underlying and secular forces. inversions are merely the most visible manifestation of these developments. in addition to inversions, these decisions are giving rise to entrepreneurs that anticipate. merger patterns that affect domiciles in the united states. profit shifting activities that are not value-creating and the subsequent negative impact on all the distortions on the u.s. labor force. while it's attempting to limit the more sensational effects and characterize them as paper shuffling this would be essentially missing the forest for the trees. it would be to focus on u.s. welfare with particular attention on reforms that would improve u.s. wages. these goals are mistakenly thought to achieve by lilting the foreign activities as foreign agentivities can be viewed as quartering activity away from the u.s. in fact, it suggests the

opposite. indeed, american welfare can be advanceded by ensuring that investments in the u.s. and abroad are owned by the most productive owner and the americans flourish. a goal now adopted by most comparable countries. while the developments described above have crystallized t case reform still variation in proposals for territorial regimes. some proposals including those with an alternative minimum taxn foreign profits or can amount to a backdoor worldwide regime with more complexity than today's system. the considerations figure largely in tax reform today but should be accorded second area status given the limited revenue in the international tax rules and the remarkable complexity distortions required to secure any such revenue. it isn't clear that policies should prioritize other countries. more broadly the international reforms in the reaction reforms to address the other developments in the corporate tax arena and the prominence of the corporate business income

and the disjunction between the capital markets in the tax authorities a blueprint for the reform would include moving to the territorial regime unencumbered by the complexity, considerably lower rate in 18 to 20%, better alignment of the text reporting of the profits and buy some taxation that corporation business income. the combination is for addressing significant changes in the global economy and a revenue neutral watherevenue nel advance the u.s. welfare. including those that have a corporate tax in the consumption tax that are feasible. legislation that is on the specific transactions run the risk of being counterproductive. these transactions are in a broad set of corporate decisions leading to several unintended consequences. rules that increase the size of the foreign targets to ensure the tax benefits of an inversion can lead to more substantive transactions. more substantive transactions are likely to involve the use of activities the firms will be paired with larger the demand of

the relocation of the activity of god including the quarter functions. the specific regulations targeted in the firms may also lead to the firms in some transactions to avoid those regulations. while it is tempting to address the transactions in advance or in lieu of the broad reform it is useful to recall the legislation like these for the transactions and reduce the prospect of reform in the intervening years area i admire your foresight addressing these issues and the highly visible manifestations of the problems in the corporate tax provide a significant opportunity for the reform. i would be happy to answer questions. >> thank you very much professor. we welcome the doctor and look forward to your comments. >> thank you. is the microphone on? chairman, ranking member, members of the committee thank you for the opportunity to testify today. i am a principal with cooper and i have a phd in economics.

focus of my practice is economic effects of tax policy and i'm appearing today on my own behalf of the views i express as my own but asked to compare how the u.s. rules o with international income compared to the rules with other countries. in my testimony i will focus on the features of the u.s. corporate tax system that falls far outside of the international norms. the features of that u.s. tax system make it more difficult for the u.s. companies to compete in the global markets. the multinational growing competition from abroad in the last 15 years and a number of u.s. companies in the global top 500 list has dropped by a third from 20035. over the loss of the global market share by the companies is due to a variety of factors and to be u.s. tax system is seen by many as a hindrance rather than

to help. the corporate statutory rate including the estate tax is 39.1%. this is the highest rate among the major economies or the 14 points above the average for the other oecd countries and almost ten points higher than the average for the other seven countries. after the tax reform act of 86, the u.s. had a relatively low corporate tax rate. however since then the other countries have reduced the rate by collective average of 19.1 of the u.s. federal corporate tax rate was increased in 1993 to 35 where it has remained since. now wh while it is widely recognized that the statutory corporate tax rate is high, studies show our effective tax rate also is high by international standards. in addition the u.s. has a worldwide system under which the income earned by the foreign subsidiaries of the company's is subject to this tax when

received by the u.s. current. unlike the united states and all other g7 countries and unlike the 28 of the other 33 oecd countries, they have adopted territorial taxes systems. the increasingly face for and competitors taxed under territorial systems. to the other foreign competitors on the top 500 list are used if you territorial tax structures. the significance i is that foren competitors of the multinational can invest in the foreign profits at home account and added home country tax. turning to recent reforms in 2009 the three countries adopted the territorial tax systems. the uk, japan and new zealand. the adoption of the territorial system was the first step in the

reform package that included lowering of the corporate income tax rate from 2821 it was scheduled next year. the british government articulated the rationale as follows. the government wants to send out the signal loud and clear that britain is open for business. and in a recent years to many businesses have left the uk and have concerns about the tax competitiveness. this is why the government is preordained in the corporate reform. japan's adoption of the 95% dividend exemption system had been advocated by the trade industry to encourage the repatriation of the earnings. in addition since 2012 japan's corporate has been cut five-point to 35.6% and the prime minister's cabinet has recently approved below 30%. also, in 2009 new zealand switched back to the directorial

tax system after a 21 year perco which it operated under a worldwide system without the verbal. thereby bringing new zealand's tax system in alignment with international norms. in closing, the combination of the corporate tax rate and the worldwide system creates an incentive for the u.s. multinationals to reinvest the earnings outside of the united states. according to a recent study co-authored by tyson former chair president clinton council of economic advisers, switching to the territorial system without reducing the u.s. tax rate would on an ongoing basis increased the annual repatriations by over 100 billion a year and create 150,000 jobs per year. reforming the u.s. system to align with international norms would enhance the ability to compete abroad and create jobs at home. thank you and i would be happy to answer questions. >> doctor robinson?

>> charan, ranking member and distinguished members of the committee, it is an honor to appear today to testify on the important topic of international corporate taxation. i am an associate professor at the school of business at dartmouth college. i teach financial accounting and taxation in my research centers on the multinational corporations. it's clear that the reform is needed. it's one of the most technically complex areas of the u.s. tax code that raises little revenue. in my view is what the academicc literature and economics finance and accounting collectively offer in terms of evaluating the range of alternative solutions. the corporate tax rate is 30%. this is the highest rate of all the countries and it far exceeds the 23.5% average.

proponents of adopting the territorial system in the u.s. often cite competitiveness issues. a common assertion is that firms are in a competitive disadvantage because they face larger tax burdens, operate in a worldwide system of van der competitors operating under territorial systems. generally speaking, this is because the u.s. firms face a high old country tax on the private countries where the competitors faced no home country tax on the foreign profits. yet no country operates either pre- or delete could he make up your worldwide or facilitate the indefinite diva role of the home country tax on the foreign profits under the worldwide system pendulum swings back to the pure territorial system. likewislikewise, as eligibilitye dividend exception is appropriately restricted, the pendulum swings back to the worldwide system. this means it is possible for

the well-designed territorial system to be at least if not more as burdensome and a poorly designed worldwide system that we have today. but it suggests u.s. firms are adapted indefinite diva role. one study finds that financially unconstrained u.s. firms should get as much income as those operating under territorial systems. also there is no evidence that the tax burden depends on how the foreign profits are taxed in the home country of its parents to the editor is some evidence that certain location decisions differentially impact the firm's global tax burdens depending on the home country. the firm resident and home country realizes a larger reduction than the global tax burden by operating in the source country than the firm and home country why also operating in the source country. whereas the opposite maybe true for the firms when operating in the source country. this suggests the burden of the

international tax system depends significantly on the anti-abuse provisions and selectively narrow or broaden the tax base with respect to certain types of income earned in specific locations. rather than whether the tax system is worldwide versus territorial. other research shows decisions about the headquarter relocations, tax haven operations and ownership structure depend on the existence and the strength of the abuse legislation. maintaining the current worldwide system with the furl or introducing a territorial system leaves the need for the anti-abuse provisions that are difficult to administer and enforce. another consideration has eliminated the implicit cost avoiding the repatriation which triggers the tax on the foreign profits under the current system and prompting the firms to allocate economic resources and and and and efficient manner. examples include making the value or the inability to

responrespond that they do debao domestic opportunities. maintaining a worldwide system but eliminating the furl would greatly reduce the cost. adopting a territorial system may not. firms operating under territorial systems face implicit costs when attempting to circumvent anti-abuse legislation, which serves as a backstop that otherwise imposes a home country tax on the foreign profits that have not been subject to the robust tax system abroad. to my knowledge, there is the estimate of the cost but my expectation is that they would be greater than under the worldwide system without the furl. my overall assessment is that the international tax system can be adequately reformed. we need not abandon the current system in favor of fundamentally different system. limiting that he furl and lowering the rates would generally reduce the incentives to shift the income, eliminate the implicit cost of avoiding the repatriation and reduce the complexity and uncertainty for

the firm. thank you and i would be happy to answer any questions you >> thank you. the final witness is mr. allen. >> charan widened -- wait a minute -- how do you do this? it's on. ranking member hatch, and members of the committee i am flattered to be here and i'm especially pleased to be getting back up into the normal role in journalism. before i proceed i have to say i'm speaking for myself, alone i'm not speaking for my employer. i am not speaking for the "washington post" which has run my material for more than 20 years. i like senator hatch and appalled to see that versions are becoming a part of the issue. i don't like this.

