Prepared Remarks of Commissioner of Internal Revenue Douglas H. Shulman before the Financial Accounting Foundation
New York Stock Exchange
New York City
Feb. 13, 2012
Thank you for that kind introduction. In my role as IRS Commissioner, I represent the United States in dealings with foreign governments and have the opportunity to interact regularly with financial services executives from other countries. One topic that comes up in my conversations, and that I have seen more and more in the press, is the question of America’s competitive position.
A recent article by Robert Kagan in the New Republic has gotten a lot of attention. His thesis is that the notion of American decline is not rooted in reality, and that many of the challenges we face today we have faced in the past… and then overcome. For instance, he states that the “[US] share of the world’s GDP has remained steady for the past four decades, with the US producing roughly a quarter of the world’s economic output, and America remains the largest and richest economy in the world.” He notes that while people are “rightly mesmerized by the rise of China, India and other Asian nations whose share of the global economy has been rising, the rise has so far come almost entirely at the expense of Europe and Japan, which have a declining share of the global economy.”
This kind of analysis seems incongruous with the litany of problems that litter the front pages of the press, from the fiscal picture, to the gridlocked political system, to wage stagnation and income inequality, to weaknesses in our educational system… the list goes on.
While I will let economists debate the merits of Kagan’s analysis, I am an optimist in many ways. And for me that optimism includes a few critical factors that I see in my job on a daily basis that are core underpinnings to maintaining our competitive position — particularly in financial matters and capital markets.
In my current position, and in my work for a decade before in financial markets, I believe that one of this country’s key strengths is the integrity of our public institutions.
For example, our long tradition of a regulatory infrastructure that is independent of politics and other influences gives us a substantial advantage over other nations where such freedom from manipulation is often not respected.
You can’t put a price on that integrity, nor its influence on our markets. Integrity begets public trust, and trust is what investors large and small seek.
As IRS Commissioner, I have seen this first hand. The IRS has a long tradition of, and we pride ourselves on, an even-handed application of the laws. Our job is to apply the tax laws as written, without putting a thumb on either side of the scale — without favoring either the government or the taxpayer. We apply the law, as written, in a fair and unbiased manner with the integrity of the tax system as our long-term goal. Let me put this in a little perspective.
I’m the chairman of the main global body of tax authorities, which is comprised of my counterparts from 43 nations, including those from all G20 nations. Late last month, I returned from our annual meeting where we focused on priority issues, such as combating offshore tax abuse and providing greater certainty, consistency and efficiency in our dealings with our largest business taxpayers.
During my informal conversations with my fellow commissioners, one thing really struck me.
Given the global economy and fiscal pressures most nations are facing, some of these taxing authority heads are under palpable pressure to collect more revenue; they have been given their marching orders.
Contrast this with the United States where I’ve never felt such pressure. I’ve worked closely with both Treasury Secretaries Paulson and Geithner, and for two Presidents, and not once did anyone ask me to go out and collect more revenue. Of course, I need to collect the revenue owed to the country. And I am always challenging our team to innovate and be more effective and efficient in the way we do our work. But there is not undue pressure that would lead to unprincipled positions.
We view this as a marathon not a sprint…valuing long-term integrity of the system versus short-term revenue. Trust is the key.
In my experience, the same can be said of other key agencies charged with important financial oversight and regulatory powers that touch the capital markets, such as the SEC, CFTC, bank regulators, PCAOB, and of course, the Financial Accounting Foundation, Financial Accounting Standards Board, and Governmental Accounting Standards Board. In fact, the six core values of the Financial Accounting Foundation are integrity, objectivity, independence, transparency, listening and leadership — all very aligned with my experience with other key agencies that touch capital markets.
Indeed, as we look around the world, it becomes clear that public trust in institutions is a critical element of US competitiveness, and where we are held up as the global standard. In their recent book on the origins of the financial crisis, Ken Rogoff and Carmen Reinhart observe, “The modern literature on empirical growth increasingly points to ‘soft’ factors such as institutions, corruption, and governance as far more important than differences in ratios of capital to labor in explaining cross-country differences…”
And in spite of periodic political rhetoric, I think in the long run there remains a respect for the independence and integrity of our key public institutions.
However, independence comes with a tricky balance because we need to be accountable for our performance and our actions, but in such a way that our integrity and our independence is never questioned.
For example, at the IRS, we have no less than six congressional committees that provide regular oversight, in addition to the Government Accountability Office, and an Inspector General exclusively dedicated to IRS oversight. The trick is to combine independence with accountability, and over time we seem to get it right in this country.
Let me focus a little on another key prerequisite for public trust that I have spent a lot of time on in my career…transparency.
When I was at FINRA, I helped created transparency in the bond markets through the launch of TRACE. There’s now a similar conversation going on about the need for greater transparency in the world of derivatives. Boiled down to its essence, this is classic economics. For markets to work there is an assumption of no asymmetry of information. And while there is no market in the world with the “perfect” information aspired to by classical economists, our markets are among the best in the world.
Clearly, accounting standards, and the infrastructure around financial reporting are a core part of the transparency in our markets. Indeed, the FAF’s core value statement says that its mission of developing accounting standards that result in high quality financial reporting “increases investor confidence. Increased investor confidence leads to better capital allocation decisions and, by extension, a stronger economy.”
In the tax world, tax reporting of the largest companies generally builds off of financial reporting. We depend on honest numbers, with rigorous corporate governance, oversight, and independent accountants, to name some of the more prominent.
Larger companies are actually required to reconcile financial reporting with tax reporting on their tax returns.
