question. A couple of weeks ago, you testified at the House
Financial Services Committee, giving an update on FSOC. You were asked
about the SEC's Staff Accounting Bulletin (SAB) No. 121, which requires
companies that ``safeguard'' digital assets to record the amount of
these investor-owned assets on the entity's balance sheet, even though
no such amounts are typically recorded on balance sheets for other
assets held in custody. The SAB's potential scope is broad and could
make traditional bank custody of digital assets and other arrangements
with third-party providers infeasible, due to capital and other
prudential requirements from holding the assets on the bank balance
sheet.
Your response at the time indicated you needed to learn more about
SAB 121.
Following the hearing in the House, do you have any updated
response on SAB 121? Specifically, how the various agencies are working
together on this and how you think banks should proceed, now that it
seems such activities are discouraged through the capital requirement?
Answer. Treasury understands that the SECs Staff Accounting
Bulletin No. 121 (SAB 121) could impact the ability of banks to provide
crypto-asset custody. Treasury is in conversations with the SEC,
Federal banking regulators, and potentially affected financial
institutions to gain a better understanding of the expected scope and
impact of the guidance on different types of financial institutions.
Question. In its discussion paper, the Federal Reserve committed to
moving forward with a Central Bank Digital Currency (CBDC) only with
clear congressional support ``ideally in the form of a specific
authorizing law.'' Since then, the White House's executive order on
crypto has identified CBDC as a top priority, tasked Treasury with
writing an additional report, and asked the Attorney General to assess
whether Congress has a role.
What role do you think Congress should play, and how do you view
Treasury's role in charting a path forward?
Answer. As noted, the Digital Assets Executive Order directs the
Department of Justice to assess whether legislative changes would be
necessary to issue a United States CBDC, should it be deemed
appropriate and in the national interest. The Digital Assets Executive
Order also directs Treasury, in consultation with other executive
branch agencies, to assess the potential implications of a United
States CBDC for economic growth and financial stability, the U.S.
payment system, national security, and democratic values. Congress and
Treasury have important roles to play in charting any path forward for
a CBDC. We believe that the two reports, which are due in September,
will inform consideration of a U.S. CBDC.
______
Questions Submitted by Hon. Rob Portman
Question. I appreciate your willingness to work with me on the
foreign tax credit regulations to ensure that withholding taxes on
service payments that have been creditable for decades will remain
creditable under the regulations finalized earlier this year. As I
mentioned at the hearing, the services provided by U.S.-headquartered
companies and their employees to foreign affiliates throughout the
world are a major benefit to the U.S. economy and the employees that
provide those services. While I appreciate concerns over the
creditability of digital service taxes and primary taxing rights, I
believe that the regulations in their current form incentivize the
outsourcing of service jobs that are so beneficial to our States.
Please detail your next steps and timeline to better target digital
service taxes under the regulations and ensure that withholding taxes
on these service payments remain creditable.
Answer. The final regulations protect the interests of the United
States by allowing a credit for foreign taxes only when the foreign
jurisdiction has the primary right to tax the income. Treasury is
considering an NPRM to start a process for any further changes and will
engage with Congress and stakeholders as part of that process. My staff
is available at any time to discuss this with you.
Question. In addition to the new ``attribution requirement'' for
foreign tax credits, I am also concerned with the rules in the final
foreign tax credit regulations that allocate foreign withholding taxes
on dividends paid by a disregarded entity (i.e., ``remittances''). The
final regulations provide that taxes are assigned based on the earnings
out of which the remittance was made, but they require taxpayers to
allocate taxes based on the tax book value of the assets of the
distributing entity as a proxy for those earnings. In many cases, the
required use of asset tax book value as a proxy for earnings produces a
material distortion that will result in double taxation through a non-
economic loss of foreign tax credits and thus increases the cost of
redeploying capital to the United States. It is also inconsistent with
the statutory language providing that a credit be allowed for taxes
that are ``properly attributable'' to foreign earnings taxed under
subpart F and GILTI.
From the time the tax book value of assets rule first appeared in
the 2019 proposed regulations, Treasury has acknowledged its potential
distortionary effect. Indeed, the 2019 proposed regulations included an
exception in the case of abuse or material distortion. When proposed
again in 2020, the material distortion exception was removed, but
Treasury asked for comments to address the distortion, including
tracing to accumulated earnings. Despite receiving comments
recommending the use of tracing to current and accumulated earnings,
the final regulations not only failed to address the potential for
material distortion but also applied the rule retrospectively,
notwithstanding comments seeking prospective applicability.
Given the material distortion that may result from the use of the
tax book value of assets, would you consider making changes to the
regulations that would allow taxpayers to demonstrate the accumulated
earnings out of which a remittance is made and to allocate withholding
taxes accordingly?
Answer. Treasury is considering an NPRM to start a process for any
further changes and will engage with Congress and stakeholders as part
of that process. My staff is available at any time to discuss this with
you.
Question. As part of the Taxpayer First Act, there were
requirements for the IRS to use electronic signature options for Forms
2848 and 8821.
What steps can the IRS take to fully implement these provisions and
ensure that it results in a faster process overall for users, similar
to private sector electronic signature options?
Answer. Earlier this year, the IRS explained how Forms 2848 and
8821 can be safely uploaded and signed online. Taxpayers can create
Secure Access accounts and follow authentication procedures to safely
and efficiently submit these forms with electronic signatures.
Question. While the IRS has made great strides in transitioning to
the electronic filing of individual tax returns, the majority of
businesses still file their quarterly and annual payroll tax filings on
paper. In fact, if a business needs to file an amended 941 (941-X),
there is not even an electronic option. These paper returns contributed
to the massive paper backlogs at the IRS over the last few years as
businesses amended their returns to claim COVID-19-related tax credits.
What steps, if any, is the IRS taking so that it will be able to
provide the option of electronic filing on forms like the 941-X, as
well as to incentivize more businesses to file electronically?
Answer. The IRS plans to continue expanding access to electronic
filing in the future. While there is not yet an electronic option for
businesses to amend their 941, businesses can electronically file their
940, 941, 943, 944, and 945 employment tax forms. The IRS is dedicated
to improving investments in technology and automation, as well as
expanding access to electronic filing.
Question. As the IRS deals with a variety of workforce issues in
the coming years, including bringing in younger workers and more staff
focused on information technology, workforce training will be an
important component.
What steps is the IRS taking to ensure that it is training its
workforce in state-of-the-art tax administration techniques that
reflects changing technology and promotes the early and fair resolution
of tax disputes? Is there additional legislative authority that could
help achieve the workforce goals of the agency?
Answer. As the IRS works on bringing in more staff, it is aware of
and cognizant of the importance of a good training program. It is
dedicated to training its employees, improving technology, and
promoting fair resolutions of tax disputes.
Question. It was brought to my attention that the IRS recently
proposed increasing the renewal fees it charges to tax professionals
from $67 to $140. When compared to the EA user fee in 2019, which was
$30, there would be over a 466-percent increase in the user fee cost.
In addition to representing taxpayers before the IRS, EAs often
perform invaluable tax preparation services. The skill and experience
EAs bring to our tax system contribute to a more effective and
efficient system. Creating a barrier of any sort for enrolled agents
could serve to disincentivize people from either becoming, or
continuing to work as, EAs. We are all aware that small businesses and
individuals have experienced economic pressure in the last 2 years and
are still feeling the impact of cost increases across our economy.
In light of these concerns, could you please provide more
information on the proposed EA user fee increase, including an
explanation of the proposed steep increase and whether alternatives
were considered, such as a more modest increase?
Answer. The IRS sets the EA user fee to recover any costs
associated with enrolling or renewing enrollment. The fee is updated to
reflect any changes in the amount it costs to provide an underlying
service.
Question. Lastly, I'd like to follow up on what we should and
should not do in this economic environment. Let us start with what we
should do.
With the prospect of a recession or stagflation becoming a reality,
are there additional tools in the Treasury toolbox to bring inflation
down and when do you think it will go down to pre-pandemic levels?
Answer. The primary responsibility for price stability lies with
the Federal Reserve. The administration is using the tools at its
disposal to ease price pressures, like its robust release from the
Strategic Petroleum Reserve.
Question. On what we should not do, should we not heed the words of
former President Obama? In 2009, he stated ``the last thing you want to
do is raise taxes in the middle of a recession.''
Do you agree that tax increases should be avoided with the current
economic uncertainty?
Answer. The U.S. economy has recovered quickly from the pandemic,
and the labor market continues to expand at a healthy rate. The modest
revenue measures under consideration that would only impact those
families earning more than $400,000/year and large corporations--some
of which would only phase in over time--would have little effect on the
path of the economy. Tax increases in 1993 and 2012 had little impact
on the economy.
______
Questions Submitted by Hon. John Thune
Question. In last year's budget hearing, I asked you about the leak
or hack of private taxpayer information which ended up in the hands of
a left-leaning media outlet, ProPublica. You acknowledged that the
breach was a serious issue and promised to keep this committee informed
about Treasury's investigation and findings into the matter. Despite
your assurances, Treasury has provided no meaningful follow-up to the
Senate Finance Committee--much less accountability to taxpayers.
Finance Republicans have repeatedly asked for updates about the breach
of private taxpayer information, and the administration continues to
delay and deflect on providing substantive answers.
How has the administration held those accountable who broke Federal
law by sharing confidential tax information?
Answer. I ensured that this matter was immediately referred to the
appropriate authorities, including the Office of Inspector General, the
Treasury Inspector General for Tax Administration, and the Department
of Justice. These authorities conduct their investigations
independently.
Question. When will you provide the Finance Committee an update
about Treasury's investigation into the breach of private taxpayer
information?
Answer. I continue to be deeply concerned about this matter, as I
have stated publicly. I ensured that it was immediately referred to the
Office of Inspector General, the Treasury Inspector General for Tax
Administration, and the Department of Justice. Those authorities
conduct their investigations independently.
