Sen. Jay Rockefeller, D-W.Va., asked a panel of tax experts at a Senate hearing why tax fairness is so often equated with class warfare, particularly on Capitol Hill.
During a Senate Finance Committee hearing Tuesday on tax reform and incentives for capital investment and manufacturing, Rockefeller said to the witnesses, “Whenever you talk about fairness around here, you’re immediately accused of class warfare. It’s not only Warren Buffett. We’ve become so traumatized in this Congress about raising tax rates. We’re accused of class warfare. It has nothing to do with that. It’s not a partisan issue, but it is in the minds of most people who work here.”
Robert Atkinson, president of the Information Technology and Innovation Foundation, agreed and added, “I would be happy to see comprehensive tax reform that would raise taxes on richer people, but not on corporations. Rich people aren’t going to move [to other countries], but corporations will. I think it’s much more important to get [corporate tax reform] right.”
Jane Gravelle, a senior specialist in economic policy at the Congressional Research Service, noted that income inequality has been increasing over the last 25 years. Unlike upper-tier incomes, incomes at the bottom have been flat. “Corporate and individual taxes are tied closely together,” she pointed out.
If Congress cuts or increases corporate taxes too much, that will influence businesses in setting themselves up as Subchapter S closely held businesses.
“It’s very hard to imagine dealing with those challenges without increasing taxes,” she said. “You’ve got to go with where the money is.”
When asked where the unpaid taxes are, she acknowledged that much of it is in individual taxes, particularly among high-income taxpayers, but the bulk of it is in small businesses.
“Most of the taxes that aren’t paid are by small businesses,” she said. “They apparently don’t pay all their taxes. When you’re using cash and don’t have a record, that’s where the biggest part of the tax gap is.”
Gravelle also pointed to international profit shifting. “U.S. companies have more profit in Bermuda than six times the GDP of Bermuda,” she said. “That would be another place to look for the money.”
Senate Finance Committee Chairman Max Baucus asked her, “What’s the best way to get that Bermuda money?”
Gravelle noted that a territorial tax system would not be the way to do it. Under a territorial system, corporations would only be taxed on the profits they earn in the U.S.
Gravelle approvingly cited legislation introduced by Senators Ron Wyden, D-Ore., and Dan Coats, R-Ind., the Bipartisan Tax Fairness and Simplification Act, also known as the Wyden-Coats bill. Gravelle said there needs to be a minimum tax to keep companies from shifting their profits offshore. “It’s a free-for-all right now,” she said.
But others on the panel argued against that approach. “The days when we could impose our tax rates on the rest of the world are long gone,” said Atkinson. “Their tax rates are going to be imposed on us.”
J.D. Foster of the Heritage Foundation pointed out that raising taxes on U.S.-based corporations would prompt many of them to seek foreign owners, as in Belgium-based InBev’s merger with Anheuser-Busch. “They would buy all our companies,” he said. “It would be a simple transaction.”
Rockefeller said he was haunted by the specter of the banks that were considered to be too big to fail during the financial crisis, and something similar might happen with tax reform. Baucus urged the panel to come up with creative ways to approach tax reform as Congress tries to find an answer to a vexing problem.