Cross-posted from Alliance for the Defence of Canadian Sovereignty
#Americansabroad and U.S. corporations have a lot in common bc they are both taxed on earnings outside the U.S. http://t.co/AOeUqIQ76T
— Citizenship Lawyer (@ExpatriationLaw) October 9, 2014
In a guest post published in Forbes Magazine, I argued that the tax treatment of U.S. citizens abroad is similar to to the tax treatment of U.S. corporations abroad (although the treatment of corporations is much less destructive). The tax treatment of both corporations and U.S. citizens abroad is based on the same destructive assumption that the U.S. can and should tax profits and incomes earned in other countries. The United States regards both it corporations and its DNA citizens as “citizens”. This suggests that the case for the tax reform in relation to U.S. citizens abroad, can be linked to the case for tax reform of U.S. corporations doing business abroad.
I concluded with:
The question is NOT whether U.S. corporate tax rates should be lowered (although they obviously should) to combat inversions, the question is whether the U.S. should:
Continue its destructive and anti-competitive policies of being the only country in the world which attempts to levy taxes on profits earned in other countries by people (in the case of Americans abroad) who do NOT live in the U.S.; or
Join the rest of the world by taxing ONLY the profits and property that are within its jurisdiction. This is called “territorial taxation”.The answer to this question depends on whether the U.S. believes that it is PART of the world or whether the U.S. believes that it is THE world.
In previous posts, I have emphasized the importance of making the case for tax reform directly to the Senate Finance Committee. In my next post, I intend to provide a framework for how this may be most effectively organized.
On January 23, 2015, Senator Orrin Hatch addressed the Brookings Institution on the need for tax reform to address the problem of corporate inversions.
Hatch of @GOPSenFinance makes case for territorial tax to combat corporate inversions http://t.co/kzI4MxGZFY – Why not for #Americansabroad?
— Citizenship Lawyer (@ExpatriationLaw) January 25, 2015
Senator Hatch is clearly and convincingly making the case for a move to “territorial taxation” for corporations. The same rationale applies to “territorial taxation” for individuals. “Territorial taxation” for individuals is:
Residence-based taxation!
Read Senator Hatch’s speech. In fact, read it more than once.
Today, Senate Finance Committee Chairman Orrin Hatch (R-Utah) delivered the following remarks at conference on corporate inversions hosted by the Brookings Institution:
I’m very happy to be here today to talk about the problem of inversions and what I believe is the solution.
Let me start with the basics.
I don’t think it will surprise anyone here to learn that I do not believe the best solution to the inversion problem is government regulations. And, the solution is not building a wall around U.S. companies to keep them from moving offshore.
The best solution to this problem is, in my view, tax reform.
Tax reform, if it’s done right, will help grow our economy, create jobs in the U.S., and discourage businesses from leaving our shores and invite businesses to set up and locate here.
Though there are disagreements on the details, there is bipartisan support for tax reform in Congress. Indeed, members of both parties have expressed their support for a tax overhaul. And, I believe there is real momentum to get something done on tax reform this year, if we remain committed.
And, believe me, I’m committed.
As the new Chairman of the Senate Finance Committee, I have made reforming our nation’s broken tax code my highest legislative priority.
I’ll have more to say about the specifics of our tax reform efforts in a few minutes. But, first, I want to lay some groundwork – I want to make the case for why tax reform is the only real, lasting solution to the inversion problem.
When we talk about inversions, particularly in recent decades, history appears to repeat itself over and over.
There is a cycle when it comes to inversions, and it usually happens in four steps.
Step 1 – A few high profile-inversions take place and people become concerned about the possibility of a trend.
Step 2 – The government takes steps to shut these inversions down.
Step 3 – Inversions are temporarily halted, but the underlying economic conditions remain the same.
Step 4 – Companies find ways around whatever solution the government puts in place and another wave of inversions takes place.
We need to learn from this history.
Let me give you a few examples.
In 1994, a U.S. corporation called Helen of Troy, a company that sold haircare and beauty products, inverted. Maybe Helen of Troy was the corporation that eventually launched a thousand inversions.
The U.S. Treasury reacted to the Helen of Troy transaction by issuing regulations making it clear that, when a U.S. corporation inverts, it triggers a shareholder-level capital gains tax.