Question. When taxpayers' private information is leaked or hacked
from the IRS, a Treasury bureau, and then shared by a partisan media
outlet, how do you think that impacts taxpayer trust in the government?
Answer. The Treasury Department is committed to protecting taxpayer
privacy and cares deeply about safeguarding taxpayer information. An
unauthorized disclosure of taxpayer information in violation of the law
would be illegal and would need to be taken very seriously. I am deeply
concerned about this matter and, in an effort to get to the bottom of
what happened, ensured that it was immediately referred to the
appropriate authorities, including the Office of Inspector General, the
Treasury Inspector General for Tax Administration, and the Department
of Justice.
Question. It has been stated before, and it bears repeating--the
OECD agreement would require changes to every one of our existing
bilateral tax treaties. Changes of this nature warrant formal treaty
changes or a multilateral convention, which would require the approval
of two-thirds of the Senate.
Do you think Pillar One is consistent with our existing bilateral
tax treaties?
Answer. It is widely understood that Pillar One requires
modification to existing bilateral tax treaties.
Question. If our bilateral tax treaties would need to be modified
to provide countries new taxing rights over U.S. companies, won't
implementation require a Senate-approved tax treaty (multilateral
convention)?
Answer. The administration has consistently said that the Pillar
One multilateral convention must be approved by Congress. There are two
possible paths for implementing international agreements in the United
States--congressional executive agreements and Article II treaties. We
look forward to consulting with Congress as to the appropriate process
to obtain such approval once the multilateral convention is ready for
signature.
______
Questions Submitted by Hon. Patrick J. Toomey
Question. During the Senate Finance Committee on June 6, 2022, I
asked when Treasury would share data on the impact of the current OECD
agreement on U.S. companies and U.S. revenue. You responded with, ``The
impact on fiscal revenues will be small. Pillar Two has a big impact
and Pillar one will have a small impact. We're a very large market
economy. We will gain revenue from our ability to tax foreign
corporations that are doing business in the United States, where we
consume those services. We will lose some from revenue that's--taxing
authority that's reallocated to foreign countries. Net it could be
positive or negative depending on details that have not yet been worked
out and that is why we have not yet provided data.''
I understand that there are details regarding Pillar One that have
not been finalized. However, based on your response, that ``the impact
on fiscal revenues will be small,'' Treasury clearly has enough data to
draw this type of conclusion--perhaps through analyzing different
scenarios for Pillar One's final details.
Congress has sole tax-writing authority. Yet, Treasury has not
provided the necessary data to develop independent estimates of the
impact of the current OECD agreement on U.S. companies and U.S. tax
revenue to Congress.
As a follow-up to my question during the hearing, will you commit
to immediately turning over the data Treasury currently has to
Congress's tax-writing committees and the nonpartisan Joint Committee
on Taxation?
Answer. Our Office of Tax Analysis staff is working to estimate the
range of potential revenue impacts based on the progress report
released by the OECD Secretariat. There are numerous open issues in
that progress report that interact in complex ways.
Question. In response to my question regarding the impact of the
current OECD agreement on U.S. companies and U.S. revenue, you
suggested that the Build Back Better Act (H.R. 5376) (BBB) GILTI tax
changes reflected the effect of implementing Pillar Two. However, the
JCT estimate of the BBB international tax changes assumes that no other
country enacts Pillar Two. The BBB GILTI revenue estimate clearly is
not an estimate of Pillar Two unless you think the United States is
going to act alone.
Do you believe no other country will enact Pillar Two?
Answer. No; the revenue estimates follow a scoring convention that
assumes no changes in the behavior of other governments.
Question. What is the revenue effect if other countries enact these
rules and begin taxing U.S. companies' foreign subsidiaries?
Answer. As noted, revenue estimating conventions require that the
JCT assume no changes in the behavior of other governments when
estimating BBBA GILTI. If other countries implement Pillar Two, the JCT
estimate for BBBA GILTI would likely be reduced, since some of the
revenue that would have been collected by the United States under BBBA
GILTI without Pillar Two could now be collected by foreign governments
that adopt Pillar Two. However, the BBBA GILTI estimate would not be
reduced to zero, because the global equalization of the tax rates of
U.S. MNE's caused by BBBA GILTI should decrease profit shifting and
cause a realignment of the location of profits with the location of
productive activities; therefore, we would anticipate that intellectual
property of some U.S. MNE's would be relocated to and taxed in the
United States and other ``shifted'' profits would also be relocated to
and taxed in the United States. The degree to which the JCT BBBA GILTI
revenue estimate would be reduced therefore depends on the magnitude of
profit reallocation, the jurisdiction to which profits are relocated,
and the number of countries that adopt Pillar Two.
Question. In addition to losing GILTI revenue under Pillar Two,
Pillar Two would also give countries expanded taxing rights over U.S.
companies' U.S. profits under the UTPR. Has Treasury estimated the
revenue effect of foreign countries' ability to tax U.S. companies'
U.S. profits, including where U.S. companies have utilized credits,
such as the R&D tax credit, which directly reduce a companies'
effective tax rate under Pillar Two?
Answer. The administration's recent Greenbook proposal precludes
foreign governments from collecting tax on U.S. companies through the
UTPR mechanism, because the United States would enact the qualified
domestic minimum top-up tax (QDMTT), which would make all U.S.
companies face at least a 15-percent minimum tax rate (as defined by
Pillar Two rules) on their U.S. income. The administration has also
committed to upholding the important tax incentives provided by key
General Business Credits by providing for refundability (as defined for
UTPR purposes) thus ensuring that taxpayers can continue to benefit
from these important incentives under the UTPR framework.
Question. Regulations promulgated by Treasury to clarify compliance
with cryptocurrency reporting requirements passed in the Infrastructure
Investment and Jobs Act (Public Law No: 117-58) have been expected
imminently since late last year. Yet, to date, Treasury has not
released those regulations.
The statutory effective date for the cryptocurrency tax reporting
requirements that passed as part of the Infrastructure Investment and
Jobs Act is January 1, 2023. This means that, if Treasury released
regulations today, businesses would only have 6 full months to design
and put in place effective processes to fully comply.
What is behind the delay?
Answer. The Treasury Department has been working on regulations and
expects to publish them in the near future. The process of promulgating
regulations, especially on novel issues like some of those associated
with digital assets, takes time.
As you know, the Treasury Department and the IRS usually announce
in a notice of proposed rulemaking when they intend to issue rules on
matters not addressed in existing regulations. The notice sets forth
the proposed regulatory text and contains a preamble that explains the
proposed rules and solicits public comments on them. This process
allows the Treasury Department and the IRS to engage with affected
taxpayers, industries, and other interested parties and enables the
public to meaningfully participate in the regulatory process. Final
regulations are issued after careful consideration of all public
comments on the proposed regulations, including those on such questions
as applicability dates. The Treasury Department intends to use this
process to govern the development of the regulations implementing
information reporting by brokers of digital assets
Question. Has Treasury expanded the scope of its regulatory focus
to other areas relevant to digital assets beyond those provisions
passed in the Infrastructure Investment and Jobs Act last year?
Answer. The Treasury Department is considering recommendations from
the public identifying potential tax issues that should be addressed
through regulations, revenue rulings, revenue procedures, notices, and
other published administrative guidance to be included in the 2022-2023
Priority Guidance Plan. The Treasury Department formulates a Priority
Guidance Plan that focuses resources on guidance items that are most
important to taxpayers and tax administration. The 2022-2023 Priority
Guidance Plan will identify guidance projects that the Treasury
Department and the IRS intend to actively work on as priorities during
the period from July 1, 2022, through June 30, 2023.
When do you expect these regulations to be released?
Answer. The Treasury Department views the development of proposed
regulations implementing information reporting by brokers of digital
assets to be a priority. We are currently working on a notice of
proposed rulemaking that will solicit public comments. We expect the
proposal to be published in the near future.
Question. What relief are you considering providing to the industry
to ensure effective compliance?
Answer. As noted above, the Treasury Department and IRS are still
in the process of drafting proposed regulations implementing
information reporting by brokers of digital assets. The Infrastructure
Investment in Jobs Act (IIJA) provides welcome clarity on the
regulation of information reporting by brokers on digital asset
transactions. The IIJA provides more certainty for Americans looking to
invest in digital assets by ensuring that they receive the same tax
documents from brokers as those trading financial assets. This
information ensures that taxpayers receive the information on sales of
digital assets they need to file their tax return and pay their tax
liabilities. We share the goal of achieving greater certainty for
Americans looking to invest in digital assets. This is especially
important given the novel nature of these assets and that this is one
of the first efforts to address incorporate digital assets into our
Nation's tax code.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. Rule-of-law nations find it difficult to track down and
seize Putin and his oligarchs' dirty assets, which are carefully hidden
using shell companies, tax havens, and other tricks. Unfortunately,
some of these assets may be concealed in the United States: while
foreign banks report on the offshore accounts of U.S. taxpayers under
the Foreign Account Tax Compliance Act (FATCA), U.S. banks do not share
information about foreign taxpayers. In the words of one expert on
financial crime, this double standard helped lead the U.S. to become
``a truly world-class tax haven.''\2\
---------------------------------------------------------------------------
\2\ Oliver Bullough, ``The Great American Tax Haven: Why the Super-
Rich Love South Dakota,'' The Guardian, November 14, 2019, https://
www.theguardian.com/world/2019/nov/14/the-great-american-tax-haven-why-
the-super-rich-love-south-dakota-trust-laws.
The President's Budget proposes to share information with foreign
partners about foreign accounts held at U.S. financial institutions--
---------------------------------------------------------------------------
known as reciprocal FATCA.
