Sen. Cornyn Speaks on the Floor on Tax Extenders, the Deficit and Job Creation
by John Cornyn on June 18, 2010 at 10:30 AM
Today, I went to the floor of the U.S. Senate to outline and explain a number of issues embedded in the tax extenders bill including deficit spending and new taxes on entrepreneurs and small businesses. The video and transcript from the speech are below:
Mr. President, I rise to discuss the raising jobs and tax loopholes act of 2010. Sometimes it's spoken of as the tax extenders bill. But in reality, it is a deficit extending bill. The reason I say that is because the substitute amendment still adds a reported $55 billion in red ink to the deficit. More deficit spending is simply irresponsible.
Our national debt, as we know, is now $13 trillion. 3 trillion of that $13 trillion of debt has been added just since the time President Obama has been sworn into office. Congress is spending money in a way that would give drunken sailors a bad name. More than 30,000 per household, more than $12,000 per household from our children, the public debt under the President's budget will be at 90 percent of our gross domestic product by the year 2020. 90 percent Of our gross domestic product. Greece had a debt to GDP ratio of 115 percent, and we are getting far too close for my comfort.
Our debt represents a national security vulnerability, and I'm glad that the substitute amendment retains my amendment, which we voted on earlier to create greater transparency on exactly who owns our debt when we run up deficits and add to the debt and requires us to periodically assess the strategic and economic risks associated with that debt.
For example, the Treasury Department recently reported that China, China holds debt, so when we spend money here, somebody has got to buy the debt and what happens is China and other countries buy that debt and that creates a potential national security and economic security issue.
The best way to reduce our strategic and economic risks associated with our debt is to stop spending the money that we don't have, stop. Every family, every business in America when they run out of money, they don't just continue to try to max out their credit card. The problem is the credit card of the federal government knows no limits. Only the federal government can continue to print money and rack up debt and hoping and praying that countries like China will buy that debt in the future. It's got to stop.
Now, America's fiscal mess is not just a math problem. Government debt crowds out private sector investment that instead could help create jobs for the 15 million Americans who are unemployed. Our unemployment rate is close to 10 percent. For Hispanics, it's 12.4%. For teenagers, it's 26.4%. The toughest job market for young people in 41 years, even though it's summertime and many of them are out of school and looking for work. Nearly nine out of ten net jobs created in may were temporary jobs created by the federal government and hiring temporary census workers. Only 41,000 net private sector jobs were created in May, an anemic figure to be sure.
According to economist Larry Lindsay, as much as 20 percent of the net private sector job creation in May was due to the oil spill in the Gulf of Mexico. Temporary workers hired to skim oil off the gulf and to protect our beaches and estuaries. And we know that the Administration will unfortunately further exacerbate the unemployment situation, particularly along the Gulf Coast where I live in Texas by its six-month ban on offshore deepwater drilling. Now, we all understand we have got to stop this spewing well. That's job number one. Number two is we need to make sure we understand what happened and make absolutely sure as much as humanly possible that it never, ever happens again, but we also need to be mature enough and aware enough to assess what this means if we impose a lengthy ban on deepwater drilling. It means more dependence on imported oil from abroad, from dangerous parts of the world, from countries that wish us ill. And it also means jobs here at home will be destroyed because those deepwater rigs will move to other parts of the world, in Brazil and other places. According to the energy industry, more than 46,000 jobs could be lost as a result of the moratorium in the short term and 120,000 jobs in the long term.
Mr. President, unfortunately, the policies that are promulgated by the United States Congress and by this Senate have an impact on jobs. They can either be a positive impact and facilitate private sector investment and job creation or they can be job killers, and I for one worry that far too often what's these days amount to job-killing policies, and this underlying bill that we are debating has a couple of good examples.
We know that job creation should be our number one priority when unemployment is at historic highs, when people are losing their homes due to foreclosure because they simply don't have jobs to be able to pay their mortgage, but this so-called tax extenders bill actually raises taxes on capital creation and on investment in a way that will hurt job creation. There are two taxes that I'm referring to specifically, and while both are somewhat technical, it's very important to understand them. The first tax relates to so-called carried interest. Partners in private equity firms are often paid based on their performance in addition to their salary. Under current law, this so-called carried interest is taxed like a capital gain at the 15 percent rate if -- if it's -- we're talking about right now, 15 percent as opposed to ordinary income which is taxed at a much higher rate.
