Camp Discusses Tax Reform in Interview

Americans have been debating tax reform almost since the day the ink dried on the last comprehensive rewrite of the US tax laws in 1986. Grassroots groups have championed fundamental changes without gaining traction; individual lawmakers have proposed legislation that never came to a vote and presidential commissions have made recommendations only to see them filed away in White House archives.

But today a confluence of factors is setting the course for real action. Where the United States once had one of the world's lowest corporate tax rates following the 1986 reform, it now has the highest corporate tax rate of all major developed economies. The US still taxes its businesses on their global income in a world where capital and people cross borders more easily than at any time in history, while big trading partners like Japan and the United Kingdom have both shifted to territorial tax systems and lowered their top corporate tax rates. And a plethora of temporary provisions in the US tax code are getting harder and harder to address with stopgap measures because the budgetary impact of those annual repairs is growing exponentially at a time when lawmakers say eliminating deficits is a top priority.

Michigan Representative David Camp knows these things well. A member of the Republican Party, he has served in Congress since 1993. Since 2011, he has been chairman of the U.S. House of Representatives' Committee on Ways and Means, which is given explicit responsibility in the US Constitution to draft revenue measures.

That makes Chairman Camp one of the most important players involved with making tax reform in the US become a reality. Chairman Camp is taking this responsibility seriously.

During his two years in charge of the Ways and Means Committee, he has held more than 20 public hearings on tax reform, including several joint sessions with the Senate Finance Committee, which oversees tax legislation in the other chamber of Congress. In early 2011, he announced it was his goal to reduce the top corporate tax rate in the United States to 25%, down from 35% currently, and to similarly lower individual tax rates. And earlier this year, Chairman Camp released a comprehensive proposal outlining his vision for how the United States should tax its companies that operate globally. Chairman Camp's ideas have sparked a substantive debate among policymakers and in the business community. President Barack Obama also has engaged, outlining his views on international tax policy in the framework for business tax reform released earlier this year.

In an exclusive interview with Ernst & Young LLP, Chairman Camp identifies tax reform as his top priority in the next two years. He makes the case for why tax reform is needed and discusses the tension he feels in designing a US tax system that is in sync with the rest of the world while maintaining an "uniquely American tax system for us." He talks about his role in driving the tax reform agenda, the feedback he's received from stakeholders on his proposals so far and the important role businesses must play in this ongoing process. And he also looks into his crystal ball and predicts success.

Dave Camp (DC): Well, obviously we have not seen our economy recover like it should, with unemployment at over 8% for more than 40 months. I think that fundamental and comprehensive tax reform is a way to get a pro-growth tax system that will help strengthen our economy. Over the next couple of months, all of these things come together because, as you know, so much of our tax code expires at the end of the year and we have a set of extenders. But that's not what I'm talking about. I'm talking about actual rates and estate tax and alternative minimum tax and all of these problems, and we have to deal with them.

We're the only nation in the world with a tax code that brings this much uncertainty. It's so difficult for investors, employers and job creators to plan ahead so that they can either build the plant, which would mean that people would be hired and jobs created, or buy equipment or grow their employment. So it really is something that we need to look at very seriously over the next couple of months. After the election, when we know who's in control, and once we settle that issue, I think it's going to be priority number one.

BA: When you talk to your colleagues in other countries, what do they say about the current state of the US tax law and all the uncertainty? How do you explain it to them?

DC: They're dumbfounded! And, see, they've made a lot of the reforms that we need to make, so they kind of look puzzled, like, "Why aren't you doing this?!" So you're trying to explain the lack of action here a lot of times. They're doing it -- they're reforming their codes, they're simplifying, they're lowering rates because they know that if they can attract those high-paying jobs, their economies will do better, the government revenues will go up and they're going to be able to meet the needs of their citizens.

BA: Right now, is this a case of dealing with the immediate crisis so something dramatic doesn't happen on January 1, while also keeping the longer-term discussion of tax reform focused on dealing with the root of the problem?

DC: We've tried to do that this year. We've had more than 20 hearings in the Committee this session on tax reform, we've put a tax reform outline in our budget and I've released a draft in terms of international tax law. We've said, "How should we deal with the fiscal cliff? Let's extend current law for a year." We've addressed the sequester (the package of automatic spending cuts scheduled to take effect on 1st January 2013 as part of the Budget Control Act) in the House and committee, as in past budgets, so we have put benchmarks out in terms of where we believe we should be addressing these issues. But we've not seen that kind of activity in the Senate -- they've not passed a budget, they've not dealt with the sequester, they've not signaled where they're really going with some of these very key areas -- and so that's going to be a real challenge.