Given the increases in stock prices in the mid-to-late 1990s, attributable largely to the dot-com boom, many shareholders had a low-basis in their shares, but yet these shares had a high value. So, at that time, the idea of an inversion triggering a significant capital gains tax on this built-in gain was a serious deterrent against a company inverting in the first place.
But then, in the early 2000s, the dot-com bubble burst.
At that point, shareholders didn’t have nearly the built-in gains that had been so typical just a couple of years earlier. With share prices depressed, U.S. corporations realized that it was, once again, a good time to invert.
And so, in the early 2000s, there was another wave of inversions.
This time, Congress acted to stem the tide, enacting bipartisan legislation to establish Section 7874 of the U.S. Tax Code, which imposed another significant hurdle for inversions. Under Section 7874, a U.S. corporation cannot engage in what is called a “naked inversion” where they invert single-handedly without still being considered a U.S. corporation for tax purposes.
And, with the enactment of this provision, inversions slowed down once again.
Obviously, that decline wasn’t permanent. If it had been, none of you would be attending this conference to talk about inversions.
There were a number of factors that led to the most recent wave of inversions which reached a peak last year.
One of those factors was likely the collapse in stock prices in 2008 and 2009. With this collapse in share prices, there was a decline in the built-in gains inherent in an inversion transaction and, therefore, a decline in the tax penalties associated with them. This may have re-invigorated interest in inversions while stock-prices were depressed.
Although stock prices largely recovered over the next few years, US multinationals had increasing amounts of offshore earnings resulting in significant amounts of trapped cash. This also re-invigorated interest in inversions.
So, highly intelligent international tax planners – like the people in this room right now – gave yet more thought about ways around Section 7874. I don’t know exactly how it happened, but this is how I picture it:
There was a conversation sometime around 2010 where some clever tax lawyers, relaxing in the South of France, over bottles of Bordeaux, conceived of a new wave of inversions.
Now, as a good Mormon boy, I don’t drink. That’s probably why I missed out on all the filthy lucre that comes with being an international tax planner.
Anyway, in this Bordeaux-infused brainstorming session, these lawyers conceived of a way to pair U.S. corporations with smaller, but still sizable, foreign corporations in order to get around the Section 7874 rules.
Prodded on by these clever lawyers, global investment banks took on the role of match-maker – setting up U.S. corporations with foreign corporations.
And, the rest, as they say, is history.
The last factor in this wave of inversions that I will mention – and the one most relevant to my job – was likely the realization that U.S. international tax reform wasn’t going to happen soon enough. Sure, there were Members of Congress committed to the job, even some who were putting out their own tax reform proposals and frameworks. But, there wasn’t any presidential leadership or engagement.
And, as a result, the failures of our tax system seemed more and more permanent, and the pressure to invert became greater and greater.
It appears that all of these pressures reached the tipping point with a wave of 2014 inversions.
This, of course, led to the September 2014 Treasury Notice. The Notice has certainly stymied inversions, but, if history has taught us anything, we can count on seeing more.
The pace of inversions could in fact pick up again. And, if we are unable to fix our tax code once and for all, it almost certainly will.
For those who believe in a worldwide tax system, you probably saw the September 2014 Treasury Notice as a good thing. That Notice certainly made it harder to escape the worldwide tax net. For my part, I don’t believe in a worldwide tax system. I believe we need to go a different direction when it comes to taxing international income and move from our worldwide-leaning international tax system more toward territoriality.
If we’re serious about preventing inversions and about keeping American companies from picking up and moving their legal headquarters elsewhere, we need to get to the root of the problem. Anything else that we do – any tinkering along the regulatory edges – will only address the symptoms. In the end, it will be like using a Band-Aid to treat a broken arm.
Despite what some, including the President and high-ranking officials in his administration, have claimed, companies weren’t leaving the U.S. because of a lack of “economic patriotism.”
For the record, I’m no fan of inversions. But, I’m even less of a fan of the rhetoric and attacks that surrounded this issue in the last year. If you ask me, it is national leaders that use their position to demonize our own companies that are lacking in “economic patriotism,” not the companies who are simply trying to do right by their shareholders and firms trying to compete, produce, and hire workers to tap into markets and customers in growing economies.
But, I digress.
