result in the debate of capital neutrality versus capital import neutrality. such a discussion usually is not helpful, in my opinion. and typically ends up going nowhere. the unit developed an interesting new theory of international taxation. capital ownership neutrality. the idea being that a tax system should not distort the ownership of assets. and in fact, capital ownership neutrality seems to fit in nicely with the acquisition inversions that we're seeing today in which a u.s. corporation across a smaller foreign corporation inverts as part of an qcquisition. it seems that the u.s. corporation is at a disadvantage if it is competing against a foreign corporation, based in a country with a territorial-type tax system. as we know, most developed countries have adopted territorial types of tax

systems. 28 of the 33 oecd countries have territorial-type tax systems. is it accurate that a u.s. corporation is at a disadvantage? >> doctor, if you could, i brief answer because i want to recognize senator grassley. >> yes. we develop neutrality. it does not matter where the dollars go but who owns what. and it's clear of the manifestation that u.s. firms aren't good owners because of taxation of assets around the world. and it's better to be domiciled somewhere else. >> thank you. >> mr. chairman, here's what i'd like to do with my five questions. i want to ask mr. stack a question, let 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 addition, for many of the things we're talking about today in terms of base stripping, we put several detailed proposals in our budget to get at this opportunity once a company inverts to strip out of the u.s. base, which as everyone knows

provides a lot of juice for these transactions so that they can do better once they're offshore reducing u.s. taxes than they could before. so we think we've shown leadership in our framework. we think we've shown leadership in putting concrete proposals in our budget. i know the president and the secretary stand ready to work with congress on both sides of the aisle to push through international tax reform. >> love to see a proposal. i'd love to see that push. maybe my colleagues see more of it than i do. i've had great conversations with individuals at the treasury and in the administration, including at the white house. but i just don't see the push. i hope we'll use this unfortunate situation where we've got examples every week of another major inversion, another one this past week and happened to be a pharmaceutical company, to actually get us to the point where we're solving the underlying problem. if we make it worse by making it even less advantageous to be a u.s. company, i really worry we'll look back five years from now and see a hollowed-out american corporate base and

wonder, what happened? what happened is we ab i did katd our responsibility here in doing our things we have to do to reform our code to make it competitive. i know my time is up, mr. chairman. i appreciate the testimony today. i hope it results in very specific action by the administration and by the congress. >> thank you, senator portman. i look forward to working with you on these matters in a bipartisan way. i'd say to our guests, i have some additional questions. senator hatch is on a very tight timeline. so i'd like senator hatch to go first. >> very gracious of you, mr. chairman. i appreciate it. it's a pleasure to work with you. this question is for dr. merril. as you know, both japan and the united kingdom adopted territorial types of tax systems in 2009. switching from a worldwide tax system with deferral. 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 with deferral system like the current united states tax system to a territorial system? and after five years of experience with a territorial tax system, what 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're experiencing now. they saw a number of large multinational companies. you know, some quite significant, that had actually moved their legal headquarters out of the u.k., primarily to ireland. and that was of great concern to the government. they decided that it would be appropriate to adopt a more competitive tax system along the lines of the quote in my oral

statement so they would be -- their tax system would be more welcoming to multinational business. one of the factors for the u.k. is they have many companies there that earn only a small part of their total income, worldwide income, in the u.k. yet, the u.k. was -- had a tax system like ours that was taxing the worldwide income of companies that only earned a small amount of income in the u.k. so in order to become a more attractive location for multinational companies, they went to the territorial-type tax system, 100% exemption of foreign dividends. and they made a number of other changes, lowering their tax rate and a 10% refundability research credit. also a 10% phased-in tax rate on income from patents. they also modified their cse rules. they've done a whole package of things mainly to make it more attractive for multinational

companies to be headquartered in the u.k. and they've been successful, as dr. robinson mentioned. some of the companies that left the u.k. actually have moved their headquarters back to the u.k. in response. japan, different situation. obviously japanese economy has not been attracting the kind of growth that they've been looking for. and they saw japanese multinationals, like the u.s., facing very high corporate tax rate, worldwide system, money not being repatriated to japan. the ministry of economy trade and industry wanted to see that money come back for additional investment in japan, and that's why they made the change. >> thank you. mr. saint-amans, glad to have you here. i appreciate what you said in your testimony, that the work of the osce is done in consensus. presumably, consensus of all

member countries means that all member countries will consent to the work the oecd is doing or else the oecd won't do that work or won't issue such report. am i right on that? >> yes, senator. a consensus means that a report is agreed when no country around the table objects to it. >> and in making sure you have the consensus of the united states, please keep in mind our system of separation of powers. law making capabilities primarily invested 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 do appreciate you being here for this hearing. will you please assure me that you understand that to obtain the consent of the united states for the oecd's work, including for the vets project, the congress must be kept informed

of the work, and that has to be working in conjunction with the u.s. treasury as well. >> senator, i do think that not only the secretariat of of course but all the oecd member countries are fully aware of this. we are more than happy to engage with the staff with the senate but without impeding on what treasury is doing. and i would like to add that most of the measures which are contemplated in the project fighting profit shifting are soft, low rules. these are common interpretations of standards, and they do not require translation by parliament but in formation of all stakeholders, and in particular the congress, is taken seriously by the eoecd

secretariat. >> mr. stack, 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 in the decision making process and in negotiating with the oecd. >> yes, senator. we fully intend to do that. i've already been up to the hill twice to meet with bipartisan staff, both houses. i look forward to continuing that throughout the process. >> we appreciate your work in that regard. thank you for doing that. i want to thank all of you for being here. i have to leave because of other commitments, but this has been extremely interesting. i'm going to read the transcript, and i'll know exactly what you all say. i'm going to hold you to it. thank you. >> he will. be on notice. we're moving towards the end of the hearing. senator portman may 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 a loophole, and then i want to drain the swamp. i want to fix this dysfunctional mess of a tax code so we have incentives for creating red, white, and blue jobs, creating jobs here in our country. i know we're going to be calling on you all often in the days ahead. i have a couple other questions about issues that are pending. senator thune, you're next. if i could just finish these two questions, we'll go right to you. the first deals with the implications of inversions on health care costs in america and the implications for the american consumer. i was struck by comments made in "the wall street journal" recently by the ceo of abbott, who said that he was concerned about the higher prices that

american consumers would have to pay if proposed inversions like his companies did not go through. and i'm still trying to figure out how these savings are going to be passed on to consumers and of course to taxpayers who put up so much of the money that funds the medicare program. so mr. -- we'll ask all three of our professors. explain to me how somehow these costs, particularly medical costs, because so many of the inversions thus far are medical, explain to me how or even if -- because you've done some scholarship on this, dr. desai. how's this going to benefit the american consumer and the medicare program in particular? we'll start with you, dr. desai. >> so i think the broad way to think about this problem is to

