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Heritage Foundation Research Fellow Brashers Testifies Before Senate Small Business & Entrepreneurship Committee
WASHINGTON, April 18 -- The Senate Small Business and Entrepreneurship Committee released the following written testimony by Preston Brashers, a research fellow for tax policy in the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, from an April 8, 2025, joint hearing with the House Small Business Committee entitled "Prosperity on Main Street: Keeping Taxes Low for Small Businesses":
* * *
My name is Preston Brashers. I am a Research Fellow for Tax Policy in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. The views I express in this testimony ... Show Full Article WASHINGTON, April 18 -- The Senate Small Business and Entrepreneurship Committee released the following written testimony by Preston Brashers, a research fellow for tax policy in the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, from an April 8, 2025, joint hearing with the House Small Business Committee entitled "Prosperity on Main Street: Keeping Taxes Low for Small Businesses": * * * My name is Preston Brashers. I am a Research Fellow for Tax Policy in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. The views I express in this testimonyare my own and should not be construed as representing any official position of The Heritage Foundation.
* * *
Overview
The 2017 Tax Cuts and Jobs Act included more than just tax cuts, but also structural reforms, simplifications, and base-broadening revenue raisers. In addition to some permanent changes, TCJA also temporarily suspended certain flawed elements of the tax code that had punished business owners and entrepreneurs who chose to invest in their workers and in the American economy.
TCJA addressed some of the more egregious problems that existed in the tax code until 2017. For example, it makes no sense to tax income from business investments before businesses actually earn that income. But that is effectively what happens when the tax system forces businesses to capitalize and depreciate such business expenses over many years or decades instead of allowing them to deduct those costs when determining their current taxable income. To address that problem, TCJA implemented full and immediate expensing for capital equipment and machinery. For five years, between 2018 and 2022, the tax treatment for these formerly depreciable capital assets was corrected, but unfortunately full and immediate expensing - also known as bonus depreciation - is now gradually sunsetting. One of Congress's top priorities now should be to lock in full and immediate expensing - not just for another few years, but permanently.
Similarly, Congress should address one of the unfortunate compromises of TCJA - the 5-year amortization of research and experimental costs. That provision is structured in a way that delays to a later year 90 percent of the value of deductions for expenses related to research and experimental activities (including employee compensation costs, material and supply costs, costs of obtaining a patent, and certain operations, management, and travel costs).1 The resulting short-term financial hit from this artificially accelerated tax liability can be severe for start-up companies with limited cash flow and limited access to capital markets.
TCJA also expanded death tax (estate tax) exemptons, helping to shield family farms and businesses from a devastating 40 percent federal tax on assets passed down to family members. Allowing the death tax exemption to be cut in half (which will happen if TCJA expires) could be the death knell for some asset-rich but cash-poor small- and mid-size family businesses.
Finally, no other expiring provision in TCJA had a larger impact on the amount of taxes paid by entrepreneurs and small busineses owners than the 20% pass-through deduction, known as Section 199A. While some reforms or improvements to the design of 199A are certainly possible, simply letting the provision lapse would be unthinkable to millions of American business proprietors who claim the deduction.
This written testimony focuses on the expiring provisions that most impact small businesses. For a more comprehensive review of the expiring 2017 tax provisions, including both individual and businesss provisions, refer to the Special Report, "What If the Trump Tax Cuts Expire? A Primer on What Is at Stake."2
* * *
Expiring Business Provisions
TCJA made several changes to business tax deductions, including changes affecting the timing of business deductions. TCJA temporarily replaced the system of depreciation schedules of up to 20 years and instead allowed businesses to fully deduct the cost of equipment and machinery in the tax year that the assets are purchased and put in use. The law also required five-year amortization of research and experimental (R&E) expenditures. TCJA created a new deduction for individuals with pass-through business income (Section 199A) and added an annual limitation on how much nonbusiness income i(ndividuals could offset with business losses in a given year. Many of TCJA's changes to business deductions are set to expire or are currently phasing out.
* * *
Phaseout of Full and Immediate Expensing for Machinery and Equipment
A key TCJA business provision--full and immediate expensing for machinery, equipment, and other assets with useful lives of up to 20 years--has been winding down since January 2023. 3 The provision, also called "bonus depreciation," allowed businesses in 2018-2022 to deduct 100 percent of the value of qualifying capital assets in the year those assets were placed in service instead of following the IRS's complex rules for depreciation of various asset classes.4
* * *
1 Internal Revenue Service, Guidance on Amortization of Specified Research or Experimental Expenditures under Section 174, Notice 2023-63, September 2023, https://www.irs.gov/pub/irs-drop/n-23-63.pdf (accessed April 3, 2025).
2 Preston Brashers, "What If the Trump Tax Cuts Expire? A Primer on What Is at Stake," Heritage Foudnation Special Report No. 311, February 25, 2025, https://www.heritage.org/taxes/report/what-if-the-trump-tax-cuts-expire-primerwhatstake.
3 26 U.S. Code Sec. 168(k)(6).
* * *
Under current law, the bonus depreciation percentage is scheduled to decrease by 20 percent per year in 2023-2026. Assuming no extension of TCJA, a company would be allowed to fully and immediately expense 40 percent of the basis of a qualifying asset purchased in 2025, while the remaining 60 percent of the asset would be subject to regular depreciation over up to 20 years (depending on the tax code classification of the asset in question).
Typically, businesses can deduct legitimate expenses as they are incurred, but depreciable assets, which are deducted over time, are the notable exception. By allowing full and immediate expensing for most capital assets, TCJA (temporarily) shifted the business tax system closer to a cash flow tax system. Under a cash flow tax system, a company's taxable income base in each period is the difference between business revenues and business expenses.5 Such a system is simpler than one that requires capitalization of some expenses, and it has the advantage of neutrality by treating purchases of equipment and machinery the same as expenditures on supplies, utilities, or marketing.
Neutrality helps ensure that companies' budget and cash flow decisions are driven by market forces, not by uneven tax treatment.
The punitive nature of long depreciation schedules for physical capital investments is especially harmful to capital-intensive industries such as manufacturing, construction, mining, and oil extraction. This unfavorable tax treatment reduces investment and inhibits the productivity and wages of workers in affected industries.
TCJA did not (temporarily or permanently) change the depreciation schedules for certain longerlived assets such as non-residential structures and residential rental structures, which retained depreciation schedules of 39 years and 27.5 years, respectively.
* * *
Permanence for Amortization of Research Expenses
TCJA made R&E expenditures subject to five-year amortization schedules beginning in 2022. 6 Before TCJA, taxpayers could fully and immediately deduct R&E costs. Amortization, like depreciation, involves the capitalization of business expenditures--but specifically expenditures involved in creating intangible assets.
Although TCJA made R&E amortization permanent, many lawmakers and outside observers hoped it would never take effect. R&E amortization was included in the tax bill to help ensure the legislation remained within reconciliation budget constraints, but there is no sound economic basis for discouraging companies from engaging in research by denying them full and immediate expensing for those expenditures.7
R&E amortization follows a straight-line method, so deductions for R&E expenditures are spread out evenly across a five-year period. It uses the midpoint convention, so the five-year period starts six months into the year.8 Therefore, a $100 R&E expenditure in year 1 results in a deduction of $10 in the first tax year, $20 in years two through five, and $10 in year six.
* * *
4 26 U.S. Code Sec.Sec. 167 and 168.
5 A cash flow tax would disregard business financing such as equity raised, loans taken, and dividends and interest paid.
6 26 U.S. Code Sec. 174. Research conducted outside the United States is subject to 15-year amortization.
7 Alex Muresianu, "R&D Amortization Hurts Economic Growth, Growth Industries, and Small Businesses," Tax Foundation, June 1, 2023, https://taxfoundation.org/blog/rd-amortization-impact/ (accessed October 22, 2024).
* * *
The increase in interest rates in recent years made the delay in deductions related to amortization and depreciation more economically damaging by raising borrowing costs.
Although not technically a TCJA expiration, Congress could use the occasion of TCJA's expiration to restore full and immediate expensing for R&E.
* * *
Expiration of the Pass-Through Deduction
The 20 percent pass-through deduction is scheduled to sunset after 2025. This deduction--also known as the Section 199A deduction or the qualified business deduction--allows sole proprietors and individuals with pass-through business income to deduct 20 percent of qualifying business income.9 The deduction effectively reduces the bottom individual tax bracket for qualifying small businesses from 10 percent to 8 percent and the top individual tax bracket from 37 percent to 29.6 percent.