The substitute amendment would change the way that this carried interest is taxed and taken from the capital gains which is a much more attractive rate which encourages capital formation and encourages investment and raise that rate to the highest individual income tax rate for ordinary income of 39%. What do you think is going to happen when entrepreneurs and investors look at this change in the tax law from 15% to 39%? Do you think it will expand or will it contract the amount of money invested in job-creating ventures? Well, common sense should tell us that it will contract it. It will reduce the number of jobs. It will reduce the capital available for investment and it is exactly the opposite policy that we ought to be pursuing with high unemployment and people losing their homes.
Now, higher taxes on this type of business activity are bad enough, but even worse is another tax that's embedded in this bill called enterprise value. Now, these are arcane subjects, and indeed I -- I felt a little better yesterday talking to some of my colleagues on the floor, and I said do you understand what enterprise value tax is? Thank goodness I saw some blank looks on their face and they did not understand it, so I didn't feel alone. So we have all had to get a little bit smart and a little bit better educated, but let me tell you what I have discovered in the process of my own education. Enterprise value is known as brand value or goodwill. It's the value of the sweat equity, the hard work that businesses put into – that owners put into businesses over time.
Under current law, when a partner sells his or her interest in a business, the enterprise value is taxed as a capital gain. This legislation would change the tack treatment on the sale of that business -- -- the tax treatment on the sale of that business but only for certain types of businesses. In other words, this bill targets certain types of businesses, but as one writer commented recently, they said they worry that this is a stalking horse for an attempt to take all capital gains treatment for the sale of business and to raise it to ordinary income levels. In other words, to double or more the taxes on the sale of certain types of businesses. Now, owners of investment firms and real estate partnerships would be singled out for higher taxes when these businesses are sold. They would pay much higher taxes than what are paid under current law.
Again, why should people care? Why should anyone within the sound of my voice care about what this handful of private equity firms and real estate partnerships pay? Well, it's because what this in effect does is it takes the seed corn that's used to grow the economy and it destroys it. It dries up the money that creates the investment that then allows the creation of businesses and expansion of businesses to create jobs. That's why all of us should care, even if we individually don't have to pay it. In fact, investment partnerships under this narrowly tailored and targeted and discriminatory bill, investment partnerships would be the only businesses in America where the value inherent in the enterprise would be ineligible for capital gains treatment and instead be hit with the higher tax bill when the overall enterprise or part of it is sold. This legislation would break new ground in taxing enterprise value as ordinary income and would unfairly tax valet cumulated perhaps over decades by small businesses all across America.
Now, supporters of this bill will tell you that this proposal is all about targeting the hedge fund managers on Wall Street and suggesting that this is payback or due retribution for the havoc that a handful of people have wrought on the American financial system. But this proposal would not target the people who caused the financial meltdown. This targeted provision would have a devastating effect on Main Street. In Illinois, in Montana, in Texas, in Pennsylvania, everywhere around this country.
Let me just give you an example, Mr. President. Private equity backed companies based in my state employ about a half a million workers. Now, what happens to those jobs if this legislation becomes law? Well, not surprisingly, a lot of the investors in these private equity firms where the private equity backed companies get their money are retirement systems like the employee retirement system in Texas and the teacher retirement system in Texas, both of which have a portion of their assets invested in private equity. So I ask again what happens if this legislation becomes law? What happens to small businesses who depend on private equity to grow their businesses and create jobs? Well, I received an answer to that question from one of my constituents by the name of Donald Brown, the Chief Executive Officer of a medical device company that has an office in -- has its main office in Fort Worth, Texas. The name of that company is Arterio Site Medical Systems, otherwise known as AMS is a fast-growing company, again something we ought to want to encourage, not discourage by the policies emanating from Washington.