understand that this question relates to the broader question of the incidents of the corporate tax. so who pays the corporate tax? there's really three sets of folks who can play. so the first is customers, which is what you're referring to via the health care system. the second is workers. the third is capital or shareholders. so whenever there is a tax-saving move, like an inversion, we can expect those benefits to accrue to one of those three sets of people. either workers are going to get higher wages, shareholders are going to get higher returns, or customers will get lower prices. i think most of the consensus in the scholarship is when taxes change, they don't typically get transmitted to product prices. >> they don't get typically translated to product prices, which would be the prices that americans pay for health care. >> in this example, exactly right. >> very good. thank you. >> they typically get translated more likely to wages and some degree shareholders. >> very good. senator thune has just come back. we'll bring you into this

question, dr. merrill and dr. robinson. that is the impact of reform on the deferral issue. of course, one of the goals around which there's bipartisan support for corporate tax reform is to simplify the system. i think we all understand that the international tax is inherently complicated. my question is, wouldn't repealing deferral go a long way towards corporate tax simplification by eliminating the complicated system that exists today of tracking unused foreign tax credits and the related earnings and profits. in effect, income would be subject either immediate taxation or exempt from the current foreign tax credits and utilized against current taxable income. so answer to the question, if you might, would deferral

eliminate a very complicated feature of the tax system, and would doing that as part of bipartisan comprehensive tax reform make the system more simple and understandable? dr. 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. and what i mean by that is that the cost associated with actually avoiding repatriation or maintaining deferral for long periods of time is what i believe makes our tax system uncompetitive. so i do think that eliminating deferral so long as the rate, of course, was lowered sufficiently would be what i would be in favor of. the reason i say that is because the alternative approach, of course, is to implement some sort of territorial system, but

i think those types of systems, to design them appropriately, would have to recognize instances where earnings were not subject to robust tax systems abroad and you have to introduce all sorts of exceptions and exclusions and base broadening provisions. by the time you introduce those, you're sort of right back where you started. so i am largely in favor of ending deferral and lowering the rate as a means of simplification. >> dr. merrill, unless you want to add anything, i'll recognize senator thune. was there anything you wanted to add? >> why don't you take mr. thune's question. >> very good. senator thune. >> thank you, mr. chairman. i want to thank you and senator hatch for holding this important hearing. thank you, all, for making time to share your expertise with us. i suspect there are significant differences about how we improve the u.s. tax code, differences of opinion among members here in the finance committee and probably in the senate and the

congress. but i think that all of us agree that we want american companies to be competitive. we want to for them to be able to compete and win in the global marketplace. i think unfortunately, we ask them to do it with one hand tied behind their back because we actually make the rules they play by. when you make bad rules, you get bad outcomes. there are economic signals right now that are driving a lot of the decision making that our 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. and we're also one of the only few countries in the world that

continues to use the worldwide system that hasn't moved to a territorial system. i shouldn't say in the world, but certainly one of the few countries in the oecd. so i just think that we need to focus on the problem mere. the problem is the high rate. there was a time when we were back in 1986 when the tax code was last reforms where our corporate tax rate was five points lower than the average. now it's about 14 points higher than the oecd average. it is only -- i mean, this is what you're going to get when you have these kinds of rules. we need to change the rules. we need to reform the tax code. so i guess it seems to me, at least, that the system is basically the worst of all worlds. because we've got -- if you're asking your businesses to compete in the foreign marketplace, not only do we have the highest corporate income tax rate among oecd nations, we're also one of the few nations that has a worldwide system of taxing income. so dr. merrill, i guess i would ask you, could you elaborate a

little on your testimony in term of what this means for a u.s.-based company competing in foreign markets against companies that are based in nations with more modern and favorable tax systems. >> yes, thank you. so what we're seeing is a world where a 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're operating. the difference is they face different home country taxation. so if the u.s. company earns income abroad and wishes to invest it back home in the united states, bricks and mortar, if it wants to use the money to get back to its shareholders, if it wants to use the money to pay higher wages to

its workers, it faces a u.s. tax on that repatriated earnings that would not be the case if it was a foreign headquartered company under a territorial-type system. so we see this manifesting itself in u.s. companies stuck in a way building up 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 in bringing it back. so that is a very important driver of why a u.s. company is not particularly an attractive target when they go out to buy a foreign company. if you're a shareholder in a foreign company and a u.s. company says, gee, i'd like to buy you, you realize that means that if you're acquired, any

foreign profits that will be distributed to you have to go through the u.s. corporate income tax system. if you're purchased by a foreign acquirer, that's not the case. it makes it harder for u.s. companies to make foreign acquisitions. it makes it harder for them to even invest back at home. >> and there seems to be a misperception about what this -- the way some of this has been covered at least in the press articles. it's implied that u.s. companies are somehow changing the taxation of their u.s. income through these deals. isn't it the case that income earned in the united states remains subject to u.s. tax regardless of the corporate structure? >> u.s. company that moves its legal headquarters abroad is still subject to u.s. income tax on its u.s. operations. it's still subject to tax if it brings back the foreign earnings it has previously earned in its foreign affiliates. >> and this is a question -- one

more, mr. chairman. there's a suggestion in the administration's proposal that we attempt to stop corporate inversions in that, you know, there's a concern about some of the steps being taken designed to stop them could create more harm than the inversions themselves. in particular is a concern this management control test that's being 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's your view on that issue? >> congress has a long history of trying to address inversion transactions, and each time finding unintended effects. congress tried in '84. the irs tried about ten years later in '94. of course, congress in 2004 adopted legislation, each time trying to deal with the transaction of the day.

and what happened is companies found different ways to achieve what the economic incentives are driving them to do, which is to have the assets owned in a tax jurisdiction that's more favorable. so the concern would be that, you know, another stop-gap measure could lead to kinds of transactions that are not desirable from a u.s. standpoint. a true foreign acquisition of a u.s. company where the headquarter jobs are abroad and the u.s. headquarter shrinks. >> mr. chairman, i thank you. i appreciate the answers to these questions. i would ask if i could get my statement, entire statement, which i didn't use all of included in the record. again, point out that we got a problem here. the problem is our tax code. >> without objection, it is so ordered. >> thank you, mr. chairman. >> senator thune, you may not have been here when i made 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's being done right now? senator portman, do you have any other questions you'd like to ask? >> thank you. why don't you go ahead. >> i have no other questions. >> can i just do a quick, quick round? >> of course. >> with the team here. first of all, i quote you all the time because the tax code is 100 years old and it looks like it. so i appreciate your attitude about wanting to pursue reform. i'm concerned that by taking this detour it's going to make it harder, not eeasier. again, the unintended consequences we talked about, include accelerating this acquisition of u.s. companies by foreign entities. the joint committee on taxation, which is our official nonpartisan scorekeeper has said with regard to the president's proposal in his budget last year, and these are mostly

international tax revenue raisers to deal with some of these issues. they said, and i quote, many of these proposals may make corporate structures with a domestic parent relatively less attractive than corporate structures with a foreign parent. and because these proposals are likely to raise u.s. tax liability, parent structure more than the foreign parent structure. seems pretty clear. and that's not republicans or democrats. these are our nonpartisan arbiters as to what we ought to be doing in terms of good tax policy. i guess one question i would love to hear from this distinguished panel is, dr. robinson talked a little babout access to capital. it's a big disadvantage to u.s. companies now. forget the rate. even forget kind of the general notion of territorial versus worldwide. the fact is these u.s. companies are not as nimble. they can't move assets around where they need them. and i think that has to be

addressed. here's my question. sometimes when i debate my colleagues can on this issue, they say, well, just because a company is foreign doesn't mean they don't have u.s. jobs, which is true. anheuser-busch still has u.s. jobs. they sell a lot of beer in america. their market share is in good shape. maybe, peter, if you could address this or dr. desai or dr. robinson, whoever has looked into this, but can you tell us about what happens when -- peter talked about fortune 500 companies. you've seen a one-third reduction in u.s. companies. what happens? what is the impact on jobs when you see u.s. companies being acquired by a foreign company? >> yeah, i have not actually studied that issue. it could go either way.

