you're talking about. we'll try. >> thank you, we're pleased to welcome our panel of experts all whom bring a wealth of experience from academia or the private sector and their experience and insight will be helpful as we focus on the inner action of tax policy and financial accounting rules. first, i'd like to welcome and introduce michael frit, fedex corporation. he's spent the last 30 years as a tax attorney for different corporations and comes to us from fedex's headquarters in tennessee. second, we'll hear from bhooirk shiktall, the senior vice president and chief tax officer tore time warner cable responsible for all areas of tax at time warner cable including policy planning, financial reporting and compliance. and third, we welcome michelle handland, massachusetts technology sloan school of management and she focuses on the intersection of taxation and

financial accounting. fourth, tomorrow newbig, the national director of quantitative commission and statistics of earnst and young and the chief economists for the treasury offers of tax analysis. he leads a group of 24 quantitative analysts who assist clients with tax and economic policy issues. and finally, mr. timothy heenan, at prax air, the largest provider of gases in north and south america. he joined in 2004 from earnst and young specializing in the development and implementation of international tax strategies. thank you all very much for your time and the committee has received each of your written statements and they'll be made part of the formal hearing record. each of you will be recognized for five minutes for your oral remarks, followed by questions. so mr. fritt, we'll begin with you. you're recognized for five minutes. >> good morning.

chairman camp, ranking member levin and members of the committee, i very much appreciate this opportunity appear before you today to discuss the importance of tax reform to fedex. we believe reducing the u.s. corporate tax rate significantly to be more in line with the rest of the developed world is essential to overall economic and job growth. and will help our company continue to invest in critical infrastructure to compete and grow. before i tell delve into the details of how we analyze tax reform i'd like to make a couple of points about fedex and our business and our tax profile. with respect to our business, through our global expedited transportation network, we connect more than 90% of the world's gdp in 48 hours or less. so if a business of any size wants to send its product from beijing to billings or cleveland to somewhere we can do it without them having to invest billions of dollars without them

building their own distribution network. our business is based on this global network. if our global network is competitive it will grow. so will we, both around the world and in the united states. with respect to tax profile we're a full-rate taxpayer. we are effective tax rate has not been below 45% in more than 20 years. this is a real competitive disadvantage for us. we're also troubled by other aspects of the current corporate tax code creating distortions and economic decision-making and diverts capital from its most efficient and effective use and it leads to lower wages and employment. like many of you in congress, our company has also been evaluating and even modeling some of the tax reform proposals. we look at these from the perspective of both what is good for our country and what is good for our company. overall, we believe the ideal corporate tax system would include materially lower tax rate. something at least close to the

average oecd rate, along with capital vimt incentives like 100 percent expensing. we've said, however, if tax reform must be revenue neutral, so be it. we're willing to put all base broadeners including expensing or accelerated depreciation on the table in exchange for a materially lower tax rate. doing so, however, would come with a cost. both macroeconomically and to our company. strong capital costs incentives like expensing generate new investment and new productive assets in the united states. and it's reflected in the chart i attached to my written testimony. there's an almost perfect correlation between new investment and jobs in this country. the from our company's perspective, we would generally expect is lower tax rate to increase our tax flow, bottom-line earnings and earnings-per-share and to the contrary, reducing capital incentives would have a

generally greater adverse affect on our cash flow. this is important because as is often said, cash is the life blood of any business. our investors paid close attention to our cash flow as well as to our bottom line earnings and earnings per share and they routinely quiz our ceo and cfo about all three. one of our biggest cash outflows that gets a lot of attention is capital expenditures. 4.2 billion in our current year, for example, up from 3.4 billion last year. so while there are other factors, assuming business tax reform must be revenue-neutral, the most critical analysis from my company's perspective is a comparison of the cash flow detriment from slowing capital cost recovery versus the earnings and cash flow benefits of a lower tax rate. if a tax reform package can't get us to a materially-lower tax rate you will not address our competitiveness issues. particularly if capital cost

