Under Secretary for International Affairs
David H. McCormick
Statement on Introduction of Clean Technology Fund Legislation

"The Treasury Department welcomes the Senate Foreign Relations Committee's introduction yesterday of bipartisan legislation authorizing $2 billion for international clean technology deployment, which would play an immediate role in reducing greenhouse gas emissions growth in the fastest growing developing countries. Secretary Paulson thanks Senators Biden, Lugar, Menendez, and Hagel for this important legislation, which supports the Administration's request for authorization of $2 billion in U.S. contributions to a new multilateral clean technology fund to combat the urgent challenge of global climate change. The Treasury Department looks forward to working with the authors to ensure the timely passage of effective legislation."

Statement by U.S. Treasury Secretary Henry M. Paulson, Jr.
On Industry Disclosure Initiative

Washington- Treasury Secretary Henry M. Paulson, Jr., made the following statement today regarding the American Securitization Forum's Project RESTART, which includes improved issuer disclosure to investors and credit rating agencies, particularly on mortgage loan-level information:

"With innovation in securitization and structured credit products has come varying degrees of complexity and other challenges, particularly related to securitization of mortgages. In March, the PWG determined that there was no single, simple solution to the problems that have emerged from the mortgage securitization process, yet market participants' behavior needed to change.

"Today's announcement by the American Securitization Forum is a meaningful commitment from market participants and is consistent with the March recommendations from the PWG. Improved disclosure is exactly what investors need to enhance their risk management practices and to give confidence to market participants. These types of actions should aid the return of the securitization market and help facilitate additional mortgage credit in the longer term."

Paulson Announces GSE Initiatives

Washington, DC-- Treasury Secretary Henry M. Paulson, Jr. issued the following statement:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Statement by Secretary Henry M. Paulson, Jr. on Fannie Mae and Freddie Mac

Washington, DC--Secretary Henry M. Paulson, Jr. made the following comment today on news stories about "contingency planning" at Treasury:

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.

"We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and with the companies. OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission."

July 9, 2008
HP-1073

Statement by Treasury Secretary Henry M. Paulson, Jr.
On Staff Changes in The Office of Domestic Finance

Washington- Treasury Secretary Henry M. Paulson, Jr. made the following statement today regarding the resignation of Under Secretary for Domestic Finance Robert K. Steel and the broader role that Assistant Secretary for Financial Markets Anthony W. Ryan will take on in the Department.

"Bob Steel has been a friend and colleague to me for more than 30 years. He has served the President and the public with ingenuity and dedication during extraordinary times in our financial markets. I know he will excel in his future endeavors," said Secretary Paulson.

Assistant Secretary for Financial Markets Anthony W. Ryan will take on a broader role managing Treasury's domestic finance and financial markets agenda. Assistant Secretary for Financial Institutions David Nason will continue to spearhead regulatory reform efforts and oversee financial institutions policy, including issues surrounding the government sponsored enterprises. Steven Shafran, who had 22 years of experience in finance before coming to Treasury, will take on a broader role in his current capacity as Senior Adviser to the Secretary. Assistant Secretary Kenneth Carfine will continue to oversee the government's fiscal operations, including managing federal financing needs and the government's cash flow. Deputy Assistant Secretary for Financial Institutions Policy Jeremiah Norton will take on additional financial institutions responsibilities.

"I have great confidence in the abilities of the Domestic Finance team at Treasury to adjust to this change and not miss a beat," said Secretary Paulson.

Under Secretary Steel was sworn in on October 10, 2006. Assistant Secretary Ryan joined the Treasury first as Senior Adviser to the Secretary in July 2006 and was sworn into his current position on December 18, 2006. Assistant Secretary Nason was first sworn in as Deputy Assistant Secretary for Financial Institutions Policy in October 2005; he was promoted to Assistant Secretary and sworn in on June 28, 2007. Assistant Secretary Carfine was sworn in on March 15, 2007 and has served the federal government for 35 years. Deputy Assistant Secretary Norton was named to his position on June 12, 2007. Steven Shafran joined the Treasury Department in February 2008 as a Senior Adviser to the Secretary.