now, if several weeks ago we put an american flag on the cover and we called these un-american but we were being partisan. collectively not in a social sense but in the society sends this isn't a republican problem. it's a problem for everybody. it's for all of us. and if you do not stop the ad versions now witversions now wia band-aid, by the time you get around to doing it there will be tens of billions of taxes that will be lost and will never be recovered. now i'm familiar -- i've been writing about this and researching it for months, and i heard the argument that while, the are a symptom. you can't deal with them unless you deal with the whole problem and you probably do deal with

the end of versions. well, i had to have a daughter that is an emergency room dr.. and when someone shows up at the er, the first thing they do is they put on a turn a kit, stabilize the patients and then they try to deal with the underlying problem. they don't say well we have to deal with the underlining problem. if you have an emergency here it may not seem that way, but you've got the beginning of a massive flood of data version unless you stop this. i know very little about the tax. i know very little about the law but i do know something about wall street, and i look at this, and it reminds me of the bubble when people did things that were just crazy but everyone was doing then and all these people

with degrees and a lot of money that whispered in your year you've goearyou've got to do th. so, people did, and it was just a disaster. so, i've written about wall street for large parts of my career. they gave us the internet bubble. they gave toxic subprime securities. and those are the biggest and versions. it's a product. it's the latest thing that good for wall street. there is a whole rationale that surrounds it don't think that it's good for society. since i don't pretend to understand anything in the national tax system except i don't understand it and i'm a english major, to me which will probably never happen because i

have to be nice to people and be polite and i don't do that well, i would adopt one of the 11 bills and cd wit with the bba de with me but i would adopt the carl levin version for one that has an expiration because if you can stop these things for a while, you can buy time to fix the system. if you say w say we both sit ard this and it will be fine. it's hard to do anything in a neutral form on the tax reform. in the complaint i've heard endlessly it is unfair to make this transaction but also ideally happens to be the date the senator published his op-ed in "the wall street journal"

that messed up because he wrote what i was going to write so i was curious but i came here anyway. so, to me that line was known. there were provisions in case the anti-and versions of changes. everybody knows this. you change the rules are attractively in 2004. but as best as i can tell, there wasn't earthquakes or fire from the sky. so if you connect like americans it is if you get the senate to go along and deal with the house begins up the patient from bleeding out we see the system and that is what i hope you will do. thank you for your time and i'd happy to answer any questions.

>> colleagues will stick to five minutes and we will get as many as we can. i'm going to ask one question up alofall of you and start with y. i've been as big critical progressive tax reform as anybody around here. and i'm going to keep pushing for the bipartisan tax reform as aggressively as possible. nobody needs you can get copies of tax reform passed this year and with the investment bankers. in a feeding frenzy there may be 25 more at versions during that time. so i'm just going to go down the road and ask each of you will that be a bad thing for america? >> that is a bad thing for america. it isn't just a one-time hit created as a hate we take the company a into cost that we incr through that ears of the budget

window. in addition i just want to add they not only reduce the u.s. tax bill on day number one, but he also adopt techniques to keep stripping out of the u.s. for each of the next ten years as well so we get hit with a double whammy and as a long-term effect in its permanent and so the cost is very high. >> it is also a symptom of the disease either you have two prevent these challenges of the u.s. tax code today. you lose control of the companies which advert in another country and that is for the u.s. and it is a bad symptom of an issue in the tax code. >> i think it will feel good to do something and i think the

reason fo for that is up with he all of these unintended consequences. there are analogies today that are helpful. rather than a term i could we have a leading patient and these things may anesthetize. >> i think i'm going to take that as a no. it is a very broken system and i understand the desire to put out the turn a kit but if you read it on too long without resolving the underlining problem you get gangrene. it's the only real answer to stop the problem. >> you are in thyou're in the ml of this. my concern about that position for both of you is that tax

reform is moving slowly. at versions are moving rapidly, and that is a prescription for chaos and that's why i want us to address both of the issues in a positive way. doctor robbins and? >> i don't have any data about this but i do remember reading about the companies leaving other countries such as the uk and then when the tax system has reformed, they have come back. these companies may not be left forever. i also think as far as i understood the transaction that only affects the tax on the future and come and it doesn't impact the tax on the accumulated earnings. so in that respect, i don't think that we run the risk of bleeding to solve the real problem and a sort of letting se

markets play out as they do. >> do you think it would be a bad thing? >> including the 25 companies advert and then fixing the tax code is a recipe for disaster. i know a little bit about how and version works and is absolutely right that the problem lies not so much what happens to the foreign profits but it becomes much easier to move money out of the united states and you have to stop this. and act some point when we are not on the clock i will stand the medical analogies with my colleagues, but this isn't the time. so i will just let it go. >> let me see if we can get one other question and i will make this for you giving what you said. walgreens is an american icon.

it's located in the heart of the country and they are talking about adverting right now. should americans be concerned about the prospect that if walgreens inverts, they will strip profits out of the united states and put them into tax haven is that something americans ought to be concerned about? spinet absolutely. the secondary question is what we do about it. >> this question is for doctor robbins in. in your written testimony, you write. some evidence to support the assertion that the multinational corporations are at a competitive disadvantage because they face larger corporate tax burdens and the competitors in the territorial tax system. you then cite three studies in

support of the statement including one site that finds the u.s. multinationals have the effective tax rate and in the multinationals based in the european union. what are there numerous studies that showed the multinationals are subject to higher effective tax rates than four in based mac multinationals and that seems to indicate that the u.s. -- let's look at it this way. let me give you an example. numerous studies show that in the written testimony the congressional research service released a report earlier this year stating effective tax rates and in one part of the report did note is effective corporate tax rate in the united states is 27.1% as compared to the rest of the countries that have an average of 23.3%. that seems to indicate the

effective tax rate is almost four percentage points higher, not later than the other countries at least by one measure. would you please comment on this and i would also like to ask you to tax rates fazed by the u.s. multinational as compared to the foreign-based multinationals. >> in my written testimony they measure counting the tax rates from the financial statement so i'm not sure what the doctor is going to follow up with in terms of his study. it may be a difference in how the tax rates are measured. but in the accounting literature, there have been a number of studies published and unpublished but searched extensively for differences in the accounting effect of the tax rate and firms and worldwide versus territorial countries and

also looked at as i mentioned the effect on these effective tax rates based on specific location decisions. and there isn't to my knowledge in the accounting literature as measured by an accounting any evidence to suggest that u.s. firms have hired rates. >> in my written statement there is a comparison of six different studies that compare effective tax rates as the u.s. and foreign companies. none of the studies are specifically focused on the foreign income of the multinational companies, and perhaps this is what doctor robbins and's comment is referring to. the studies i look at refer to the u.s. versus foreign

companies in the accounting data and one of the studies that is published by the business roundtable compares to the financial statement of the companies in the 58th different countries and the u.s. had a high year than average effective tax rate and the other multinationals in the study. the bank that does this study we help them with that and compared the taxes in the 183 countries looking at purely domestic companies into there are several other studies that i cited there that have a focus rarely on domestic investment. looking at a broad range of study almost every study that i've seen has shown that when you do an international comparison of the tax rate versus foreign whether it is done through the margin or the average effective tax rate studies, the u.s. consistently