incentives are reduced as part of the deal. one other thing that needs to be considered in the mix of tax renorm is the mix of simplification. this is difficult if not impossible to measure, but its value should not be underestimated in closing, we commend the recent tax reform discussion draft released by you, chairman and we think it is an excellent starting point and we urge you continue your efforts to lower the corporate tax rate to be consistent with the oecd average and to simplify. we need to get back to the basics. where businesses compete on the basis of the merits of their products and services but not on the basis of what the tax code says. thank jew into thank you, mr. frit. >> chairman camp, ranking member levin and members of the committee, thank you very much for inviting me to share our views on corporate tax reform. i'm the senior vice president and chief tax officer for time warner cable, mark schictel.

i'll tell you about the tax policy on time warner cable and i'll explain why we believe that less complexity and a lower rate will benefit our investors, employees and customers, as well as the overall economy and americans at large. spun off from time warner cable nearly three years ago, time warner cable is a fortune 150 capital-intensive domestic company that provides high-speed data, video and voice services to over 14.5 million customers. we have over 48,000 employees in 29 states. we offer our workers secure jobs and wages and benefit packages that are competitive and that support families, dreams and retirements. last year we hired over 7300 people including hundreds of veterans. we're part of our nation's communication's backbone that enables domestic companies to

compete rooij naturally, nationally and globally. we help small and medium-sized businesses grow and thrive. time warner cable spends about $3 billion a year on capital improvements a third of which goes to wages. in 2012, we're continuing to extend our network to even more businesses and families. our investments also support a national network of suppliers including nearly a quarter of a billion dollars spent annually with minority and female-owned businesses. our effective tax rate is historically around 39%. while our cash tax is paid is lower driven by temporary incentives such as bonus depreciation, the benefits of which are now reversing. taxes are a significant business cost ranking among our largest in terms of magnitude, along with our programming, employee, financing and capital outlays.

although difficult to quantify and allocate, these taxes are ultimately bourn by our investors, workers and customers through lower returns and wages, less investment and training, and we do benefit from targeted incentives like research dplet section 199. given our capital intensity, however, we currently rely, even more heavily, on timing incentives that don't impact gaap financial accounting such as expensing and accelerated depreciation which significantly enhances our cash flows and ability to invest in our people, technology and network infrastructure. these policies have and continue to support our business. over the decades, well-intentioned policy choices have helped to produce a tax

code and related regulations that are read in small print and measured in volumes. each enacted policy objective is accompanied by nuance rules needed to implement, clarify and limit potential abuse. it's not just the complexity that burdens our economy. it's the year after year starts, fits, stops, changes and uncertainty that frustrate business leaders, analysts and investors alike. often, the benefits are very large. swaying or thwarting decisions of what, when and where to invest. subtle changes from one year to the next. intentionally or unintentionally, deny one company a benefit while often heaping on an extra helping for another. it's time for american businesses to put aside our industry specific wish lists. and to work collectively to

support a more corporate tax structure. we recognize that competing priorities and deficit reduction efforts likely mean that corporate tax reform will need to be revenue-neutral. as a member of the rate coalition, we're willing to put all of our tax incentives on the table and broaden our rate. we advocate for a significantly lower rate, a simpler code and a predictable consistent set of tax rules upon which business can make long-term decisions. america has so many business advantages, yet, we're saddled with an inefficient tax structure and an uncompetitive tax rate. we're pleased that there is growing consensus for reform that significantly reduces the corporate tax rate. we want to commend chairman camp

and this committee for its leadership in this regard. we would welcome the opportunity to work. committee and its members and staff in dealing with these issues as tax reform progresses. once again, i want to thank chairman camp, ranking member levin and the members of this committee for inviting me today. i very much appreciate this opportunity to testify and would be happy to answer any questions you might have. thank you. >> thank you, hanland. >> thank you for the opportunity to testify before you today. the main point of my temperature is the responsiveness to tax policies can be affected by the financial implications of those policies. first i'll offer some general examples of the importance of financial accounting to managers of publicly traded companies. one example is in a study of