The pass-through deduction does not apply to all business income of individuals. Some restrictions and limitations apply:
* Specified services trade and businesses--such as businesses engaged in health services, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services--face a pass-through deduction phaseout if individual taxable income exceeds $197,300 ($394,600 for married joint filers).10
* The pass-through deduction is limited to the greater of 50 percent of the company's W-2 wages related to the business or 25 percent of W-2 wages plus 2.5 percent of unadjusted basis in qualifying business property.11
TCJA included the pass-through deduction for owners of businesses that are perceived as being small or midsize to balance out TCJA's reduction in the corporate rate. (Although some large companies are organized as pass-through entities, most are structured as C corporations because of the S corporation 100 shareholder rule.12)
While the corporate rate is lower than the current top effective pass-through tax rate, it is inaccurate to say the corporate rate is preferential.13 Corporate income is also subject to an extra layer of tax at a 15 percent to 23.8 percent rate at the investor level when profits are ultimately distributed to the shareholders or when corporate stock is sold.
* * *
8 26 U.S. Code Sec. 174(a)(2)(B).
9 26 U.S. Code Sec. 199A.
10 26 Code of Federal Regulations Sec. 1.199A-5, and Internal Revenue Service, "IRS Releases Tax Inflation Adjustments for Tax Year 2025." Amounts listed are for 2024. These amounts are subject to an annual inflation adjustment.
11 Joint Committee on Taxation, General Explanation of Public Law 115-97.
12 26 U.S. Code Sec. 1361(b).
13 Unlike the pass-through deduction, TCJA's reduction in the corporate rate was made permanent.
* * *
If TCJA expires outright, sole proprietors and pass-through businesses in the top tax bracket could be at a competitive disadvantage compared to corporations. The top pass-through tax rate of 39.6 percent would be similar to the combined corporate and long-term capital gains rate, but owners of pass-throughs have to pay their full tax rate up-front on all earnings, including earnings retained by the businesses. In contrast, corporate shareholders can defer investor-level taxes on earnings retained by the corporations, only paying taxes when they ultimately realize income from their investments (e.g., through dividends or stock sales).14
The expiration of the pass-through deduction would make organizing as a pass-through business less attractive than it is now. Some businesses would respond by reorganizing as C corporations.
* * *
Expiration of Business Loss Limitations
If TCJA expires, the current annual limitation on business losses that can be deducted on personal taxes would expire. In 2018, individuals, estates, and trusts were limited to using $250,000 of business losses ($500,000 for married joint filers) to offset income from other sources. 15 With inflation adjustments, those limits now stand at $313,000 and $626,000.16 Individuals can carry forward any disallowed losses indefinitely to future tax years as net operating losses.
The annual cap on deductible business losses is scheduled to expire after 2025. However, some preexisting limitations on passive business losses would continue to apply.17
* * *
Expansion of Death Tax (Estate and Gift Taxes)
If TCJA expires, the estate and gift tax exemption amount would be halved in 2026. TCJA temporarily doubled the estate and gift tax exemptions, allowing a total of $11.18 million (in 2018) in lifetime gifts or transfers upon death to be untaxed before the estate and gift taxes take effect.18 The exemption amount is adjusted for inflation and stands at $13.99 million as of 2025 (it would be $7 million if not for TCJA's temporary changes).19 The top estate tax rate is 40 percent and was unchanged by TCJA.20 The higher tax exemption amount is scheduled to expire after 2025, but the estate tax rates would remain unchanged.
Despite the steep 40 percent tax rate, estate and gift tax revenues represent a comparatively small revenue source (averaging about 0.6 percent of federal revenues in the past decade).21 Following TCJA, estate and gift tax revenues did not fall as dramatically as some expected. The JCT estimated that the 2018-2025 increase in the estate and gift tax exemption would reduce overall tax receipts by a total of $83 billion compared to if TCJA had not been enacted.22 In fact, while estate and gift tax collections fell by about $6 billion each in the 2019 and 2020 fiscal years relative to 2017 and 2018, 2023 estate and gift tax collections were up by about $11 billion compared to 2017./23 Although the estate tax represents a minor revenue source for the United States, it can have severe ramifications for family farms and family businesses. Owners of family farms, in particular, are often "asset rich but cash poor," so the family members who inherit them are often unable to raise the funds needed to pay the estate tax unless they sell off the inherited property.
* * *
14 Before TCJA, corporations could defer investor-level taxes, as they can today. However, because the pre-TCJA corporate tax rate stood at 35 percent, there was usually a significant tax advantage to organizing as a pass-through business where circumstances allowed.
15 26 U.S. Code Sec. 461(l).
16 Internal Revenue Service, "IRS Releases Tax Inflation Adjustments for Tax Year 2025."
17 Joint Committee on Taxation, General Explanation of Public Law 115-97.
18 Ibid.
19 Internal Revenue Service, "IRS Releases Tax Inflation Adjustments for Tax Year 2025." 20 26 U.S. Code Sec. 2001. After taxpayers use up the $13.99 million exemption, taxable estates and gifts are subject to progressive tax brackets that max out at 40 percent. Tax rates ranging from 18 percent to 39 percent apply to taxable estates and taxable gifts below $1 million.
* * *
Conclusion
Small businesses are already disadvantaged by the enormous burden of federal, state, and local regulations and the challenge of tax compliance. Unlike large corporations, most small business owners and entrepreneurs must navigate these complexities with little to no help from outside consultants or in-house teams of lawyers and accountants. Small businesses cannot absorb government-imposed burdens to the extent that larger corporations can. The last thing that small businssess need is an enormous tax increase.
Collectively, the expiring TCJA provisions that benefit small businesses were an indispensable part of the 2017 legislation's success. If lawmakers hope to revitalize the economy and ensure that American small business owners and entreprenerus have the ability to succeed and thrive, then extending these provisions should be a top priority.
* * *
The Heritage Foundation is a public policy, research, and educational organization recognized as exempt under section 501(c)(3) of the Internal Revenue Code. It is privately supported and receives no funds from any government at any level, nor does it perform any government or other contract work.
The Heritage Foundation is the most broadly supported think tank in the United States. During 2022, it had hundreds of thousands of individual, foundation, and corporate supporters representing every state in the U.S. Its 2022 operating income came from the following sources:
Individuals 78%
Foundations 17%
Corporations 2%
Program revenue and other income 3%
* * *
21 Office of Management and Budget, "Table 2.1--Receipts by Source: 1934-2029."
22 Joint Committee on Taxation, Estimated Budget Effects of the Conference Agreement for H.R.1, the Tax Cuts and Jobs Act, December 18, 2017, https://www.jct.gov/publications/2017/jcx-67-17/ (accessed October 18, 2024).
23 Office of Management and Budget, "Table 2.1--Receipts by Source: 1934-2029." TCJA's changes to the estate and gift tax may have also affected income tax receipts, though the effect on income taxes is unclear.
* * *
The top five corporate givers provided The Heritage Foundation with 1% of its 2022 income. The Heritage Foundation's books are audited annually by the national accounting firm of RSM US, LLP.
Members of The Heritage Foundation staff testify as individuals discussing their own independent research. The views expressed are their own and do not reflect an institutional position of The Heritage Foundation or its board of trustees.
* * *
Original text here: https://www.sbc.senate.gov/public/_cache/files/d/d/dda158ac-4488-45c8-91c6-9c8d0ea31fc9/0530C3A8E868C98B4AFA39813CE69AF8E6241D1140C50526EF1AF7FE1312890B.brashers-testimony.pdf
* * *
My name is Preston Brashers. I am a Research Fellow for Tax Policy in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. The views I express in this testimony ... Show Full Article WASHINGTON, April 18 -- The Senate Small Business and Entrepreneurship Committee released the following written testimony by Preston Brashers, a research fellow for tax policy in the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, from an April 8, 2025, joint hearing with the House Small Business Committee entitled "Prosperity on Main Street: Keeping Taxes Low for Small Businesses": * * * My name is Preston Brashers. I am a Research Fellow for Tax Policy in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. The views I express in this testimonyare my own and should not be construed as representing any official position of The Heritage Foundation.
* * *
Overview
The 2017 Tax Cuts and Jobs Act included more than just tax cuts, but also structural reforms, simplifications, and base-broadening revenue raisers. In addition to some permanent changes, TCJA also temporarily suspended certain flawed elements of the tax code that had punished business owners and entrepreneurs who chose to invest in their workers and in the American economy.
TCJA addressed some of the more egregious problems that existed in the tax code until 2017. For example, it makes no sense to tax income from business investments before businesses actually earn that income. But that is effectively what happens when the tax system forces businesses to capitalize and depreciate such business expenses over many years or decades instead of allowing them to deduct those costs when determining their current taxable income. To address that problem, TCJA implemented full and immediate expensing for capital equipment and machinery. For five years, between 2018 and 2022, the tax treatment for these formerly depreciable capital assets was corrected, but unfortunately full and immediate expensing - also known as bonus depreciation - is now gradually sunsetting. One of Congress's top priorities now should be to lock in full and immediate expensing - not just for another few years, but permanently.