comes up above average. so, i put it in my testimony because it is commonly thought that effective tax rates with u.s. companies are low. but by international standards according to all of the studies that i see and accept for actually the ones in leslie's testimony the u.s. comes up in the top quartile. >> since the discussion of the international tax reforms, can the debate of the capital export neutrality versus the n. port neutrality such a discussion usually is not helpful in my opinion and it typically ends up going nowhere. but you have to select a new theory of the international taxation. the capital ownership neutrali neutrality. the idea being that the tax system shall not distort the ownership of the assets, and in fact the capital ownership neutrality seems to fit nicely with the acquisition and versions that we are seeing

today which the u.s. corporation acquires a smaller organization and inverts as a part of the acquisition. and now my question is if the u.s. corporation wants to acquire a foreign corporation it seems the u.s. corporation is at a disadvantage. if it is competing against a foreign corporation based in the country, with a territorial type of tax system, and as we know most developed countries have adopted a territorial type of tax system in fact 28 of the 34 oecd countries have turned to the typed text systems. systems. is it activates the corporation is a disadvantage? >> if you could a brief answer to recognize senator grassley. >> we develop the capital ownership neutrality into the idea is what you said what matters isn't where the dollars go who owns what and in the context we are talking about they are manifestations of the fact that the u.s. firms are not

good owners because of the tax provisions around the world and it is better to be domicile somewhere else and it is of the patterns that give rise. >> here is what i would like to do with my five minutes. i would like to ask a question to begin with and let him think about it for four and a half minutes and i want to read a statement and then stop so she can answer my question. .. him think about it 4 1/2 minutes, led him read a statement. >> colleagues, at this point, we have had a vote called i think it's the consensus of the members that we'll have to break because here in. we'll get as far as we can. senator. >> mr. stack, this is a question i'd like to have you think about. the treasury has recently informed me it has finally begun work on a report mandated by the american job creation act to study the 2004 anti-inversion

provisions. when does the treasury department expect to finish its study of the 2004 inversions legislation, and before enacting such important legislation, shouldn't treasury at least complete the report mandated to study the issue? like most of my colleagues here today, i've deep concerns about the practice of companies moving overseas for the primary purpose of avoiding u.s. taxes. average americans and companies that remain in america are rightfully outraged. when companies leave the united states, leaving the rest of us to in the early 2000s i led an effort to prevent companies from simply setting up a filing cabinet and a mail box overseas to escape millions of dollars of federal taxes. in 2004, when i was chairman, i was successful enacting reforms that establish rules governing inversions for the first time. under these reforms, an inverted company continues to be treated as a domestic company until

there is a significant change in ownership or substantive business activities are located in the foreign country. a second feature of these reforms prevents an inverted company from skipping town without first paying taxes on untaxed earnings. prior to these changes, all the company had to do was move its tax home out of the you'd and file papers with a tax haven. there were no rules or standards for determining whether a transaction had substance or was purely a tax avoidance scheme. a number of companies took advantage of the lack of rules and standards to move to the cayman islands or bermuda as examples. these inversions were purely paper with no substantive change of operation. in 2004, provisions have successfully curtailed abuses

targeted by the legislation as a nonpartisan congressional research services said, these reforms, quote, effectively ended shifts to tax havens where no real business activity took place. this is not to say inversions no longer take place. the 2004 reforms were never intended to establish a berlin wall that forever trapped companies in the united states regardless of business needs. these reforms were targeted at and put an end to egregious abuses epitomized for augelin house that serves as mail boxes for millions. the significant foreign company, usually european, these are not the traditional tax haven countries with little or no corporate tax, but major u.s.

trading partners with competitive tax systems and rates. there is little question that lowering one's tax bill continues to be a factor in companies deciding to invert. however, unlike transactions in the early 2000s, these are substantive transactions that come with both risk and benefits for companies involved as a result factors other than taxes likely play a role in deciding to invert. i do not condone that behavior. one area that should be studied further is a role of tax rules that allow inverted companies to strip income out of the u.s. plays in a company's decision to invert. i'm going to stop and put the rest of it in and ask mr. stack to answer my question on the study we asked for. >> sure, senator. as we mentioned in our letter last week, now that we've gotten

great guidance out on inversions, we are working on the study. i apologize. i cannot give a specific time frame for answering it. i would say that given the pace of inversions that have picked up recently, we would not think there would be a need to await the study to bring back our full attention to this issue which is happening before our eyes. >> thank you, mr. chairman. >> thank you, senator grassley. senator brown. >> thank you, mr. chairman. i would talk for a moment about a question for you, mr. stack, about earnings stripping. companies are using intercompany debt to lever up their u.s. subsidiary and duct interest up to 50% of pretax earnings, shifting profits to the lower tax country. the second element of this tax arbitrage is shifting intellectual property and attributed profits to tax havens. my question is what do we do right now to create a kind of

temporary trip wire that will allow legitimate mergers, but prevent those arbitrage-driven inversions? >> thank you, senator. one of the reasons we singled out these anti-stripping proposals in our budget, even without reform these things are going on now and going on particularly in cases where we have inversions. so whether it be interest stripping, making it harder to take intangibles out of the united states, changing the treatment of instruments that you can take a deduction here and have no income inclusion somewhere else, we think these are all urgent needs that would protect our base even before we do tax reform and will also protect our base while the inversion wave is happening, and they're very important. >> thank you. mr. chairman, i want to ask a question of mr. sloan. i want to make one comment. the more we read about this and i appreciate the chairman has brought this out more

effectively than anybody in this senate. when people in this country increasingly think the system's rigged, people in this country increasingly see large companies find ways of avoiding taxes. people struggle to pay their own taxes. people see these large companies having benefitted from a manufacturing tax credit, infrastructure in our country then using legal means, nobody's arguing, most of us are not arguing they are using legal means, finding ways to avoid taxes. i think this committee needs to take this charge very seriously that the public loses, increasingly loses confidence in this tax system causing others perhaps to cheat and loses, increasingly loses confidence in this legislative's body ability to do anything if we can't narrowly follow mr. stack's advice and senator wyden's ideas

and do something narrowly now about inversions, we clearly have not lived up to our public charge. let me ask a question, mr. sloan. we were seeing increasingly more and more stories from senator levin's work on his subcommittee that hedge funds and investment banks are big drivers of these deals which indicates a potentially short-term focus on stock price and fees, the rewards to wall street are plentiful, as mr. sloan said. premiums offered to shareholders of foreign companies so inverting companies may avoid u.s. taxes. if you would answer a couple of questions, if would you, mr. sloan what role in your mind do equity funds and private equity funds, investment banks hedge funds play in encouraging companies to avoid taxes by completing an inversion? is there any counterweight to this pressure companies received from short term focused investors? >> all of these players are in business to make money. they are in a competitive business.

they want to show a higher rate of return than other people so they can continue to attract more money and get more fees. and as long as something is not illegal, they will do it. and if you talk to them socially, they're not bad people. they're human beings, even like senators and journalists. they're regular people, but they have these forces that drive them. and i think they are perfectly fine corporate ceos who, if you people will just protect them and get rid of the inversion temptation, they are happy not to invert. but everyone now feels pressure and everyone's scared. it's becoming a mania. by the time it waves, it fades away, it's too late. >> thank you, chairman. >> thank you, senator brown. senator schumer is next. i am going to try after the

first vote to run over and vote because we have colleagues who feel very strongly about this. senator schum ieschumer. >> thank you. i want to thank you and senator hatch holding this hearing today. we must independent this trend to leave our borders for tax avoidance purposes. there's been a significant uptick in the number of inversions. 47 u.s. corporations reincorporated overseas through these inversions. during that period, now there are more than a dozen perspective deals. many of my colleagues, particularly on the other side of the aisle argue we shouldn't be looking at this issue in a vacuum right now. they say we should instead be focused on corporate tax reform. i would ask those arguing that we wait for tax reform just how soon do you think that's going to be possible? chairman camp tried tax reform on the republican side. even speaker boehner didn't give it much credence.

so if we wait for tax reform, we're going to have lots more inversions and it's going to take far too long if we ever get to tax reform at all. saying that we should wait for tax reform to deal with inversions is a green light to allow many more inversions to occur. for some who make it, frankly, it's an execution to keep this loophole in place for the foreseeable future. the tax reductions achieved through inversions happen in a couple of different ways, mr. chairman. first, by moving their domecile, they are no longer on u.s. tax and this has been appealing to pharmaceutical companies. walgreens, for instance, is doing the same thing. why is that? well, it's the second piece of the inverter's tax avoidance equation.