if the foreign company is a better managed company, bring in new technology, it could increase jobs. on the other hand, it could go the other way. i don't know what the actual experience has been. >> dr. desai? >> i think you're right to put this in the context of a broader market for corporate control, which is really the issue with foreign acquisitions. i think the issue with foreign acquisitions is particularly with respect to high value added headquarter jobs, those may well get relocated when it becomes foreign owned. that is something that we have seen at least anecdotally. we also know that headquarter jobs are really important. they give rise to lots of economic spillovers more generally. for that reason, i think you're right to be suspect of the potential for these foreign acquisitions, which is they can lead to high-value added jobs going abroad and in particular headquarter jobs. >> dr. robinson? you do any research on this? >> i was going to say, i don't have anything to add concrete. i've not done any research in this area. >> let me just assert something

that's probably pretty obvious. when a company chooses a domicile somewhere else and when the headquarters moves, which often happens, there's an intangible impact. so the companies in, you know, our great cities in america are major benefactors. companies in my home state of ohio are involved in every single nonprofit in one way or another. and often provide a lot of executives to, you know, help to lead these nonprofits and charities. and obviously make huge contributions. i've love to see some research on that. i do think this is sort of the intangible impact of companies pulling out of the u.s. it hasn't been given adequate focus and research. so if any of y'all have any thoughts on that, i would love to see if we could look into that. certainly on the jobs front, we'd like more information. but also on just intangible benefit. what happens?

why does it matter? i think it matters. i think my colleagues do. that's why we're working hard on this. i think we need better information to be able to explain this more in terms of the impacts, the negative impacts to our constituents. thank you, mr. chairman. >> thank you, senator portman. at this point, i'd ask unanimous consent that a statement by senator levin be included in the hearing record. without objection, the statement will be included. let me leave you all with one thought that we really haven't, i think, gotten into much this morning. it seems to me it would be one thing if there were just a few of these inversions. in other words, if there were a few of them, we'd work, as we've talked about this morning, on comprehensive, bipartisan, you know, tax reform. we fixed it, and then we wouldn't be back here again in another decade.

part of what has influenced my judgments is that's not going to happen. and i spoke a couple hours ago from reports about the financial press about this feeding par ii. that's what's actually going on out there. it's not a few of these inversions you could put to bed with financial tax reform. according to the financial press, it is a feeding frenzy where you have the investment bankers going out to all the possible companies with their slide decks and say, you better do this quickly. and the reality is that tax reform is moving slowly and the inversions are moving very rapidly. as i indicated before, i think that's a prescription for real chaos. so you could hear from the senators here today. wasn't a lot of shouting and a lot of screaming and finger pointing. so a lot of goodwill here. my hope is that with your good

accounts, very thoughtful testimony, you can help us address both of these tasks. to close the inversion loophole and then move on to the great challenge in front of this committee. that's the real cure, which is comprehensive bipartisan tax s-

up next on c-span3, the head of the irs testifies at a house oversight subcommittee hearing. then congressman talks about some of the challenges facing the veterans affairs department. later, the senate finance committee looks at possible changes to the u.s. tax code. >> 40 years ago, the watergate scandal led to the only resignation of an american president. american history tv revisits 1974 and the final weeks of the nixon administration this weekend, the house judiciary committee as it considered impeachment of the president and the charge of abuse of power. >> what you have here are questions about what the framers had in mind, questions about whether the activities that had

been found out by the committee and by the senate, watergate committee, were indeed imbea imbeachable, and certainly can we prove that richard nixon knew about them and even authorized them? >> watergate 40 years later, sunday night at 8:00 eastern on american history tv on c-span3. next, irs commissioner john koskinen is asked by members of an oversight panel about the missing e-mails of former irs employee lois lerner. she's the subject of several ongoing investigations looking into whether the irs targeted certain political groups. congressman jim jordan of ohio chairs this subcommittee hearing.

>> committee will come to order. i want to thank our witness for being here again. and we'll start with some opening statements. i'll start first by recognizing the chairman of the full committee, the gentleman from california, mr. issa. >> thank you. that's very kind. commissioner, i know that this is unprecedented to have a commissioner of the irs in front of this committee so often. and i appreciate the fact that you have been willing to be brief and participate even beyond our requests at times. as we continue to explore a number of questions, the timeline of the crash, the inconsistency of the probability of lost e-mails by multiple people within government, we appreciate that you were not in

government. you were not doing this at the time. but as you can imagine, not just the internet, not just fox, but america is beginning to question how convenient so many e-mails of so many people at the heart of targeting conservative groups for their views, for their politics and for the fact that citizens united was objected to by the president, how many of them had loss of data and how much is not available to the american people. a cover-up is normally described as something that happens during an investigation around here, things go missing during the investigation. but when it comes to the loss of data, it's clear that data began disappearing and not being able to be yet found at a time when congress was just beginning to

look at wrongdoing that is now confirmed, that began with the president objecting to citizens united, that began with democratic members of the house and senate writing letters asking for investigation of people that were politically the opposite of their party. not asking for investigations about all people who may be involved in political activities in addition to their nonprofit work. it is clear they were driven within the irs and perhaps other areas by political bias and a belief that the president wanted a fix and that the fix had to occur. again, commissioner, you weren't in government at that time, but government is today. it is their time, it is their watch. it is their responsibility. whether it's the s.e.c., the irs, the department of justice, or any and all of government

activities that led to the unfair treatment on the eve of campaign elections of conservative groups. it is clear that there was a convenient loss of far more data by far more people than is explained by the normal arrhythmatic probability. today, we'll explore not only the timeline but when this committee received that timeline. it was your watch to give us accurately and keep us up to date on developments related to lois lerner and other parts of our investigation. it is my view that you could have done better. you will and have paid a price in public opinion for not being as forward leaning and proactive as you could have been. but that was yesterday. today, what we're asking you to do is continue working with your ig and if we're fortunate enough to get a special prosecutor,

work with him or her, and of course work with the groups that now have federal judges ordering the irs to show particular information and bringing it all together back to this committee. because this committee has an intent to make to the greatest extent possible public what we can find is being done on behalf of the american people to bring back the confidence in the irs. so again, i appreciate your willingness to be here. these are not easy hearings, and each time you come, you leave with more questions from us than you come with answers to us. and that is the nature of an investigation that continues to evolve. so mr. chairman, i want to thank you for recognizing me early. commissioner, again, you need to be part of the solution. i believe you have to a certain extent, and i believe you're committed to do more. and for that, i thank you, and i yield back. >> recognize the member from maryland, the ranking member of

the committee. >> thank you very much, mr. chairman. commissioner koskinen, i want to thank you for testifying before this committee yet again. this is the third time in the past month you have appeared before us and that does not count a fourth appearance you made before the ways and means committee last month on the same topic. unfortunately, it appears that you and other irs employees are now becoming collateral damage in a fight for the spotlight among a few republican committee chairmen, issa and representative camp. this is unseemly, embarrassing, it is not a proper way to run an investigation or to spend millions of dollars in taxpayer funds.