I see these inversions as symptomatic of a dysfunctional tax code that is taxing at too high a rate and is attempting to tax worldwide income. What we need is a tax system that will encourage investment and growth in the U.S. For that, we need tax reform.
If you’ve been around Washington over the last few years, chances are, you’ve already heard me talk about tax reform. I’ve been making the case for reform on the Senate floor, in the Finance Committee, in public appearances, in written materials, and in private conversations. And, I’m going to continue to do so.
I want to pose a question to the audience. Raise your hand if you heard about the tax reform book I released in December.
Now, raise your hand if you read the whole thing.
It looks like some of you have some homework to do.
In that book and elsewhere, I’ve laid out seven principles that I believe should guide our tax reform efforts.
I won’t go into detail on each principle today. Instead, I’ll just list them – and encourage you all, once again, to read the book. Don’t wait to see the movie.
The seven principles are: 1) Economic Growth; 2) Fairness; 3) Simplicity; 4) Permanence; 5) American Competitiveness; 6) Promoting Savings and Investment; and 7) Revenue Neutrality.
Not all of these principles directly relate to the problem of inversions. But, some of them do. The one that relates the most is American Competitiveness.
Put simply, we need to make American a better place to do business and put our job creators on equal footing with their foreign competitors. To do that, we need to lower corporate tax rates and transition toward a territorial tax system.
That is what is being done in the rest of the industrialized world. That, more than anything else, is what makes some of these foreign countries – particularly countries like Ireland and the U.K. – more attractive destinations for American companies seeking to invert.
There is a lot of agreement on bringing down the corporate rate. Both Republicans and Democrats have endorsed that general idea as the basis for reforming our business tax system. Unfortunately, there continues to be widespread disagreement on getting rid of our current worldwide tax system.
Most of my Republican colleagues want a territorial tax system. Some open-minded Democrats are sympathetic to it – especially if they really want to stem the pressure to invert. But, as of yet, we haven’t gotten significant buy-in from a large number of Democrats on this idea.
I hope that will change. And, I think it will.
After all, it only makes sense. Like I said, the rest of the world is already moving in that direction. If we want to compete, we’re going to have to follow suit.
What we mean by a territorial tax system is not taxing foreign-source business income, but, at the same time, making sure we do tax US-source income, accurately measured. Under such a system, we would continue to tax domestic source income of U.S. multinationals, but the earnings they make offshore would not be subject to U.S. tax.
Of course, I don’t believe a territorial system will be a magic elixir. There will likely still be pressure to invert even if we make that change. But, this much needed transition is the first and a very important step we can take to stem any future inversion waves.
Once we have agreement on the overall idea of a territorial system, we can talk about other ideas that will further prevent erosion of our tax base. But, in all discussions, we must – and I can’t stress this enough – we MUST always be looking at our international taxation system with an eye toward improving our competitiveness.
We cannot be competitive with our current treatment of taxation of foreign-source business income and our current tax rates. Our corporate tax rate is the highest in the world, and proposals for reform have envisioned rates that are not even at or below the average of OECD countries. Maybe we won’t have the lowest rates in the world, but we should at least be able to not have the highest.
As most of you know, the Senate Finance Committee is already fully engaged in a very real tax reform effort. We’ve created five working groups that will look at all the areas of our tax system with an eye toward producing recommendations for a comprehensive tax reform bill.
My goal is to introduce such a bill and mark it up in the committee later this year.
As I said earlier this week, this is not an exercise. This isn’t just for show. I’m not in this just to introduce a proposal or two and move on.
My only goal when it comes to tax reform is to make new law. And, with the help of all my great colleagues on the Finance Committee – Ranking Member Wyden in particular – that’s just what we’re going to do.
I hope we can learn from our history of inversions. I hope we can go after the root causes of this problem rather than merely treating the symptoms.
Once again, the solution to this problem is tax reform.
I want to once again thank Brookings for having me here today. And, I want to thank all of you for taking the time to listen.
God bless you all.
I predicted that with Senator Hatch at the helm, that tax reform would move quickly. We are at an important moment. I believe that we the the opportunity to educate the Senate Finance Committee on the realties of life as “U.S. Person Abroad”.
“The president and high-ranking officials” are really being attacked by him- basically for incompetence!
Wow.