So we'll have that immediate crisis, as you've mentioned, of expiring provisions -- for example, if the AMT issue is not dealt with by the end of the year, it could mean a delay of as many as 60 million refunds, and the expiration of all these policies would obviously be a big economic hit to the economy. Those issues are going to have to be dealt with, we're going to need to get some stability in terms of what tax policy is, and then I hope we can pivot very quickly to fundamental and comprehensive tax reform. For the obvious reasons we're not competitive internationally -- it's a huge burden, compliance costs are out of sight, it's very complex -- and if we can address that, we can get a tax code that's modernized, fair, simple and really grows the economy and creates jobs.

A contrast with 1986

BA: As people look at tax reform, there's a natural tendency to think back to the experiences of other tax reform efforts here in the US, and the one that always gets mentioned is the 1986 Act. How do you think the challenges today differ? Are there particular factors that today are make-or-break in terms of advancing your objectives with respect to fundamental reform?

DC: I think one of the big differences is that the economy is in much worse shape now than it was then, and for a longer period of time. I think that means the compelling reason for doing it is actually stronger now. We do need presidential leadership on this issue. We haven't had that to date and that would really be a difference. Obviously Ronald Reagan was committed to this, it was his number one priority, and we need that same kind of commitment out of the White House in order to push this. We've done a lot, with 20+ hearings in the Ways and Means Committee, to try to move this issue forward -- lots of good input, lots of good data, lots of good background work -- but we're going to need really that kind of leadership to continue to move it forward.

There are some similarities. I think that we want to do this in a revenue-neutral way. You don't want to take one aspect of corporate to fund personal rate reduction, and so I think in the general sense and in terms of business and personal, this should be revenue-neutral.

BA: Mr. Chairman, what have you found particularly notable from the 20 hearings on tax reform conducted in your committee?

DC: Well, just in a general sense, I'm very impressed with the member participation, and both Republicans and Democrats, and the seriousness with which they've approached the issue -- I think that's been very encouraging. Also, the quality of the witnesses and their willingness to come forward. It's not easy to do, to take time out from a job and come to Washington and prepare testimony and be subject to all the questions that you might get.

I'm very grateful for this participation we've had, and the follow-ups to that have been helpful. I've known this is complicated. I've known that all along and I wouldn't say that surprised me, but I think it reinforced that we need to be very careful because if you make a mistake it could have a dramatic effect on a huge part of the economy.

So I think it's been about openness, it's been about transparency, it's been about trying to get the best information before the Committee that we can get and understanding that that isn't the be-all-and-end-all, that there are other ways that we can learn and understand and that we can then drive the agenda.

Probably the most surprising thing is we actually have driven the agenda. There really wasn't a lot of talk about tax reforms three years ago; there is now, and that's probably the biggest accomplishment that these 20 hearings have secured.

A 25% corporate tax rate

BA: Let's focus on the business tax side now. One area where there seems to be widespread agreement among policymakers and among business leaders is the need to reduce the US corporate tax rate. You've talked about reducing the corporate tax rate to 25%, which would bring our rate much more in line with the rates of our major trading partners, and you've just talked about the importance of revenue neutrality. How do you envision getting to a significant reduction in the corporate tax rate with a constraint of revenue neutrality?

DC: Well, the 25% rate is obviously our goal, and, as we did during Bowles-Simpson (The National Commission on Fiscal Responsibility and Reform, formed in 2010 to identify policies to improve the fiscal situation), we're going to have to go through and look at all of the various tax provisions and understand the impact of making those changes to the code. If we can get a tax code that meets that goal, we believe there will be a pro-growth element to that and you'll actually see revenue to the government. That's been the case in every tax reform that's occurred, whether it was the Kennedy years or the Reagan years, and I believe that could happen again.

BA: Some commentators have suggested that if the corporate tax rate can't be dropped dramatically, say well below 30%, perhaps corporate tax reform might not be worth the effort, the disruption to the status quo. Others think that there is much that needs to be done to make our code more efficient and that there are benefits from those kinds of changes as well as from rate reduction. Do you think there's some threshold level to which the rate must be dropped in order to get benefits from reform in the corporate area?