Similarly, Congress should address one of the unfortunate compromises of TCJA - the 5-year amortization of research and experimental costs. That provision is structured in a way that delays to a later year 90 percent of the value of deductions for expenses related to research and experimental activities (including employee compensation costs, material and supply costs, costs of obtaining a patent, and certain operations, management, and travel costs).1 The resulting short-term financial hit from this artificially accelerated tax liability can be severe for start-up companies with limited cash flow and limited access to capital markets.
TCJA also expanded death tax (estate tax) exemptons, helping to shield family farms and businesses from a devastating 40 percent federal tax on assets passed down to family members. Allowing the death tax exemption to be cut in half (which will happen if TCJA expires) could be the death knell for some asset-rich but cash-poor small- and mid-size family businesses.
Finally, no other expiring provision in TCJA had a larger impact on the amount of taxes paid by entrepreneurs and small busineses owners than the 20% pass-through deduction, known as Section 199A. While some reforms or improvements to the design of 199A are certainly possible, simply letting the provision lapse would be unthinkable to millions of American business proprietors who claim the deduction.
This written testimony focuses on the expiring provisions that most impact small businesses. For a more comprehensive review of the expiring 2017 tax provisions, including both individual and businesss provisions, refer to the Special Report, "What If the Trump Tax Cuts Expire? A Primer on What Is at Stake."2
* * *
Expiring Business Provisions
TCJA made several changes to business tax deductions, including changes affecting the timing of business deductions. TCJA temporarily replaced the system of depreciation schedules of up to 20 years and instead allowed businesses to fully deduct the cost of equipment and machinery in the tax year that the assets are purchased and put in use. The law also required five-year amortization of research and experimental (R&E) expenditures. TCJA created a new deduction for individuals with pass-through business income (Section 199A) and added an annual limitation on how much nonbusiness income i(ndividuals could offset with business losses in a given year. Many of TCJA's changes to business deductions are set to expire or are currently phasing out.
* * *
Phaseout of Full and Immediate Expensing for Machinery and Equipment
A key TCJA business provision--full and immediate expensing for machinery, equipment, and other assets with useful lives of up to 20 years--has been winding down since January 2023. 3 The provision, also called "bonus depreciation," allowed businesses in 2018-2022 to deduct 100 percent of the value of qualifying capital assets in the year those assets were placed in service instead of following the IRS's complex rules for depreciation of various asset classes.4
* * *
1 Internal Revenue Service, Guidance on Amortization of Specified Research or Experimental Expenditures under Section 174, Notice 2023-63, September 2023, https://www.irs.gov/pub/irs-drop/n-23-63.pdf (accessed April 3, 2025).
2 Preston Brashers, "What If the Trump Tax Cuts Expire? A Primer on What Is at Stake," Heritage Foudnation Special Report No. 311, February 25, 2025, https://www.heritage.org/taxes/report/what-if-the-trump-tax-cuts-expire-primerwhatstake.
3 26 U.S. Code Sec. 168(k)(6).
* * *
Under current law, the bonus depreciation percentage is scheduled to decrease by 20 percent per year in 2023-2026. Assuming no extension of TCJA, a company would be allowed to fully and immediately expense 40 percent of the basis of a qualifying asset purchased in 2025, while the remaining 60 percent of the asset would be subject to regular depreciation over up to 20 years (depending on the tax code classification of the asset in question).
Typically, businesses can deduct legitimate expenses as they are incurred, but depreciable assets, which are deducted over time, are the notable exception. By allowing full and immediate expensing for most capital assets, TCJA (temporarily) shifted the business tax system closer to a cash flow tax system. Under a cash flow tax system, a company's taxable income base in each period is the difference between business revenues and business expenses.5 Such a system is simpler than one that requires capitalization of some expenses, and it has the advantage of neutrality by treating purchases of equipment and machinery the same as expenditures on supplies, utilities, or marketing.
Neutrality helps ensure that companies' budget and cash flow decisions are driven by market forces, not by uneven tax treatment.
The punitive nature of long depreciation schedules for physical capital investments is especially harmful to capital-intensive industries such as manufacturing, construction, mining, and oil extraction. This unfavorable tax treatment reduces investment and inhibits the productivity and wages of workers in affected industries.
TCJA did not (temporarily or permanently) change the depreciation schedules for certain longerlived assets such as non-residential structures and residential rental structures, which retained depreciation schedules of 39 years and 27.5 years, respectively.
* * *
Permanence for Amortization of Research Expenses
TCJA made R&E expenditures subject to five-year amortization schedules beginning in 2022. 6 Before TCJA, taxpayers could fully and immediately deduct R&E costs. Amortization, like depreciation, involves the capitalization of business expenditures--but specifically expenditures involved in creating intangible assets.
Although TCJA made R&E amortization permanent, many lawmakers and outside observers hoped it would never take effect. R&E amortization was included in the tax bill to help ensure the legislation remained within reconciliation budget constraints, but there is no sound economic basis for discouraging companies from engaging in research by denying them full and immediate expensing for those expenditures.7
R&E amortization follows a straight-line method, so deductions for R&E expenditures are spread out evenly across a five-year period. It uses the midpoint convention, so the five-year period starts six months into the year.8 Therefore, a $100 R&E expenditure in year 1 results in a deduction of $10 in the first tax year, $20 in years two through five, and $10 in year six.
* * *
4 26 U.S. Code Sec.Sec. 167 and 168.
5 A cash flow tax would disregard business financing such as equity raised, loans taken, and dividends and interest paid.
6 26 U.S. Code Sec. 174. Research conducted outside the United States is subject to 15-year amortization.
7 Alex Muresianu, "R&D Amortization Hurts Economic Growth, Growth Industries, and Small Businesses," Tax Foundation, June 1, 2023, https://taxfoundation.org/blog/rd-amortization-impact/ (accessed October 22, 2024).
* * *
The increase in interest rates in recent years made the delay in deductions related to amortization and depreciation more economically damaging by raising borrowing costs.
Although not technically a TCJA expiration, Congress could use the occasion of TCJA's expiration to restore full and immediate expensing for R&E.
* * *
Expiration of the Pass-Through Deduction
The 20 percent pass-through deduction is scheduled to sunset after 2025. This deduction--also known as the Section 199A deduction or the qualified business deduction--allows sole proprietors and individuals with pass-through business income to deduct 20 percent of qualifying business income.9 The deduction effectively reduces the bottom individual tax bracket for qualifying small businesses from 10 percent to 8 percent and the top individual tax bracket from 37 percent to 29.6 percent.
The pass-through deduction does not apply to all business income of individuals. Some restrictions and limitations apply:
* Specified services trade and businesses--such as businesses engaged in health services, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services--face a pass-through deduction phaseout if individual taxable income exceeds $197,300 ($394,600 for married joint filers).10
* The pass-through deduction is limited to the greater of 50 percent of the company's W-2 wages related to the business or 25 percent of W-2 wages plus 2.5 percent of unadjusted basis in qualifying business property.11
TCJA included the pass-through deduction for owners of businesses that are perceived as being small or midsize to balance out TCJA's reduction in the corporate rate. (Although some large companies are organized as pass-through entities, most are structured as C corporations because of the S corporation 100 shareholder rule.12)
While the corporate rate is lower than the current top effective pass-through tax rate, it is inaccurate to say the corporate rate is preferential.13 Corporate income is also subject to an extra layer of tax at a 15 percent to 23.8 percent rate at the investor level when profits are ultimately distributed to the shareholders or when corporate stock is sold.
* * *
8 26 U.S. Code Sec. 174(a)(2)(B).
9 26 U.S. Code Sec. 199A.
10 26 Code of Federal Regulations Sec. 1.199A-5, and Internal Revenue Service, "IRS Releases Tax Inflation Adjustments for Tax Year 2025." Amounts listed are for 2024. These amounts are subject to an annual inflation adjustment.
11 Joint Committee on Taxation, General Explanation of Public Law 115-97.
12 26 U.S. Code Sec. 1361(b).
13 Unlike the pass-through deduction, TCJA's reduction in the corporate rate was made permanent.
* * *
If TCJA expires outright, sole proprietors and pass-through businesses in the top tax bracket could be at a competitive disadvantage compared to corporations. The top pass-through tax rate of 39.6 percent would be similar to the combined corporate and long-term capital gains rate, but owners of pass-throughs have to pay their full tax rate up-front on all earnings, including earnings retained by the businesses. In contrast, corporate shareholders can defer investor-level taxes on earnings retained by the corporations, only paying taxes when they ultimately realize income from their investments (e.g., through dividends or stock sales).14
The expiration of the pass-through deduction would make organizing as a pass-through business less attractive than it is now. Some businesses would respond by reorganizing as C corporations.