I think that if corporations will be taxed territorially in the future- if they can get those opposed to swallow what seems for them to be a very bitter pill – then the rest of what one hopes for will fall into place, and America will do what the rest of the world is doing – namely RBT. Maybe it goes hand in hand with understanding the principle wrong in CBT.
Just hope that Congress now takes action to get it on Obama’s desk – he will veto it – but it will raise a stink.
We shall see. Hopeful, but we shall see in the fullness of time.
I suggest that folks continue to bombard Sens Hatch, Rand and the rest (and the Representatives in the House) with all the reasons why CBT, FATCA, a broken tax system and excessive arrogance are severe obstacles to prosperity in the US (and elsewhere) and tools of enslavement.
Actually rbt for people is the horse before the cart
I think rbt for corporations first is the cart before the horse
I’m not sure if the Pres would veto tax reform that embraces territorial taxation. He has proposed a limited territorial system that wouldn’t tax profits earned in high tax jurisdictions such as Europe and Canada, but retain the taxation of US persons. As Brockers, our strongest argument with homelanders is our tax competitiveness. Most won’t care about the plight of the expat, but the notion that a draconian tax code is inhibiting would likely resonate. Senator Hatch’s statements and the recent SFC report have given me some hope that change is coming.
Why do I have the sinking feeling that we’re going to be forgotten once again? This speech by Sen. Hatch is strictly about tax relief for corporations. Does he mean a territorial taxation system across the boards or just territorial taxation for corporations? Everything I read here seems to point to the latter. I am very happy that Sen. Hatch is bringing up the subject but he carefully qualifies what he is talking about by the use of such as phrases as “reforming our business tax system” and “What we mean by a territorial tax system is not taxing foreign-source business income ….” . Well, what about *our* pension income and *our* mutual fund earnings and *our* income from “foreign” health benefits, registered savings funds, etc., etc.? Are we the proverbial chopped liver?
Everything he says in this speech is so, so true, but it is equally true for individuals. Not once are individuals mentioned in his hopes for tax reform. All I can hope is that this statement appearing about midway through his speech is as all-encompassing as it sounds: “For my part, I don’t believe in a worldwide tax system. I believe we need to go a different direction when it comes to taxing international income and move from our worldwide-leaning international tax system more toward territoriality.” If he means this for *everybody* and not just for corporations, then “amen”. Anything less will just be another partial fix.
@TheNewJerseyDevil
Inhibiting what though? I can see businesses caring about the effects of CBT because wealthier immigrants will start to give the U.S. a miss or only go for short periods., but even then some homelanders are going to like that there is less competition. When the number of overseas U.S. citizens crashes, will they care or think good riddance to bad rubbish?
This argument will only change when a number of situations take place:
1. Inverted companies start selling in Yuan (ditching the US dollar and causing embarrassment to the US Congress).
2. When it becomes apparent that as the BRICs set up competing infrastructure against the dollar, the dollar will be just one in 3 powerful currencies in the world (USD, Yuan, Euro). There will be no advantage in trading in US dollars solely because your customers are willing to take any of the other two because they are as readily accepted by other countries.
The US Congress will only change when it feels enough pain, and we’re not there yet. Hatch is an exception to the rule. DC politicians like Levin and Schumer live in the past and don’t see the world is changing right around their feet.
I am looking forward to the suggestions John will make in his next post so that we can organize well, given this sounds like it is going to move fairly quickly.
Thought Sen Hatch’s reference to “clever international tax lawyers at a Bordeaux-infused brainstorming session” was funny and likely, spot on. It sounds like Hatch has observed the pattern of how the corporations continue to get around the laws/roadblocks congress/Treasury has put up before. That suggests to me he has some pretty good ideas about what to avoid in the new measures. And he clearly has some simple ideas to start with in terms of positive suggestions; lower the rates and move to RBT. He said he “doesn’t believe in worldwide taxation.” It would be completely inconsistent to not apply one thing for corporations (one kind of taxpayer) and another to a different kind of taxpayer (individuals). I believe him when he says “tax reform is his highest legislative priority.”
I like his statement regarding not being a fan of the “rhetoric and attacks…,” Huge problems for us. If we can get them to see facts rather than the endless, thoughtless garbage that is generally applied to our situation, perhaps they can shift.