How could this proposal help to track down the dirty assets of
Russian oligarchs?
Answer. This proposal would provide the IRS with information on
accounts held by foreign persons at U.S. financial institutions that
are currently not visible to the IRS. The proposal would also provide
the IRS with visibility on accounts held indirectly by foreign persons
through U.S. or non-U.S. passive entities. The information collected
under the proposal could also be used by the IRS to understand how
foreign persons access the U.S. financial system and use layers of
entities to conceal ownership. If this proposal were paired with
changes to other sections of the Internal Revenue Code, this
information collected could potentially be shared with other Federal
partner agencies, including the Office of Foreign Assets Control, to be
used to enforce sanctions against oligarchs.
Question. How would this proposal help the IRS crack down on
offshore tax evasion?
Answer. The information obtained through the United States'
information exchange relationships with other jurisdictions has been
central to recent successful IRS enforcement efforts against offshore
tax evasion. The strength of those information exchange relationships
depends, however, on cooperation and reciprocity. Further, as the IRS
has gained more experience with exchange of tax information on an
automatic basis with appropriate partner jurisdictions, it has become
clear that a jurisdiction's willingness to share information on an
automatic basis with the United States often depends on the United
States' willingness and ability to reciprocate by exchanging comparable
information. The intergovernmental agreements include commitments by
the U.S. government to advocate and support relevant legislation to
achieve equivalent levels of reciprocal information exchange. Requiring
financial institutions in the United States to report to the IRS the
comprehensive information required under FATCA would enable the IRS to
provide equivalent levels of information to cooperative foreign
governments in appropriate circumstances, which will strengthen the
United States' relationships with those governments and demonstrate
that the United States is a reliable exchange partner that follows
through on its international commitments.
The proposal also would require brokers, such as U.S. digital asset
exchanges, to report information relating to the substantial foreign
owners of the passive entities. Tax evasion using digital assets is a
rapidly growing problem. Since the industry is entirely digital,
taxpayers can transact with offshore digital asset exchanges and wallet
providers without leaving the United States. The global nature of the
digital asset market offers opportunities for U.S. taxpayers to conceal
assets and taxable income by using offshore digital asset exchanges and
wallet providers. U.S. taxpayers also attempt to avoid U.S. tax
reporting by creating entities through which they can act. The
collection of information on foreign beneficial owners of certain
entities transacting in digital assets with U.S. brokers would ensure
that the United States is able to benefit from a global automatic
exchange of information framework with respect to digital assets and
receive information about U.S. taxpayers transacting with offshore
digital asset exchanges and wallet providers.
Question. Does the IRS have the resources it needs to be able to
effectively use information collected under FATCA to enforce the law?
Answer. The IRS's ability to utilize FATCA information, including
conducting data analysis of, as well as comparisons between, Forms 8938
filed by U.S. account holders and Forms 8966 (or FATCA Reports) filed
by or on behalf of foreign financial institutions has been adversely
impacted by resource constraints. IRS information technology
limitations have made it difficult to conduct queries and analysis of
data relevant to FATCA enforcement. By way of example, development of
new capabilities for the primary database intended to house data from
Forms 8938 and 8966 was halted in 2018 due to budget and resource
constraints prior to deployment of functionality that would have made
it easier to query, extract, and analyze FATCA data. An interim
reporting solution has produced more limited and less usable output
requiring highly specialized and trained IRS employees who must develop
complex code. Both information technology and human resource
limitations have caused delays in the time it takes to make FATCA data
available for analysis and use. Moreover, taken together, the
constraints set forth above have precluded the development of fully
automated data matching capabilities. Further, after the data is
available for use, resource constraints in the IRS's compliance
functions have impacted the magnitude of compliance activities the IRS
is able to conduct regarding both the individual and financial
institution populations.
Question. While broker-dealers and mutual funds have long had anti-
money laundering and countering the financing of terrorism (AML/CFT)
responsibilities, neither the investment advisers that manage private
funds (e.g., private equity, venture capital, and hedge funds) nor the
funds themselves have any such requirements. Exempting the $11-trillion
private investment industry from AML/CFT safeguards emboldens our
adversaries and undermines our national security. In December,
President Biden released the U.S. Strategy on Countering Corruption,
which rightfully called for ``prescribing minimum reporting standards
for investment advisers and other types of equity funds.'' The Treasury
Department reiterated this commitment in its April 29, 2022 response to
a March 30, 2022 letter that Senator Warren and I sent encouraging
Treasury to move forward on this rule.
However, the Treasury Under Secretary overseeing AML policy
recently appeared to backtrack on the President's commitment. In his
May 25, 2022 remarks to the Securities Industry and Financial Markets
Association, the Under Secretary stated multiple times that his team
was still determining whether action should even be taken.
Does the Treasury Department still plan to follow through on
President Biden's commitment to extend AML/CFT safeguards to investment
advisers and other equity funds?
Answer. The U.S. Department of the Treasury is assessing regulatory
deficiencies in the U.S. AML regime in accordance with Pillar Two of
the U.S. Strategy on Countering Corruption (``the Strategy'').
According to Strategic Objective 2.1 of Pillar Two, ``Treasury will
reexamine the 2015 Notice of Proposed Rule Making (NPRM) that would
prescribe minimum standards for anti-money laundering programs and
suspicious activity reporting requirements for certain investment
advisors.'' To that end, Treasury is engaging with Federal and private
sector stakeholders to better understand the AML/CFT risks due to the
limited transparency within the investment adviser and private fund
space. These efforts will help Treasury better understand the risks,
identify whether gaps exist, and assess whether additional rulemaking
is required to address any existing gaps in regulatory coverage for
investment advisers and, if so, how to appropriately tailor the rule to
extend AML/CFT safeguards to the investment adviser and private fund
industry.
Question. If Treasury does not plan to follow through, how does it
plan to prevent such entities from being an ``end-around'' for
criminals and kleptocrats of our existing AML/CFT provisions?
Answer. Treasury is conducting a review of the current investment
adviser landscape since the NPRM was issued in 2015, factoring in
stakeholder feedback from the comment period. This includes further
assessing the level of illicit finance risk posed by investment
advisers and their clients, as well as evaluating and studying current
AML/CFT controls in place within the broader investment adviser and
private fund space. As part of these efforts, Treasury is working to
analyze the best way to enhance transparency for investment advisers.
Even as Treasury is assessing systemic deficiencies, it is working
tirelessly alongside its domestic and foreign counterparts to find
kleptocrat and other criminal assets and enablers, including through
the Russian Elites, Proxies, and Oligarchs (REPO) Task Force. We will
bring to bear our suite of enforcement tools against investment
advisers and other parties that help sanctioned Russians conceal
assets.
Question. Community Development Financial Institutions (CDFIs) play
a critical role in our financial system. For example, the Providence,
Rhode Island-based Capital Good Fund offers small loans and
personalized financial coaching to families in Rhode Island and other
States. The Wall Street Journal notes that, ``For those on the fringes
of the financial system, lenders like . . . [the] Capital Good Fund are
a safety net--a place to get an affordable loan to buy a home or a car
or to cover an unexpected expense.''
The President's FY 2023 budget requests $331.42 million--an
increase of $61.42 million (or 22.7 percent) over FY 2022 levels--for
the Community Development Financial Institutions Fund (CDFI Fund) to
administer the fund's programs and oversee the existing portfolio of
awards.
How will the increased appropriations for the CDFI Fund help CDFIs
expand their investments in low- and moderate-income communities and
communities of color?
Answer. The Community Development Financial Institutions Fund (CDFI
Fund) has worked for nearly 3 decades to provide open and equitable
access to capital in communities across the United States, including
low- and moderate-income communities and communities of color.
For example, the CDFI Fund's Community Development Financial
Institutions Program (CDFI Program) actively works to address problems
of access to capital and affordable financial services by providing
Federal resources to CDFIs. During Fiscal Years 2017-2020, CDFI Program
Financial Assistance award recipients reported that roughly 74% of
their lending portfolio was targeted in distressed areas and to
underserved populations, exceeding the CDFI Certification threshold
requirement of 60 percent.
Increased funding for the CDFI Fund--including for core CDFI
Program Financial Assistance resources--will increase the volume of
resources available to CDFIs to lend and invest in low- and moderate-
income communities and communities of color; their capacity to lend and
invest in areas of higher distress and disinvestment; and the overall
level of impact in marginalized communities of all types across the
Nation.
______
Questions Submitted by Hon. Todd Young
Question. I understand that the Biden administration has agreed to
rules at the OECD that would substantially diminish the value of our
research and development (R&D) tax credit. As a result, U.S. companies
which heavily invest in domestic research would be subject to
additional tax by foreign countries because they qualify for the R&D
credit, while foreign-based companies receiving direct subsidies from
their own countries would not. In other words, Chinese companies
receiving direct subsidies from the Chinese government would pay less
tax, but our companies could be subject to more tax by foreign
countries like China.
Why did the U.S. Treasury Department agree to rules that diminish
the value of the R&D tax credit?
Answer. Under the Pillar Two model rules and commentary, tax
credits generally reduce a taxpayer's tax expense and thus effective
tax rate. That general rule was necessary, given the goal of Pillar Two
to level the playing field for American businesses and end the race to
the bottom for corporate effective tax rates. Failure to account for
credits and other incentives would render the minimum tax meaningless.
The Pillar Two model rules thus follow financial accounting treatment,
meaning that non-refundable credits reduce tax expense, while
refundable credits are treated as income.
Treasury is committed to working with Congress to ensure that
taxpayers continue to benefit from important tax incentives like the
R&D tax credit. One potential means to do so would be to modify the R&D
tax credit so that it is treated as refundable for Pillar Two purposes.