as the commissioner knows very well, when chairman camp was informed about the crash of lois lern lerner's hard drive, he said he would be holding the first public meeting before the ways and means committee ten minutes later. congressman issa had a subpoena calling the commissioner to testify first before our committee. he did not contact the commissioner before issuing the subpoena and didn't hold a debate or vote. in response, the chairman moved this hearing up several days so he was the first one in front of the cameras. it did not seem to matter to either chairman that the irs provided numerous extemporaneous documents showing the computer crash was a technological problem that multiple i.t. officials attempted to remedy.

those facts apparently were irreleva irrelevant. the goal is so public. camp has acted as general to conduct an investigation into ms. lerner's harddrive crash, which has agreed to do. commissioner koskinen testified last time that he was here, that the inspector general asked him to make his investigation a top priority, which meant not subjecting irs employees to any other interviews by the inspector general's interviews were going on. that was the ig's request. rather than waiting a few weeks, chairman issa disregarded the ig's request and demanded that the irs make the employees available to him now. commissioner koskinen explained that the inspector general did not want irs employees subjected to multiple interviews, but chairman issa just began issuing more unilateral subpoenas. he forced the irs employees to

appear before the oversight committee and he excluded chairman camp's staff from participating when the commissioner testified before. republicans accused him of obstruction, claiming he was hiding witnesses from the committee. when he again explained that the inspector general asked him not to subject irs employees to multiple interviews, chairman issa said he was going to follow up with the inspector general directly. well, that apparently didn't happen. yesterday, i asked my staff to contact the inspector general's office to find out exactly what was going on. they have spoken to the deputy inspector general of investigations and i can report what he told us. the deputy ig for investigation confirmed that his office is now conducting the investigation that chairman camp requested. he confirmed exactly what commissioner koskinen told us, which is the inspector general preferred that irs employees nots be subjected to multiple

interviews in order to avoid tainting their testimony. without directly criticizing the chairman's actions, the deputy ig for investigations stated that his investigators working for the inspector general, they want everyone to allow them to complete their interviews first, quote, without distraction, end quote. as he stated then, there's no confusion of witness testimony and integrity of the investigation is not impaired. contrary to these requests, chairman issa has been forcing irs employees to come before our committee to transcribe interviews excluding chairman camp's staff, irs employees also being forced to appear before ways and means. invariably, after each of these interviews, chairman issa and chairman camp issued dueling press releases with tidbits of information and very big

transcript excerpt s in their effort to compete. no matter how unsubstantiated their claims are, they also told us something else. over the past year and a half, they have obtained no new evidence that would change the conclusions in the audit from 2013. as i close, there is simply no evidence whatsoever of any white house involvement in the exempt abications. the irs has already spent $18 million responding to these dupelicative investigations and commissioner koskinen is now testifying before congress for his fourth time in just over a month. yet, chairman issa informed committee members yesterday that he will be holding yet another hearing on the topic next wednesday. we have the notice here. and with that, i'll yield back. >> i thank the gentleman. >> mr. chairman -- >> chairman is recognized. >> point of privilege. there are a number of words in

the gentleman's statement that disparage me and i object to his words and debate and i ask that he withdraw them and ask unanimous consent that among the terms that be withdrawn would not only be the unseemly statement but in fact when the chairman -- when the ranking member disparaged me for a number of areas, including my intent and essentially said that the items i said were not true. additionally, the ranking member, while objecting to multi multiple -- while objecting to multiple claims of cherry picking releases or interfering with the ig, failed to mention that in june of 2013, he released the entire john schaefer transcript, which has compromised this investigation by statements made in future transcribed interviews saying they have reviewed these in

preparation for those. so i certainly would say while questioning the intent and some argument about the republicans not getting along, the ranking member managed to go beyond the ordinary opening statement and claiming the intent, in fact the ranking member in june of 2013 went on national television claiming the investigation was over. this investigation is not over. i would ask that such items including unseemly be taken down. >> objection? >> i object. >> the gentleman objects. i understand. but i would reiterate that the decorum of this committee should not lead to personal attacks as to the intent of individuals on either side. the fact is this committee is conducting vigorous oversight. we do so as a matter of our

obligation as a committee, and i would make one last request. i ask unanimous consent that the staff be able to place the timeline into the record so that the ranking member's clearly erroneous claims that our request for this hearing -- our first hearing, came after the event when in fact the timeline will show that the subpoena had been served prior to the announcement from ways and means, and as the ranking member would know if he had ever chaired this committee, the fact is it takes a long period of time to prepare a subpoena, to write a subpoena, to go to the clerk and get it approved and then to serve it. so i would hope that the ranking member once he sees that in the record, would recognize that in fact he has been clearly erroneous in his claims and i yield back. >> i thank the gentleman for yielding. if we can, without object, let's

allow the timeline in and let's move to the next opening statement. would that be satisfactory? >> it is satisfactory. >> i thank the gentleman. >> i just wonder, though, is the brief response to the distinguished chairman? >> do you really have to? >> no, i don't really have to, other than to say to you, mr. chairman, i certainly associate myself and i know my colleagues do on this side of the aisle as well, withat we should always speak with respect about each other, we should never question each other's intention. that has not been the practice as often as i would like on this committee. i certainly hope this would reflect a new day dawning in the committee and that we can proceed civilly. i thank the chair. >> i thank the gentleman for his comments. our subcommittee meets today to continue its oversight of the irs and the targeting of conservative tax exempt

applicants. we welcome back our witness, irs commissioner john koskinen. all kinds of questions need to be answered, and that's why for the third time in a month we're -- we have mr. koskinen here to answer and address what many of those unanswered questions. first, we were promised the irs would produce all of lois lerner's e-mails. then we learned some had been destroyed and there was absolutely no way he could produce all of ms. lerner's e-mails to congress. second, we were told the irs had confirmed that all back updates with lois lerner's e-mails had been destroyed. then we learned last week from irs attorney thomas kane that a backup tape may exist. third, we were told there was one harddrive crash, lois lerners and then the ways and means committee told us there were seven or eight total crashes and now we learn that there may be as many as 20. think about this. the irs has identified 83