DC: We've had testimony on that at the committee and in various hearings from various sectors and industries. It's a little different for everybody, but we have had pretty strong unanimity around the 25% rate, that if we can get to 25% that they [companies] can see a path forward to that even though they may lose some of the deductions and provisions that they've taken advantage of in the past. So we've increased our consensus around that number, and I think that's the goal that I have every intention of achieving.

BA: Mr. Chairman, you've talked about your objective of making the United States a more attractive place to invest and you held a hearing focused on the tax considerations of foreign companies investing into the United States. How do you want tax reform to affect inbound investment?

DC: We need and want more of it. Plain and simple. I want the US to be the most attractive place in the world for capital investment. And what we are hearing from foreign-headquartered companies with US operations is that the best thing we could do is lower our corporate rate.

A changing world

BA: Let's shift now to international tax reform. This October marks the 50th anniversary of the enactment of our subpart F regime governing the taxation of controlled foreign corporations, which is one of the basic building blocks of our international tax system and is the source of much complexity and much of the difference between our system and those of the rest of the world. The discussion draft that you released last October has focused attention on moving the current system to a more territorial tax approach. The 95% participation exemption, which is the centerpiece of your discussion draft, is quite similar in approach to many of our major trading partners, and that similarity is significant. What do you see as the key objectives of international tax reform in the United States?

DC: Well, as you mention, it's the 50th anniversary, so it's been a long time since we've looked at it. In an earlier discussion I was really thinking more on the personal side, but you asked, 'What's the difference between now and '86?' Well, in the case of international, the world has changed dramatically. There are a lot more viable places for investment around the world than 50 years ago. Fifty years ago the US was really the top place for a multinational to be headquartered; it was the top location for investment. But there are alternatives now. We have to understand and recognize that our international tax law is out of step and out of date with where the rest of the world is, and yet we're competing with the rest of the world.

The other issue we have a difficulty with is that our US-based companies that earn revenue overseas actually are penalized if they bring it back to invest here, compared to their counterparts and competitors. So we want that to happen [the repatriation of profits] not just on a one-time basis but on a regular basis because we know that money left overseas is ultimately going into plant and equipment and jobs overseas, rather than here at home.

It is estimated that as much as a trillion dollars could come back. If we could bring that private sector money back here and invest it, I believe that's another aspect that would help grow our economy. That's why when our plan was evaluated as creating a million jobs in the first year, in connection with restrained spending in our budget, it was because we had items like transition designed to bring dollars back. So we need to move away from a worldwide system to a territorial system that more resembles what the rest of the world has.

BA: Thinking about the rest of the world, as you look at the design of what would be an optimal US international tax system not only for today's economy but also for the future economy, are there particular insights that you see to be gained from the choices that other countries have made in their international tax approaches?

DC: We've tried to get insight into what other countries are doing, but that doesn't mean we're going to mirror them because we have our own unique challenges and our own unique economy. But I do think it's very important to get that sort of understanding because that's who we're competing with. So we do have to have some sense of what's working, and why, in other parts of the world, but we're going to need to design a uniquely American tax system for us.

How business can engage

BA: Mr. Chairman, you referred a moment ago to revenue neutrality, and you've consistently talked about international tax reform on a stand-alone basis being revenue-neutral. What do you see are the benefits of doing international tax reform on a revenue-neutral basis, and why do you see that as so important?

DC: I think if you have a section of tax policy being used to pay for another section of tax policy, I think it would be very hard to get consensus on the sorts of reform you need.

This is all about 'How do we get our economy moving again? How do we get job growth in the United States and how do we get people back to work?' And one of the ways you do that is not have an antiquated, outdated tax system that actually penalizes the kind of job growth that might occur in the United States by bringing dollars back. But we have to understand that not every country has our rules, so there does need to be some sense of dealing with the base erosion issues. We've got a number of ideas out there and we've not settled on one, and we're still getting input; we got more feedback in the committee as late as yesterday. So it's a very important area -- it's an important area to get right -- and that's why I think it was very important to get out there early, in a more detailed way, and give those affected stakeholders an opportunity to come back with feedback.

BA: You mentioned base erosion, which is an area that's received a lot of attention in the current debate. Your international tax discussion draft includes three alternative options for addressing the potential for base erosion through shifting of income, and those options have a particular emphasis on income from intangible property. Your discussion draft specifically seeks input from the business community on these alternatives or on other approaches. Do you have any suggestions as to the types of information that are most valuable for the business community to provide as you continue to work on this area?