* * *
Expiration of Business Loss Limitations
If TCJA expires, the current annual limitation on business losses that can be deducted on personal taxes would expire. In 2018, individuals, estates, and trusts were limited to using $250,000 of business losses ($500,000 for married joint filers) to offset income from other sources. 15 With inflation adjustments, those limits now stand at $313,000 and $626,000.16 Individuals can carry forward any disallowed losses indefinitely to future tax years as net operating losses.
The annual cap on deductible business losses is scheduled to expire after 2025. However, some preexisting limitations on passive business losses would continue to apply.17
* * *
Expansion of Death Tax (Estate and Gift Taxes)
If TCJA expires, the estate and gift tax exemption amount would be halved in 2026. TCJA temporarily doubled the estate and gift tax exemptions, allowing a total of $11.18 million (in 2018) in lifetime gifts or transfers upon death to be untaxed before the estate and gift taxes take effect.18 The exemption amount is adjusted for inflation and stands at $13.99 million as of 2025 (it would be $7 million if not for TCJA's temporary changes).19 The top estate tax rate is 40 percent and was unchanged by TCJA.20 The higher tax exemption amount is scheduled to expire after 2025, but the estate tax rates would remain unchanged.
Despite the steep 40 percent tax rate, estate and gift tax revenues represent a comparatively small revenue source (averaging about 0.6 percent of federal revenues in the past decade).21 Following TCJA, estate and gift tax revenues did not fall as dramatically as some expected. The JCT estimated that the 2018-2025 increase in the estate and gift tax exemption would reduce overall tax receipts by a total of $83 billion compared to if TCJA had not been enacted.22 In fact, while estate and gift tax collections fell by about $6 billion each in the 2019 and 2020 fiscal years relative to 2017 and 2018, 2023 estate and gift tax collections were up by about $11 billion compared to 2017./23 Although the estate tax represents a minor revenue source for the United States, it can have severe ramifications for family farms and family businesses. Owners of family farms, in particular, are often "asset rich but cash poor," so the family members who inherit them are often unable to raise the funds needed to pay the estate tax unless they sell off the inherited property.
* * *
14 Before TCJA, corporations could defer investor-level taxes, as they can today. However, because the pre-TCJA corporate tax rate stood at 35 percent, there was usually a significant tax advantage to organizing as a pass-through business where circumstances allowed.
15 26 U.S. Code Sec. 461(l).
16 Internal Revenue Service, "IRS Releases Tax Inflation Adjustments for Tax Year 2025."
17 Joint Committee on Taxation, General Explanation of Public Law 115-97.
18 Ibid.
19 Internal Revenue Service, "IRS Releases Tax Inflation Adjustments for Tax Year 2025." 20 26 U.S. Code Sec. 2001. After taxpayers use up the $13.99 million exemption, taxable estates and gifts are subject to progressive tax brackets that max out at 40 percent. Tax rates ranging from 18 percent to 39 percent apply to taxable estates and taxable gifts below $1 million.
* * *
Conclusion
Small businesses are already disadvantaged by the enormous burden of federal, state, and local regulations and the challenge of tax compliance. Unlike large corporations, most small business owners and entrepreneurs must navigate these complexities with little to no help from outside consultants or in-house teams of lawyers and accountants. Small businesses cannot absorb government-imposed burdens to the extent that larger corporations can. The last thing that small businssess need is an enormous tax increase.
Collectively, the expiring TCJA provisions that benefit small businesses were an indispensable part of the 2017 legislation's success. If lawmakers hope to revitalize the economy and ensure that American small business owners and entreprenerus have the ability to succeed and thrive, then extending these provisions should be a top priority.
* * *
The Heritage Foundation is a public policy, research, and educational organization recognized as exempt under section 501(c)(3) of the Internal Revenue Code. It is privately supported and receives no funds from any government at any level, nor does it perform any government or other contract work.
The Heritage Foundation is the most broadly supported think tank in the United States. During 2022, it had hundreds of thousands of individual, foundation, and corporate supporters representing every state in the U.S. Its 2022 operating income came from the following sources:
Individuals 78%
Foundations 17%
Corporations 2%
Program revenue and other income 3%
* * *
21 Office of Management and Budget, "Table 2.1--Receipts by Source: 1934-2029."
22 Joint Committee on Taxation, Estimated Budget Effects of the Conference Agreement for H.R.1, the Tax Cuts and Jobs Act, December 18, 2017, https://www.jct.gov/publications/2017/jcx-67-17/ (accessed October 18, 2024).
23 Office of Management and Budget, "Table 2.1--Receipts by Source: 1934-2029." TCJA's changes to the estate and gift tax may have also affected income tax receipts, though the effect on income taxes is unclear.
* * *
The top five corporate givers provided The Heritage Foundation with 1% of its 2022 income. The Heritage Foundation's books are audited annually by the national accounting firm of RSM US, LLP.
Members of The Heritage Foundation staff testify as individuals discussing their own independent research. The views expressed are their own and do not reflect an institutional position of The Heritage Foundation or its board of trustees.
* * *
Original text here: https://www.sbc.senate.gov/public/_cache/files/d/d/dda158ac-4488-45c8-91c6-9c8d0ea31fc9/0530C3A8E868C98B4AFA39813CE69AF8E6241D1140C50526EF1AF7FE1312890B.brashers-testimony.pdf
House Science, Space & Technology Committee Chairman Babin Issues Opening Statement at Hearing on DeepSeek
WASHINGTON, April 18 -- Rep. Brian Babin, R-Texas, chairman of the House Science, Space and Technology Committee, released the following opening statement from an April 8, 2025, hearing entitled "DeepSeek: A Deep Dive":
* * *
Good morning. Thank you, Chairman Obernolte, for convening today's hearing. I also want to thank our expert panel of witnesses for their participation.
Today's discussion presents us with a critical opportunity to examine the impact of DeepSeek's artificial intelligence models on America's technological leadership, innovation ecosystem, and national security.
DeepSeek ... Show Full Article WASHINGTON, April 18 -- Rep. Brian Babin, R-Texas, chairman of the House Science, Space and Technology Committee, released the following opening statement from an April 8, 2025, hearing entitled "DeepSeek: A Deep Dive": * * * Good morning. Thank you, Chairman Obernolte, for convening today's hearing. I also want to thank our expert panel of witnesses for their participation. Today's discussion presents us with a critical opportunity to examine the impact of DeepSeek's artificial intelligence models on America's technological leadership, innovation ecosystem, and national security. DeepSeekserves as a significant wake-up call. On the day of President Trump's second inauguration, this Chinese-owned company released its R1 model, which quickly surpassed ChatGPT to become the top-rated free application in U.S. app stores.
The Chinese Communist Party (CCP) presents a formidable and growing strategic challenge to our technological leadership. We know the CCP is aggressively pursuing plans to dominate next-generation technology, including through the theft of our research, innovations, and sensitive data.
Supporting DeepSeek is part of their plan. In fact, several U.S. government agencies, such as NASA and the U.S. Navy, have banned DeepSeek on federal devices because of its serious data privacy concerns.
The emergence of DeepSeek is particularly troubling given reports that it developed these models using American advanced semiconductor chips, including ones that the Department of Commerce banned from being sold to Chinese entities.
However, what's more alarming is that without U.S. leadership in open-weight models, DeepSeek could become the foundation for global AI applications that promote CCP values and potentially contain hidden vulnerabilities. If the United States cedes leadership in AI to the CCP, we risk not only our economic future but also our national security.
The development and deployment of critical technologies, such as AI, quantum, and advanced semiconductors, could be compromised by the values of the CCP, resulting in a failure to uphold American ideals of fairness and transparency.
But let's be clear: we cannot surpass China by imitating its approach. We must build systems that promote coordination and cooperation across the entire U.S. science and technology enterprise, both public and private, while leveraging the benefits of the free market.
We should continue to follow the recipe for success that led to American leadership in other emerging technologies like information technology, quantum, biotech, space, and energy.
This includes tearing down government barriers to private sector innovation, lowering taxes, protecting private property, reducing energy costs, and leveraging standards and best practices rather than aggressive regulations and market-corrupting subsidies. America's strength has always been our innovative spirit, our entrepreneurial drive, and our commitment to individual liberty.
The Trump Administration acknowledged this fundamental truth in a January executive order, which stated that the policy of the United States is "to sustain and enhance America's global AI dominance in order to promote human flourishing, economic competitiveness, and national security."
This approach underscores the significance of American leadership without unnecessary government intervention. We've already seen progress in this direction with the announcement of the Stargate Project and the proliferation of "little tech" investments by the private sector.
