corporate tax rates. timing of taxes matters. and particularly, for cash-constrained firms, accelerated depreciation can provide important cash flow benefits. accelerated deduction provide benefits similar to an unsecured zero interest rate loan from the federal government. at today's historically low interest rates, the value of accelerated tax deductions is relatively modest for kworpgss with access to capital markets. many corporate tax executives as dr. hanlan noted focus not only on cash tax liabilities but on their reported financial statement effective tax rates and reported book earnings. temporary book tax differences like accelerated depreciation and many other provisions do not affect the total financial statement effective tax rate, which is based on the total accrued tax expense both current and deferred.

a lower corporate tax rate and accelerated depreciation both reduce the economic effective tax rate on tangible business capital investments. but a lower corporate tax rate also reduces many other tax ddi extortion. bias toward corporate debt and taxable income shifting across tax jurisdictions. the lock-in effect on corporate capital gain realizations. lockout effect on foreign dividend repatriations and reduces the tax on corporate entrepreneurship and innovation. they emphasize the necessity of combining permanent expensing with repeal of interest deductibility in order to prevent negative effective tax rates. in 1982, congress peeled back accelerated depreciation as part of their deficit reduction efforts, coup to what were considered excessive tax benefits from combining

investment tax credit with accelerated depreciation and interest deductibility. the 1986 tax act was a key starting point for the 1986 tax reform process. the base-broadening in 1982, enabled the lower individual income tax rates to continue to be indexed for inflation. while also reducing the deficit. it was clearly a tradeoff between base bradening versus lower tax rates which continued in 1984 and thculminated in the 1964 act. and a recent study by two treasury comments found that 50 to 60% of corporations and only 30 to 40% of pass-through businesses took advantage of the recent bonus depreciation rules. the study notes that while accelerated depreciation in theory reduces the cost of investment, quote, in practice, various factors limit the use of bonus depreciation and its

relative value. financial statement accounting is one of those factors that influence the company's business decisions and which economists generally don't include that their tax modeling. in addition to financial accounting, tax risk and uncertainty, compliance burdens and other nonincome taxes will affect business decisions. financial accounting is one of several reasons why in corporations may prefer a permanently lower corporate tax rate to more target tax incentives. i'd be happy to answer any questions about my testimony. >> thank you very much. mr. heenan? >> good morning. thank you for inviting me today and i appreciate it. i'd like to start by commending you, chairman, and the rest of the committee, for tackling this important topic of tax reform. we support the efforts and appreciate the time to talk about it here today. i'd like to start to give a little bit of a background about -- maybe not a household

name. we sell air. we sell the components air. we can sell to a food and beverage company for a night again in your potato chip bag. the fizz in your soda. big companies, steel kpaenls that yooiz tons and tons of gases so a very diverse customer group. we have about $11 billion in sales worldwide and we're the largest industrial gas producer here in the united states. important, we spend about $2 billion a year on new capital investment. we go through a very rigorous process. we sit at a able to with the seen your leaders on each new project and they tend to be big projects and we discuss capital investment and we compare projects around the world. and for us, cash is king. to answer the question that was posed -- in what way does financial accounting affect our

business investment decisions? our answer is simple, it really does not affect our decisions. for us, it's about cash. cash is king. earnings will follow the cash. if we have more cash we have more to invest and the earnings will follow. so we don't focus on financial accounting. it's important to focus on earnings for other decisions in the business but on the investment decisions, cash is king. so we use a sort of net-present value cash flow model and don't vary from it. i can tell you that hurz this week we'll go through ten projects and not one of those project also say anything about earnings. all of them will talk about internal rate of return which is the cash flow model we focus on. while i support the tax reform, i think that we really have to take a close look at the targeted deductions that we may eliminate that pay for that tax reform. and specifically, you know, many