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REPORTS

• Steel Resignation Letter (PDF)

Statement by U.S. Treasury Secretary Henry M. Paulson, Jr. On the SEC, Federal Reserve Memorandum of Understanding

Washington- Treasury Secretary Henry M. Paulson, Jr. made the following statement today regarding the memorandum of understanding on information sharing and cooperation between the Securities and Exchange Commission and the Federal Reserve.

"The MOU finalized between the SEC and the Federal Reserve is consistent with the long-term vision of Treasury's Blueprint for a Modernized Regulatory Structure and should help inform future decisions as our Congress considers how to modernize and improve our regulatory structure."

Under Secretary McCormick Statement
on World Bank Approval of Clean Technology Fund

"The United States welcomes the World Bank's decision today to establish a $5-$10 billion international clean technology fund that will reduce greenhouse gas emissions growth in the fastest growing developing countries by promoting low-carbon development.

"We have been working closely with the Bank's leadership, potential donor and recipient countries, as well as the environmental and business communities, to develop a Fund that effectively addresses the dual challenges of poverty and climate change.

"The President has requested from Congress $2 billion over the next three years for the Fund to support immediate action to help reduce greenhouse gas emissions in developing countries where they are growing the fastest through the deployment of commercially available clean technology."  

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June 26, 2008
HP-1060

Statement For the Record of the Senate Committee on Finance Hearing on International Tax Reform Held on June 26, 2008

Chairman Baucus, Ranking Member Grassley, and Members of the Finance Committee, the Office of Tax Policy of the United States Department of the Treasury is pleased to present these comments for the record, as well as the attached Treasury Department report entitled, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.

The global economy has changed markedly over the past half century, and so too has the U.S. role in that global economy. Trade and investment flow across borders in greater volume and with greater ease. As we look to the future, many factors, including education, immigration, and trade policies play an important role in the lives and living standards of U.S. workers and in the ability of U.S. companies to compete globally. By influencing incentives to acquire and use capital, the U.S. international tax regime, and U.S. business taxes more generally, also play an important role in economic decision making.

Increasingly, the ability of U.S. companies to grow and prosper depends on their ability to do business globally. In the 1960s, the decade during which many of our current tax rules regarding cross-border activities and investment were first enacted, international trade and investment flows were much less important than they are today to the U.S. economy and to U.S. companies. Thus, the United States was free to make decisions about its tax system based primarily on domestic considerations. Moreover, our trading partners generally followed the U.S. lead in tax policy.

Circumstances have changed since the 1960s. Globalization – the growing interdependence of countries resulting from increasing integration of trade, finance, investment, people, information, and ideas in one global marketplace – has resulted in increased cross-border trade and the establishment of production facilities and distribution networks around the globe. Businesses now operate more freely across borders, and business location and investment decisions are more sensitive to tax considerations than in the past.

As barriers to cross-border movement of capital and goods have been reduced, differences in nations' tax systems have become a greater factor in the success of global companies. Globalization has made it imprudent for the United States, or any other country, to enact tax rules that do not take into account what other countries are doing. Our major trading partners recognize this. Many have modified or plan to modify their business tax systems to improve their global competitiveness. For example, during the past two decades, many of our major trading partners have lowered their corporate tax rates, causing the United States to go from being a low statutory corporate tax-rate country to being a high statutory tax-rate country. Moreover, during the same period, many of the member countries of the Organisation for Economic Co-operation and Development (OECD) have changed how they tax the foreign earnings of their companies, increasingly moving toward systems that exempt from tax the active foreign earnings of their multinational companies.

As our major trading partners respond to the realities of the global economy, U.S. companies increasingly suffer a competitive disadvantage. The U.S. business tax system imposes a burden on U.S. companies and U.S. workers by raising the cost of investment in the United States and burdening U.S. companies as they compete with foreign companies in foreign markets. Business taxes play a key role in the economy because they influence the incentive to acquire and use capital – the plants, offices, equipment, and software that corporations employ to produce goods and services. In general, an economy with more capital is more productive and ultimately attains a higher standard of living than economies that have accumulated less capital. Workers gain when businesses have more capital and, correspondingly, workers stand to lose when the tax system leads businesses to invest less and have a smaller capital stock.