DC: A lot of businesses have spent a lot of time modeling. We've not only had options A, B and C, but we've had options D and E coming in recently as well. We're looking at those. I know others are looking at maybe not just the rate of tax and the jurisdiction but, again, seeing what income is earned there. But I think we have to keep in mind that there are low-tax jurisdictions and we're going to have to deal with those and not have those be a magnet for reporting income.

BA: You mentioned getting input regarding other potential approaches as alternatives to the options included in your proposal. Where do you see developments going with respect to the approach to base erosion and the balance with the broader territorial principle?

DC: The only way to get to a territorial system is to have credible, workable base erosion rules. We've received very constructive feedback from businesses that compete in the global marketplace every day. That feedback is helping us to construct the best possible base erosion rule from both an economic perspective as well as a tax policy perspective.

BA: So information about the kinds of activities, the kinds of business that companies are doing around the world, how that business is structured, and how if it fits in with the business they're doing in the United States, is it that kind of input that's most useful as you work toward a balance between the pro-competitive objectives you stress and the need to protect against base erosion?

DC: Yes, and of course, business transactions are very complex in an international setting. And whether that's royalties or intellectual property, we know that those are used to enter other markets and be active in other markets and to make the profits that we'd like to see come back. But really the hallmark of it is the 95% threshold and we're going to need to address base erosion in a robust fashion, and that's what we've still been trying to get information around. But I look at all of this as being something that the Committee will deal with as we move forward on comprehensive reform, but the more information we get, the better we can do the job. So these 20 hearings that we have done have not just been about the hearing record, but they have triggered a lot of input, as have visits to the office and data being exchanged and a very open discussion draft.

BA: Mr. Chairman, your international tax proposal has really advanced the debate by providing details that allow businesses to do both qualitative and quantitative analysis of the potential impact of the proposed changes to their operations. Your staff has been very receptive to comments of all types, from policy concerns, to business implications, to technical questions about the details of the discussion draft. That process certainly has been very important to the business community. What should businesses be doing to keep this constructive dialogue going as your work advances?

DC: Well, we want those evaluations and thoughts. Again, we've got really good people on the committee -- good members, great staff on the committee -- but we can't possibly know the nuances and complexities of every business in America as those who own and operate them and are employed in them do. So we're trying to understand what's going to work. This is all about trying to get the best tax code in the world for the United States so that we can be the number-one economy, we can have the best credit rating, we can have the highest job growth, we can have the highest GDP growth. And the result of that is that those benefits will extend to people, with more jobs, higher income and more prosperity. That's what this is all about.

BA: When you put out your discussion draft, you indicated you were focusing on the international tax area first because the changes being proposed are fundamental and feedback from a broad range of stakeholders would be valuable. What is the next step and when? Another international tax discussion draft that builds on the input received? A new discussion draft on another area of the tax code?

DC: I don't like to lay down artificial markers or timelines. Tax reform is tough enough on its own, and we have to remain nimble enough to adjust our strategy in the wake of new events. I released the discussion draft because I thought it would help move the entire effort forward. I think it did -- the business community became more engaged and even the White House was forced to put forward some ideas. So, if in a couple of months another draft is the right move, that's what we will do. If it's something else, we'll do something else. But I can guarantee you, no coach is going to give their playbook to the opponent, and neither am I.

Tax reform should move on its own

BA: Now some questions about the process for getting tax reform done. In thinking about the legislative path for tax reform, do you think that tax reform is separable from entitlement reform and deficit reduction?

DC: I do. I think they're all critical issues facing our nation, so I'm not trying to minimize the others, but I do think you can do tax reform on its own. I think if you try to make tax reform about reducing the deficit, I think it makes it much harder. That's the exact testimony that we got from both [former Treasury Secretary] James Baker and [former House Majority Leader] Richard Gephardt when they testified in front of the Joint Committee on Taxation. So yes, you could address these other items, but I think the more you burden it with those other goals, the more difficult it is. I think tax reform should move on its own, in a comprehensive way, and not be seen as a path to reducing the deficit or balancing the budget.

BA: In terms of tax reform, do you think that reform needs to be comprehensive, or can individual and corporate tax reform move on separate paths?