These trends build upon the substantial advantage we have as a nation. We have robust capital markets, innovative companies, cutting-edge research institutions, and bountiful natural resources that fuel our emerging technology enterprise. But DeepSeek is a reminder that we must be vigilant and not take our leadership for granted.
Evaluating the capabilities of Chinese models is critical to understanding the competitive landscape, maintaining our technological advantage, and assessing the risks they pose to national security. How we respond to challenges like DeepSeek will determine whether the United States continues to lead the world in AI or whether we allow the CCP to overtake us.
I look forward to hearing from our witnesses about DeepSeek's models and how the U.S. public and private sectors can accelerate American AI leadership into the future.
Thank you, and I yield back the balance of my time.
* * *
Original text here: https://science.house.gov/2025/4/opening-statement-of-chairman-brian-babin-at-deepseek-a-deep-dive
* * *
Good morning. Thank you, Chairman Obernolte, for convening today's hearing. I also want to thank our expert panel of witnesses for their participation.
Today's discussion presents us with a critical opportunity to examine the impact of DeepSeek's artificial intelligence models on America's technological leadership, innovation ecosystem, and national security.
DeepSeek ... Show Full Article WASHINGTON, April 18 -- Rep. Brian Babin, R-Texas, chairman of the House Science, Space and Technology Committee, released the following opening statement from an April 8, 2025, hearing entitled "DeepSeek: A Deep Dive": * * * Good morning. Thank you, Chairman Obernolte, for convening today's hearing. I also want to thank our expert panel of witnesses for their participation. Today's discussion presents us with a critical opportunity to examine the impact of DeepSeek's artificial intelligence models on America's technological leadership, innovation ecosystem, and national security. DeepSeekserves as a significant wake-up call. On the day of President Trump's second inauguration, this Chinese-owned company released its R1 model, which quickly surpassed ChatGPT to become the top-rated free application in U.S. app stores.
The Chinese Communist Party (CCP) presents a formidable and growing strategic challenge to our technological leadership. We know the CCP is aggressively pursuing plans to dominate next-generation technology, including through the theft of our research, innovations, and sensitive data.
Supporting DeepSeek is part of their plan. In fact, several U.S. government agencies, such as NASA and the U.S. Navy, have banned DeepSeek on federal devices because of its serious data privacy concerns.
The emergence of DeepSeek is particularly troubling given reports that it developed these models using American advanced semiconductor chips, including ones that the Department of Commerce banned from being sold to Chinese entities.
However, what's more alarming is that without U.S. leadership in open-weight models, DeepSeek could become the foundation for global AI applications that promote CCP values and potentially contain hidden vulnerabilities. If the United States cedes leadership in AI to the CCP, we risk not only our economic future but also our national security.
The development and deployment of critical technologies, such as AI, quantum, and advanced semiconductors, could be compromised by the values of the CCP, resulting in a failure to uphold American ideals of fairness and transparency.
But let's be clear: we cannot surpass China by imitating its approach. We must build systems that promote coordination and cooperation across the entire U.S. science and technology enterprise, both public and private, while leveraging the benefits of the free market.
We should continue to follow the recipe for success that led to American leadership in other emerging technologies like information technology, quantum, biotech, space, and energy.
This includes tearing down government barriers to private sector innovation, lowering taxes, protecting private property, reducing energy costs, and leveraging standards and best practices rather than aggressive regulations and market-corrupting subsidies. America's strength has always been our innovative spirit, our entrepreneurial drive, and our commitment to individual liberty.
The Trump Administration acknowledged this fundamental truth in a January executive order, which stated that the policy of the United States is "to sustain and enhance America's global AI dominance in order to promote human flourishing, economic competitiveness, and national security."
This approach underscores the significance of American leadership without unnecessary government intervention. We've already seen progress in this direction with the announcement of the Stargate Project and the proliferation of "little tech" investments by the private sector.
These trends build upon the substantial advantage we have as a nation. We have robust capital markets, innovative companies, cutting-edge research institutions, and bountiful natural resources that fuel our emerging technology enterprise. But DeepSeek is a reminder that we must be vigilant and not take our leadership for granted.
Evaluating the capabilities of Chinese models is critical to understanding the competitive landscape, maintaining our technological advantage, and assessing the risks they pose to national security. How we respond to challenges like DeepSeek will determine whether the United States continues to lead the world in AI or whether we allow the CCP to overtake us.
I look forward to hearing from our witnesses about DeepSeek's models and how the U.S. public and private sectors can accelerate American AI leadership into the future.
Thank you, and I yield back the balance of my time.
* * *
Original text here: https://science.house.gov/2025/4/opening-statement-of-chairman-brian-babin-at-deepseek-a-deep-dive
Franchise Business Owner Testifies Before Senate Small Business & Entrepreneurship Committee
WASHINGTON, April 18 -- The Senate Small Business and Entrepreneurship Committee released the following written testimony by Jerry Akers, a franchise business owner of Great Clips and Joint Chiropractic, on behalf of the International Franchise Association, from an April 8, 2025, joint hearing with the House Small Business Committee entitled "Prosperity on Main Street: Keeping Taxes Low for Small Businesses":
* * *
Good morning, Chairs Williams and Ernst, Ranking Members Velazquez and Markey, and distinguished members of the Committees. My name is Jerry Akers, and I am a franchise business owner ... Show Full Article WASHINGTON, April 18 -- The Senate Small Business and Entrepreneurship Committee released the following written testimony by Jerry Akers, a franchise business owner of Great Clips and Joint Chiropractic, on behalf of the International Franchise Association, from an April 8, 2025, joint hearing with the House Small Business Committee entitled "Prosperity on Main Street: Keeping Taxes Low for Small Businesses": * * * Good morning, Chairs Williams and Ernst, Ranking Members Velazquez and Markey, and distinguished members of the Committees. My name is Jerry Akers, and I am a franchise business ownerof Great Clips and The Joint Chiropractic. I own and operate with my wife and two daughters 33 Great Clips and four The Joint Chiropractic locations in my home state of Iowa, as well as Nebraska. I am also a co-author of the best-selling book "Live it 2 Own it" a Franchise bootstrap guidebook leading to the formation of ZDynamix - a company tasked with paving the way of success for franchise business owners.
I appreciate the invitation to appear before this Committee to share my story of small business ownership and discuss the views of local business owners everywhere as it relates to tax policy. I will focus my comments on the Section 199A deduction for qualified business income, bonus depreciation, the deductibility of interest, the estate, and tax relief for tipped workers. It is important that small business perspectives are heard by our nation's leaders.
I appear today on behalf of the International Franchise Association (IFA), the world's oldest and largest organization representing franchising worldwide. IFA works through its government relations and public policy, media relations, and educational programs to protect, enhance and promote franchising and the approximately 830,876 franchise establishments that support nearly 8.8 million direct jobs, $896.9 billion of economic output for the U.S. economy, representing almost 3 percent of the Gross Domestic Product (GDP). IFA members include franchise companies in over 300 different business format categories, individual franchisees, and companies that support the industry in marketing, law, technology, and business development.
I have experienced firsthand the remarkable impact that franchise businesses can have on local economies and communities, including their ability to create jobs, develop a skilled workforce, and foster economic growth. My wife and I have created a community of our own, employing over 250 team members that have been part of our system over the past several years. These team members are treated as an extension of our family and receive industry leading wages and Fortune 500 benefits all while working for a small franchised organization. As a multi-brand franchise owner and area developer for The Joint Chiropractic, I also assist other franchisees to create success and generate wealth in their communities. We are proud of the growth of franchising and its role in the economic recovery. Franchising had a great year in 2024, and 2025 looks to be another strong year of growth.
* * *
The Franchise Model
Franchising is perhaps the most important business growth strategy in American history. First beginning in 1731, when Ben Franklin entered into a partnership with Thomas Whitemarsh, who franchised Franklin's printing business - The Pennsylvania Gazette, the franchise system has served as a core American model over centuries for opportunity and entrepreneurism, contributing to robust job creation and providing foundational skills development for small business owners and workers.
When most people think of franchising, they first focus on the law, and while the law is certainly important, it is not the central tenant to understand franchising. At its core, franchising is about the relationship between the franchisor and its franchisees-- how the franchisor supports its franchisees, the franchisor's brand value and how the franchisee then meets its obligations to deliver the products and services to the system's brand standards.
Often affiliated as "big business," franchising is in fact the exact opposite. A franchise is first a local business, distinguished from other local businesses because it licenses the branding and operational processes of a franchisor while operating independently in a defined market. The local owner, or franchisee, like myself, is responsible for hiring staff, organizing schedules, managing payroll, and all daily operational tasks as well as local sales and marketing. The value of franchising then lies in a strategic balance in the relationship between a franchisor and franchisee: the independence of a franchisee to manage its day-to-day operations and connections with its employees, consumers and the local community balanced with the franchise system giving aspiring small business owners a head start toward becoming their own boss, with a proven business model that can set up new business owners for success and easier access to lines of credit than a traditional business.