In terms of those 7 principles as the basis of sound tax policy, off the top of my head, I bet we can make a case for at least some. And I will add one that is usually included when discussing the qualitative characteristics of tax systems, “Balance between Sectors.” While this usually means insuring that no type of business or individual be asked to assume a disproportionate share of the tax burden, it almost certainly means to apply the same type of taxation system to its taxpayers.
1)Economic Growth
2)Fairness
Esp when norm is foreign accounts (legitimate)
deductions do not exist in the other countries
Obamacare tax as well as AMT due to MFS/”alien”
spouses
3) Simplicity
and penalties
Something we are not eligible for
4) Permanence
5) American Competitiveness
6) Promoting Savings and Investment
7) Revenue Neutrality
We have nothing to lose by trying to influence the Committee. I don’t know about you but if corporations manage to get RBT and we do nothing, I for one, would feel miserable and regretful for not having tried to get the same for us, our kids, and future generations.
@Tricia,
Thanks for introducing those 7 principles of sound tax policy.
I could add to #2 Fairness, the fact that as the TAS has noted, FBAR and FATCA form and reporting penalties are layered – and that tax and compliance experts noted that there was substantial chance of inadvertent errors due to the differences in what and how the information and accts each of those forms requires. And US homeland children and their families are not forced to file reports on their local legal birthday and education savings accts with an agency whose mandate is to track criminals – the Financial Crimes Enforcement Network (FINCEN).
and #6
Promoting Savings and Investment
It is grossly punitive to encourage those inside the US to take advantage of deliberate tax advantaged accts to save for children’s post-secondary education, and now, for disability (http://www.autismspeaks.org/news/news-item/able-act-helps-give-new-choices-individuals-disabilities , but to not only disallow that for those outside the US (ex. RESPs and RDSPs), but to burden and punish them as ‘foreign trusts’ with the layers of reporting and penalty regimes of the 3520, 3520A, FBAR, etc. (ex. http://www.rdsp.com/2014/03/10/rdsps-and-fatca-warning-to-people-with-disabilities-with-any-connection-to-the-u-s/ , and http://www.collinsbarrow.com/en/cbn/publications/resp-and-tfsa-accounts-for-u.s.-citizens ).
Perfectly possible to have territorial taxation for corporations while retaining CBT for humans. In fact, some sitting Republicans have effectively endorsed that idea already:
http://isaacbrocksociety.ca/2012/11/18/homelanders-propose-raising-taxes-on-us-persons-abroad-to-pay-for-territorial-taxation/
http://isaacbrocksociety.ca/2013/02/05/yet-another-attempt-to-kill-the-foreign-earned-income-exclusion-in-the-name-of-territorial-taxation/
Millions of Americans living within the territory of the USA not only want to dump the citizenship based taxation, but want to dump the entire tax code. Just about the time we get a politicians convinced we want the FairTax, he or she goes to D.C. and finds out how they get so much money to spend, keeping a job where they have less than a 10% job approval rating.
Lobbyists start on them the first day. They come with a check in hand, ”for your next campaign fund” and magically they forget they promised to dump the code and pass the FairTax and it stays that way until just before they decide not to run any more and they again become ”representatives of the people” again and are for the FairTax again.
The only way we will ever get the FairTax as the financing method of the US Government is to have enough members of The Americans For Fair Taxation (the FairTax parent org) and enough money to defeat anyone we target as being against us. The Membership is only $5.00 a year. so all you expats can have a voice where you have none now, join us. Join and congress will be afraid of us, as they are the NRA.
1. Note that he always mentions foreign-source business income. This means “active” income such as sales and profits from outside the US. But investment income, such as interest and capital gains, received by US corporations, would still be taxed on a worldwide basis. I realized this when I read the actual bill released by Dave Camp last year. However, other developed countries often mentioned to have “territorial” taxation actually have the same system, where they exempt foreign “active” income only.
2. US corporations are not comparable to Americans abroad, but to US residents. People have citizenship and residence, but corporations only have a place of incorporation, which is parallel to residence. An exemption of foreign “active” income of US corporations would be similar to an exemption of foreign “earned” income (salaries) of US residents who work abroad temporarily, like the FEIE (without the requirement that the person reside abroad). What we are asking with RBT is not an exemption, or even a redefinition of income, but a redefinition of taxpayer. If “territorial” taxation is adopted for corporations, RBT for individuals should be certainly adopted as well, but not because the two are comparable, but because the case of individuals is worse, as the nexus to the country is even weaker.