And we have a new corporate transparency reporting requirement which identifies where financial reserves were taken for potential tax liabilities in FIN48 reporting. Our goal is to have a transparent discussion with corporations…and to create greater certainty, consistency and efficiency in targeting non-compliance and resolving issues with taxpayers.
Again, I’m a firm believer that there’s a link between transparency and integrity. And an open, public dialogue is essential to this. One key attribute of this country, which leads to trust and better outcomes, is our democratic tradition of making policy decisions in the light of day — with a lot of public debate on important issues that affect market participants.
Let me give you an example in which I’m deeply involved. In 2010, Congress passed a law called the Foreign Account Tax Compliance Act, or FATCA, to help the IRS in its campaign against offshore tax evasion. The law came on the heels of some major initiatives we had pursued, including compelling a major Swiss bank for the first time in history to turn over thousands of accounts of US taxpayers hiding assets in that country.
The basic framework of FATCA is that financial institutions across the globe must try to indentify US taxpayers who hold accounts there and turn information over to the IRS. If they do not agree to do this, there will be withholding on payments coming out of the US. Since the law passed, many foreign financial institutions have expressed significant concerns about the burden the law placed on them.
As we devised the regulations which would enumerate the details of the implementation, we tried very hard to listen to those concerns. I met with CEOs and CFOs of foreign financial institutions on multiple occasions. After nearly two years of back and forth, last week we put out detailed regulations for implementation of FATCA — with the goal of achieving the policy goals of the legislation by focusing on the accounts with the highest risk of non-compliance, and trying to minimize burden.
For instance, we piggy-backed on know-your-customer rules for most of the due diligence that needs to be performed on existing accounts, delayed difficult withholding provisions for a minimum of five years while implementing the core withholding provisions sooner, and allowed global financial institutions to avoid withholding even if all their affiliates could not meet the strict requirements of participation from day one.
Anytime we use administrative authority, we run the risk of getting criticism. However, I believe a couple of things are important to keep in mind. First, the US system works because we a have a process where we listen to affected stakeholders and refine our policies over time as we learn more.
Second, and back to the theme of independence, my colleagues and I have an obligation to call it as we see it and make the best principled decision based on the information available. So while not everyone will always agree with our decisions, our job is to implement the statute with an eye towards the best policy. In this case, we tried to maximize offshore tax compliance, while minimizing burden on market participants. And a transparent, open process led us to a better ultimate product.
The final factor of our nation’s strength that I want to mention is a cultural one. I have held for a long time, since I first started selling lawn cutting services to my neighbors in Ohio when in junior high school, that the entrepreneurial spirit is alive and well in America. We are still a country where most kids can dream of being the President, or a corporate CEO. While we have serious issues with income inequality, which recent studies have enumerated, we do not have a rigid society where people are put into boxes and have no hope of upward mobility.
Unlike other rigid societies and cultures, in America, a 22-year-old recent college graduate can make a suggestion to improve the workplace; and a 30-year-old can come up with a new product idea and even challenge a CEO in a meeting.
This cultural underpinning is a key to our success. I see it in the international context, where my American colleagues are fast to put creative solutions on the table – that may break with precedent, but are necessary to move forward in our dynamic and ever-changing world.
A colleague of mine in the US government recently told me the story of going to China for an official visit, and discussing education.
Clearly, China has emerged as a global power and has demonstrated strength in important competitive areas. At the same time, everywhere he went, officials kept asking how they could teach their next generation of citizens to learn to think creatively and innovate — an area where the US distinguishes itself globally.
This is the opposite of the common narrative, where many bemoan the US falling behind in education compared to China and other rapidly developing and growing economies. While we certainly have our problems, and are lagging behind many nations in math and science, I’ve long held the belief that we should not overlook the entrepreneurial — sometimes irreverent — spirit of Americans as a critical competitive advantage.
Before I wrap up, let me end where I started — by saying our competitive position is still ours to lose. I’ve mentioned a few key attributes that are important to the strength of our nation and our markets that I witness every day: Public institutions that over the long run are independent and have integrity; transparency and public dialogue that are built into the core of our system; and an entrepreneurial culture and spirit. These, as well as other key attributes, such as a legal system that respects the sanctity of contracts, help keep our competitive position intact and ensure that we continue to have the most liquid and robust capital markets in the world.
That is not to say that we don’t have our challenges and that other nations won’t continue to evolve and challenge our competitive position. But, I think we still have some important things going for us, including our continued position as the standard setter for confidence in public institutions and market transparency. Obviously the FAF, FASB and GASB, as well as the venue of tonight’s event — the New York Stock Exchange — represent the best of those attributes which help keep our competitive position and markets strong.
Throughout my career, I have always had a strong interest in, and respect for, how institutions maintain public trust and integrity. Indeed, the financial institutions represented here today could not prosper without the trust of their customers, regulators and the general public.
The IRS is one of the largest and most complex financial services institutions in the world. We collect approximately $2.5 trillion annually, and have 100,000 employees. And we interface with over 200 million individuals, businesses and non-profits every year, including most adult Americans. Because of these responsibilities, I often remind our team that integrity and trust are essential to our brand, and in turn to the proper functioning of our nation. After all, let’s face it; most people don’t look forward to doing their taxes. But for many Americans, it is the only direct interaction that they have with their government every year. And so the perception of competence and fairness that taxpayers have in the IRS plays a significant role in their confidence in the US government and our ability to surmount the challenges ahead.
Thank you for letting me share these thoughts with you tonight, and I would be happy to take a few questions.