members here, folks here that have been testifying have mentioned accelerated depreciation under the current u.s. rules, that's an important factor that helps to influence our investment decision so if we're going to move accelerated depreciation in favor of a lower rate, we need to weigh the two very closely to see what it's going to do to investment decisions for companies like us. so, thank you and i would be happy to take any questions you might have. >> thank you. and thank you all for your excellent testimony. now we'll move into a question time. and i have a question for all of you, you were invited here because you represent capital-intensive businesses that could be asked to consider trading off a substantial amount of tax benefit if there was a comprehensive reform plan that

could alter pretty dramatically the corporate tax rate and reduce it somewhat drastically. the committee wants to understand better how businesses such as yours, evaluate those tradeoffs and that will be part of tax reform 'i understand that we're not talking about details today. but especially with respect to choosing the right base-broadening measures, could a revenue-neutral reform package that reduces the corporate rate to 25% and moves to a territorial system, could that improve the competitiveness of your company? if you each could take a few minutes and -- or a do you moments to answer that -- a few moments to answer that. >> my answer is "yes." at 25% that's close to the oecd average which is about 25% right now. given our international competition that's about where we need to be at a minimum. you talk about base-broadeners and the trade justify and there certainly is as i mentioned in my prepared remarks. that's something we take into

consideration. the cash-flow effects are detrimental, no question. but lowering the tax rate overall to something around 25%, i think, would be well received. >> mr. schetel? >> i agree with mike. resounding, "yes." i think if we can get to a 25% rate or something like that that's in line with the rest of the developed world you'll find the vast majority of the business community coming out in support of it. i know it's a challenge to get there. from our perspective as a company, our health and growth is tide inextricably to the growth and health of the overall economy. no question about it. that's the biggest driving factor in how well we do over the long run. our view is that it's significantly lower rate and simpler tax code will come down to the benefit of the entire economy and will encourage

overall, more growth and development and that will, in turn, increase if returns that we have to our shareholders and the opportunities that we have out there. >> mr. heenan? >> i'd like to give you a "yes or no" answer but i've been doing this a long time and the devil is in the detail and in our view, clearly, all tax expends suring are not created equal. expenditures are not created equal. focusing on accelerated depreciation. a tax rate will affect both our old business and our new investment and we have a -- we're the largest industrial gas company in the u.s. and we'll certainly benefit from a rate reduction but to your specific question on investment decisions, that's a future question. a rate benefit is not going to impact our future decision so when i look at accelerated deprooegs appreciation that's focused on new investment.

new investment will bring growth and jobs. so i think we just have to be very cautious as to which tax expenditures we're using and we're particularly focused on accelerated depreciation because we think it has a special place in promoting new growth and we think with that, will come jobs. >> but if the right base-broadening measures were chosen, do you think a revenue-neutral package that reduced the rate to 25% would help the competitiveness, including a territorial system? >> if accelerated depreesh remains is same and everything else goes we could -- >> from your point of view. i'm asking your opinion. so if the right base-broadening measures were taken it would increase the -- >> absolutely. >> to follow up, could you envision a package, the three of you, being designed that would lead employers to invest more and hire more american workers? >> answer roubsolutely.

i think the ideal package, maybe not practical but the ideal one would be some rate close to the oecd rate with 100% expensing and i think you'd see tremendous new investment, additional global expansion, u.s. expansion and job growth. absolutely. and even if you went with a base-broadeners you talked about chairman camp, if you got down to a rate of 25%, no doubt that would also increase growth. >> i would love to keep our tax incentives like accelerated depreciation. i would love to see expensing extended as part of an overall tax reform that lowered the rates to 25%. but i don't see how that's possible in a revenue-neutral fashion. i think for the short term, until we have corporate tax reform, i think expensing, extending bonus depreciation is tremendously important and impactful.