not only can these companies avoid paying taxes on their internationia internationial optations, they can avoid paying taxes on their u.s. taxes that remain in the united states. one way is through a mechanism in the tax code called the interest expense deduction. it's a five-step process. they set up a u.s. subsidiary to operate their u.s. business. when that subsidiary owes u.s. taxes, they transfer the corporate funds between the foreign parent and subsidiary and call it a loan to the subsidiary that. triggers a u.s. tax deduction. the interest expense deduction for this subsidiary, which then largely offsets their u.s. tax liability. the loan is repaid through the profits of u.s. tax subsidiary to the foreign parent, and u.s. taxes have been avoided. as a result, they pay little or no tax on their u.s. profits, as well. now, we've attempted to limit

this type of behavior in the past. we put a cap on the debt-to-equity ratio of the u.s. subsidiary, but the current law still provides very lucrative tax benefits for intercompany benefit. in fact, mr. sloan, your magazine or your website did an op-ed on this talking about the risks and rewards of inversions, which mentions the interest expense deduction. so as we work together to put a proposal to combat this growing challenge, we have to look at it from every angle. now, i support the proposal that senator levin and the administration have been working on, an immediate two-year moratorium and increasing the number of foreign shareholders to inversion there 20 to 50, making it more difficult to happen. i do have concerns with the management and control part of the levin proposal because we want to keep jobs at home and the management control proposal may encourage jobs to grow

abroad. levin's proposal is not enough. we should include a proposal that further limits or disallows the interest expense deduction to deal with the u.s. profits that they are also trying to avoid. doing so will be a deterrent for those considering an inversion as they'll no longer see that opportunity to avoid u.s. taxation, and it will deal with the retro active problem. you eliminated pro expectatively, but any company that did an inversion six months ago, a year ago, five years ago will still lose this deduction. so it's a prospective policy action to counter past and future inversion activity. it would ensure we don't leave those inverters at the front of the line, the one whose started the trend with a competitive disadvantage. mr. stack, my only question, my time is running out. i know my dear colleague is waiting. does the administration agree that we should consider measures to further limit or disallow the

current interest expense deduction for inverters in any legislative package we pursue to combat inversions this year? >> yes, senator. we fully agree. we think you've shone a light on a very dangerous part of the inversion craze. the ability the day after the inversion transaction to continue to strip the u.s. tax base we have a budget proposal to that effect, but think you are pointing to a very critical aspect of the problem. >> thank you. i want to say to companies doing inversions, you want to operate here, you want access to this market, access to the work force, access to the economy, understand this here today, to continue to have that access, you are going to have to pay your fair share of u.s. taxes. things are changing. >> thank you, senator schumer. the time for the vote has expired. we are going to go. i'm going to come back as quickly as i can. thanks. >> i wanted very much to be here even though we have to go

running out. thank you to each of you. i want to say to my colleagues, we have a place to start tomorrow which is to bring jobs home act. i'm very pleased to be working. it takes a simple first step on what needs to be a series of steps. if you want to move your company we are not paying the cost to move out of this country. if we want you to come back, we'll let you write that off and give you 20% tax credit. if you leave, you're on your own. that's not enough because we have folks that leave on paper. they are not picking up their plant and leaving. i will stay, mr. sloan, i couldn't agree with you more. this is not a partisan issue. this is an american issue. i think the american public is going to be watching very closely to see companies that need consumers who are doing this. i think they underestimate the

reaction of consumers and other businesses in going forward. i do think if we can move forward and overcome a filibuster, get on the bring jobs home act, we could at carl levin. i'm with you. i serve with both my dear colleagues sandy and carl in michigan. carl's approach of a two-year effort to get us to tax reform is the right way to go. we could add that certainly with the bring jobs home act. i believe that we need to do that and we need to get started on this. i also think it's important, you are right in terms of -- certainly all of you saying we need tax reform, we need to do that, we know we need to do that. we know we are in a global economy. we have to address this. but we also do know that i don't know of any sector paying 35%, our corporate rate. the reality is we have a lot of incentives, we want incentives that relate to manufacturing or r&d or other things, but when i

look at the list, from medical devices at 18.8% or financial services 16.5% or petroleum production 11.3% or down to public/private equity paying 0.8% rate, a large disparity and a number of issues we need to address. here is what i want to comment on. that is the issue around -- we have two issues. corporate tax reform, global economy, how do we address this and incentivize making things and growing things in america and innovation in america. then we have folks that just plain don't want to pay their fair share and benefit from america. so you've got folks on inversions who, they don't want to breathe beijing's air. they want to breathe american air. they don't want water of third world countries. they want to drink the water. they don't want the rule of law

of a lot of countries. in haiti talking to our business, as you pull up a cargo ship you can't get the product off the ship without paying a whole bunch of bribes. so they want our rule of law. they want our innovation, education, infrastructure, breathe the air, drink the water, they just don't want to contribute. that doesn't sound like normal american values to me. what it does is create a race to the bottom where we're not going to have customers, then we're really not going to have businesses as we go forward on here. this is a deep concern to all of us. i guess, mr. sack, i would simply ask when we look at competitiveness internationally from your perspective, certainly the rate is important, but we know even going to 28% that means eliminating r&d tax credit, section 199 for small businesses. that means eliminating

accelerate depreciation which is so critical in a state like mine with manufacturing. there's got to be more to it than just tax grade in terms of investing in america. i would ask you if we are going to stay competitive internationally, make things and grow things here, what are some of the other priorities besides lowering the rate? >> thank you, senator. first on the rates, i would also add the point that a lot of the discussion about rates kind of ignores the fact that there will always be countries with lower rates than ours where people may want to seek to go. there is this tax competition going on. in terms of other things we could be doing, the first thing i want to point out and this relates back to rates, our effective rates, very widely. we don't have a level playing field across our industries. number two, we don't have a level playing field for countries that can take ip and put it offshore or have a broad enough market offshore to take advantage of some of these international provision.

in addition to lowering the rates, we think it's very important to broaden the base for these taxes so we can create some akwlt, eliminate the winners and losers so that everybody has the advantage of this lower effective rate as we go forward. as you also point out, maintaining incentives for research and development so that we remain the premier country in terms of this type of activity is also of critical concern. >> thank you. i believe at this moment i better get over to vote or i'm going to miss the vote. thank you very much. are we in recess. we are in recess at the call of the chair. thank you very much. s. corporat

rate was increased in 1995 where it remained since. while it's widely recognized that the statutory corporate tax rate is high -- very much appreciate senator portman's patience. i look forward to working with you closely on these issues. senator portman. >> thank you, mr. chairman. i have had some long conversations with you and i appreciate you championing tax reform. i liked your first response to the inversion proposal. we have a little difference of

opinion on tactics here because i do think this is an opportunity for us to encourage solving the problem rather than dealing with the symptom. we heard a lot of testimony today about what will happen if we just go after this particular issue. i know there's some difference among the panelists as to i don't think there is any difference, i hope, about the fundamental problem. mr. stack and i just spoke. i spent a lot of time talking to administration officials about this issue, too. the bottom line is it is advantageous to being an american company. it makes more sense to be a foreign entity to be able to take advantage of a tax system with the great majority of our competitors who are 93% of our foreign competitors as peter merrill told us today who do have a lower rate. it's a deadly combination to have this high rate and have a worldwide system. i just don't think what we are talking about in terms of a

short-term fix is going to help. there's good testimony today about how it could even hurt because if you just deal with inversions, you have some unintended, but perhaps negative consequences, demanding the location of even more jobs overseas is what dr. desai talked about. my concern is foreign acquisitions. recently we sat down with u.s. companies to talk about this issue. i've been doing this the past few years and worked on this in the super committee. we are hearing over and over again the fact already foreign acquisitions are on the rise, even without this rule. if we put this rule in place then we could limit the deductibility of interest as one of my colleagues said, and we could make it harder to be an american company. we'll have more and more foreign companies owning u.s. assets. some of those will be takeovers. recently, biopharmaceutical company came to see me, last week, from the boston area.