Fast-growing companies create jobs which allow people to provide for their families and in a high unemployment economy, it ought to be exactly the sort of growth that we ought to encourage. But this company has a -- has an interesting story to tell because it's partnered with the Institute for Surgical Research at Fort Sam Houston in San Antonio, and their goal is to improve surgical outcomes for troops injured by blast burns and to reduce the necessity of amputations. It has also grown because private equity capital invested in this business be in 2007 and helped them grow from six employees, from six employees to 70 employees, with an average employee salary that exceeds $72,000 a year. Brown told me in a letter that I will ask to make part of the record here in just a moment. He said -- quote -- "by changing the tax treatment of carried interest to ordinary income, this bill would penalize entrepreneurial risk taking and discourage investment in companies like ours that need"
Mr. President, I would ask unanimous consent that Brown's letter to me be made part of the record following my remarks. Mr. President, it is telling and it's also disappointing that the Senate earlier today rejected the Thune alternative which I cosponsored. The reason why I say it is telling and disappointing is because the Senator from South Dakota offered us an option to extend many of these expiring tax provisions, but it would not have enacted punitive economically destructive tax increases, things like the enterprise value tax and the tax on carried interest. The option offered to us by Senator Thune, the senator from South Dakota, would have continued important expiring tax provisions, included the state and local tax deduction which I may -- I must add provides Texans with over $1 billion in federal tax relief annually. That's because we don't have a state income tax and we're proud of it. That's one reason why we continue to grow and create jobs while many other parts of the country do not fare as well. But this at least provides equity to us by allowing people in Texas who pay sales tax to write that off their federal income tax as other states do when they pay a fell – when they pay a state income tax, to write it off their federal income tax.
But instead of increasing the budget deficit by $55 billion, which this bill does as it currently has been offered, the option offered by the Senator from South Dakota would have reduced the deficit – reduced the deficit -- by $68 billion and extended the expired tax provisions. It is baffling to me why we would reject, why the Senate would reject an opportunity to do what, on a bipartisan basis we want to do, extend these tax benefits for the benefit of the American people, but to do so in a way that's fiscally responsible. I just don't -- I don't get it.
And, hence, further evidence of the growing disconnect between what's happening here in Washington in the United States Congress and what we're hearing from the American people, who are tired of reckless spending and they're tired of endless debt and they know a day of reckoning will come. Mr. President, if the Senate adopts the legislation before us, it will send another clear message. It will tell investment firms and real estate partnerships, it will send the message that you have been punished for taking risks, you have been punished for creating jobs, and you have been punished for success.
For all other American entrepreneurs, the people we ought to be encouraging because these are the people who make the investment that allows companies to be started and companies to grow and jobs to be created, but to all other American entrepreneurs it will send the message that it may not have been you this time, but you're next. The next time the big spenders want more money to grow the size of the federal government, your company, your business could be the next on the chopping block. To global investors -- and we know that in globalized economy, there are people all around the world that have a lot of different choices in where they want to start their business. Unfortunately, to these global investors, it will send the message, if we pass this bill as written, America does not want your business. America does not want your business. Now, I can't think of a more damaging, a more destructive message to be sent by what we do here in the Congress than to send the message to global investors that we don't want your business here in America. And that's because our economic rivals, other countries like China and India and others, offer a much lower tax and offer a much more welcoming environment when it comes to entrepreneurs and investors from a tax perspective.
And to the 15 million Americans who are unemployed -- 15 million Americans -- including the 472,000 who filed for unemployment claims for the first time last week, this legislation will send the message that Washington's priority is not in creating jobs. Washington's priority is to grow the government. Mr. President, I don't think these are the messages that we should be sending. I urge my colleagues to oppose this substitute amendment.
We'll have a chance to show the American people on which side we stand when we vote next on this cloture on this bill tomorrow morning. And make no mistake about it, a vote for this bill will be a vote for killing jobs, for chasing away investment, for saying America is not interested your business at a time when Americans are suffering high unemployment and people are losing their homes because they can't pay their mortgage payment because they've lost their jobs, with no -- with no end in sight. Mr. President, I yield the floor and suggest the absence of a quorum.