Offering refundability for the R&D credit has desirable policy
features, outside of the global tax deal considerations, as it offers
substantial support to innovative start-up firms. Such firms produce
some of the country's most important R&D, and some studies suggest that
such firms are the most responsive to R&D incentives when they are able
to take advantage of them. This policy goal needs to be weighed against
revenue considerations.
Question. I understand that the current rules that the Biden
administration has agreed to at the OECD provide favorable treatment to
tax equity-financed tax credits.
Do you believe it makes sense to incentivize the monetization of
tax credits? Why or why not?
Answer. Under the Pillar Two model rules and commentary, tax
credits generally reduce a taxpayer's tax expense and thus effective
tax rate. That general rule was necessary, given the goal of Pillar Two
to level the playing field for American businesses and end the race to
the bottom for corporate effective tax rates. Failure to account for
credits and other incentives would render the minimum tax meaningless.
The Pillar Two model rules thus follow financial accounting treatment,
meaning that non-refundable credits reduce tax expense, while
refundable credits are treated as income.
Treasury has worked with the OECD to clarify the treatment of
general business credits under the Pillar Two minimum tax. We are
confident that the value of many of our general business credits is
preserved under the OECD rules, and we have established a process with
the OECD for working towards additional clarifications. For those
credits that are impacted by the Pillar Two model rules, as noted in
the FY 2023 Greenbook, the Biden administration remains committed to
working with Congress to ensure that taxpayers continue to benefit from
important tax incentives that provide U.S. jobs and investment, in a
manner consistent with the framework outlined by the Pillar Two model
rules and commentary.
Question. According to the National Center for Science and
Engineering Statistics, small and medium-sized businesses performed 10
percent of the total R&D in the United States in 2019. This accounts
for about $52 billion spent on R&D by smaller enterprises.
As we look to stimulate the U.S. economy and create jobs,
especially coming out of the COVID pandemic, it is especially important
to develop tax incentives to increase R&D domestically--as opposed to
companies taking their R&D offshore. That is why I am championing S.
749, the American Innovation and Jobs Act, with Senator Hassan. This
bill enjoys considerable bipartisan and bicameral support and counts
over one-third of the entire U.S. Senate, on a strictly bipartisan
basis, as cosponsors. The American Innovation and Jobs Act would ensure
that companies can fully deduct their R&D expenses each year. The
legislation also doubles the refundable R&D tax credit and extends it
to more startups and small businesses. Small businesses are the
backbone of this country, and we need to do everything possible to
support and ensure their growth as they become the next American
success story.
Do you believe S. 749 and the R&D tax credit can help support small
businesses?
Answer. Academic studies have generally found that businesses
increase R&D investment when given tax incentives for R&D, such as
research tax credit, though there is some disagreement over how big
this increase is and to what extent businesses relabel other
expenditures as qualifying research. Some studies suggest that small
businesses may be more responsive to these tax incentives than larger
businesses. The incentive effect of the incentives must also be weighed
against the loss in tax revenue
Question. Is the U.S. Treasury Department considering new ways the
R&D tax credit can be improved to better help and incentivize small
businesses?
Answer. The Treasury Department is always considering options to
improve the effectiveness of the tax code. We welcome input from you
and your staff as we work with Congress to develop the most cost-
effective ways to encourage more R&D by small businesses
Question. On May 4, 2022, the Senate voted 90 to 5 to instruct the
U.S. Innovation and Competition Act (USICA) conference committee ``to
insist that the final conference report include provisions that expand
the research and development tax credit for small businesses and
preserve full and immediate expensing for research and development
investments.''\3\
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\3\ https://www.young.senate.gov/newsroom/press-releases/senate-
votes-to-support-young-and-hassans-bipartisan-provision-to-strengthen-
research-and-development-as-part-of-us-innovation-and-competition-act.
Do you believe that the USICA/America COMPETES conference committee
should include R&D tax relief in its final conference report? Why or
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why not?
Answer. The administration supports the timely completion of the
USICA/
American COMPETES conference, as this legislation is an important step
to strengthen our supply chains, revitalize domestic manufacturing, and
reinvigorate the innovation engine of our economy.
Question. Is your answer above consistent with the Treasury
Department's FY 2023 budget position that assumes a 4-year delay of the
expiration of immediate expensing for qualifying R&D expenditures? Why
or why not?
Answer. The administration strongly supported passage of the Build
Back Better Act. BBB included a 4-year delay to the requirement that
qualifying R&D expenditures be capitalized and amortized, rather than
expensed in the current year. The passage of BBB was assumed as part of
the administration's budget baseline. Treasury believes legislation is
an appropriate place to address changes to R&D tax incentives.
Question. For the first time ever, a gallon of regular gas costs
$5.00 on average nationwide, according to AAA's reading from June 11,
2022. Although the price is incredibly high, it should hardly come as a
surprise. The Biden administration has forced our country to rely on
foreign oil from OPEC, driving up gas prices for everyday Americans,
whereas we could be energy-independent if the administration would
simply allow for greater domestic production.
Would increasing our domestic production of oil result in reduced
gas prices for Americans?
Answer. The administration is taking ongoing action to bring down
the current high energy prices. The President announced the release of
a record 1 million barrels per day from the Strategic Petroleum Reserve
and has rallied international partners to join the United States,
releasing a combined 210 million barrels of oil on the market. The
administration has expanded access to biofuels like E15 to increase
supply and lower prices at thousands of gas stations.
The administration understands that our efforts to increase energy
production in the near-term must be coupled with medium- and long-term
efforts to transition our economy away from fossil fuels produced by
autocrats and towards clean energy.
Question. When you testified before the Senate Finance Committee on
the President's FY 2022 budget, you stated: ``My view on the inflation
outlook has been, and remains, that inflation is transitory.''\4\ You
repeated that assertion for nearly a year, and only recently admitted
that your forecast was incorrect. Despite President Biden's claims that
record-breaking inflation can be attributed to everything from Putin's
invasion of Ukraine to recent Chinese lockdowns, Americans know that
sky-high inflation was occurring well before these events took place.
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\4\ Secretary Yellen's response to Senator Young's Question for the
Record #11.
On a similar note, in recent comments to reporters, you stated:
``The economic outlook globally is challenging and uncertain, and
higher food and energy prices are having stagflationary effects. . .
.''\5\
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\5\ https://apnews.com/article/russia-ukraine-covid-health-
63a9d0ec0ee778dcdd8355b3ffebb99e.
Given your recent comments that inflation is not going away, how
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concerned should Americans be about the prospect of stagflation?
Answer. The U.S. economy continues to add jobs at a rapid pace, and
most indicators show continued expansion of the U.S. economy. The U.S.
economy will certainly expand more slowly than in 2021 given that we
are close to full employment. Inflation is unacceptably high, and there
may be a period where inflation is declining but still elevated as we
transition to slow and steady growth.
Question. In prepared testimony, you noted that, ``we are
witnessing sharp reductions in the budget deficit, with the
Congressional Budget Office recently forecasting the largest nominal
reduction to the Federal deficit in history.'' However, the
Congressional Budget Office also found that the true cost of Build Back
Better as passed by the House last year is almost $5 trillion, is not
paid for, and adds $3 trillion to the deficit.\6\
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\6\ https://www.cbo.gov/system/files/2021-12/57706-BBBA-Palmer-
Letter.pdf.
In the event the House-passed Build Back Better bill came across
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the President's desk, do you believe he should sign it? Why or why not?
Answer. I believe that the House-passed legislation represents an
important step forward in addressing climate change, lowering the cost
of prescription drugs, building more affordable housing, making child
care more affordable, and reforming our tax code to ensure greater
fairness. The House-passed bill did not include everything the
administration initially proposed, but on balance, the legislation
makes our economy stronger and fairer. I would recommend that the
President sign the legislation.
Question. According to recent reporting by The Washington Post, the
Biden administration has plans to cancel up to $10,000 in student debt
per borrower for those who earned less than $150,000. In total, it is
estimated this would cost about $230 billion.\7\
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\7\ https://www.washingtonpost.com/us-policy/2022/05/27/biden-
student-debt-borrower/.
As the debate around loan forgiveness continues, we should not
forget that the median personal income in the United States in 2020 was
$35,805.\8\ In other words, the Biden administration will cancel
student loan debt for anyone making more than four times the median
personal U.S. income. As you know, many of those who hold debt are
early career professionals who will go on to make lots and lots of
money, perhaps millions, over their lifetime.
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\8\ https://fred.stlouisfed.org/series/MEPAINUSA672N.
In your opinion, is it fair to ask the American public, and more
specifically, hard-working Americans who chose not to attend college or
who have already worked hard to pay off their debt, to front the cost
---------------------------------------------------------------------------
of college and graduate school for well-off professionals?
Answer. There are many American households who have incurred high
levels of student debt with modest incomes. Their student debt
constitutes a substantial burden on their ability to own a home, start
a family, find the right job, or open a business.
Question. Does the administration plan to extend the student loan
repayment pause beyond the current August 31, 2022, expiration?
Answer. The administration is considering several options with
respect to student debt relief.
Question. I remain frustrated that neither Congress nor the public
has been provided any information on the cause of the apparent leak of
confidential taxpayer information to ProPublica. It is outrageous that
our systems do not have the ability to detect unauthorized access, and
if they do, evidently not in a timely manner. In response to my
question during last year's Treasury budget hearing on this subject,
you stated, ``all is being done to get to the bottom of this
potentially criminal activity.''\9\
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\9\ QFR responses from ``Hearing on the President's Fiscal Year
20223 Budget,'' June 16, 2021.
In more recent comments to the House Ways and Means Committee on
June 8, 2022, you acknowledged that, ``[The leak] is a huge deal . . .
and it would not be appropriate to push them to hurry [the relevant
agencies'] investigation or try to interfere with the timing of it.''
You continued on to state: ``I am as anxious as you are to find out
---------------------------------------------------------------------------
what happened.''