DC: I think it needs to be comprehensive and the reason is . . . again, I didn't respond completely when you asked first, 'What's the difference between now and '86?' -- well, in '86 you didn't have most of business organized as pass-through entities and now you do. So if you do just corporate reform, you still don't impact the majority of the business economy in America, so you need to do both if you want to get that real economic jolt.

The other thing is, they're both problematic, they're both in need of reform -- on the personal side, not only just because the tax rates are all expiring but because of the complexity and the cost of compliance. Together, they combine to create the sense that your neighbor has a lower rate than you do simply because they engage in certain activities favored by the government.

On the business side, we've spent some time talking about that, particularly the high rate, the complexity in the international area, the fact that we're out of step with the rest of the world. And we really need to move in a comprehensive way in order to get the kind of total economic benefit we want. The other things that have been tried haven't worked, whether it's quantitative easing or whether it's stimulus, those things haven't really moved the needle on getting people hired, getting people back to work or getting our GDP growing at a more rapid rate, and so I think we need to do all of it.

BA: How much progress have you made in dealing with the issues involving the treatment of corporate and pass-through business entities?

DC: Well, the theory is to have parity. Business entities are organized based on what's best for their business, not necessarily what's the best tax policy, and so that's why in our proposals we say that both the individual and top corporate rates are 25%. For individuals we have two rates, 10% and 25% respectively. So we recognize there is a difference, but I think that it's important to try to have parity between individual and corporate so that you don't drive, just because of the tax rate, to a certain business model but instead they organize in a way that best meets the needs of whatever they're producing or whatever service they're providing.

BA: Is it necessarily a "one fell swoop" approach to comprehensive tax reform, or is there an incremental path?

DC: I think you need to do it in one fell swoop, but as I said earlier, I think we need to take a step on extending because we're in this very unique situation of everything expiring at the end of the year. I think we need to deal with that but then move in one fell swoop to kind of bring in some more fundamental reform, and I think that there is support among many -- Democrat and Republican -- in the House and Senate to do that next year.

BA: Mr. Chairman, it's interesting to hear you talk about what the rest of the world is doing and how we should consider some of those changes they have made. At the same time, you are clear on the need to create a uniquely American tax system. One of the tools that these other countries use is VAT. What is your thinking on that these days?

DC: I don't see it having viability. Having said that, I'm not going to foreclose any discussion, but I don't personally see it as a viable alternative. It's been rejected 97-0 in the Senate, it's never been popular and I don't see it as really an alternative. But I'm not going to foreclose anyone else in terms of discussing that issue, and I think a good example of that is a 2011 hearing we had on alternative systems of taxation.

BA: You've described tax reform as your "absolute highest priority." What do you think it will take to get tax reform on the fast track?

DC: Presidential leadership would be nice. As I mentioned, it was Ronald Reagan who was critical to that, and administrations, when they want to, can do a lot to give the issue a real platform and I think that whoever is President is going to be facing this issue, because the economy hasn't recovered and because the need is so great. When I started on this a couple of years ago, there really weren't that many people talking about tax reform, and now they are, so I think the United States public is ready for it and are demanding it.

As I've said, if we don't do the AMT fix, 60 million refunds get delayed. To be facing this year in and year out, or every other year in and year out, is really not a way to have the most dynamic, growing, productive economy in the world. And if we're talking about stability from the government, there needs to be stability in our tax system so that business leaders and players in small businesses can plan and understand what their obligations are going to be so they can make those very serious and big investments of hiring people or building plant or buying equipment.

When you talk to a lot of people -- either young people themselves or their parents -- when they're in their 20s, they often get internships because businesses aren't able to make a full commitment to an employee. Well, one of the reasons they can't is that they can't anticipate what their obligations are going to be. So if we can bring some certainty, some clarity, some simplicity and fairness to the tax code, both for businesses and individuals, I'm convinced we'll see the economic engine that's been idling in America really rev up and get people back to work, which is seriously a need.

BA: One final question, Mr. Chairman. The Tax Reform for the 21st Century Act -- will we see the Rose Garden signing ceremony in 2013 or will it be in 2014?

DC: Well, having just watched the Olympics and seeing all these successful athletes, they always envision themselves standing on that podium, getting the gold medal. So yes, I think you've got to envision yourself standing there in the Rose Garden, watching the President of the United States (whoever that is) sign legislation for comprehensive and fundamental reform that will grow our economy and create jobs.

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