i asked about the acquisitions in the boston area biopharma companies. 28 companies have been acquired in the last several years. 17 of those 28 were acquired by foreign entities. you put the hole in the dam here then you are going to have a flood here and have a worse result, more pressure on jobs leaving this country. so i mean we talk a lot about revenue and income-stripping and earnings stripping. i agree when you do a tax code that captures income in the most efficient way, but this is about jobs. my question i guess to mr. stack is what's going to happen if we continue to make it harder to be an american company? aren't we going to see more, not just acquisitions, but acquisitions of american assets? because foreign companies have higher after-tax profits, it's more profitable for them. they can pay a premium for our assets for subsidiaries being

sold. you'll see american companies shrinking if not being taken over by foreign entities. what's your answer to that? >> senator, i think that the tax code as we look out in terms of leveling this playing field, i think it is important for us to take as an opening step that we will never be able to offer, let's say, rates as low as countries that are trying very hard through tax competition to lure companies overseas. so there will often be a tax differential between the united states and other countries that might on the margins fuel some of that acquisition activity. we have a lot of great things in this country though that keep companies here and keep them competitive and keep them doing very well. so i do agree then, and all the plans on tax reform seek to lower the rate, and there is universal consensus that and we should be bringing it down. and when we bring it down, we will come closer to level the

playing field with those foreign -- >> so i think this is not just an important problem. i think it's an urgent problem. i think you have all sounded the alarm here. again, we have differences on the panel and on our panel as to how to address it. but it seems to me when you look at the history of our country, the only time you see major tax reform is when the treasury takes the lead. omb has to be involved in the numbers. what's treasury doing? tell me what concrete steps are being taken to address this, as said today, emergency situation. is it just to plug the hole in the dam here or are you actually looking as the president has talked about over the last couple years actually solving the underlying problem? >> sure. senator, the president's framework in 2012 really was kind of a far-reaching move forward. to think differently about our international tax rules. and that is to say it was going to be able to bring down the rates, broaden the base to deal with some of the differential effective rates i mentioned

earlier. but also through the foreign minimum tax try to cut out some of the game playing that goes by stripping into, you know, very low-tax jurisdictions. we think that kind of set the tone for some of the work that was done both in finance committee and by chairman camp. and that there's a very robust set of proposals, you know, on the table right now.in ad in terms of the base stripping we put several detailed proposals in the budget to get at this opportunity once a company in efforts to strip out of the u.s. base which as everyone knows provides a lot for the transactions so they can do better once they are offshore reducing u.s. taxes than they could before. so we think we've shown leadership in the framework and in putting concrete proposals in the budget and i know the president and secretary stand ready to work with congress on both sides of the aisle to push through international tax reform. >> i would love to see that push. maybe my colleagues seem worth

it than i do. i have conversations with individuals at the treasury and the administration including the white house, but i just don't see the punch. i hope we will use this unfortunate situation that we have the major version to be the pharmaceutical company to get us to the point that we are solving the problem and if we make it worse by making it less advantageous to the company i worry we will look back and see a hollowed out american corporate base and wonder what happened. we abdicated our possibility doing everything the panel a grease we have to do to make it competitive. i know my time is up and i appreciate the testimony today. there is a specific action by the administration and the congress. >> thank you senator portman. i looked over to working with you in a bipartisan way. i have additional questions. senator hatch is on a tight timeline so i would like senator hatch to go first.

>> that is very gracious of you and i look forward to working with you. this question is for doctor romero. both japan and the united kingdom adopted the territory types of tax system in 2009 switching from the worldwide tax system with the furl. these are two countries with large economies. japan is the third-largest economy in the world and the united kingdom is the sixth largest economy in the world. can you tell me why japan and the united kingdom switched from a worldwide the furl system like the current tax system to the territorial system and after five years of experience with a territorial tax system what would have been the results for both japan and the united kingdom? >> yes, thank you for the question. the united kingdom was experiencing phenomenon not

unlike what we are experiencing now. they saw a number of large multinational companies. some quite significant that it actually moved their headquarters out of the uk primarily to ireland, and that was of great concern to the government and they decided that it would be appropriate to adopt a more competitive tax system along the lights of the quote in the oral statement. so the tax system would be more welcoming to the multinational business. one of the factors for the uk is they had many companies that earned only a small part of their total income. yet the uk had a tax system like ours that was taxing the income of companies that only earned a small amount of income in the uk. so in order to become a more attractive location for the

multinational companies, they went to the territorial type of tax system under the exemption of the foreign dividends and made a number of changes they indicated will bring the tax rate and also adopted a 10% refundable research credit and they also adopted a 10% phased-in 10% tax rate on income from patents and they also modified the rules that they have done a whole package of things namely to make it more attractive for the multinational companies to be headquartered in the uk. uk. and they've been successful as doctor robinson mentioned some of the companies that left the uk actually moved their headquarters back to the uk in response. japan is a different situation. they saw the japanese multinationals like the u.s. facing very high corporate tax rates by the high system money

not being repeat treated to japan, the trade industry wanted to see that money come back for additional investment. in japan that is why they made the change. >> it is good to have you here. the work is done by consensus. that is the measures cannot be adopted without the consensus of all of the member companies. presumably the consensus of all of the company's nam companies l member companies consented to the work the oecd is doing or else they want to do that work or issue such a report; am i right on that click >> yes, senator. the consensus means that the report or the soft glow which is what would develop when no country around the table objects to it. >> do you have the consensus of the united states please keep in

mind that the system in the separation of powers the law making capability sparingly infested with the congress in obtaining the consent of the united states it is necessary to get the consent of the u.s. congress. so we don't appreciate -- we appreciate you being here for the hearing. to obtain the consent of the united states for the oecd work and for the project the congress must be kept informed of the work and of course that has to be working in conjunction with the u.s. treasury as well. >> senator, that is not only the secretary of course but all of the member countries to be aware of this we are more than happy to end each with the staff on the hill but without impeding on

with the treasury is doing and i would like to add that most of the measures which are completed in the project are soft rules into these are common interpretations of the standards and is they do not require but information of all stakeholders and in particular the congress. >> let me ask you the same question. please reassure me the u.s. treasury department will keep congress informed and not get ahead of the congress and the decision-making process into the negotiation in the oecd regarding that. >> we fully intend to do that. i've been there twice to meet with bipartisan staff in both houses and i look forward to continuing that throughout the process.

>> we appreciate the work in that regard. i want to thank all of you for being here. i have other commitments, but this has been extremely interesting and i am going to read the transcripts and i will know exactly what you will say and i'm going to hold you to it, too. >> you will, beyond notice. we are moving towards the end of the hearing. senator portman a have additional questions but let me give you my sense of where we are. i certainly am not interested in building any walls. i want to close the loophole and drain the swamp. i want to fix this dysfunctional mess of the tax code if we have incentives for creating red, white and blue jobs here in the country. and i know we are going to be calling on you while often in the days ahead. i just ha have a couple of other questions about issues that are

pending. senator thune, your next if i could finish these questions and then we will go right to you. the first deals with the implications of the versions on health care costs in america and the implications for the american consumers. i was struck by comments made in "the wall street journal" recently. he said he was concerned about the high prices that american consumers would have to pay if the proposed versions like his companies didn't go through. and i'm still trying to figure out how these savings are going to be passed on to consumers and of course the taxpayers who put up so much of the money that funds the medicare program. succumb and all three of the

professors, explain to me how somehow these costs, particularly medical costs because so many of the insurgents thus far are medical. explain to me how if because you've done scholarship on this, how is this going to benefit the american consumer and the medicare program in particular? we will start with you. >> the broadway to think that the problem is to understand. it is who pays the corporate tax, and there are three sets of votes that can play. first is the customers that you are referring to. the second is workers and then the third is capital or shareholders. so whenever there's a tax saving move we can expect the benefits to accrue to one of those three sets of people either the workers will get higher wages or

customers will get low prices. most of the consensus in the scholarship is when the taxes change they don't typically get transmitted to the product prices. it would be the prices that americans pay for health care. healthcare. >> in this example that is right. they typically get more likely the wages and to some degree the shareholders. >> let me then because the senator has come back and we will bring you into this question, doctor robinson. and that is the impact of reform on the default issue. and one of the goals on which there is bipartisan support for the corporate tax reform is to simplify the system. we all understand the international tax is inherently complicated. my question is what entry. the deferral go a long way towards corporate tax

simplification by eliminating the complicated system that exists today of tracking unused foreign tax credit and the related earnings and profits, in effect income would be subject either to the immediate taxation or exempt in the current foreign tax credit would be utilized inn it current taxable income. answer to that question a few bites would be fertile would be a very complicated future of the tax system and avoid doing that as part of the bipartisan comprehensive tax reform make a system more simple and understandable? doctor robinson? >> i do think as i put in my written testimony that the implicit cost of the u.s. tax system is higher than the explicit cost.

it's avoiding the repatriation or maintaining d. fo the girl fa long period of time is what i believe makes the tax system and competitive. so, i do think that eliminating that he fertile so long as the rate of the course is lower sufficiently is what i would be in favor of and the reason that i say that is because the alternative approach of course is to implement some sort of a territorial system, but i think those types of systems to design them appropriately would have to recognize to the robust tax systems abroad that you have to introduce all sorts of exceptions and exclusions and base broadening provisions and by the time that you introduce those you are sort of right back where you started and so i am largely in favor of ending the deferral and lowering the rate in december vacation.