Despite how it is often characterized, franchising is not an industry, rather it is a business growth model used within nearly every industry. Like I mentioned earlier in my testimony, there are more than 300 different sectors that are represented in franchising, and franchised companies offer a huge range of products and services from lodging to fitness, home renovators to hair salons, plumbing to pest control, restaurants, security, lawn care, and yes, even to dog care services, like Camp Bow Wow. So again, franchising is utilized far beyond the fast food brands that many most associate with it. In fact, 60% of franchises are outside of the restaurant sector.
There are two principal explanations for the popularity of franchising as a method of distribution. One is that it "was developed in response to the massive amounts of capital required to establish and operate a national or international network of uniform product or service vendors, as demanded by an increasingly mobile consuming public." The other is that franchising uniquely provides an opportunity for an aspiring business owner to own their own business with a brand, concept, and system for support in place, while having the autonomy to run their own day-to-day business operations. These two motivations are consistent with a business model in which the licensing and protection of the trademark rests with the franchisor, and the capital investment and direct management of day-to-day operations of each franchise unit are the responsibility of the franchisee who owns, and receives the net profits from, its individually owned franchise unit.
It is typical in franchising that a franchisor will license, among other things, the use of its name, its products or services, and its operational processes and systems to its franchisees. The turnkey nature of operating a franchised business is why I and so many of my fellow franchisees purchased a franchise. Franchisees look to the franchisor to protect the trade names, trademarks and service marks (collectively the "Marks") and brand by establishing and enforcing standards on all franchisees in a system. Such standards are essential for protection of franchisees' equity in their businesses and consumers of the brand. These standards allow franchisors to maintain the uniformity and quality of product and service offerings and, in doing so, to protect their Marks, the goodwill associated with those Marks, and most importantly, consumer confidence in the Marks and brand.
* * *
2025 Franchising Economic Outlook
For the last several years, franchising has exceeded economic expectations and surpassed the rate of growth of the broader economy. Last month, IFA released its annual Franchising Economic Outlook for 2025, and for the second consecutive year, franchising is experiencing tremendous growth. The report, conducted by FRANdata, an industry-leading research and analytical firm, is IFA's annual study that details the franchise sector's performance for the past year and projected economic outlook for the year ahead. It also provides an in-depth state outlook for all 50 states and Washington, D.C.
The report positively notes that even in the face of ongoing economic uncertainty and policy headwinds in 2024, franchise growth exceeded expectations, highlighted by 2.2% growth in franchise establishments and more than189,000 new jobs. And now, as we turn the calendar year into 2025, the report notes that a stabilizing labor market, easing interest rates, and increasing optimism about our economy are expected to propel franchising further, forecasting that franchise establishments will grow an additional 2.4%. This growth is projected to create approximately 210,000 new jobs across franchising this year, bringing franchise employment to more than 9 million jobs. Some other key highlights from the report that I wanted to bring to the Committees' attention are:
* Projected growth in the number of franchise establishments is expected to increase in 2025 by more than 20,000, or 2.5%, from 830,876 total franchise establishments to 851,000 total establishments.
* Total franchise output in 2025 is projected to exceed $936.4 billion, increasing by 4.4%, from $896.9 billion in 2024.
* Franchise GDP is expected to increase at a pace of 5% to $578 billion, which significantly outpaces the 1.9% growth in the broader economy projected by the Congressional Budget Office.
* The two franchise sectors that are expected to be the fastest-growing industries in 2025 are personal services and then retail food, products, and services, anticipated to increase by 4.3% and 3.5%, respectively.
* Regionally, it is forecasted that growth in the Southeast and Southwest will outpace the rest of the U.S. franchise market this year, with output growing by 6.2% and 8.5%, respectively.
* And as it pertains to states, the top 10 fastest-growing for franchise growth are: Georgia, North Carolina, Virginia, Arizona, South Carolina, Pennsylvania, Tennessee, Florida, Colorado, and Maryland.
So, as we enter into 2025, the economic outlook for franchising is strong and promising. We have favorable economic conditions and supportive regulatory policies which are helping pave the way for such expected growth and expansion across various sectors in franchising.
* * *
The Importance of Tax Policies that Support Small Businesses
As we all know, in 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA), which significantly overhauled large portions of the tax code for individuals, families, and businesses. While many of these changes for corporations were permanent, many of the individual and small business provisions are expiring at the end of this year.
Several of these expiring provisions are critical to locally owned franchise businesses. I appreciate the urgency with which Congress is seeking to address these as the uncertainty created by their looming expiration is giving small businesses pause as they make investment decisions that will allow them to grow and create jobs.
* * *
Section 199A Deduction for Qualified Business Income
The TCJA created the Section 199A deduction that provides passthrough businesses with a 20% deduction for qualified business income to provide a degree of parity with the large rate cut included in the bill for C corporations. Unlike the corporate rate cut, the 199A deduction, which functions much like a reduced tax rate on qualified business income, will not be available beyond 2025 unless Congress acts. Notably, more than 95% of franchised businesses are organized as passthroughs.
Much like the rest of small business owners, the 199A deduction has enabled me to increase investment in new equipment, technology, and facilities, driving growth and innovation, while the extra financial breathing room has allowed me to hire more employees, and provide better benefits to existing team members.
More importantly, this deduction has helped level the playing field, allowing businesses like mine to compete with larger corporations, and provide a level of financial stability that has been very valuable. The thought of these hard-earned gains being jeopardized is deeply unsettling. It's not just about numbers; it's about the livelihoods of families, the vitality of communities, and the spirit of entrepreneurship.
I urge Congress to make the pass-through deduction permanent to provide continued certainty to franchise businesses on Main Street.
* * *
Bonus Depreciation
The TCJA allowed businesses to immediately write off 100% of the cost of capital investments in qualified property placed in service after September 27, 2017, and before January 1, 2023. This provision encourages businesses of all sizes to make investments that will boost wages and increase hiring. Unfortunately, bonus depreciation has already begun to phase out. It stands at 40% for this year and will be phased out entirely in 2027 absent Congressional action.
Bonus depreciation allows businesses to deduct a large percentage of the cost of eligible assets in the year they are purchased. This immediate deduction significantly reduces taxable income, leading to lower tax liabilities and improved cash flow. For our businesses, this influx of cash is crucial for reinvestment, expansion, or managing operational costs. More importantly, the provision incentivizes businesses like mine to invest in new equipment, technology, and other qualifying assets, leading to increased productivity, efficiency, and overall economic growth. By allowing to make capital expenditures sooner rather than later, I have the ability to take a large deduction upfront simplifying tax planning, and reducing the complexities associated with traditional depreciation schedules.
As the bonus depreciation percentage decreases each year, the immediate tax savings for businesses also diminish. This means that businesses will have to spread out their deductions over a longer period, resulting in a delayed tax benefit. The phase-down ultimately leads to a higher tax burden for businesses in later years, as we can no longer claim the same level of immediate deductions.
The phasing down of this provision adds further complexity to long term business planning, and capital expenditure planning. Businesses must now plan for the future, knowing that the tax benefits are being reduced.
In essence, while the bonus depreciation provision provided a substantial boost to small businesses, its phase-down creates a growing concern about increased tax burdens and potential disincentives for investment. For these reasons, I strongly support restoring and making 100% bonus depreciation permanent.
* * *
Estate Tax
The TCJA made permanent the $5 million exemption, spousal transfer and stepped-up basis that was passed as part of the American Taxpayer Relief Act of 2012 and increased the exemption to $11 million through the end of this year. These provisions are critical to allowing family businesses like mine to be passed down to the next generation without selling or taking on crushing debt burdens.
Estate taxes can pose a substantial burden on family-owned businesses when the owners pass away. Without careful planning, heirs may be forced to sell off parts or all of the business to cover the tax liability. The TCJA's increased estate tax exemption helps maintain the business's continuity and preserves the family's legacy. Family businesses often have significant value tied up in illiquid assets, such as property, equipment, and inventory. Paying a large estate tax can create a liquidity crisis. By increasing the exemption, the TCJA has lessened the immediate financial strain on these businesses, enabling our families to focus on long-term strategic planning rather than worrying about immediate tax liabilities.
This is very personal to me - as I mentioned at the beginning of my testimony, our daughters are minority partners at this time in our Great Clips locations and will eventually own 100% of that business. Whether or not that generational transfer can happen - hopefully many years from now - may well depend on whether Congress acts.