I understand the need to avoid interference in an ongoing
investigation, however, if indeed ``all is being done to get to the
bottom of this potentially criminal activity,'' how do we still not
have any information on the source of the leak more than a year after
the apparent criminal disclosure?
Do you believe the considerable duration of time this investigation
has taken, without any intermediate updates to Congress or the public
on the status or initial findings, is the level of service and
transparency that American citizens deserve? Why or why not?
Answer. The Treasury Department is committed to protecting taxpayer
privacy and cares deeply about safeguarding taxpayer information. As I
have said publicly, I remain deeply concerned about this matter. In an
effort to get to the bottom of what happened, I ensured that it was
immediately referred to the Office of Inspector General, the Treasury
Inspector General for Tax Administration, and the Department of
Justice. These authorities conduct their investigations independently.
Question. In 2021, the Department of Treasury completed its review
of sanctions authorities and actions. The report included
recommendations to modernize sanctions administration. I was encouraged
by the findings of the report, including the acknowledgement that
``sanctions are only as effective as their implementation.'' This issue
is of greater importance and urgency now in the wake of the Russian
invasion of Ukraine and the administration's related new sanctions.
What steps has the Department of Treasury taken to implement the
recommendations outlined in its 2021 sanctions review report?
Answer. Treasury's modernized approach to sanctions implementation
is evident in our multilateral and well-coordinated campaign to deploy
sanctions against Russia for its brutal further invasion of Ukraine.
The multilateral sanctions we have imposed were developed using the
lessons learned from the sanctions review. We are working on a number
of new initiatives, including standing up a new sanctions analytical
center of excellence that will bring together economics, finance,
supply chain, analytics, and sanctions professionals to enhance our
ability to conduct integrated analysis in support of the design and
implementation of sanctions. We are also working on initiatives to
improve the employee experience, enhance existing capabilities, expand
our coordination and collaboration with partners and allies around the
world, and improve how we communicate and share information with the
public.
Question. How do you view the effectiveness of our current
sanctions programs? Does Treasury have the resources necessary to
appropriately administer existing sanctions programs?
Answer. The 2021 Sanctions Review was not a review of individual
sanctions programs. Treasury, however, routinely analyzes the effects
of particular sanctions actions and programs, including in consultation
with interagency counterparts. Sanctions effectiveness can be scoped
and defined in various ways, including by changing behavior--our
primary goal--as well as freezing significant assets of U.S.
adversaries and prompting coordinated action by and with our foreign
partners. Assessing the overall effectiveness of a given action or
program is something that must be done on a case-by-case basis, and we
are carefully thinking about ways to enhance these efforts as we look
ahead, particularly as we continue to implement the recommendations
noted in the Sanctions Review. Treasury remains deeply appreciative of
the increase in funding TFI received in the FY 2022 appropriations. We
support the President's FY 2023 budget, which identifies additional
needs for sanctions efforts, including additional employees to manage
complicated enforcement cases; handle greater private-sector
engagement; bolster capabilities to develop complex targeting actions;
and manage additional policy, regulatory affairs, and licensing
actions.
Question. The 2021 report suggests that changing global financial
architecture ``has a profound impact on the efficacy of U.S. financial
sanctions.'' Has Treasury conducted any analysis on the effectiveness
of existing sanctions programs in supporting U.S. foreign policy?
Answer. See above
Question. Is there evidence that U.S. sanctions are undermining the
use of the U.S. dollar in international transactions more broadly?
Answer. The U.S. dollar is the leading currency in the
international monetary system. The longstanding and continued
prominence of the dollar is underpinned by a confluence of factors
including the United States' strong economic performance, sound
macroeconomic policies and institutions, open, deep, and liquid
financial markets, institutional transparency, commitment to a free-
floating currency, and strong and predictable legal systems.
Treasury seeks to deploy sanctions in a way to mitigate risks to
the prominence of the dollar, including in support of a clear policy
objective and with strong multilateral coordination. Actors that are
the target of, or are otherwise affected by, U.S. sanctions may more
frequently seek to enter contracts and settle transactions denominated
in currencies other than the U.S. dollar.
As stated in our 2021 Sanctions Review, we must guard against any
``overuse'' of sanctions that would imperil the competitiveness of the
dollar in a systemic manner, including over time.
Question. Do U.S. sanctions reduce the incentive for U.S. financial
institutions to establish correspondent banking relationships in other
jurisdictions? How does Treasury view the decline in U.S.-linked CBRs,
the role of the U.S. dollar, and U.S. sanctions programs?
Answer. U.S. financial institutions make business decisions
regarding their correspondent banking relationships based on a number
of factors, which include the risk profile of the jurisdiction. Their
risk assessment includes sanctions risk amongst a variety of other risk
areas, such as money laundering, terrorist financing, and political and
broader macroeconomic risks.
We continue to monitor and evaluate concerns related to the decline
in U.S.
correspondent-banking relationships. And, as part of sanctions review
implementation, we are looking at developing new capabilities and
partnerships for improving sanctions compliance.
The U.S. dollar is the leading currency in the international
monetary system. The longstanding and continued prominence of the
dollar is underpinned by a confluence of factors including the United
States' strong economic performance, sound macroeconomic policies and
institutions, open, deep, and liquid financial markets, institutional
transparency, commitment to a free-floating currency, and strong and
predictable legal systems.
Treasury seeks to deploy sanctions in a way to mitigate risks to
the prominence of the dollar, including in support of a clear policy
objective and with strong multilateral coordination.
Question. While Treasury maintains a Specially Designated Nationals
and Blocked Persons List, does it also maintain a searchable database
of all existing sanctions programs and authorities?
Answer. Yes.\10\
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\10\ https://home.treasury.gov/policy-issues/financial-sanctions/
sanctions-programs-and-country-information.
Question. Within every sanctions program, the Department of
Treasury issues numerous licenses to authorize certain transactions
with blocked parties. While many licenses are needed in mitigating
unintended harm to U.S. businesses or support humanitarian relief
efforts, I am concerned that licenses are increasingly broad and
undermine the efficacy of our sanctions. For instance, in the recent
Russian sanctions, General License 6 exempts all transactions related
to medicine, medical devices, and agricultural commodities while
General License 8 authorizes all transactions related to energy, which
is very broadly defined. Together, it appears these two licenses
effectively exempt almost two-thirds of all Russian exports from any
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sanctions.
How does Treasury review and determine the appropriate scope for
general licenses within sanctions programs? What public sector data or
input from industry is used in scoping general licenses?
Answer. OFAC reviews the need for general licenses for each program
on a case-by-case basis. Ultimately, the decision to issue a general
license, its terms, and the scoping of such license, is made in
consultation with the State Department and other interagency partners
and is based on furthering the foreign policy and national security
interests of the United States.
Question. How often does Treasury review existing general licenses
and determine if their scoping remains appropriate? Does Treasury
evaluate whether general licenses are abused or undermine the foreign
policy objectives of sanctions programs?
Answer. OFAC reviews existing general licenses as necessary, and in
consultation with the State Department and other interagency partners,
to determine if such licenses continue to further the national security
and foreign policy interests of the United States. OFAC regularly
responds to questions and feedback from the regulated public regarding
the scope of general licenses. Treasury can also revoke a general
license or take enforcement action in the event that there is evidence
of abuse.
Question. Do wind-down authorization general licenses allow
designated entities an opportunity to sell or dispose of assets in U.S.
jurisdictions in such a way that they are able to maintain the value of
their blocked assets?
Answer. No. Wind-down authorizations are time-limited licenses
which authorize transactions that are ordinarily incident and necessary
to wind down transactions involving a designated person or prohibited
activity. Wind-down authorizations do not typically authorize the
unblocking of any blocked property nor allow dealings in the blocked
property.
Question. Enforcement of sanctions matter as much as
implementation, but it seems rare for the Department of Treasury to
refer for criminal prosecution of those that thwart our sanctions.
Instead, we see frequent use of settlements that allow Treasury to
collect fines while the entity acknowledges no wrongdoing. While this
may encourage voluntary self-disclosure by financial institutions, I am
concerned it creates a sense that sanctions violations are only a minor
offense, undermining broader compliance efforts.
Since 2020, how many apparent violations of sanctions programs have
been referred to law enforcement agencies for criminal investigation
and prosecution?
Answer. In enforcing U.S. sanctions using its civil authorities,
OFAC's Office of Compliance and Enforcement (OCE) works actively to
identify sanctions violations and, where appropriate, provide
information to U.S. law enforcement or agencies for criminal
investigation. OFAC's OCE maintains close working relationships with
the Department of Justice (DOJ), including the Federal Bureau of
Investigation, as well as the Departments of Homeland Security and
Commerce, which enforce other relevant authorities, and routinely
coordinates with these agencies. OFAC would respectfully refer you to
DOJ for further discussion on its active criminal sanctions enforcement
efforts.
Question. What percentage of OFAC investigations end in civil
monetary penalties? What percentage of OFAC investigations end in a
finding of violation? What percentage of OFAC investigations end in a
settlement?
Answer. OFAC's OCE has closed 2,852 investigations since July 1,
2019. Forty-nine (approximately 1.2 percent) of these cases were
resolved via settlement involving the payment of civil penalties. Five
(0.17 percent) of these investigations resulted in a Finding of
Violation.
OCE's overriding objective is to promote sanctions compliance, with
enforcement actions playing a major role alongside active industry
engagement and public guidance. The Enforcement Sanctions Guidelines,
which OFAC published on November 9, 2009, provide a general framework
for the enforcement of all economic sanctions programs administered by
OFAC. These guidelines state that if OFAC determines there is
insufficient evidence to conclude that a violation has occurred or that
a Finding of Violation or a civil monetary penalty is not warranted
under the circumstances, but believes the underlying conduct could lead
to a violation in other circumstances and/or the apparent violator does
not appear to be exercising due diligence in assuring compliance with
the statutes, Executive orders, and regulations that OFAC enforces,
OFAC may issue a cautionary letter, which can convey OFAC's concerns
about the underlying conduct and/or the apparent violator's OFAC
compliance policies, practices, and/or procedures. Such letters, which
are nonpublic, also play an important role in promoting compliance, as
they put companies on notice that their conduct could result in
violations and provide an opportunity for remediation.