custodians of documents and information. the irs has identified these people, associated with this targeting of conservative groups, and now almost a fourth of them may have had harddrive crashes. unbelievable. first, we were told that irs found utin april of 2014 that ms. lerner's e-mails were lost, but then we learned they knew on february 4th, 2013, about the hard drive crash and it found out just days later that the harddrive had been recycled and its contents were unrecoverable. that's why we continue to have hearings. that's why we have mr. koskinen back for the third time in a month. we would like to get some straight answers. we have convened this hearing because today, over a month after the first irs told congress it lost ms. lerner's e-mails, there are still many unanswered questions. there are still unanswered questions about why the irs delays notifying us about the problems with ms. lerner's e-mail. the deputy attorney general cole

told us last week that the justice department learned of the missing e-mails from press accounts in the media. i mean, imagine that. one of the highest profile investigations in years, and the justice department has to learn about critical evidence by the central player in this investigation, they learn about that in news accounts, not directly from the internal revenue service. that's why last week sitting at this very table where mr. koskinen sits today, depitary attorney general cole said he would have liked to have known about the e-mails earlier and he announced the justice department was investigating why commissioner koskinen failed to disclose the e-mails in a timely manner. let me reiterate that. james cole, deputy attorney general, the united states department of justice, said last week in that same chair to this same committee that they're investigating why the internal revenue service delayed months in telling the congress, the american people, and most importantly, the fbi and the justice department, about the

loss of lois lerner's e-mails. rather than the irs coming to congress and informing us what it knew when it knew it, they waited four months. they only came forward to acknowledge the missing emaims when it had no choice, and it disclosed the news the only way it knows how, by bearing it in a friday afternoon letter to the senate. information obtained by the committee in the last few days provides more questions than answers about the missing e-mails, but remember, this isn't information the irs is offering up willingly. it has taken almost a month for the irs to finally come clean and subpoenas to get people to talk. we tried a week to get mr. kane to talk, and we had to subpoena him to get him to come for the deposition last thursday. the american people have this information only because the committee has been asking questions and that's why commissioner koskinen is here today. he's the individual, hand picked by the president to clean up this agency, and that's why he's here today, to answer our questions.

until we know all the facts, until we clear about the confusion and misstatements about ms. lerner's e-mails, the committee will continue to press for the truth. that's the mission of the subcommittee and that's wi we meet today. the gentleman from pennsylvania is recognized. >> thank you, mr. chairman. first off, thank you, mr. koskinen, for coming today. we schedule these things on these doohickeys and it asks you, do you want to make this a recurring entry? and when i see koskinen, i want to say yes at this point. >> so do i. >> at this point, i am concerned that committee republicans are no longer using these hearings for the purpose of investigating what happened to the groups that were the subject of the inspector general's may 2013 report. this seems to be something different. and i want to say, we all ought

to agree that the point of this committee, the oversight and government reform committee, is not publicly to harass federal agency heads, mr. koskinen. it is to conduct responsible oversight of the legitimate critical issues within our jurisdiction. i believe that these repeated hearings that we're seeing today are both an abuse of authority and a dereliction of this committee's duties. i think it's abundant lly clear that chairman issa and chairman camp are in a taxpayer funded footrace about who can make headlines about lois lerner's lost e-mails and we heard about a request for a timeline, and we ought to look at the timeline because it was on june 16th, shortly after chairman camp of ways and means announced he would be holding a hearing with you, commissioner koskinen, on june 24th, that chairman issa of this committee issued a

unilateral subpoena compelling the commissioner to testify before this committee on june 23rd. in response, chairman camp moved his hearing up to june 20th. so it's something like a children's fairy tale that we're looking at here. in addition, chairman issa is no longer allowing staff from the ways and means committee to participate in the oversight committee interviews. chairman issa's refusal to hold joint interviews is resulting in wasted taxpayer money as irs employees like you, mr mr. koskinen, are now being subjected to multiple duplicative interviews. i also want to address republican claims that the targeting of conservative groups is this government wide conspiracy initiated after the citizens united decision involving the president, the irs, a conspiracy including the department of justice and other federal agencies. this committee has obtained no

evidence linking these accusations to what we all know now were inappropriate criteria used by irs employees in cincinnati. some of my colleagues on the other side of the dies have chosen to overlook the funneling of dark money into the political system of the united states, republicans have demanded accountability from the irs but have not demanded the same from corporations who influence our national elections. in january 2010, the u.s. supreme court in a 5-4 decision on citizens united allow ed for profit corporations, unions and nonprofit groups to raise unlimited funds and register for tax exempt status under the 501(c)(4) designation and the irs then became flooded with applications for this status. a 501(c)(4) designation is exclusively meant for organizations whose primary

activity is social welfare defined in the tax code as making charitable, educational, and recreactional contributions to a community. while 501(c)(4)s are not barred from participating in political campaigns, it is stated plainly and clearly that political participation must be an insubstantial amount of the group's overall activity, accounting for less than 50% of expenditures. the irs's job was to make sure the groups were following the rules so they weren't taking tax breaks meant only for groups contributing to the community, not hiding the influence of the select few individuals have on our nation's electoral politics. as i have said before in previous hearings, this is about groups doing everything they can do to hide where they get their money. obscure the true intentions, and have undue influence on the political system tax free. anonymous money in politics is something we don't need in this country. something that disrupts the

democratic process, and something that has to be changed. i commend the chairman leahy and senator ahaul of the committee for advancing sj-res 19 proposing an amendment to the u.s. constitution which would negate these damaging effects of citizens united. i have co-sponsored the house companion to that bill presented by ted deutch, and with that, i'll conclude my comments and yield back to you. >> i thank the gentleman. members have seven days to submit seven written statements to the committee. mr. koskinen, you know how this works. please stand, raise your right hand, do you solemnly swear and affirm the testimony you're about to give is the truth, the whole truth, and nothing but the truth so help you god. you're now recognized for your opening statement. your statement, and then we'll

ask questions. >> chairman jordan, ranking member cartwright, members of the subcommittee, thank you for the opportunity to appear before you today. with your permission, i'll provide a brief introductory statement and submit a complete copy of my testimony for the record. before beginning my statement, i want to thank the subcommittee for its willingness to work around my travel schedule. in attempting to set the original date, my understanding was you were interested in an overview. that's covered in more detail in my statement. in general, the irs regularly and routinelynicate acts with the department in tax matters and financial fraud. our criminal investigation committee recommends them to the tax division for prosecution. these cases represent a variety of tax issues including refund fraud, abusive tax shelters, repairer fraud, and

noncompliance. the international area office offers a good illustration of what our coordinated efforts can accomplish. recent efforts include the guilty plea by bmp, two major financial institutions found to be in violation of u.s. law. routine interactions between the irs and doj also involve the irs office of chief council, which reviews all criminal tax cases developed by our criminal investigation division before those cases are recommended for prosecution. in addition, when the department of justice' tax division litigates a civil matter, chief counsel attorneys are involved, elaborating on the arguments and positions taken. i may now turn to an update of the effort the irs has made to cooperation with the investigators into the use of inappropriate criteria to evaluate applications for tax exempt status under 501(c)(4), the revenue code. these include four investigations by congress, one by the department of justice and one by the inspector general.