The current U.S. system for taxing multinational companies has been developed in a patchwork fashion, resulting in a web of tax rules that is unlikely to promote maximum economic efficiency. The United States cannot afford to be left behind as other nations modernize their business tax systems, including the taxation of foreign earnings. In general, inaction would make the United States a less attractive place in which to invest, innovate, and grow. As capital moves more freely across borders, and emerging countries begin to approach U.S. levels of education and training, some advantages that the United States currently has will erode. Americans deserve a tax system that is simple, fair, and pro-growth – in tune with the nation's dynamic economy.

The tax relief proposed by President Bush and enacted by Congress in the past few years has helped lay the foundation for considering ways to ensure that the U.S. tax system helps U.S. businesses and U.S. workers compete in a global economy. In 2005, the President established the President's Advisory Panel on Federal Tax Reform to identify the major problems with the current tax system and to provide recommendations on making the tax code simpler, fairer, and better suited to the modern economy. The Tax Panel's report recommended two options for comprehensive overhaul of our federal income tax system – the Growth and Investment Tax plan and the Simplified Income Tax plan. These approaches differ somewhat, but both would reduce taxes on business and capital income.

Last year Secretary Paulson, recognizing that an examination of our business tax system in the context of the global marketplace was overdue if the competitiveness of U.S. businesses and U.S. workers in a global economy is to be maintained, initiated a review of the nation's system for taxing businesses. On July 26, 2007, the Secretary hosted a conference on Business Taxation and Global Competitiveness, where distinguished business leaders and policy experts discussed how the current business tax system can be improved to make U.S. businesses more competitive in today's global economy. The conference highlighted the need for reform. The participants stressed that the U.S. business tax system has not kept pace with changes in the world economy. The conference participants expressed a conviction that in order for U.S. companies and U.S. workers to compete and thrive in today's global economic climate, the U.S. business tax system also must adapt to these changes.

Treasury Report on Business Taxation and Global Competitiveness

In December 2007, the Treasury Department released a comprehensive study addressing business taxation and global competitiveness as a follow-up to the July 2007 conference. This report, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21^st Century, examines how business taxation in the United States compares with that of the United States' major trading partners. It also outlines several broad approaches to business tax reform, including some approaches to taxing foreign earnings.

International Comparison of Business Taxation

Since 1980, the United States has gone from a high statutory corporate tax-rate country to a low-rate country, following the Tax Reform Act of 1986, and, based on some measures, back again to a high-rate country today. During the past two decades, many of our major trading partners have lowered their corporate tax rates, some dramatically. Within the OECD, the United States now has the second highest statutory corporate tax rate at 39 percent (including state corporate taxes) compared with the average OECD statutory tax rate of 31 percent.

Statutory corporate income tax rates are the most common measure of the tax burden imposed on corporations. The evolution of OECD corporate tax rates over the past two decades suggests that corporate tax rate setting is an interactive process subject to the pressures of international competition. In the early 1980s, the United States had a relatively high statutory corporate tax rate of nearly 50 percent (i.e., combined federal and average state rates). The Tax Reform Act of 1986 lowered the U.S. federal statutory corporate tax rate to 34 percent, and the U.S. combined statutory corporate tax rate fell to 38 percent, well below the then-prevailing OECD corporate tax rates. OECD rates trended steadily down over the ensuing decade, while the top U.S. federal statutory corporate tax rate increased to 35 percent in 1993. The average and median OECD statutory corporate tax rates fell below the U.S. corporate tax rate in the 1990s and have continued to decline. Now, the United States is once again a high corporate tax rate country.