certainly from our vantage point and the vantage point, it's tremendously important. that being said, if we all put everything on the table and we start working toward a targeted and a simpler code, i think we'll see more growth and for us, that will definitely result in more jobs and more investment. >> all right. >> i've got a question for ms. hanlan and mr. neubig. in congress we measure by looking at cash stackses over a ten-year period without using a discount rate. and that's very different from how public companies calculate under gaap and very different than how public companies calculate cash flow benefits. if this committee succeeds in designing a program that's

revenue-neutral over a ten-year period the way congress measures it but in the aggregate, increases company's book earnings, do you think that such a tax reform package would lead to more economic activity being located here in the united states? and therefore, more jobs for american workers? >> i guess the main thing i would say to that is if you would, you know, remove the mitigating effect of financial accounting, there seems to be no negative effect that would come from that so to the extent doing the tax side of the it would increase jobs and investment releasing it from mitigating effect from accounting could only help those incentives. >> mr. neubig? >> i think the companies are going to be looking at a lot of different measures of taxes. and you mentioned that although it might be revenue-neutral over a ten-year period from a government-scoring standpoint,

it might be higher total taxes on the corporate community. i think there would certainly be concern about that, having some adverse effect. there's certainly lots of benefits from a lower corporate tax rate. but they are going to be looking at the total tax burden in the u.s. so you factor many the other -- >> sorry about the microphone problems. >> the other tax-based issues so it's really the who will tax reform package that they'll be looking at. >> to the two of you again, some commentators say cash is king and that investors are so fist kated enou sophisticateded enough to look through this. how do you respond to the arguments that investors look through book earnings and see only cash? >> this is a great question. it's been asked many times in accounting workshops when we present research on earnings

management, for example. the first thing to recognize is accounting is used for two purposes, equity markets and contracting purposes. debt contracts and compensation contracts and to the extent those are written based on accounting numbers you'll see managers respond to those same incentives. equity markets, these contract writers, they're not stupid or not savvy enough, i wouldn't say, in using the accounting earnings because that's general, like a score card. account earnings can predict future cash flows better than current cash throws so it's reasonable for these people to use accounting earnings. and finally, the other thing is that investors may be savvy but they're still only human so there's a long line of behavioral finance research show investors have limit add tension and limit prod saed processing in a complicated situation.

>> all right. >> there are differences across the different companies and accelerated depreciation and the cash flow benefits. >> maybe you should borrow someone else's microphone. -- >> cash-constrained companies can certainly benefit from the cash flow benefits from a number of the timing provisions so i think it not all companies are alike. there's going to be a number of companies, as dr. hanlan noted. if you look specifically at the financial statement earnings and book earnings i found that in terms of my discussions with a number of corporate executives but there's a number of corporations that do the type of project evaluation, looking at the cash flow benefits. i guess i would say that at the current time for companies that have access to capital markets, interest rates are at a historic

low and to the extent that accelerated depreciation is really a zero interest rate loan from the federal government, the benefits of accelerated depreciation at the current time are modest for those that have access to capital. >> thank you. mrs. hanlan, finally, you mentioned in your testimony the important point that some of the analysis that we've been talking about today doesn't really apply to closely-held businesses. could you just explain how closely-held businesses might analyze tax reform differently than publicly-held companies? >> yes. there's a long line of literature and accounting research that examines this book tax tradeoff and what we can find if we can get the data, we'll line up brooiv vat companies and public companies and essentially you'll find private companies are much more responsive to takes incentives and tax-reporting incentives in our public companies and the idea is that the public companies have the financial constraints so it's true that

private company also respond to these incentives more than the public companies will. mr. levin? except for the last few questions, we've been really discussing broader issues of tax reform and not book and tax accounting issues. we may be relieved by that because we need to look at it. they're not easy issues. and you're going to have to, i think, have a few seminars with us on that subject as we look at these broader issues. so it's really the broader issues that have been mostly discussed here. and let me just say a word about that. there's no doubt we need to look

at tax reform. there's no need, as i said earlier, to look at it with care. and not simply grab ahold of a specific figure without looking at its consequences. because according to the joint tax analysis, when we asked them, they said if the rate were reduced to 28%, half of that reduction would come from ending accelerated depreciation. so when people say they want the rate dramatically reduced, but not at the expense of expensing accelerated depreciation, that doesn't really fit. and it was interesting in the

testimony of the first two of you, that you in the testimony - you know this well. you said our investors applaud capital incentives like expensing. capital investment can be up to 35% less than it would be otherwise in the first year. of course, that evens out. that's kind of a broad embrace. your testimony, if i might, you know it well. i'll just read it. this is important for us to have a full intelligent discussion of this vital issue.