added to that has been the recent new investigation by the inspector general of circumstances surrounding the crash of lois lerner's harddrive three years ago. to date, we have now produced more than 960,000 pages of unredacted documents to the tax writing committees and more than 700 thousands pages of redacted documents to the house oversight and committee, in addition, the irs has been working on the identification and production of lois lerner e-mail. as part of the document production, the tax writing committees have received 67,000 e-mails that we found involving ms. lerner. we're continuing to provide redacted versions to the oversight committee, which to date has received more than 54,000 e-mails from lois lerner. we are working to provide these documents as quickly as we can. in the course of collecting and producing ms. lerner's e-mails, the irs daempted that her harddrive crashed in 2011. at that time, ms. lerner had

asked i.t. professionals at the irs to restore her harddrive, but their were unable to do so. nonetheless, the irs will prusz 24,000 e-mails from the period 2009 and 2011, largely from the files of other individuals. the irs provided information about the hard drive crash to all six investigating entities in a public report to be released in june. i would note that our june report to the extent that it focused on ms. lerner's hard drive crash was based in part on e-mails we had already provided to the congressional committees, the inspector general, and the department of justice. some of those e-mails were produced as long ago as last fall. those e-mails were provided in the normal course of production related to the search terms agreed upon previously. those all six investigators have had initial information about the hard drive crash since last fall. also, additional e-mails about ms. lerner's hard drive crash were produced this spring to

investigators prior to the release of our june report. i also want to point out that consistent with a bipartisan congressional request, the inspector general as noted, is proceeding with its own investigation regarding the crash of ms. lerner's hard drive. the ig, as noted earlier, has asked the irs not to do anything to interfere with its investigation and we're honoring that request to the extent possible. in addition, on july 18, we responded to a court inquiry with detailed information regarding the crash of ms. lerner's hard drive. this information is consistent with what was previously provided in the six investigations and we have provided the oversight committee and the other investigating committees with a copy of that information. i understand in last week's hearing with doj, there was a question as to what information the irs gave to the department ability the hard drive crash. we provided all investigating entities with the same information in our june report which we released to the public. doj did not receive any additional information. since releasing our june report,

we have continued to cooperate with the investigation. since mid-june, we have produced to the over sight committee more than 100,000 pages of documents and made witnesses available for interviews with congressional staff. five of those interviews have already occurred. our deputy chief information officer has given three briefings for congressional staff, including one for the oversight committee, and as noted, i have testified at four hearings, including the one today. this concludes my statement and i would be happy to take your questions. >> thank the jenltalman. i'll turn to the vice chair of the committee. >> thank you, mr. chairman. good morning, commissioner. mr. koskinen, are you aware that you currently are under investigation by the justice department regarding your role in determining when to produce lois lerner's e-mails? >> i'm not aware of an investigation. i did see the deputy attorney general's statement last week before this committee that he was interested in -- would be interested in why we had not provided him information in

april as opposed to june, but i have not received any notice of an investigation. >> well, he told us that it was something that the justice department would look into, and he said it was information that they did wish they had at the time that you discovered it. let me ask you this. the committee interviews irs deputy associate chief kourn thomas kean and he testified that senior irs officials, including the counsel to the commissioner, realized lois lerner's e-mails were missing, that there was a hard drive crash, on february 4th, 2014. and that by mid-february, they realized that the e-mails would not be recoverable off that hard drive. yet, you testified in front of this committee on march 26th, 2014, and after being asked numerous times whether you would produce all of lois lerner's e-mails consistent with the subpoena, you said you would. so if a senior irs official knew in mid-february that the e-mails

could not be recovered off the hard drive, why did you tell this committee that you would produce them? >> because i testified before, when i testified at previous hearings, when i testified in march, i said we would provide all lois lerner e-mails. as i have always testified since then, i did not mean to testify that if they didn't exist we would present them. i did present you with all of the e-mails we had. in regard to when the irs new the impact of the hard drive crash, as i have testified several times in the 11 hours of hearings since june 13th, what i was advised and knew in february when you took the e-mails that had been provided to this committee and other investigators and instead of looking at them by search terms and instead looked at them by date, it was clear there were fewer e-mails in the period up through 2011 than subquently, and there was also, i was told, had been a problem with ms. lerner's computer. it was not described to me in any greater detail than that.

i was advised near the end of february we were now reviewing all of our production capacity to make sure nothing had been done in the production capacity that would have explained or would have caused the loss of any e-mail. that process went forward, but at the same time, i would remind everybody, we were focused primarily on the request from this committee and finance committee and ways and means committee to provide complete production of all the documents we had related to the determination process. and we did that, and in mid-march, provided to the tax writing committees a letter saying we had now produced all the documents we had regarding the determination process. >> okay, i appreciate that. we even asked mr. cole, if someone responds to a discovery request and say they will produce all of them, they can't just do that, represent that, and then know, gee, we're not going to be able to produce all of them. once they figure that out, they have to come immediately and tell the opposing party, in this case, a congressional

investigation, so it's not the same. yet you guys sat on the information for several months and that caused this investigation from our end to be obstructed. let me ask you this about the back-up tapes. the irs has told congress that back-up tapes from 2011 no longer exist, yet mr. kane testified in terms of the interview of this committee that back-up tapes may in fact exist. can you now under oath definitively state that the relevant back-up tapes that this committee has sought do not in fact exist? >> excuse me. as i understand from your press release, what mr. kane said was the information we provided in june was accurate to the best of everyone's knowledge at that time. what he said since then is that the inspector general -- >> what you said, too, with all due respect, you said on june 20th, 2014, to the ways and means committee, that we, meaning the irs, confirmed that back-up tapes from 2011 no longer existed because they had

been recycled pursuant to the irs's normal policy. that was a definitive statement on your part. now we're getting information from mr. kane, well, the irs isn't exactly sure that that is in fact true. >> what mr. kane reported was information that the inspector general has started to review tapes to see if there's additional information on them. mr. kane said therefore there may be back-up tapes that were recycled but may be recoverable. we have no information -- i have no information about what the inspector general is doing with those tapes. in fact, the inspector general advised us that he was reviewing those tapes and asked us not to do any further investigation, not to have any further conversations, and i understand he asked this committee as well not to make the existence of their review of those tapes public, but at this point, i have no information as to whether there's anything usable on those tapes. >> can you confirm to the committee today -- we have been told, obviously, about lerner's hard drive failure, then ways