The decline in OECD corporate tax rates appears likely to continue. Other countries are reducing their corporate tax rates, leaving the United States further behind. Effective this year, Canada reduced its corporate income tax rate from 21 percent to 19.5 percent, lowering its combined central and local corporate rate to approximately 33 percent. Canada has indicated also that it will reduce its central corporate tax rate to 15 percent by 2012. Germany reduced its total corporate tax rate from 38 percent to 30 percent, Italy reduced its corporate tax rate from 33 percent to 27.5 percent, and the United Kingdom reduced its corporate tax rate from 30 percent to 28 percent. Smaller countries among the OECD also have been particularly aggressive in cutting their corporate tax rates, with Iceland, Ireland, Hungary, Poland, the Slovak Republic, Greece, Korea, and Luxembourg reducing their corporate tax rates significantly in recent years.

Of course, statutory corporate tax rates provide an incomplete picture of the corporate tax burden because they reflect neither the corporate tax base nor investor-level taxes. Depreciation allowances – the rate at which capital investment costs may be deducted from taxable income over time – are a key determinant of the corporate tax base and an important factor distinguishing the statutory corporate tax rate from the effective marginal corporate tax rate.The difference between the statutory corporate tax rate and the effective marginal corporate tax rate varies depending on the source of finance – debt or equity – because interest is generally deductible, but dividends are not.The required rate of return for debt-financed investment, therefore, is lower than the required return for equity-financed investment. Most OECD countries offer accelerated depreciation for equipment investment. However, in contrast to its high statutory corporate tax rate relative to other OECD countries, the United States has relatively generous depreciation allowances for equipment. In the OECD, only Greece and Italy have more generous depreciation allowances.

Worldwide vs. Territorial Tax Systems for Taxing Foreign Earnings

The increased globalization of U.S. businesses and the decline in corporate tax rates abroad have focused attention on the U.S. corporate tax rules in the international context.

Under current law, corporations formed in the United States are subject to tax on their worldwide income, meaning that they are subject to immediate U.S. tax on all of their direct earnings, whether earned in the United States or abroad. However, U.S. corporations with foreign subsidiaries generally are not taxed on the foreign subsidiaries' active business income (such as from manufacturing operations) until the income is repatriated. That is, until that active business income is returned to the United States, typically through a dividend to the parent corporation, U.S. tax is deferred. Not all foreign subsidiary income is subject to deferral, however. For example, U.S. tax is not deferred on passive or easily moveable income of foreign subsidiaries of U.S. corporations, under the anti-deferral rules in subpart F of the Internal Revenue Code.

To prevent double taxation of income by both a foreign country and the United

States, a U.S. corporation is generally allowed a foreign tax credit for foreign taxes paid by it. In addition, a U.S. corporation is generally allowed a foreign tax credit for foreign taxes paid by a foreign corporation, of which it owns 10 percent or more of the voting stock, on earnings the foreign corporation repatriates. The foreign tax credit is claimed by a taxpayer on its U.S. tax return, and reduces U.S. tax liability on foreign source income.

The major alternative to a worldwide system is a territorial system in which the home country exempts all or a portion of the foreign earnings from home-country taxation.The U.S. system was developed at a time when the United States was the primary source of capital investment and dominated world markets. The global landscape has shifted considerably over the past several decades, with other countries challenging the U.S. position of economic pre-eminence.

Although a predominantly worldwide approach to the taxation of cross-border income was once prevalent, it is now used by less than one half of OECD countries. Instead, many of these countries now use predominantly territorial tax systems. Furthermore, the United Kingdom and Japan, large U.S. trading partners that still have a worldwide system of taxation, are both studying the adoption of a more territorial tax system.

Approaches to Business Tax Reform

Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century, attached to this statement, seeks to advance the dialogue on the key linkages between tax policy and American competitiveness in the global economy. To that end, the study outlines specific business tax areas that can be addressed, including the taxation of cross-border corporate income. Shaped by the discussion at the Treasury Department's July 2007 conference on competitiveness and the evolution of the global marketplace, the report discusses three bold approaches for business tax reform: (1) replacing business income taxes with a business activities tax (BAT), a type of consumption tax, (2) eliminating special business tax provisions coupled with a business tax rate reduction, and (3) eliminating special business tax provisions coupled with faster write-off of business investment, potentially combined with the exemption of active foreign earnings. The study also discusses implementing specific changes to our current system of taxing business income that focus on important structural problems within our business tax system. As noted in the study, these changes could take place within or outside the context of broad tax reform.

