On January 20, 2011, the House Committee on Ways and Means held a hearing on fundamental tax reform. As billed by the committee, the purpose of the hearing was to “examine the economic and administrative burdens imposed by the current structure of the federal income tax. . . .[and] explore the cost of complexity borne by American families, the cost of a corporate tax system that is increasingly out-of-step with the rest of the world and the broader cost to the U.S. economy of a tax system that fails to maximize job creation and impedes economic growth.” This was the first in a series of tax reform hearings expected to take place over the next several months under the new Republican leadership of Chairman David Camp (R-MI).

1. January 24, 2011 House Committee on Ways and Means Hearing on Fundamental
Tax Reform
TAX POLICY CLIENT ALERT
This Alert provides only On January 20, 2011, the House Committee on Ways and Means held a hearing on
general information and fundamental tax reform. As billed by the committee, the purpose of the hearing was to
should not be relied upon as “examine the economic and administrative burdens imposed by the current structure of the
legal advice. We would be federal income tax. . . .[and] explore the cost of complexity borne by American families, the
pleased to discuss our
cost of a corporate tax system that is increasingly out-of-step with the rest of the world and
experience and the issues
the broader cost to the U.S. economy of a tax system that fails to maximize job creation
and impedes economic growth.” This was the first in a series of tax reform hearings
presented in this Alert with
expected to take place over the next several months under the new Republican leadership
those contemplating
of Chairman David Camp (R-MI).
investments in these markets.
For more information, contact The following witnesses testified at the hearing (links to prepared testimony are provided):
your Patton Boggs LLP
attorney or the authors listed • The Honorable Nina E. Olson, National Taxpayer Advocate
below. • Robert A. McDonald, Chairman of the Board, President and Chief Executive
Officer, The Procter & Gamble Company, testifying in his capacity as Chairman,
Rosemary Becchi Fiscal Policy Initiative of the Business Roundtable
202-457-5255 • Warren S. Hudak, President, Hudak & Company, LLC
rbecchi@pattonboggs.com • Kevin A. Hassett, Ph.D., Senior Fellow & Director of Economic Policy Studies,
Micah Green American Enterprise Institute
202-457-5258 • Martin A. Sullivan, Ph.D., Contributing Editor, Tax Analysts
mgreen@pattonboggs.com
At the direction of the chairman, the hearing focused on defining the problems in the
Donald Moorehead
202-457-5212 current tax system.
dmoorehead@pattonboggs.com
Chairman and Ranking Member Introductory Remarks
Emanuel Rossman
202-457-5664
Chairman Camp began by suggesting that the hearing marked the beginning of what will
erossman@pattonboggs.com
be a long discussion on tax reform – a discussion he hopes will be bipartisan. Referencing
Aubrey Rothrock the Tax Reform Act of 1986, the chairman indicated, “The law in ‘86, which marked the
202-457-5620 successful culmination of years of work, broadened the tax base and lowered tax rates,
arothrock@pattonboggs.com and it remains the basis of our system of taxation. But in some sense, it’s a shell of its
George Schutzer former self. In the intervening years, members of Congress from both sides of the aisle
202-457-5273 have loaded the tax code with a dizzying array of credits, deductions, exclusions and
gschutzer@pattonboggs.com exemptions.” Before yielding to Ranking Member Sandy Levin (D-MI), Chairman Camp
emphasized the difficulty inherent in reforming the code in a manner that lowers rates and
Jonathan Babu
202-457-5342
broadens the base, emphasizing the breadth of the dialogue necessary for accomplishing
jbabu@pattonboggs.com meaningful reform.
Erin McGrain
202-457-5344
emcgrain@pattonboggs.com

2. WWW.PATTONBOGGS.COM
In his brief introductory remarks, Ranking Member Levin echoed Chairman Camp by
suggesting that the effort to reform the code must be bipartisan, bicameral and backed by
the administration. Representative Levin also highlighted some basic principles that should
guide reform, including fiscal responsibility, the creation of jobs, the promotion of economic
growth and the provision of assistance to the “working” family.
Panel Discussion
Several themes ran through the panel discussion: (1) the complexity of the code, which
causes confusion and leads to administrative burdens for both individuals and
corporations; (2) how the current corporate tax structure places U.S. corporations at a
considerable economic disadvantage, as compared to their foreign counterparts; (3)
determining the appropriate shape (e.g., revenue-neutral) and scope (i.e., whether to
address both the corporate and individual systems) of reform efforts. The following
highlights from the panel discussion have been grouped accordingly.
Complexity of the Code
Members and panelists agreed that the current tax system is overly complex and
confusing, particularly for individual filers, including many small businesses operating as
pass-through companies. Ms. Olson explained that “since the last major reform 25 years
ago, the code has become an ever-expanding patchwork of provisions with little logical
connection.” Further, she argued that “the tax code as it stands today imposes excessive
compliance burdens on individual taxpayers and businesses. It is rife with complexity and
special tax breaks, helping taxpayers who can afford expensive tax advice and
discriminating against those who cannot.”
U.S. Corporations Operate at Economic Disadvantage
Much of the hearing focused on the manner in which the current corporate tax structure
puts U.S. corporations at a disadvantage and impedes their global competitiveness. Mr.
McDonald, representing the Business Roundtable, noted that, among Organization for
Economic Cooperation and Development (OECD) countries, the United States has the
second highest corporate tax rate and will have the highest rate (14 percentage points
above the average) later this year, following Japan’s adoption of a proposed corporate-
rate reduction. While Mr. McDonald declined to propose a specific number for a reduced
corporate rate, he indicated that the Business Roundtable would work with the committee
to determine an appropriate percentage. Dr. Sullivan suggested that if reform is revenue-
neutral, “we’d be lucky to get down to 30 percent” – to go below 30 percent would likely
require finding other revenue sources.
Mr. McDonald explained that the Business Roundtable has encouraged its members not to
focus on one-time repatriation, but rather push for a competitive rate and a move toward a
territorial system. He noted that most OECD countries, including the U.K. and Japan, have
adopted territorial tax systems, largely exempting foreign earnings from home-country
taxation. He suggested that countries have chosen to adopt territorial systems “to improve
the competitiveness of their businesses and their economies.” Similarly, Dr. Sullivan
emphasized the importance of understanding the negative domestic impact of transfer-
pricing, likening it to “corporate welfare available only to businesses investing abroad.”

3. Shape and Scope of Reform
While revenue-neutrality was mentioned throughout the hearing, there did not appear to
be consensus on whether a reform effort should be revenue-neutral. For example, in
response to a question from Representative Richard E. Neal (D-MA) concerning the
possibility of revenue-neutral reform, Mr. McDonald indicated that, in meeting with
Treasury Secretary Geithner last week, corporate executives asked for revenue neutrality
to be “taken off the table” for the moment, with a simple focus on moving forward in a
fiscally responsible manner. However, other panelists seemed to advocate for or presume
revenue-neutral reform.
Most panelists seemed in agreement that fundamental reform will require an examination
of both the corporate and individual tax systems. Representative Earl Blumenauer (D-OR)
asked Ms. Olson and Mr. McDonald whether the corporate and individual systems must be
addressed concurrently to achieve successful reform. Both agreed that, given many
businesses operate as pass-through entities, corporate and individual reform must be
accomplished jointly.
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