and means have identified as many as seven or eight additional individuals who are relevant to the investigation whose hard drives also crashed during this period. now based on testimony from mr. kane, it could be as many as 18 or 19 different hard drives that have crashed, that would be relevant. so can you definitively state to this committee the number of hard drives from relevant individuals that crashed during the period in question? >> i can tell you what i know at this time, which is in the first six months of 2011, over 300 hard drive crashes occurred, and there were over 5,000 reports of hardware problem. the first six months of this year, for example, over 2,000 hard drives have crashed. >> i understand, but that's your whole agency. we're talking about people who happen to be relevant in a relatively small universe of people and the number of hard drive crashes seem to be getting higher the more we investigate. >> right, and in may, i asked our people once we knew that

there was an issue on ms. lerner's crash, i asked for what the industry standards were for hard drive crashes, was advised 3% to 5% of hard drives crash. i asked them for a review of the question you're asked of custodians, how many of those 83 had hard drive crashes. we reported on the monday, june 16th, to the ways and means committee in a staff interview that we knew there were probably at least six or seven. the next morning, promptly on the receipt of that information, the ways and means committee issued what turned out to be an erroneous press release saying all those e-mails had been lost including the e-mails of nicole flax. it turned out in a further investigation it appears no e-mails from ms. flax were lost because the hard drav that crashed was not her office computer. i'm sorry, can i answer the question? >> the question was the number of hard drives crashes. i understand you mentioned the

ways and means investigations, but the numbers. where do we stand on the number of hard drive crashes? >> where we stand is thereafter, the ig was requested by congress to do an investigation, and the ig asked us not to do any further interviews or investigations so we have not pursued further what the additional implications are, how many hard drives crashes of custodians or what the implications are because the inspector general is investigating that very issue. i cannot give you a definitive answer at this point as to either how many custodians had crashes or if they did, how many lost e-mails because i would emphasize not every crash loses -- >> he put the upper limit at 20. there seems to be a contradiction there. my time is up. mr. chairman, thank you for indulging me. i yield back. >> thank the gentleman. >> i want to thank you for testifying before the committee today and for the third time of the month. when you testified on june 23rd, 2014 and july 9th, 2014, you

told us that the ig was investigating circumstances of ms. lerner's computer crash. on june 11th, 2014, you wrote to this committee reiterating that the ig is conducting an investigation into the loss of ms. lerner's e-mails and that as you previously testified, you would honor the inspector general george's request to prioritize his investigation. has the inspector general expressed concern to you about the release of non-public information about an ongoing ig investigation? >> when the inspector general first talked to me and asked us to give a priority to his investigation and not to do any further investigation or witness interviews ourselves, he explained to me that they were concerned that they did not want to muddy the waters. they wanted to have their ability to talk to witnesses and then go back and talk to them

again without anyone having conversations in between time. so they were very concerned that witnesses that they were interviewing in the investigation be allowed to proceed with the inspector general only. >> do you know when that was that you had that conversation with the inspector general? >> the conversation was shortly after they were asked by the finance committee and congress to make the investigation -- i can't remember which date was in mid-june. >> the ig has expressed similar concerns to our committee. for example, on july 2nd, 2014, committee staff held a conference call with the inspector general in which the ig described the investigation of lois lerner's hard drive as, quote, very active, open, and ongoing. end of quote. and asked our committee to refrain from publicly disclosing the non-public information regarding this ongoing investigation.

is the ig's investigation into this manner still active and ongoing to your knowledge? >> to my knowledge, it's still active and ongoing. >> would the ranking member yield for just a question. were majority staff members present at that briefing where the inspector general conveyed that information? >> yes. >> our staff says that they weren't, and if i -- you'll get your time plus extra if you would like, inspector general called our counsel yesterday. he happened to be in my office with mr. meadows, and said that they had talked to you but did not express any of the comments you made in your opening statement or frankly any of the comments that you're making now. >> why don't we have a meeting next week since we are having all of these irs hearings. >> i'm open to that. >> because we can go back and forth on this. i want to be very clear as to what was said.

so you know, when you're talking about he say, she say, it's better than we have them here, and we'll do that if you so choose, but i would be happy to. the ig has expressed similar concerns again to the committee. it's your understanding that the ig investigation is still ongoing? >> it is. as far as i know. >> so in spite of the inspector general's request on july 21st, chairman issa issued a press release based on the interview of irs deputy associate koernl, quote, new kwemedevelopments, e quote, have regarded uncertainty regarding the existence of back-up tapes. commissioner koskinen, is it your practice to release nonpublic information about an ongoing ig investigation? >> no. >> why not? >> because we made a commitment to the ig that we would give --

honor his priority, that we would not do anything that would interfere with his investigation, he would talk to anybody he wanted, they could look at any evidence they wanted, and we would not have an ongoing discussion with any of the witnesses because we did not want to interfere. >> mr. issa's pres release and statements from mr. kane and other witnesses undermined the partisan narrative. mr. kane told the committee that he was aware of a, quote, potential issue, end of quote, regarding the backup tapes. but he did not know any additional detail. when asked whether he had seen, quote, any evidence that any irs employee intentionally destroyed documents or e-mails to avoid their disclosure, end of quote, commissioner kane said, and i quote, i have not seen anything to that effect, end of quote. have you seen any evidence of obstruction by irs employees?

>> i have not. >> yesterday, the committee staff interviewed irs national director for legislative affairs leonard alsor. he told the committee staff that based on the information available at the time, your june 13th, 2014, letter to the senate finance committee stating that backup tapes from 2011 had been recycled was accurate. is that right? >> i don't know what he said, but i understand from the press release about mr. kane that he said the information we had and provided on june 13th was accurate and that's what everybody knew at the time. >> now, we were also told that earlier this month, he was made aware of an issue with a backup tape, but that he did not know if the backup tape from 2011 was from 2011 or whether it was

mislabeled. he said that even if the unrecycled backup tapes exist from 2011, the irs does not know whether they contain e-mails from ms. lerner, not previously produced to the committee. sitting here today, do you know any additional details regarding the backup tape issue that the ig is currently looking at? >> no, all i know is actually what mr. kane said, that at this point, nobody had any information as to what was on those tapes or whether they were relevant. >> and until the ig determines the facts regarding this backup tape issue, are you in a position to direct your earlier statement? >> no, my point has been that we're going to honor the ig's investigation. i look forward, as everybody does, to his completion, and we'll see what his facts are and what he determines happened

three years ago, and we'll respond accordingly. >> and you were asked earlier about computer crashes and you said that you were not aware of the folks who may have relevance to this investigation with regard -- concerning their crashes. would you normally have that kind of information? >> normally, if things had proceeded as might do, when i asked in may for the answers to this question, that is how many custodians had hard drive crashes in light of the fact the industry says they crash regularly, i had asked for a review of how many crashed and what the implications were. we had not completed that review when we provided our june report. and basically, we had that morning the following monday our i.t. people had been advised, i had not been advised, that you kn we knew there were six or seven custodians with hard drive crashes.