companies accused by the sec of fraudulently overstating accounting earnings. it tushes out that these companies also overstated their income to the irs and paid taxes on their inflate add counting income. this suggests that the companies were willing to pay substantial sums of cash in order to report higher financial accounting earnings. in the literature we call this "the book tax tradeoff." a second example is in a survey of tax executives of publicly-traded companies. 85% of the tax executives said that top management at their company uses the accounting effective tax rate is more important than the actual cash taxes paid. the tax policy, my written testimony discusses three policies related to investment. as you know the u.s. has one of highest statutory corporate tax rates in the world. with a top rate of 35%. rather than reducing our corporate rates our policies have instead included targeted tax provisions like bonus depreciation and attempts to reduce economic effective tax

rates and promote investment. in addition, we have a worldwide tax system with deferral which has, in part, led to multinational u.s. companies holding a great deal of cash overseas. financial accounting has affected the responses in each of these cases. because the details can become technical quickly i'll discuss only one of these in detail today. accelerated depreciation including bonus depreciation. accounting earnings are competed using the akrooil method of accounting meaning that expenses are recorded n financial statements when incurred, regardless of when the actual cash is paid. the same method of accounting is for income expense. in the case of depreciation most companies eyes straight liable depreciation for book depreciation. however, this is only temporary in nature because the same amount will be depreciated for

financial accounting and tax purposes over the life of asset. the deduction per tax is faster than the expense for book. to compute the income tax expense for financial accounting purposes in this case, the kaunting rules require expensing not just the taxes paid but also, accruing and expense ing the future taxes that will be paid because the company yooised that tax shield early, thus, accelerated or bonus depreciation $not reduce a firm's accounting income tax expense and their reported effective tax rate and does not increase reported earnings relative to the world. when asked, corporate management will often reveal a preference for a rate cut over bonus depreciation for several reasons, one of which is that there's no reduction in income tax expense on the income statement but there would be with a rate cut. in addition, empirical evidence on responsiveness relative to the investment tax credit which reduced financial akoungts and

income tax expense reveals the response was greater than holding the cash value savings constant suggesting that the accounting effect is important and serves to mitigate the responsiveness to accelerated depreciation because there's no financial accounting benefit. in conclusion, the main point of my testimony is that what many consider to be cosmetic accounting effects play a role in responsiveness to tax policy and these financial accounting implications can often mitigate the effectiveness of policies. in addition, as i discussed more fully in my written testimony, sometimes the accounting implications lead to other unintended consequences, like incentives to leave cash overseas and in addition, at times concern over the accounting implications has caused tax policy to be enacted in a particular manner like in

serve, testify today and i look forward to questions. >> thank you. mr. nubil you're recognized. >> i was an economist at the u.s. treasury's office of tax analysis from 1980 to 1990 during the development of the 1986act. financial accounting issues were not very important then but over the last 25 their importance grow not only at the federal level, but also, in terms of state tax policy and tax policy in other countries. in 2005, president bush's advisory panel on federal tax reform outlined a business cash flow tax that allowed first-year 100% 'write-off of capital investment like bonus depreciation. one might have expected that this plan which many of my economist brethren claim results in a zero effective tax rate for

new capital investment would have received strong support from the business community but it did not. this led me to consider a number of reasons why in economists often predict the effection of tax refoirms much differently than the business community. although i am not an accountant, in testimony before the select revenue subcommittee in 2006, i noted the importance of financial accounting rules when many corporate executives evaluate alternative tax retomorrow proposals. i will restrict my comments to several reasons why many corporations may prefer a lower corporate tax rate to more targeted tax reductions. i'll yourself accelerated tax depreciation as one example, since its repeal has been proposed in combination with lowering the corporate tax rate in several recent tax reform plans. also, a number of countries have moved toward economic depreciation to partially finance their reduction in their 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 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