Rather than present a particular recommendation, the report examines the strengths and weaknesses of the various approaches. The various policy ideas discussed in the report represent just some of the approaches that could be considered. The report does not advocate any specific recommendation nor does it call for or advance any legislative package or regulatory changes. The report discusses the issues posed in this statement for the record in greater detail.

Each of the approaches discussed in the report would improve the competitiveness of the United States compared to our current system for taxing U.S. business. Nevertheless, the approaches differ in a number of dimensions. The BAT described in Chapter II of the report would possibly provide the largest benefit in terms of its effect on expanding the size of the economy – ultimately increasing output (measured in terms of Gross Domestic Product, or GDP) by roughly 2.0 percent to 2.5 percent – but raises a number of serious implementation and administrative issues.

The second and third approaches focus on fundamental reform of the existing system for taxing business income by broadening the tax base, and either lowering the business tax rate or providing a faster write-off of the cost of investment. These approaches would replace a vast array of special tax provisions, which are sometimes highly targeted to encourage particular economic activity, with broad tax relief for U.S. businesses.

These approaches also examine the possibility of the adoption of a territorial tax system in the United States. The report outlines a few types of territorial tax systems. It describes a type of territorial tax system that exempts dividends from abroad from home-country tax and that is generally referred to as a "dividend exemption" system. The report describes a "basic dividend exemption system." It also describes a few alternative territorial types of tax systems.

The present U.S. system for taxing the foreign source income of U.S. multinational corporations has several undesirable effects. The present system distorts economic behavior. For example, corporations may forgo U.S. investment opportunities to avoid the imposition of U.S. taxes. The current system also distorts the choice of where to exploit intangible assets, such as patents, and the choice of where to locate income and expenses for tax purposes. Finally, the current system is very complex, and a dividend exemption system would reduce some of the complexity related to the taxation of repatriated earnings.

Moving to a type of territorial system, therefore, could have several advantages as compared to present law. More than half of OECD countries use some type of dividend exemption system, and a dividend exemption system could reduce some of the economic distortions imposed by the current U.S. tax system.

However, there may be drawbacks to the adoption of a dividend exemption system in the United States. Various complex provisions would need to remain in the Internal Revenue Code, including those related to non-exempt income as well as income inclusions resulting under the current subpart F rules. Moreover, rules regarding the pricing of transactions between U.S. corporations and their foreign affiliates (the so-called "transfer pricing" rules) would come under increased pressure, as the move to a territorial system would increase the incentive to shift income and assets to low-taxed offshore jurisdictions. However, extending the exemption system to include additional forms of business income (such as active royalties) could relieve some of that pressure and in addition allow for further simplification, but could raise other issues and concerns.

Last, the study also discusses implementing specific changes to our current system of taxing business income with a focus on important structural problems within the current system, including the taxation of certain foreign earnings. The international tax issues considered in the report include targeted reforms to the anti-deferral rules of subpart F and simplifying the U.S. tax rules for taxing the foreign earnings of small businesses.

Conclusion

The U.S. business tax system must help U.S. companies and workers compete globally by taking into account the increasingly integrated global economy. With a view to maintaining our competitiveness, U.S. tax policy must respond to and anticipate changes in the global marketplace. The current U.S. system is far from optimal, and we cannot afford to be left behind as other nations modernize their business tax systems, including the taxation of foreign earnings. The U.S. system for taxing businesses needs to be reevaluated to consider how it can be improved to attract and generate the investment and innovation necessary to advance the living standards of all Americans. The Administration looks forward to working with the Finance Committee on this important topic.

Attachment:

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LINKS

• Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century