that was provided to the way and means committee. we have not been able to pursue if there were 6, 12, or 15 because once the ig started, we agreed we would not pursue those issues until they completed their investigation. >> now, just a last question. when the doj was here the other day, and this was -- you were asked about this a bit earlier. they talked about the fact that they had not gotten information about the crash back in april. so they got it in june, i think, like everybody else. why is that? >> when we -- in april, determined that in fact there had been a hard drive crash and some e-mails may have been lost, our next step was to in fact investigate how many e-mails did we actually have and could we find, and our plan and proposal was we would pull all of that information together, including information about custodians and

make a public presentation to the committees including a description of why it why it takes us so long in our archaic system to respond to a request for documents. we provided that in the june 2013 report as i testified earlier. we did that before the complete production of the e-mails when we originally intended because the senate finance committee asked us for an update on both the determination of the documents as well as the other investigations and searches we were doing. e we gave them that. we noted that we had had found nothing beyond what we had noted in our march letter with regard to the determination process, which was the subject of the investigations when they started. but we had not completed at that time a review of the custodians, nor had we completed until the end of june the production of tax writers of lois lerner's e-mails. so our plan was when we pulled it all together, we would be

able to explain what our process was shs the difficulties, what we had learned about lois lerner's e-mails, what we had learned about others and what we were able to determine. we were able to recover 24,000 lois lerner e-mails. we thought all of that was important information for people to have rather than simply saying if there's a problem with her computer and now we're investigating how many e-mails there were, which would have triggered a hearing six weeks earli earlier. we don't know everything we would like to know because we stopped asking people while the i.g. is doing their investigation, which we fully support. i have confidence that the i.g. is independent of us. he's got 15 people working on it according to the filings they made last friday. and we have told him personally whatever he needs, other documents, whatever people he wants to find, he can have access to and we'll stay out of the way. we have gone out of our way not

to talk to anyone in the potential he might want to interview about what happened three years ago when the hard drive crashed. >> i understand. >> russell george told you he did not want this committee in congress interviewing the same witnesses he was interviewing? >> no, he told me that he did not want us interviewing any witnesses -- >> that's fine, that's not the same as congress. why did we have to subpoena mr. kain? >> because the i.g. in our discussions said he did not want us to do anything to cause any of our employees to be interviewed before he had a chance -- >> for the record. the inspector general did not tell you that it would behihind his investigation? >> the inspector general told us if we started providing names it would interfere with their investigation and that's why -- i testified two weeks ago and said we were trying to cooperate with the i.g. and the chairman upd that which is why you don't release full transcripts.

>> you have conveyed to this committee that the inspector general department want this committee interviewing and he did not say to you. that's all i need. the gentleman from north carolina is recognized. >> thank you, mr. chairman. commissioner, i want to go back to one thing that the gentleman from maryland just asked you and make sure i heard you correctly. so if you know the testimony that you have given in congress is not correct, you're not going to correct that until we get a final report from the i.g., did i hear that correct? i thought that's what you said. >> what i said the testimony that i have given in the past was accurate. as of the time of what i knew. right now the question is do i know any more about tapes, and i don't other than the i.g. is investigating whether there are tapes and whether they are recoverable. >> if you find during the course of your normal business that

what you told congress, you will come immediately to us and let us know? >> i'm happy to correct. the chairman with regard -- >> so within 24 hours of you finding that you have given us incorrect testimony, you will find us and let us know. >> if i know it's incorrect and if the committee has any chairm questions, when the lawyer talked about records, he isn't me a letter and here's what she said, here's what you said, take a look at it and correct it. and i appreciated that. >> we appreciate the fact that you'll come back us to. i thought you were saying you were going to wait. >> no, i wouldn't know until the i.g. investigation is complete. what the answer is in terms of how many custodians. >> you won't know what they found. are you saying you're not talking to mr. cane or anybody? you're not talking to anybody in the irs about any of this? >> i'm not talking to any potential witnesses for the inspector general about what happened three years ago in the

investigation. >> when you read the reports d you take to him and say, hey, this doesn't jive with what i know? >> no, because mr. cane is someone i assume they will be talking to. >> did you talk to someone who talked to him? >> no, i read the release that this committee put out. >> so did you read the release of the ways and means press release that talked about a scratched hard drive? >> i saw that this morning. it was put out last night i understand. >> does that concern you that it was scratched and not cracked? it concerns me. does it concern you? if that's accurate? >> i haven't talked, i don't know the gentleman. i don't know what e he said. >> if it's accurate, would that concern you? let me tell you why it concerns me. and this is an hp laptop. to get to the hard drive, it is no easy task.

you've got multiple screws that have to be taken to get to it. then once you get to that, you actually have a hard drive inside that have zech more screws that have to be taken off to get to the hard drive in order for it to be scratched. would that concern you if it were scratched that there may be some other motive? >> it would be a piece of information that -- >> would it concern you, yes or no? >> i wouldn't know whether to be concerned or not. i don't know anything about, as i understand from the press release -- >> it concerns me and i'm going to ask my staff to see how long it would take to get to that hard drive to make -- if it indeed were scratched. >> i'm sure the i.g. is going to look into that and i'm sure he's talking to that witness. >> i hope so.

let me go back to the numbers. . earlier you said you had 2,000 hard drive crash this is year. >> yes. >> so let me ask you about numbers. you know i'm a numbers guy because i just did the numbers real quickly. if you look at your entire body of some 84,000 to 90,000 irs employees depending on, let's take that, that's a 2.2% failure rate. in the people that truly are involved in this in that secure of 80 people, if we had 16 to 18 hard drive crashes, why would the hard drive crash of that group of people be ten times greater than what you have throughout the agency? can you explain? what would be the probability of that happening? that still would be four times

greater than your overall average. can you explain that? >> i don't know what the details were. i do know when i asked for the industry statistics, once you get beyond the warranty period, it goes to 10 to 15%. >> lois lerner's laptop was a new laptop pfs. it was not an old one. the probability of her hard drive failing was at the lowest. according to industry statistics. does that surprise you? >> no. >> but it does surprise you that her hard drive failed? >> no, my understanding about it is from the industry is it's 2 to 5% depending on computers are regularly fail. >> if you have ten times that amount, would you say that's an anomaly. >> if you had ten times an amount, that would be an anomaly. >> i'm giving you the numbers. >> if you stipulate, you have

ten times more than the industry average, that would be an anomaly. >> thank you, i yield back. >> gentleman from pennsylvania. >> thank you, mr. chairman. mr. koskinen, the very first question you got was something to the effect my colleague put the question to you whether you were aware you were under investigation by the department of justice and this is a very public hearing. this is a very, very public. we invite members of the press to come to these hearings and these hearings are televised and i think it's important we don't lead the public down the wrong path from what the truth is here. mr. koskinen, have you ever received a target letter from the department of justice to say you're under investigation? has anyone, anyone told you verbally that you're under

investigation by the department of justice? >> no. >> has anyone, anyone said to you verbally anything that would hint to you that you're under investigation by the department of justice? >> no. >> has anyone, anyone said anything to you to hint to you that you might be the target of a justice department investigation some time in the future? >> no. >> thank you for that. another thing that you've been trying to get out and you were continually interrupted in your answers were comments about industry statistics about computer failures. i want to give you a chance now to make full sentences. >> in may when we had this problem and proceeding to find how many lerner e-mails we could have,