Information on OCE's actions, to include settlements, Findings of
Violation and civil monetary penalties in addition to the Enforcement
Sanctions Guidelines and the Framework for OFAC Compliance Commitments
can be found at https://home.treasury.gov/policy-issues/financial-
sanctions/civil-penalties-and-enforcement-information.
Question. Does Treasury have the resources necessary to
appropriately enforce existing sanctions programs?
Answer. Treasury remains deeply appreciative of the increase in
funding received in the FY 2022 appropriations. We support the
President's FY 2023 budget, which identifies additional needs for
sanctions efforts, including additional employees to manage complicated
enforcement cases; handle greater private sector engagement; bolster
investigations into complex targeting actions; and manage additional
policy, regulatory affairs, and licensing actions.
Question. In August 2021, the IMF allocated $650 billion in Special
Drawing Rights, with the approval of the U.S. Department of Treasury.
This is the largest allocation of SDRs in history by far. Since this
funding is distributed to all members of the IMF, I remain concerned
this could represent a bonanza and a lifeline for dictators and regimes
around the world.
What is the administration's perspective on the current use and
effectiveness of newly allocated SDRs in supporting financial stability
and liquidity around the world?
Answer. Treasury supported the August 2021 allocation to SDRs to
meet the long-term global demand for reserves. In accordance with the
IMF's Articles of Agreement, the SDR allocation was distributed to all
IMF members in proportion to their respective IMF quota shares. As of
end June 2022, emerging market and developing countries, which received
about $232 billion worth of SDRs, have used about 12 percent of their
SDRs to service IMF obligations or acquire usable currency. The poorest
countries received $21 billion. The allocation is helping these hard-
hit countries respond to the economic impacts of the COVID crisis and
spillovers from Russia's war of aggression against Ukraine.
For example, the August allocation provided Ukraine with $2.8
billion worth of SDRs which Ukraine has used to repay IMF obligations
and acquire usable currency. Jordan sold the $469 million worth of SDRs
it received from the SDR allocation for budget financing in lieu of a
higher cost debt issuance. Tanzania used its $543 million worth of SDRs
to acquire usable currency and is holding these proceeds in its
reserves.
Question. What steps is Treasury taking to ensure that SDRs do not
provide a lifeline to dictators?
Answer. SDRs are not currency; rather they are a reserve asset that
can only be exchanged by a holder for useable currency in transactions
recorded by the IMF's SDR department.
Treasury is leading U.S. efforts to prevent governments whose
policies we oppose, like Iran, Russia, and Belarus, from receiving any
benefit from their SDRs. We and like-minded partners, who comprise a
significant portion of the voluntary purchasers of SDRs under the IMF's
Voluntary Transactions Arrangements, would not agree to transact with
these countries, making it difficult for them to exchange their SDRs
for usable currency.
Additionally, as part of the SDR allocation, Treasury successfully
pressed IMF staff to enhance the details it reports on members' SDR
holdings and transactions by breaking out transactions into the
aggregate categories of IMF operations and SDR trading. IMF staff also
agreed to publish a note on best practices for SDR use to guide their
country teams and authorities--this note was published in August 2021
on the IMF's website.\11\ The IMF publishes members' SDR holdings on a
monthly \12\ and quarterly \13\ basis. In addition, at Treasury's
request, the IMF started publishing an annual summary update on SDR
transactions \14\ and has committed to undertaking an ex-post report on
members' use of SDRs, which it will publish 2 years after the
allocation.
---------------------------------------------------------------------------
\11\ https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/
08/19/Guidance-Note-for-Fund-Staff-on-the-Treatment-and-Use-of-SDR-
Allocations-464319.
\12\ Guidance Note for Fund Staff on the Treatment and Use of SDR
Allocations (https://www.imf.org/en/Publications/Policy-Papers/Issues/
2021/08/19/Guidance-Note-for-Fund-Staff-on-the-Treatment-and-Use-of-
SDR-Allocations-464319).
\13\ International Monetary Fund's Financial Statements and the
Quarterly Reports on IMF Finances, https://www.imf.org/en/Data/IMF-
Finances/Quarterly-Financial-Statements.
\14\ First year of publication: https://www.imf.org/en/
Publications/Policy-Papers/Issues/2021/10/26/Annual-Update-on-SDR-
Trading-Operations-498096.
Since August 2021, Russia, Iran, and Belarus have not exchanged any
of their SDRs for usable currency. For countries where there is
currently a lack of clarity within the IMF membership regarding the
purported government, like Afghanistan, Burma, and Venezuela, Treasury
is engaging robustly with IMF management and staff to help safeguard
---------------------------------------------------------------------------
the SDR resources for its people.
Question. Iran holds almost $7 billion in Special Drawing Rights at
the IMF. If the Biden administration were to lift sanctions on the
Central Bank, would there be any constraints on Iran using those funds
for any purpose?
Answer. U.S. sanctions on Iran remain in place, and we would not
purchase SDRs from Iran. Our designation of the Central Bank of Iran
presents one hurdle to the regime's ability to benefit from its SDR
holdings but not the sole hurdle. We will continue to work with like-
minded countries and employ diplomatic pressure to reduce the
likelihood that Iran will benefit from an SDR exchange. The United
States is committed to retaining all the necessary tools and
authorities to target Iran's support for terrorism, as well as its
other malign activities.
Question. As you know, Article II, section 2 of the United States
Constitution states: ``[The President] shall have Power, by and with
the Advice and Consent of the Senate, to make Treaties, provided two-
thirds of the Senators present concur.''
On September 28, 2021, you said the following before the Senate
Banking Committee: ``I believe there are a number of ways in which
Congress could implement [Pillar One], but certainly ratification of a
treaty would be one way in which Congress could authorize. And
certainly Congress has to authorize the transfer of taxing rights
that's contemplated in Pillar One.''
You have since made seemingly conflicting statements to the above.
I would appreciate you providing clarity on whether you believe the
Biden administration can circumvent the Constitution's explicit
requirement for Senate treaty ratification.
Do you believe there is a way other than approval of a resolution
of ratification by two-thirds of the Senate for Congress to approve the
Organisation for Economic Co-operation and Development's ``Pillar One''
plan? Please answer ``yes'' or ``no.'' Note that an answer other than
``yes'' or ``no'' will be deemed unresponsive to this question.
Answer. Yes.
Question. If your answer is ``yes,'' please explain the other
way(s) Congress could authorize Pillar One. If your answer is ``no,''
please explain your reasoning.
Answer. The administration has consistently said that the Pillar
One multilateral convention must be approved by Congress. There are
three possible paths for entering into international agreements in the
United States--sole executive agreements, congressional executive
agreements and Article II treaties. We look forward to consulting with
Congress as to the appropriate process to obtain congressional approval
once the multilateral convention is ready for signature.
Question. Despite your commitment to provide the Senate Committee
on Small Business and Entrepreneurship the necessary tools and
resources to conduct oversight over COVID-related programs, you still
have not offered--or remained available--to testify before the
committee as required by section 321(b) of the Economic Aid to Hard-Hit
Small Businesses, Nonprofits, and Venues Act (title III of division N
of Public Law 116-260).
While I understand that the Treasury Department has offered the
Deputy Secretary to testify, the law's provision states that the
``Secretary of the Treasury shall testify before the Committee on Small
Business and Entrepreneurship of the Senate.'' Therefore, I hope, and
expect, you to agree to come before the committee in short order.
Given that you are months behind on your obligation, will you
withdraw your unauthorized delegation of authority to the Deputy
Secretary and commit to testifying personally before the Senate
Committee on Small Business and Entrepreneurship as required by law?
Answer. Treasury is committed to providing Congress and all of our
oversight bodies with the information they need to conduct their
important work on behalf of the American people. Since taking office, I
have testified before Congress over a dozen times, and I look forward
to continuing this robust engagement in the weeks and months ahead.
As referenced in the question, section 321 of the Economic Aid and
Hard-Hit Small Businesses, Nonprofits, and Venues Act provides that
``the Secretary of the Treasury shall testify before the Committee on
Small Business and Entrepreneurship of the Senate.'' The delegation of
duties by heads of Federal agencies has been a routine practice for
many years, in light of the fact that executive branch agencies are too
large and complex for all their duties to be handled by the head of the
agency personally. Examples are widespread in legislation; for example,
the same statute you cited also requires the Secretary to send notices
by mail to taxpayers regarding payments (section 272); receive
individuals' tax payment information (section 273); and provide
financial assistance to aviation businesses (section 404), among other
duties. Given the breadth of the duties assigned to the Secretary by
legislation, whoever holds the position is permitted to delegate the
authority to other agency officials to lawfully take these actions. In
contrast, in other instances Congress has specified that a particular
responsibility may not be delegated. For example, the same statute
provides in another section that ``[A]ny official that is required by
this Act to report or to certify to the Committees on Appropriations of
the Senate and the House of Representatives may not delegate such
authority to perform that act unless specifically authorized
herein.'').
Congress has expressly authorized the Secretary of the Treasury to
``delegate duties and powers of the Secretary to another officer or
employee of the Department of the Treasury,'' including the Deputy
Secretary. Treasury Order 101-05(2)(a) provides that the Deputy
Secretary ``has authority, in [his] own capacity and [his] own title,
to perform any functions the Secretary is authorized to perform.''