we're strongly influenced by tax incentives that improve our reporting ingi inin ining metri. such as our taxes and earnings per share. there are differences that permanently reduce our taxes paid and affect our tax rate thereby encouraging new investment. let me just indicate. i was looking, as we were reading over your testimony last night, at marty sullivan's analysis of winners and losers, if there were a reduction in the rate to 30% with slower

depreciation repeal the domestic production credit and repeal the research credit. this is interesting and not very surprising the industries that benefit from that, and i'll just read a few, they apply to you, i guess. surts, insurance, retail trade. these are winners. bank holding companies, real estate. other services. mining essentially evens construction. and then those who are losers, food manufacturing, utilities, other manufacturing chemicals,

minerals and machinery manufacturing, transportation, internet. i don't quite understand that. but agriculture, technical services, computer and electronics, very dramatically transport equipment and electrical products. i think since these are most the technical stuff in the announce. of our hearing, i think your testimony today underlining the importance of looking deeply into this issue. when we say everything is on the table, that doesn't really settle what's left on the table, right?

it's easy to say let's put everything on the table. the real issue is what's taken off and what's left. we welcome your testimony and hope today's hearing is another step towards our comprehensively looking at these issues so that we can come out with a proposed revision tax code. we need to look at tax reform in terms of how we promote a continued growth in services and

agriculture and the like. but also in the industrial sector of the united states. i think that's a well-rounded response. >> how long before you guys can take over the postal service. >> do i have to answer that question? >> well, you're doing a good enough job right now. >> you deliver to the door and the postal service doesn't even come. >> well, if you have a problem, just call. >> you say the idea of reform would lower the rate to at least 25% and include incentive for

investment such as bonus debreesh yags. however, you also say you're willing to put all base broadeners on the table for significantly central reform tax code with materially lower tax rate. what rate would that be if you have to give up all the other nicks? >> it really dpepds on what's in the package. but given our competition overseas, we think it would have to be close to the oecd rate. if you get there, assuming that doesn't continue to decline, as chairman camp asked earlier, i think it would be a good place to be. does ma mean r&d tax credit, eliminate them if you got the rate low enough? >> i'm sorrier sir? >> if we got the rate low enough, would you go along with that? >> yes, sir.

>> you know, i had a meeting with some of your guys on dallas, they said 23%. you like that number than 29? i bet you do. >> i do like better 23 better, yes, sir. if you could make that happen, that would be terrific. >> would you care to comment on that as well? >> yes, thank you. we care tremendously about issues like accelerated appreciation. for us, it's enormous. well, we have crunched the numbers and weave looked at all the different policy proposals that are out there. we clearly care about the impact on cash flow. i think the rate does improve cash flow in the long run. if you get to a low enough rate, i think somewhere around a rate that's consistent with the developed world, say 25%, i think it's a clear winner for us

as well as the economy. >> and you can get rid of all the other -- >> yes. >> look, i'm not delighted to. i'm a real list as well. >> you say with targeted tax insentives, there's very little evidence that these policies have spurred any investment. can you comment on that? >> yeah, my statement is based on the, you know, the weight of the evidence and the literature. and basically, there are papers that will show there's a time effect. so firms will shift the purchase of equipment to a period that's earlier, say by december instead of january.

what we can't tell in the literature and what is very difficult to parse out is whether these are, you know, part of it is just timing. sort of it is just shifting. some of it could just be a change in reporting. in other words, when you say a certain class of asset gets a certain benefit, they might just now record different assets differently. we can't tell that in the literature. the research really finds very little. it's just the weight of the evidence and a large sample. >> have you done any studies on elimb gnawing all the incentives and just lowering the tax rate? >> not exactly, no. >> i'm very interested in this discussion on both counts having worked for many years on manufacturing before coming to the house of representatives.