>> i will recognize senator simmons. is there anything you want to add? >> thank you mr. chairman and i want to thank you and to senator hatch for holding this hearing and thank you all for making the time to share your expertise with us. i suspect there are significant differences about how we approved the u.s. tax code. code. some differences of opinion among members of the finance committee and probably in the senate and in the congress. but i think that all of us agree he want american companies to be competitive and win in the global marketplace and i think unfortunately, we ask them to do it with one hand tied behind their backs because we actually make the rules they pay by. when we make the rules you get to bad outcomes and there are economic signals right now that are driving a lot of the decision-making that the businesses are following.

so i think some of this inflammatory rhetoric and accusing them of not being economic patriots is really not helpful and i would hope that we could focus on not just the symptoms but actually the cause for these problems, and that is we have an outdated dysfunctional tax code with the highest rate in the developed world if we are one of the few in the world but continue to use a worldwide system that hasn't moved to the territorial system in the world but certainly one of the few countries in the oecd. i think we need to focus on the problem here and the problem. back in 1986 when the corporate tax rate was five points lower and now it is 14 points higher than the average.

this is what you're going to get when you have these kind of rules so we need to change the rules and reform the tax code. the system is basically the worst of all the worlds because we've got if you're asking your business to compete in the foreign market place not only do they have the highest corporate tax in the nations and also where as i said one of the few nations that has a worldwide system of taxing income. succumb i guess i would ask you could you elaborate a bit more in terms of what this means for the us-based company competing in the foreign markets against companies that are based in the nations with more favorable tax systems? >> what we are seeing is a world where the u.s. company that operates abroad is now generally competing with foreign competitors in the same market but facing a very different home

country tax system. they all face the same rules in the country where they are operating. but france is they face different home country taxation. succumb if the u.s. company earns abroad is back home in the united states works and border that wants to use the money to get back to shareholders that wants to use the money to pay higher wages to the workers it faces the text of that repatriated earnings that wouldn't be the case under the territorial type of system. so, we see this manifesting itself in the u.s. companies stuck in a way building up the cash abroad that they would like in many cases to return to the u.s., to invest here, to use for

a variety of purposes, but if they do, they would face the highest tax rate in the world and bringing it back. so that is a very important driver of why the u.s. company isn't an effective target when they go to buy. if the u.s. company says i would like to buy coming you realize that means that you are acquired, any profits that will be distributed to you have to go through the u.s. corporate income tax system. if you are purchased by a foreign acquirer that makes it hard for companies to make acquisitions and it makes it harder for them to even invest back at home. there seems to be a misperception about the way that some of this has been covered at least in the press articles it

is employed u.s. companies are somehow changing the taxation of the u.s. income through the deals. isn't it the case that income earned in the united states remained subject to the corporate structure? >> u.s. companies that lose the legal headquarters abroad is still subject to u.s. income tax on its operations and its still subject to the tax and brings back the earnings that its previouslit'spreviously earned n affiliates. >> one more mr. chairman? in the administration proposal that we attempt to stop the corporate versions in that there is a concern about some of the steps that are being taken that are designed to stop them but could create more harm in the versions themselves and in particular there is a concern that this would be advanced by the white house, and some here in the senate could have the

effect of encouraging mergers whereby management control would be outside of the united states. what is your view on that issue? >> the congress has a long history of trying to address the transactions and each time finding unintended effects. the congress tried in 84 and the irs tried about ten years later in 94 and of course the congress in 2004 adopted legislation and try to deal what happened is they found different ways. in that jurisdiction is more favorable. as for the concern would be that another stopgap measure could lead to the kind of transactions that are not desirable for the u.s. standpoint. the u.s. company into the headquarters of shrink.

>> i appreciate the answers and if i could get my statement, the entire statement, which i didn't use all of it including the record and again point out that we have a problem here. the problem is the tax code. >> you may not have been here when i need this point. i am fully committed to working with you and colleagues on the other side of the aisle for the ultimate cure, which is fixing this dysfunctional mess of a tax system. the question is what are we going to do about the damage that is being done right now. >> do you have any other questions that you would like to ask? >> why don't you go ahead. >> i have no other questions. >> just a quick round. first of all, i quote you all the time because the chair may makes a point of the tax code is 100-years-old. and it looks like it. [laughter]

so, i appreciate your attitude about wanting to pursue the reform. i am concerned that by taking this detour is going to make it harder, not easier and there will be unintended consequences we talked about including accelerating this acquisition of u.s. companies by foreign entities. the joint committee in the taxation which is the official nonpartisan scorekeepernonpartid with regardscorekeepers hadwithn the budget last year in the testimony these are mostly international tax revenue raisers to deal with on these issues they said and i quote many of these proposals may make corporate structures with a domestic parent relatively less attractive than the corporate structures in a foreign parent because they are likely to raise the issu issue of the tax liabiy for the domestic code structure in more than the current event structure it seems pretty clear and that isn't republicans or democrats. these are the nonpartisan arbiters of what we do in terms

of good tax policy. i guess the one question i would love to hear from the state which panel is doctor anderson talked about the capital and the most efficient slow capital obviously is a disadvantage right now so forget the rate. even forget the kind of general notion of the territorial versus worldwide. the fact is that u.s. companies are not as nimble. i think that has to be addressed. here is my question. sometimes when i debate my colleagues on this issue they say that it doesn't mean that they don't have u.s. jobs. this is true. anheuser-busch still has u.s. jobs and they sell a lot of beer in america. the market share is in good shape.

if you could address this and tell us a little bit about what happened when peter talked about the fortune 500 companies in the last 15 years seen a reduction in the u.s. companies. what happens? what is the impact on jobs when you see u.s. companies being acquired by the foreign company? >> i have not actually studied that issue. it could go either way. if the foreign company is a better managed company they bring new technology. they could increase jobs. on the other hand, it could go another way but i don't know the actual experience has been. >> i think you're right to put this in the broader context of the corporate controlled just good for the foreign acquisition and particularly with respect to high value-added.

that is something that we have seen at least anecdotally coming and we know that the headquarters jobs are really important. they give rise to lots of economics more generally. so, for that reason you are right to be suspect of the potential for the acquisitions which is that he can lead to the high value-added jobs going abroad. >> doctor robinson. >> i was going to say i don't have anything to add concrete. with the headquarters move which often happens, there is an intangible impact and so the companies in our great cities in america are major factors of companies in my home state of ohio that are involved in every single nonprofit in one way or another. and often they provided a lot of executives to help lead the

nonprofits and charities and make huge contributions. the companies are pulling out of the u.s. and there hasn't been given an adequate. i think it matters my colleagues do. we were working hard on this, so i think that we need better information to be able to explain this more in terms of the biggest impacts to the constituents. >> thank you mr. chairman. >> at this point i would afghanistan said that the statement would be included in the hearing record without objection the statement will be included. let me leave you all with one

thought that we haven't gotten too much this morning. it seems to me that it would be one thing if there were just a few of these. as we talked about this morning on the comprehensive and bipartisan tax reform we fixed it and then we wouldn't be back here again in another decade. a parpart of what has influencey judgment is that isn't going to happen. and i spoke a couple of hours ago about reports in the financial press about this feeding frenzy. that's what is actually going on out there. it isn't a few of these inversions that you can put to bed for preemptive tax reform. but according to the financial press communities they feeding frenzy where you have the investment bankers coming out to all of the possible companies

with a slight index and so you have to do this clay. and the reality is that tax reform is moving slowly coming into the inversions are moving very rapidly. and as i indicated before, i think this is a prescription for the chaos. so, you could hear from the senators here today. there wasn't a lot of shouting and screaming and finger-pointing. in the fossil testimony you can help us address both of these tasks to cloak the inversions loophole and then move onto the greatest challenge on the front of this committee and that is the real cure which is the pretense of bipartisan tax reform. with that, the finance committee is adjourned.