3. Dave Camp’s bill proposes an exemption of 95% of foreign “active” income of US corporations. I can’t understand why he didn’t make it 100% already, and the bill is long and complex, with many requirements and restrictions. It certainly does not simplify the tax code. If this is how they do tax reform, I’m concerned that they will try to implement RBT similarly, with a complicated “special provision” for Americans abroad with a bunch of rules and exceptions, including an exit tax. If I have the chance to talk to Congress again, I will insist that they do a decent job and actually exterminate the words “citizen” and “alien” that infest the tax code, as I already did in my draft. Americans abroad should not be mentioned at all.
4. Orrin Hatch voted for a resolution in 2012 (sponsored by Rand Paul, Mike Lee and Jim DeMint) calling for territorial taxation for corporations and individuals. It’s extremely unlikely that Congress would approve this (exempting foreign income of US residents as well), but I think this shows that he agrees with the idea, at least in principle. Thus I think that he agrees with RBT. However, I don’t expect him, or any other politician, to mention CBT/RBT in public at all, because it’s a very minor issue compared to the rest of tax reform. If they implement RBT, they will do it in silence.
@Tricia
Very insightful post…and everyone, don’t forget that Sen. Mike Lee is the junior senator from Utah. The same Mike Lee that spoke so supportively to expats in Paris awhile back. One would hope that these two guys meet regularly to discuss a range of issues, including tax reform.
@badger
I stuck the FBAR/8938 in “Simplicity,
I couldn’t decide, looking at it from the SFC view, whether “Promoting Savings and Investment” would “count” if you will bc if they allowed RBT, they probably would’t give a damn about whether we could save or not……..
@Lake Superior guy
Very kind of you but I have only cross-posted this from the ADCS-ADSC WordPress site. The writing is all John Richardson’s.
Utah, yes, that is very portentous and hopefully the sort of influence that will roll right over all the mental wragling about what is what, pre-guessing what can and cannot be. Nothing is more important than the human element. There are some very good signs….
If lobbyists come in with check in hand “for your campaign fund” then I wonder how many politicians take that money and place it in a tax haven like Delaware of Wyoming? Because that sure would explain why nobody votes to crack that nut of tax evasion.
How unfair. How corrupt the system is.
As Eric says, it is perfectly possible to change things for corporations but not individuals.
I also think it is perfectly possible to continue CBT with a new tax code.
A major problem is lobbying. While some efforts are being made, and perhaps even some progress has been made, there is no way we will progress without lobbying.
Daydream: if CAD300000 can be raised here, imagine if 3 million expats actively lobbied, giving $50-100 each per year…
@Shadow Raider
Thank you for the continued clarity you bring to the situation and for all the work you have been doing on these issues.
You wrote:
“Dave Camp’s bill proposes an exemption of 95% of foreign “active” income of US corporations. I can’t understand why he didn’t make it 100%….” — Perhaps just to keep the hooks in just to remind them that they can change back whenever they want.
You also wrote:
“If they implement RBT, they will do it in silence.” — You are probably right about this, provided they ever get past the “if.”
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Shadow Raider: I agree 100% with everything you said. I hope you have the opportunity to get your ideas before Congress again. I, too, am very much afraid that when they get around to it at all they are going to institute RBT in a totally half-assed and half-baked fashion. They’ve got to cut out the cancer once and for all.
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Can`t Nina Olson get involved? Because she is not an expat herself, her voice has so much weight on the injustice side.
They’re still considering using Canada as a model for RBT, including its departure tax:
IV. NON-RESIDENT U.S. CITIZENS
1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions (Schneider, “The End of Taxation Without End: A New Tax Regime for U.S. Expatriates,” 2013; similar to the law in Canada)
a. Require a minimum period of residence abroad
b. Impose an exit tax on electing taxpayers where deemed to sell all assets at the time of election
2. Repeal the foreign-earned income exclusion (H.R.2 (108th Congress), Jobs and Growth Tax Relief and Reconciliation Act of 2003, sponsored by Rep. Thomas)
http://www.finance.senate.gov/issue/?id=0587e4b4-9f98-4a70-85b0-0033c4f14883