Pursuant to these authorities, the Secretary has delegated the
responsibility for the testimony described in your letter to Deputy
Secretary of the Treasury Wally Adeyemo. Deputy Secretary Adeyemo has
repeatedly offered to testify before the committee, and I hope that he
will be permitted to testify regarding these important programs.
______
Communication
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Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to address this issue. on the Department of the Treasury Budget. Many
but not all of these were already submitted this year to the Ways and
Means Oversight Subcommittee and the Finance Committee previously
regarding the IRS budget alone and on tax fairness, as well in comments
to both revenue committees last year regarding the Department's budget.
However, there is enough new material to justify reading forward,
especially regarding the current economy.
We are quite sure that there will be questions from the Minority about
the National Debt. I have a question for the Secretary and Minority
members and Senators. Who benefits from the National Debt (both public
and private)? Who is on the hook for paying it back? Does the question
of Debt as a percentage of GDP have any relevance?
Anyone familiar with our work at the Center for Fiscal Equity knows
that we have a few possible answers to these questions. In reverse
order, debt as a percentage of GDP is meaningless. The more salient
measure is debt as a multiple of income taxes paid. Using this standard
shows exactly how unsustainable our current fiscal course is.
We have attached a 1-page summary regarding Debt Ownership as Class
Warfare that addresses the other two. The key findings of our research
is that the top 10% own the majority of public debt assets and owe the
majority of debt obligations. The top 1% owe over a third and own more
than 40%. In short, those who pay and those who owe are the same
people: capitalists. Without the national debt, leveraging private
banking, debt and investment--especially the intrinsically worthless
assets in secondary markets--is impossible.
We are all for ending the National Debt, along with capitalism as we
know it today. Capitalism is about to drive the nation into ruin again.
The Pandemic provided a temporary reprieve as the Federal Reserve
propped up bondholders who have invested (again) in bad housing and
commercial property debt. Subsidies to families and loan purchases by
the Fed delayed the pain, however the pain is inevitable.
Please see the second attachment about Depression 2022, refer it to the
Secretary and ask her to respond to it in your post-hearing questions.
I would hope that these scenarios are already on the radar of the
Assistant Secretary for Economic Affairs.
The most important question for the Secretary to face is whether there
was a reaction via correspondence or phone calls from families who had
finally received an adequate Advance Child Tax Credit under the
American Rescue Plan Act and had it taken away at the end of last year
because of bipartisan obstruction against continuing to do so.
Some of the bipartisan opposition in the Senate came from those who
consider direct subsidies from the IRS to have the ``stink of
welfare.'' I advise such Senators in both parties to raise the minimum
wage so that no one is having to work just to receive this credit and
that the best way to distribute the credit is with wages.
For middle-income taxpayers whose increased credits are less than their
annual tax obligation, a simple change in withholding tables is
adequate. Procedures are already in place to deliver refundable credits
to larger families.
Employers can work with their bankers to increase funds for payroll
throughout the year while requiring less money for their quarterly tax
payments (or estimated taxes) to the IRS. The main issue is working out
those situations where employers owe less than they pay out. This is
especially true for labor-intensive industries and even more so for
low-wage employers. A higher minimum wage would make negative quarterly
tax bills less likely. Again, no one should have to subsist mainly on
their child tax payments.
While we can hope that, in the short term, obstruction on increasing
the CTC can be dealt with. Going forward, now that the American Rescue
Plan Act has expired, any permanent increase to and refundability of
the Child Tax Credit (and ideally an even more generous credit) will
require permanent tax reform. We include our prescription for such
reforms at our third attachment.
One of the central proposals in this plan is the creation of a
Subtraction Value-Added Tax (Net Business Receipts Tax), which would
replace the corporate income tax and filing of business taxes as part
of the personal income tax. The difference between changing quarterly
withholding and enacting a subtraction VAT is six of one and a half
dozen of the other.
The reason for this is that the proposed subtraction VAT is based on
the notion that employers would be responsible for paying and
reconciling the taxes now filed by employees. This would add little
additional burden to employers (especially the self-employed) but end
the burden of filing taxes for all but the highest salaried employees.
Debates on the Child Tax Credit have used $75,000 as a benchmark. This
debate has gone on so long that the numbers have changed. What used to
be proposed at $75,000 per year should now be delivered at $85,000.
Likewise, economic reports, particularly by the IRS Statistics on
Income, should be shifted to reflect this reality. Between $50,000 and
$100,000, there should be five groups. Between $100,000 and $200,000,
there should at least be four so that the border between the fourth and
fifth quintiles can be more adequately expressed. Every tax wonk in the
nation will appreciate this.
Our second major proposal is the creation of an asset value-added tax.
There are two debates in tax policy: how we tax salaries and how we tax
assets (returns, gains and inheritances). Shoving too much into the
Personal Income Tax mainly benefits the wealthy because it subsidizes
losses by allowing investors to not pay tax on higher salaries with
malice aforethought.
With tax subsidies for families shifted to an employer-based
subtraction VAT, and creation of an asset VAT, taxes on salaries could
be filed by employers without most employees having to file an
individual return. It is time to tax transactions, not people!
The tax rate on capital gains is seen as unfair because it is lower
than the rate for labor. This is technically true, however it is only
the richest taxpayers who face a marginal rate problem. For most
households, the marginal rate for wages is less than that for capital
gains. Higher income workers are, as the saying goes, crying all the
way to the bank.
In late 2017, tax rates for corporations and pass-through income were
reduced, generally, to capital gains and capital income levels. This is
only fair and may or may not be just. The field of battle has narrowed
between the parties. The current marginal and capital rates are seeking
a center point. It is almost as if the recent tax law was based on
negotiations, even as arguments flared publicly. Of course, that would
never happen in Washington. Never, ever.
Compromise on rates makes compromise on form possible. If the
Affordable Care Act non-wage tax provisions are repealed, a rate of 26%
is a good stopping point for pass-through, corporate, capital gains and
capital income.
A single rate also makes conversion from self-reporting to automatic
collection through an asset value-added tax levied at point of sale or
distribution possible. This would be both just and fair, although
absolute fairness is absolute unfairness to tax lawyers because there
would be little room to argue about what is due and when.
Ending the machinery of self-reporting also puts an end to the Quixotic
campaign to enact a wealth tax. To replace revenue loss due to the
ending of the personal income tax (for all but the wealthiest workers
and celebrities), enact a Goods and Services Tax. A GST is inescapable.
Those escapees who are of most concern are not waiters or those who
receive refundable tax subsidies. It is those who use tax loopholes and
borrowing against their paper wealth to avoid paying taxes.
For example, if an unnamed billionaire or billionaires borrow against
their wealth to go into space, creating such assets would be taxable
under a GST or an asset VAT. When the Masters of the Universe on Wall
Street borrow against their assets to avoid taxation, having to pay a
consumption tax on their spending ends the tax advantage of gaming the
system.
This also applies to inheritors. No ``Death Tax'' is necessary beyond
marking the sale of inherited assets to market value (with sales to
qualified ESOPs tax free). Those who inherit large cash fortunes will
pay the GST when they spend the money or Asset VAT when they invest it.
No special estate tax is required and no life insurance policy or
retirement account inheritance rules will be of any use in tax
avoidance.
Tax avoidance is a myth sold by insurance and investment brokers. In
reality, explicit and implicit value-added taxes are already in force.
Individuals and firms that collect retail sales taxes receive a rebate
for taxes paid in their federal income taxes. This is an
intergovernmental VAT. Tax withheld by employers for the income and
payroll taxes of their labor force is an implicit VAT. A goods and
services tax simply makes these taxes visible.
Should the tax reform proposed here pass, there is no need for an IRS
to exist, save to do data matching integrity. States and the Customs
Service would collect credit invoice taxes, states would collect
subtraction VAT, the SEC would collect the asset VAT and the Bureau of
the Public Debt would collect income taxes or sell tax-
prepayment bonds. See the last attachment for details on this.
Before this happens, the question for the Secretary is if her
analytical budget is big enough to consider such options as these.
Thank you, again, for the opportunity to add our comments to the
debate. Please contact us if we can be of any assistance or contribute
direct testimony.
Attachment One--Debt Ownership as Class Warfare, February 16, 2022
Visibility into how the national debt, held by both the public and the
government at the household level, sheds light on why Social Security,
rather than payments for interest on the debt, are a concern of so many
sponsored advocacy institutions across the political spectrum.
Direct household attribution can be made by calculating direct bond
holdings, income provided by Social Security payments and secondary
financial instruments backed with debt assets for each income quintile.
Responsibility to repay the debt is attributed based on personal income
tax collection. Payroll taxes create an asset for the payer, so they
are not included in the calculation of who owes the debt. Using 2019
tax data and the national debt as of COB February 15th, the ratio is
$19 of debt owed for every dollar of income tax paid.
The top 4% take home 33% of AGI (not shown in table), with the next 20%
and the bottom 75% each taking a third. This is how we classify class
distribution in America. To allow estimates of asset ownership, we have
distributed income using rounder numbers.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsThe bottom 80% of tax-paying units hold few, if any, public debt
assets in the form of Treasury Bonds or Securities or in accounts
holding such assets and only take home one-third of adjusted gross
income. Their main national debt assets are held on their behalf by the
Government. They are owed more debt than they owe through taxes. The
next 10% (the middle class), hold more in terms of long term
investments and mutual fund and bond assets. They hold a bit under a
fifth of social insurance assets.
The top 10% pay more than half of income taxes (the dividing line is
about 97.5%--and has been for a while). Asset shares within the top 10%
are estimated using the same breakdown as the entire population, that
is, the top 1% hold 54% of Federal Reserve and Long Term Investment
Assets and 77% of mutual funds and bonds as held by the top 10%. A
similar fraction is used to estimate holdings by the top 0.01%--which
is consistent to how much income they receive (note that I did not say
earn.