[inaudible conversations] [inaudible conversations] one results to report tonight with 93% of the precincts reporting the businessman david perdue defeated the congressman jack kingston 51-49% in the runoff for the senate republican primary.

and the general election he will go out to face democrat. the daughter of the former senator sam nine. coming up on c-span to the israeli ambassador to the u.s. discusses the fighting between israel and hamas. the commission releases a report about

>> in an interview with the christian science monitor and other reporters the ambassador to the u.s. spoke about the fighting between the israeli military and hamas and gaza that began two weeks ago. the interview was motivated by the paper's washington bureau chief david cook. this is an hour >> the objective is not to

conquer that. that is never set as the objective. and we hope to achieve this objective of the piece to restore the same peace and quiet militarily or diplomatic. so it is preferred to achieve that objective diplomatically. the prime minister if he will recall we are now in day 15 or 14. before the conflict began, so about two and a half weeks ago the prime minister said that quiet will be met with quiet. that without an incredibly popular position to take at the time because at the time we had a few dozen rockets flying in ad every day so we didn't even want to which the operation to begin with even that which we had embarked on. and unfortunately, those statements i've administer were met with 100 rockets that started the operation. bow before the grand operation,

there was another opportunity to end the military operations on both sides, and that operation came to that opportunity, excuse me, came from the egyptian cease-fire proposal that was put forward in egypt and i think now it is about seven days ago or eight days ago. the cease-fire proposal was backed by the arab league and the egyptians are putting forth again it wasn't a very popular position in israel. i want you to understand that. it was against the public and that is one reason why they were not so favorable towards the idea of the cease-fire. you have to put yourself in their situation. that situation. if you have two thirds of the country in the bomb shelters firing rockets an into the third round don't forget we have the defense and now we are in the third operation and they just want to make sure that it's going to be real and sustained

and we aren't going to have the operations in five years and then the operations in six years. that's where the opposition came out because they want to continue it. it also was politically contentious and it thought that there were is really ministers in the security cabinet that were publicly opposed and oppose it as the prime minister who did not want to escalate the conflict in any way and actually backed it and pushed it through the security cabinet. it was supposed to take into effect 9:00 in the morning according to the egyptians about a week ago in israel passed it as i said not without some contention, but it was gone and that would have avoided any of the ground options if you saw them subsequently. what happened unfortunately in the hours when israel was holding the fire and seizing its offensive military actions in the strip, hamas fired dozens

and dozens of rockets over the six-hour period so that's how that fell apart. then we had a couple of theories in the cease-fire by the humanitarian cease-fire. they do not take the offensive actions we have been trying the best way we can to avoid having to go further and having to intensify or expand military operations and thank you does everyone else you may want to be the only one in the room that's peace is now that you mentioned it the have tried to not expand the operation. unfortunately we have to continue. the actual trigger for the grand operation was something very

specific that happened that some people may have forgotten, and that is the intent to insult rate it up to perpetrate the attack. it's to get that the israeli civilians and we found that the equipment that we were clear they were also trying to kidnap people. i don't want to get specifically into what they've had but there have been things that attract laser devices. they were trying to kill and kidnap people. we had a case of 13 coming out of the ground going through gaza, not only for gaz through t coming out of the other side through this subterranean and all of the mazes they have underground which is pretty remarkable but i refer to it the other day with all of these vast networks underneath so they popped up on the israeli side and we were very fortunate that one of our soldiers saw it.

it becomes very difficult because in many ways they will dress up as jurors so you have to tell whether it is friend or foe and a lot of times that means the action and you will take is somewhat delayed and in that case we have to be to make sure they were. and we were not able to get to all of the terrorists because a lot of them went back into the tunnels but it just made clear that in the tunnel networks where they will infiltrating and they remind you the tunnels between gaza and egypt, those are largely weapons and good smuggling tunnels. those i'm talking about now are the networks between gaza and israel where you have a sense in order to perpetrate. it's not within the smuggling that it's to get people on the other side and i think now we have had four different attacks at this point. i think for different attacks

where people have tried to infiltrate and we've suffered casualties as a result. but it is an operation designed to work out of the tunnels and take some time. i'm not a military expert but you certainly have to draw the tunnels in a certain way that you are not just going up and opening that they can rebuild very quickly. so that is the process that israel is in now. of course anywhere we find missile batteries wthatmissile g to deal with that as well. we are in the area where there is a great deal of warfare from the ground forces. we have lost 27 people total. israelis 25 soldiers, about 65 wounded. we have destroyed up until now about 20, was into 40 different openings of the tunnels because it is in just one, while other times it is an underground maze

so you have to find where all of these points are anti-story then. the second thing is i wanted to discuss quickly is it's the nature of the warfare on both sides. one critical moment on the israeli side has been ironed out. it wasn't present in the first tax and that led to the faster ground operation because all the rockets were landing you had to move quicker to get into the missile launch. then we ended up not having the ground operation because after eight days we would be able to achieve a cease-fire. it's very similar to the goals of the 2012 operation ended up ending the ground invasion or incursion and we were able in 2012 to get the cease-fire after eight days and that led to a

fairly religiously long period of quiet. it goes down the number of attacks for a while but then it starts picking up again. then you have the color of defense and it went down and started to erode and now you have this other operation. it avoided the ground action and we have an iron dome system just taking a look of rockets out of the sky and those of you that do not know the system, it doesn't fire at every incoming rockets so you have about 2,000 fired at israel. it will engage everyone. if it is headed towards an area that we deem to be a very low likelihood of having a civilian population because it could be

in an open area, then the system will not engage. it's only when we have a rocket that is coming specifically to a built-up area that we use the iron dome on the defense system to knock it out and it will come in probably after the operation ends and the research in each instance. but i will say that it looks. it was 84% so it's higher. only 16% said let's say significantly higher right now but we only know the final numbers when they come in. the other thing i want to stress -- >> they pay me to be rude -- i will end with this. i come from israel -- remember

we had a congressman joe wilson who said you lied and people were outraged? while we were sitting in the israeli professor's office and when we heard that news reports come in, we said to ourselves if we could get our feminist or into and out with only one person calling him a liar they would give them the prize. so rude is relative. [laughter] the final point i will make and i will skip the third point because i'm sure that it will come up in your questions anyways people don't realize thathat it also saves palestinin lives and i will explain why. if you are forced into a situation and with peace missiles and rockets that are being knocked out of the sky, the cost of the restraint goes way up and could have many more

civilians killed, muc much or damage, many more wounded. and therefore, the pressures to take very fast action tickets to all of those places where the rocket launchers are would be much greater and with the iron dome has done is not only protected our civilians, but it's giving the leadership sort of time and space that needs to make more carefully and calibrated decisions ancalibrato something which is not only it could be costly for israel in terms of the lives of our soldiers but it would certainly be called for the palestinians. i will leave it at that and open up for questions. >> one or two and then we are going to go to john to start. i was struck this morning reading a "new york times" report. they quoted one of the survivors saying i will marry again four times and i will have ten signs with each wife and they will all

be in the resistance. so i wanted to ask you sort of the access digital question about the tension between the military power and success creating a longer-term problem for the state of israel. >> there are a lot of different elements to the question. first let me make this clear we do not target civilians. we don't. i'd seen myself personally i saw how many operations there were that are important because you see the civilians are coming in harms way. we have to understand first balf all what the rules are because people don't know them. they throw around words like disproportionate without any understanding of what that means. it is proportionate response from what i can gather in the interview is that because you and questions i'm asked, it is the need to be what is the body