* * *
Deductibility of Interest
Under the TCJA, prior to January 1, 2022, businesses' interest expense deductions were limited by section 163(j) to 30% of their earnings before interest, tax, depreciation, and amortization (EBITDA). Interest deductions are now limited to 30% of earnings before interest and tax (EBIT) - a stricter limitation. This change, combined with rising interest rates, is proving to make incremental investments by small businesses much more expensive. On average, a business affected by the change could see a three-fold increase in its incremental tax burden, facing both higher interest rates when financing improvements and a very high tax rate.
While I understand the rationale for wanting to discourage undue leverage, for small businesses, it hinders our growth. I urge Congress to restore this limitation to an EBITDA basis.
* * *
Tax Relief for Tipped Workers
President Trump's proposal to eliminate taxes on tips helps workers and small business owners alike. As a salon owner, I can tell you this proposal would provide meaningful tax relief to my employees who rely on tips as a significant part of their income. The most immediate effect would be a substantial increase in the amount of money our team members keep. Currently, a portion of their tip income is subject to federal and, in some cases, state income taxes, as well as payroll taxes.
Removing these taxes would mean they retain the full value of their tips.
I am particularly grateful that Members of Congress have recognized that it is important to provide parity across businesses where tipping is common.
* * *
Other Policy Concerns - Joint Employer
Finally, I would like to highlight a regulatory issue that has the potential to not only strengthen the franchise business model. That is, to permanently extend the 2020 National Labor Relations Board's joint employer rule.
As you are aware, in October 2023, the NLRB issued its final joint employer rule, which rewrote the standard for determining how brands and owners could be jointly responsible for the same employees under the National Labor Relations Act (NLRA). The rule threatened the ability of hundreds of thousands of local small business franchise owners, like mine, to make their own employment decisions - as it would ultimately lead to higher costs, less autonomy, and less equity for franchisees. When the joint employer standard was similarly expanded from 2015 to 2017, it cost franchised businesses $33 billion per year in operational costs and led to a 93% increase in lawsuits.
Recognizing the harm this rule would bring, both the House and Senate voted to overturn the joint employer rule in early 2024 using the Congressional Review Act (H.J. Res. 98), which I and other members of IFA commend. Then later in March 2024, a U.S. District Court judge struck down the 2023 NLRB rule, allowing for the former 2020 rule to be reinstituted.
While a reprieve from the previous NLRB's joint employer rule has been welcome news, I wanted to stress the importance that the current, common sense standard in federal labor law has on franchisees, like mine, and state that any action towards permanently preserving the current NLRB rule would not only protect both businesses and workers, but also create the regulatory conditions that allow both franchisors and franchisees to thrive, grow, and create jobs and opportunities in the communities that they serve.
Legislation such as the Save Local Business Act would help franchise small businesses tap into their potential to be an economic power engine and further assist the workforce issue. This important piece of legislation would keep the hard-earned equity of business owners like myself invested into their stores, community, and workers.
* * *
Conclusion
It is no surprise that for many small business owners like me, the TCJA provisions have been a lifeline. It has provided a sense of stability, allowing me to reinvest in my businesses, hire new employees and provide better benefits, and weather economic fluctuations. The prospect of losing that feels like a rug being pulled out from under me. The anxiety of potentially facing a significantly higher tax burden is a heavy weight to bear, especially for those who operate on tight margins.
In the already volatile economic climate, the added layer of tax uncertainty creates a sense of anxiety. Small business owners are accustomed to taking risks, but the threat of a significantly higher tax burden feels like an unfair and unpredictable obstacle.
Franchise businesses contribute significantly to our nation's economy, creating a diverse range of employment opportunities from entry-level positions to management roles. In addition, by offering a platform for individuals to become small business owners with lower risks than starting a business from scratch, franchises encourage entrepreneurship, which in turn creates more jobs and enhances local economies. It is critical that Congress continue tax policies that support franchising, and all small businesses. IFA and I are ready to be a resource in this effort. Thank you again for the opportunity to testify. I am happy to answer any questions you may have.
* * *
Original text here: https://www.sbc.senate.gov/public/_cache/files/d/4/d496342b-2a95-4f17-abb6-8892f59944b2/088588BFAE52F54387E4553BB3FA90FE6EA3543BEC96BD72A0BD19A163004EC3.akers-testimony.pdf
* * *
Good morning, Chairs Williams and Ernst, Ranking Members Velazquez and Markey, and distinguished members of the Committees. My name is Jerry Akers, and I am a franchise business owner ... Show Full Article WASHINGTON, April 18 -- The Senate Small Business and Entrepreneurship Committee released the following written testimony by Jerry Akers, a franchise business owner of Great Clips and Joint Chiropractic, on behalf of the International Franchise Association, from an April 8, 2025, joint hearing with the House Small Business Committee entitled "Prosperity on Main Street: Keeping Taxes Low for Small Businesses": * * * Good morning, Chairs Williams and Ernst, Ranking Members Velazquez and Markey, and distinguished members of the Committees. My name is Jerry Akers, and I am a franchise business ownerof Great Clips and The Joint Chiropractic. I own and operate with my wife and two daughters 33 Great Clips and four The Joint Chiropractic locations in my home state of Iowa, as well as Nebraska. I am also a co-author of the best-selling book "Live it 2 Own it" a Franchise bootstrap guidebook leading to the formation of ZDynamix - a company tasked with paving the way of success for franchise business owners.
I appreciate the invitation to appear before this Committee to share my story of small business ownership and discuss the views of local business owners everywhere as it relates to tax policy. I will focus my comments on the Section 199A deduction for qualified business income, bonus depreciation, the deductibility of interest, the estate, and tax relief for tipped workers. It is important that small business perspectives are heard by our nation's leaders.
I appear today on behalf of the International Franchise Association (IFA), the world's oldest and largest organization representing franchising worldwide. IFA works through its government relations and public policy, media relations, and educational programs to protect, enhance and promote franchising and the approximately 830,876 franchise establishments that support nearly 8.8 million direct jobs, $896.9 billion of economic output for the U.S. economy, representing almost 3 percent of the Gross Domestic Product (GDP). IFA members include franchise companies in over 300 different business format categories, individual franchisees, and companies that support the industry in marketing, law, technology, and business development.
I have experienced firsthand the remarkable impact that franchise businesses can have on local economies and communities, including their ability to create jobs, develop a skilled workforce, and foster economic growth. My wife and I have created a community of our own, employing over 250 team members that have been part of our system over the past several years. These team members are treated as an extension of our family and receive industry leading wages and Fortune 500 benefits all while working for a small franchised organization. As a multi-brand franchise owner and area developer for The Joint Chiropractic, I also assist other franchisees to create success and generate wealth in their communities. We are proud of the growth of franchising and its role in the economic recovery. Franchising had a great year in 2024, and 2025 looks to be another strong year of growth.
* * *
The Franchise Model
Franchising is perhaps the most important business growth strategy in American history. First beginning in 1731, when Ben Franklin entered into a partnership with Thomas Whitemarsh, who franchised Franklin's printing business - The Pennsylvania Gazette, the franchise system has served as a core American model over centuries for opportunity and entrepreneurism, contributing to robust job creation and providing foundational skills development for small business owners and workers.
When most people think of franchising, they first focus on the law, and while the law is certainly important, it is not the central tenant to understand franchising. At its core, franchising is about the relationship between the franchisor and its franchisees-- how the franchisor supports its franchisees, the franchisor's brand value and how the franchisee then meets its obligations to deliver the products and services to the system's brand standards.
Often affiliated as "big business," franchising is in fact the exact opposite. A franchise is first a local business, distinguished from other local businesses because it licenses the branding and operational processes of a franchisor while operating independently in a defined market. The local owner, or franchisee, like myself, is responsible for hiring staff, organizing schedules, managing payroll, and all daily operational tasks as well as local sales and marketing. The value of franchising then lies in a strategic balance in the relationship between a franchisor and franchisee: the independence of a franchisee to manage its day-to-day operations and connections with its employees, consumers and the local community balanced with the franchise system giving aspiring small business owners a head start toward becoming their own boss, with a proven business model that can set up new business owners for success and easier access to lines of credit than a traditional business.
Despite how it is often characterized, franchising is not an industry, rather it is a business growth model used within nearly every industry. Like I mentioned earlier in my testimony, there are more than 300 different sectors that are represented in franchising, and franchised companies offer a huge range of products and services from lodging to fitness, home renovators to hair salons, plumbing to pest control, restaurants, security, lawn care, and yes, even to dog care services, like Camp Bow Wow. So again, franchising is utilized far beyond the fast food brands that many most associate with it. In fact, 60% of franchises are outside of the restaurant sector.