This illustration shows who benefits the most from having a national
debt, therefore who has the most to lose through default.
Attachment Two--Depression 2022
A depression is inevitable because tax cuts and monetary policy have
fueled asset speculation. The current speculative bubble that no one
talks about is oil futures in NYMEX. Under Obama, regulations were
added to stop balloons. Under Trump, Mick Mulvaney gutted those regs.
We now have a big balloon on our hands that is about to pop. There is
plenty of oil. Because of the Trump Administration, there is also
plenty of price manipulation.
Last year's toy was cryptocurrency, especially Bitcoin. Bitcoin is
attracting poor people (and some of the stimulus money). Coin
collection machines now allow being paid in Bitcoin rather than in
store credit or cash. Criminals love it too. It is being sold as a way
to invest and grow rich. There is even a fancy name for it: quantum
finance.
Dealer claims that Bitcoin has big rises and smaller crashes simply
proves the point that we are dealing with a legal Ponzi scheme. When
the top of the food chain cashes out, everyone else realizes that they
own a worthless product.
In the current bond market, properties that have been seized in
foreclosure have been purchased with private equity and are so heavily
leveraged that they cannot be sold until the holding company files for
bankruptcy in the next Great Recession. See Homewreckers: How a Gang of
Wall Street Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture
Capitalists Suckered Millions Out of Their Homes and Demolished the
American Dream by Aaron Glantz. The C-SPAN Book TV discussion with Mr.
Glantz will give the committee a heads-up on what such testimony would
include. See https://www.c-span.org/video/?465567-1/homewreckers.
The long and short of it is that many now have to rent or own leveraged
properties. Our absentee landlords have cashed out and left servicing
companies to bleed us dry. They essentially own us because we have to
work harder and longer to have a place to live while those who have
cashed out live in gated and high-end assisted living communities. In
the last year, Exchange Traded Funds have been all the rage. Who wants
to bet on where the latest pool of junk is hiding?
Tax credit support for families is a better recession circuit breaker
than waiting for the Congress and state legislatures to act, although
increasing the child tax credit (which should be inflation adjusted) is
the best way to provide immediate stimulus, as do higher Food Stamps
(which would be mostly repealed by a higher Child Tax Credit).
The other circuit breaker in a recession is increased income taxation
on the wealthy. Recessions do not happen, as Marx and Schumpeter
posited, from overproduction or a business cycle. They come about
because the wealthy have received tax breaks which encourage asset
inflation and questionable investment (often with an assist from the
Federal Reserve so that such investments may be migrated to Main
Street). Higher income tax rates take money from the savings sector so
that the consumption sector can recover (even without government
subsidies).
Higher taxes on the wealthy are beneficial to the economy, now and in
the next recession, because they take money out of asset inflation in
the savings sector and can then be used to increase spending on the
elements of GDP: government purchases, household consumption, net
exports and plant and equipment investment (which is not part of asset
speculation, as supply side economists falsely assert).
Attachment Three--Tax Reform, Center for Fiscal Equity, December 7,
2021
Individual payroll taxes. Employee payroll tax of 7.2% for Old-Age and
Survivors Insurance. Funds now collected as a matching premium to a
consumption tax based contribution credited at an equal dollar rate for
all workers qualified within a quarter. An employer-paid subtraction
value-added tax would be used if offsets to private accounts are
included. Without such accounts, the invoice value-added tax would
collect these funds. No payroll tax would be collected from employees
if all contributions are credited on an equal dollar basis. If employee
taxes are retained, the ceiling would be lowered to $100,000 to reduce
benefits paid to wealthier individuals and a $16,000 floor should be
established so that Earned Income Tax Credits are no longer needed.
Subsidies for single workers should be abandoned in favor of radically
higher minimum wages. If a $10 minimum wage is passed, the employee
contribution floor would increase to $20,000.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $100,000 per
year, will range from 7.2% to 57.6%. This tax will fund net interest on
the debt (which will no longer be rolled over into new borrowing),
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the
result of battlefield injuries, including mental health and addiction
and eventual debt reduction.
Our proposed brackets have been increased from $85,000 to $100,000
because this is the income level at the top of the 80% of tax paying
households who earn the bottom third of adjusted gross income. Earners
above this level are considered middle class. Likewise, the top 1% of
income earners are at the $500,000 level, which will be used as the
start of the highest rate.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
dividend taxes, and the estate tax. It will apply to asset sales,
dividend distributions, exercised options, rental income, inherited and
gifted assets and the profits from short sales. Tax payments for option
exercises, IPOs, inherited, gifted and donated assets will be marked to
market, with prior tax payments for that asset eliminated so that the
seller gets no benefit from them. In this perspective, it is the
owner's increase in value that is taxed. As with any sale of liquid or
real assets, sales to a qualified broad-based Employee Stock Ownership
Plan will be tax free. These taxes will fund the same spending items as
income or S-VAT surtaxes.
This tax will end Tax Gap issues owed by high income individuals. A 26%
rate is between the GOP 23.8% rate (including ACA-SM surtax) and the
Democratic 28.8% rate as proposed in the Build Back Better Act. It's
time to quit playing football with tax rates to attract side bets. A
single rate also stops gaming forms of ownership. Lower rates are not
as regressive as they seem. Only the wealthy have capital gains in any
significant amount. The de facto rate for everyone else is zero. For
now, however, a 28.8% rate is assumed if reform is enacted by a
Democratic majority in both Houses.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits,
including:
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence-level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits. Distributions from such corporations will be
considered salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability. I-VAT
also forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government.
Enactment of both the A-VAT and I-VAT ends the need for capital gains
and inheritance taxes (apart from any initial payout). This tax would
take care of the low-income Tax Gap.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.5% to 13%).
As part of enactment, gross wages will be reduced to take into account
the shift to S-VAT and I-VAT, however net income will be increased by
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
replace pass-through and proprietary business and corporate income
taxes.
Carbon Added Tax (C-AT). A Carbon tax with receipt visibility, which
allows comparison shopping based on carbon content, even if it means a
more expensive item with lower carbon is purchased. C-AT would also
replace fuel taxes. It will fund transportation costs, including mass
transit, and research into alternative fuels (including fusion). This
tax would not be border adjustable unless it is in other nations,
however in this case the imposition of this tax at the border will be
noted, with the U.S. tax applied to the overseas base.
Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried
income of $425,001 and over, shifting business filing to a separate tax
on employers and eliminating all credits and deductions--starting at
6.5%, going up to 26%, in $85,000 brackets.
2. Shift special rate taxes on capital income and gains from the
income tax to an asset VAT. Expand the exclusion for sales to an ESOP
to cooperatives and include sales of common and preferred stock. Mark
option exercise and the first sale after inheritance, gift or donation
to market.
3. End personal filing for incomes under $425,000.
4. Employers distribute the Child Tax Credit with wages as an
offset to their quarterly tax filing (ending annual filings).
5. Employers collect and pay lower tier income taxes, starting at
$85,000 at 6.5%, with an increase to 13% for all salary payments over
$170,000 going up 6.5% for every $85,000--up to $340,000.
6. Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes
to employers, remove caps on employer payroll taxes and credit them to
workers on an equal dollar basis.
7. Employer paid taxes could as easily be called a subtraction
VAT, abolishing corporate income taxes. These should not be zero rated
at the border.
8. Expand current state/federal intergovernmental subtraction VAT
to a full GST with limited exclusions (food would be taxed) and add a
federal portion, which would also be collected by the states. Make
these taxes zero rated at the border. Rate should be 19.5% and replace
employer OASI contributions. Credit workers on an equal dollar basis.
9. Change employee OASI of 6.5% from $18,000 to $85,000 income.
Attachment Four--Tax Administration, Treasury Budget, February 12,
2020
Shifting to a single system for all business taxation, particularly
enacting invoice value-added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers
will end the need for filing for most, if not all, households. Any
remaining high salary surtax would be free of any deductions and
credits and could as easily be collected by enacting higher tiers to a
subtraction VAT.
Subtraction VAT collection will closely duplicate the collection of
payroll and income taxes--as well as employment taxes--but without
households having to file an annual reconciliation except to verify the
number of dependents receiving benefits.
Tax reform will simplify tax administration on all levels. Firms will
submit electronic receipts for I-VAT and C-VAT credit, leaving a
compliance trail. S-VAT payments to providers, wages and child credits
to verify that what is paid and what is claimed match and that children
are not double credited from separate employers.
A-VAT transactions are recorded by brokers, employers for option
exercise and closing agents for real property. With ADP, reporting
burdens are equal to those in any VAT system for I-VAT and A-VAT and
current payroll and income tax reporting by employers.
Employees with children will annually verify information provided by
employers and IRS, responding by a postcard if reports do not match,
triggering collection actions. The cliche will thus be made real.
High-salary employees who use corporations to reduce salary surtax and
pay I-VAT and S-VAT for personal staff. Distributions from such
corporations to owners are considered salary, not dividends.
Transaction-based A-VAT payments end the complexity and tax avoidance
experienced with income tax collection. Tax units with income under
$84,000 or only one employer need not file high-salary surtax returns.
Separate gift and inheritance tax returns will no longer be required.
State governments will collect federal and state I-VAT, C-VAT, S-VAT
payments, audit collection systems, real property A-VAT and conduct
enforcement actions. IRS collects individual payroll and salary surtax
payments, performs electronic data matching and receive payments and
ADP data from states. SEC collects A-VAT receipts.
I-VAT gives all citizens the responsibility to fund the government. C-
VAT invoices encourage lower carbon consumption, mass transit, research
and infrastructure development. A-VAT taxation will slow market
volatility and encourage employee ownership, while preserving family
businesses and farms. Very little IRS Administration will be required
once reform is fully implemented. All IRS employees could fit in a
bathtub with room for Grover Norquist.
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