count on both sides. so therefore there were 600 something palestinians were killed, 25 israelis were years ago it was 200 palestinians and the one israeli that is deemed to be a disproportionate response and that is how most people deal with it you think the actions you were taking a disproportionate and that is what is asked all the time and it's hard to understand what portion of the years and we will get to the question after asking. you make a distinction between combatant and noncombatant that is the most important principle and they always make the distinction they hope to kill as many as possible and israel did not target a single post any and. we do not believe they targeted. if not for us, when a civilian is killed is an operational failure and the more civilians that are told the greater

operational failure. and obviously a tragedy in and of itself. and for hamas, they celebrate. the greater the number of casualties, the -- for them the greater the success of the operation. that is a basic distinctio distt you have the proportionality. and this is okay but say there's a legitimate target because when a schoolhouse hospital mosque's turned into a military command center or a weapon or a place that we can fire rockets can it becomes by the rules of the war legitimate target. you cannot turn a hospita hospio a military command center according to the rules. it is a war crime for hamas to do that. that is a war crime. you cannot use a mosque as a missile manufacturing system and if it comes with legitimate targets for the question is okay but can you target a specific instance box then you can do the question of the proportionality. meaning just because it is a legitimate target doesn't

necessarily give you the right to hate it because that's for you to be able to do that, you have to show the gain that you would get is worth the potential loss of lives that you might seek ahead of time so i don't want to go into the theoretical examples but if we had one rocket that is sitting in a school somewhere and there's 50 kids in a classroom, then you cannot actually target to get to the rocket. that would be disproportionate because you would have that one rocket that would justify killing 50 children in the school. on the same token if you had 200 rockets into place and you had one civilian by the rules of the war, you could target the place even if you knew ahead of time they would be hurt. can you target the same target tomorrow or in an hour or three

hours? and they always make these calculations. i was amazed being in the war room, which the legal officials of the military play a role in the real-time decision-making. i will give you an example. in the last round our intelligence knew where he greater number of the long-range rockets were and in the first hour of the operation one of the assignments in the first two hours was to take out as much of the long-range capability as possible. and i think that it was 18 rockets if memory serves the number that we have pinpointed and 17 of them were destroyed. one of them was not the straight into the reason why is because we had that system and all of a sudden we saw a kid coming into the brain and they made a decision at the time not to attack it and move on. they would come back to it. they didn't move into it because it was fired. that is to rescue only speak to make these decisions. but we don't target. as to the specific question i have to know each specific case

and sometimes it takes time for us to investigate what exactly happened. an instance the first day we know what happened when you had seven members were five members of the six members of the same family and in that case, israel tried to get his family out of the house. they apparently had left the house. then we fired what is called a dummy bomb which hit the top of the hous house and the structurl damage but it's like the last two dates out of the building. apparently his family believed that was the real bomb and from the time that it was launched they granted to the house that's why they were caught. >> without regard to the

specifics the more general problem is the large civilian casualties strengthening long-term resistance and enmity -- >> i get to that. first of all the reason you have to civilian casualties is because i think it is in an unprecedented way you use human shields as part of their defense strategy their attack strategy. i don't know what the national security strategy is that i think that it would use human shields in a texaco way somebody hiding in somebody's house and using a woman or a child hiding behind. they are placing their missile batteries in a strategic way so it is to put the civilians in

harms way so here we do dropping leaflets and making phone calls and sending text messages and we have officials if you haven't seen the video we will provide it to you. they are telling the palestinian civilians to go into harms way to use themselves as human shields. it's part of their operation and they are saying it on television on something that an israeli official vehicle of the videos on palestinian television without going out and saying don't listen to them can ignore them and get out of harms way. recently you had a case when we went in with our ground forces in one area where there were a lot of casualties in this case of what we think a majority of them were the fighters of hamas and in this case none of those people should have been there. 48 hours befor before we told everybody to get out of those areas and to go, they have places where to go and we told them exactly where they should go to get out of the way of the

fighting. some of them i think were forced to stay. you have palestinians are forced into a situation where they are forced to stay then we have the rocket attacks against us or our soldiers are moving through the centers of town and all of a sudden you have for man and i thinmen and ithink rocket that d at that or from the house and from that house there are five or six civilians to fired back into the civilians were killed. what do you do long-term? i think it is a very difficult challenge. it's a difficult challenge to overcome but understand the hatred for israel has been deeply embedded for a long time. the charter is committed, that they are committed to.

there's 10,000 people from their homes and we gave the keys to the palestinian authority. james and the head of the world bank had a group of people many of whom were jewish philanthropists to buy agricultural facilities greenhouses. i think it was around $15 million to leave it behind. there could be. it's about thinstead both the gs were destroyed. and the question is how much money does it take for them to build that network and you have massive amounts of concrete, not just soft soil. the maximum amount of concrete. so all of this money that is going in is being used basically

to fuel the war against israel and that is what is creating a generation. and the incitement is creating a generation of people. the decisions of the palestinian leadership to fight against the war. do i think -- somebody whose family was killed. and even i could see the most just action that you could take it doesn't diminish the fact that it's a tragedy when innocents are killed and how does it affect the family i agree with you that is an issue how do you deal with it but we have to look at the alternative that israel has. we are in a situation we have to defend our people and we are doing it in ways that other countries have not done and what not to do and that is what i would say to somebody born and raised in the country. 200 million americans were sitting in bomb shelters do yesterday tha the u.s. militarye u.s. government would take -- wouldn't take action that is less forceful than israel and by being diplomatic and i think that is true of any country in the world as we are very

careful. we are not perfect even if 99% of the time we get it right if you have 2,000 operations in the heavily dense populated area 20 of them go wrong, you have a lot of civilian casualties and if it is a tragedy, we don't want it and as i said, we do everything to avoid it. and for us, the more civilian, the greater the failure. the greater the failure of any. >> we are going to go to howard and george. >> dot about the nature and frequency of the consultation between the president and the rest are at this time and that relationship itself certainly started out rather difficult. those early meetings when president obama can and it was pretty painful to watch the minister lecturing them and so on. and i know as a diplomat you are required to se say the relationp is wonderful.

but can you talk about how this evolved and what it was then and what it is now? >> they focus on the differences that exist. you don't write stories saying it was a normal day. ate dinner with the kids com, pt them into bed, story at 11. it doesn't work that way. you know that you will always focus on attention and there've been ways we haven't seen eye to eye with the administration. obviously the peace process has been one of them. the support for missile defense is at record levels and very appreciative of the fact that we would be able to have a system working so well that it's untargeted. for me the rubber meets to be coming to the road in the relationship in the u.s. and israel the rubber meets the road

when israel is forced to defend itself and the question becomes where is the president of the united states and i will tell you this is the second time the pillar of defense being the first where the president has been backing israel's right to defend itself in the strongest possible times. i was with the prime minister for eight days and i don't think that support have been any better than it was. here now i'm in washington and basically every day in touch with the white house or the state department and a lot of times both. i think the print mr. has spoken to the president three or maybe it will be four times, spoken to kerry more than that. and we feel there is very broad support to defend itself. there's always been concerned

with the civilian casualty. we are concerned with civilian casualty. but i think that if the support is there because they are recognized was what they do if they were faced with a similar situation. so i think in terms of the relationship where the rubber meets the road and it's been very good if not excellent. on the things that matter most. and i expect that will continue if israel continues to move forward >> would you be able to tweak the deal in us to get whoever the interlocutor is to convince them to sign onto a cease-fire could israel accept that or is it now the mission as you stated to destroy the tunnels and sustain and protect israel collects >> the mission is the sustained peace and quiet.

the issue in the tunnels triggered the exact ground operation that we are working now as we speak. the military is working to destroy those tunnels. look, they supported a cease-fire proposal and we were hoping that it would be supported and the pressure would be brought to bear on hamas to support those terms. not going to get into the negotiation on those terms. we have a proposal the premise through the cabinet and don't forget it is a decision that has to go through the cabinet. and last time he had a fight to put it through the cabinet, but i'm sure that if the prime minister believes that the goals that i said to you to sustained peace and quiet for israel can be achieved that he will bring that to the cabinet. >> ..

>> but they didn't say that they were going to reject a star proposal. i think about would be guiding the shoemakers in the future as