There are two principal explanations for the popularity of franchising as a method of distribution. One is that it "was developed in response to the massive amounts of capital required to establish and operate a national or international network of uniform product or service vendors, as demanded by an increasingly mobile consuming public." The other is that franchising uniquely provides an opportunity for an aspiring business owner to own their own business with a brand, concept, and system for support in place, while having the autonomy to run their own day-to-day business operations. These two motivations are consistent with a business model in which the licensing and protection of the trademark rests with the franchisor, and the capital investment and direct management of day-to-day operations of each franchise unit are the responsibility of the franchisee who owns, and receives the net profits from, its individually owned franchise unit.
It is typical in franchising that a franchisor will license, among other things, the use of its name, its products or services, and its operational processes and systems to its franchisees. The turnkey nature of operating a franchised business is why I and so many of my fellow franchisees purchased a franchise. Franchisees look to the franchisor to protect the trade names, trademarks and service marks (collectively the "Marks") and brand by establishing and enforcing standards on all franchisees in a system. Such standards are essential for protection of franchisees' equity in their businesses and consumers of the brand. These standards allow franchisors to maintain the uniformity and quality of product and service offerings and, in doing so, to protect their Marks, the goodwill associated with those Marks, and most importantly, consumer confidence in the Marks and brand.
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2025 Franchising Economic Outlook
For the last several years, franchising has exceeded economic expectations and surpassed the rate of growth of the broader economy. Last month, IFA released its annual Franchising Economic Outlook for 2025, and for the second consecutive year, franchising is experiencing tremendous growth. The report, conducted by FRANdata, an industry-leading research and analytical firm, is IFA's annual study that details the franchise sector's performance for the past year and projected economic outlook for the year ahead. It also provides an in-depth state outlook for all 50 states and Washington, D.C.
The report positively notes that even in the face of ongoing economic uncertainty and policy headwinds in 2024, franchise growth exceeded expectations, highlighted by 2.2% growth in franchise establishments and more than189,000 new jobs. And now, as we turn the calendar year into 2025, the report notes that a stabilizing labor market, easing interest rates, and increasing optimism about our economy are expected to propel franchising further, forecasting that franchise establishments will grow an additional 2.4%. This growth is projected to create approximately 210,000 new jobs across franchising this year, bringing franchise employment to more than 9 million jobs. Some other key highlights from the report that I wanted to bring to the Committees' attention are:
* Projected growth in the number of franchise establishments is expected to increase in 2025 by more than 20,000, or 2.5%, from 830,876 total franchise establishments to 851,000 total establishments.
* Total franchise output in 2025 is projected to exceed $936.4 billion, increasing by 4.4%, from $896.9 billion in 2024.
* Franchise GDP is expected to increase at a pace of 5% to $578 billion, which significantly outpaces the 1.9% growth in the broader economy projected by the Congressional Budget Office.
* The two franchise sectors that are expected to be the fastest-growing industries in 2025 are personal services and then retail food, products, and services, anticipated to increase by 4.3% and 3.5%, respectively.
* Regionally, it is forecasted that growth in the Southeast and Southwest will outpace the rest of the U.S. franchise market this year, with output growing by 6.2% and 8.5%, respectively.
* And as it pertains to states, the top 10 fastest-growing for franchise growth are: Georgia, North Carolina, Virginia, Arizona, South Carolina, Pennsylvania, Tennessee, Florida, Colorado, and Maryland.
So, as we enter into 2025, the economic outlook for franchising is strong and promising. We have favorable economic conditions and supportive regulatory policies which are helping pave the way for such expected growth and expansion across various sectors in franchising.
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The Importance of Tax Policies that Support Small Businesses
As we all know, in 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA), which significantly overhauled large portions of the tax code for individuals, families, and businesses. While many of these changes for corporations were permanent, many of the individual and small business provisions are expiring at the end of this year.
Several of these expiring provisions are critical to locally owned franchise businesses. I appreciate the urgency with which Congress is seeking to address these as the uncertainty created by their looming expiration is giving small businesses pause as they make investment decisions that will allow them to grow and create jobs.
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Section 199A Deduction for Qualified Business Income
The TCJA created the Section 199A deduction that provides passthrough businesses with a 20% deduction for qualified business income to provide a degree of parity with the large rate cut included in the bill for C corporations. Unlike the corporate rate cut, the 199A deduction, which functions much like a reduced tax rate on qualified business income, will not be available beyond 2025 unless Congress acts. Notably, more than 95% of franchised businesses are organized as passthroughs.
Much like the rest of small business owners, the 199A deduction has enabled me to increase investment in new equipment, technology, and facilities, driving growth and innovation, while the extra financial breathing room has allowed me to hire more employees, and provide better benefits to existing team members.
More importantly, this deduction has helped level the playing field, allowing businesses like mine to compete with larger corporations, and provide a level of financial stability that has been very valuable. The thought of these hard-earned gains being jeopardized is deeply unsettling. It's not just about numbers; it's about the livelihoods of families, the vitality of communities, and the spirit of entrepreneurship.
I urge Congress to make the pass-through deduction permanent to provide continued certainty to franchise businesses on Main Street.
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Bonus Depreciation
The TCJA allowed businesses to immediately write off 100% of the cost of capital investments in qualified property placed in service after September 27, 2017, and before January 1, 2023. This provision encourages businesses of all sizes to make investments that will boost wages and increase hiring. Unfortunately, bonus depreciation has already begun to phase out. It stands at 40% for this year and will be phased out entirely in 2027 absent Congressional action.
Bonus depreciation allows businesses to deduct a large percentage of the cost of eligible assets in the year they are purchased. This immediate deduction significantly reduces taxable income, leading to lower tax liabilities and improved cash flow. For our businesses, this influx of cash is crucial for reinvestment, expansion, or managing operational costs. More importantly, the provision incentivizes businesses like mine to invest in new equipment, technology, and other qualifying assets, leading to increased productivity, efficiency, and overall economic growth. By allowing to make capital expenditures sooner rather than later, I have the ability to take a large deduction upfront simplifying tax planning, and reducing the complexities associated with traditional depreciation schedules.
As the bonus depreciation percentage decreases each year, the immediate tax savings for businesses also diminish. This means that businesses will have to spread out their deductions over a longer period, resulting in a delayed tax benefit. The phase-down ultimately leads to a higher tax burden for businesses in later years, as we can no longer claim the same level of immediate deductions.
The phasing down of this provision adds further complexity to long term business planning, and capital expenditure planning. Businesses must now plan for the future, knowing that the tax benefits are being reduced.
In essence, while the bonus depreciation provision provided a substantial boost to small businesses, its phase-down creates a growing concern about increased tax burdens and potential disincentives for investment. For these reasons, I strongly support restoring and making 100% bonus depreciation permanent.
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Estate Tax
The TCJA made permanent the $5 million exemption, spousal transfer and stepped-up basis that was passed as part of the American Taxpayer Relief Act of 2012 and increased the exemption to $11 million through the end of this year. These provisions are critical to allowing family businesses like mine to be passed down to the next generation without selling or taking on crushing debt burdens.
Estate taxes can pose a substantial burden on family-owned businesses when the owners pass away. Without careful planning, heirs may be forced to sell off parts or all of the business to cover the tax liability. The TCJA's increased estate tax exemption helps maintain the business's continuity and preserves the family's legacy. Family businesses often have significant value tied up in illiquid assets, such as property, equipment, and inventory. Paying a large estate tax can create a liquidity crisis. By increasing the exemption, the TCJA has lessened the immediate financial strain on these businesses, enabling our families to focus on long-term strategic planning rather than worrying about immediate tax liabilities.
This is very personal to me - as I mentioned at the beginning of my testimony, our daughters are minority partners at this time in our Great Clips locations and will eventually own 100% of that business. Whether or not that generational transfer can happen - hopefully many years from now - may well depend on whether Congress acts.
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Deductibility of Interest
Under the TCJA, prior to January 1, 2022, businesses' interest expense deductions were limited by section 163(j) to 30% of their earnings before interest, tax, depreciation, and amortization (EBITDA). Interest deductions are now limited to 30% of earnings before interest and tax (EBIT) - a stricter limitation. This change, combined with rising interest rates, is proving to make incremental investments by small businesses much more expensive. On average, a business affected by the change could see a three-fold increase in its incremental tax burden, facing both higher interest rates when financing improvements and a very high tax rate.
While I understand the rationale for wanting to discourage undue leverage, for small businesses, it hinders our growth. I urge Congress to restore this limitation to an EBITDA basis.
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Tax Relief for Tipped Workers
President Trump's proposal to eliminate taxes on tips helps workers and small business owners alike. As a salon owner, I can tell you this proposal would provide meaningful tax relief to my employees who rely on tips as a significant part of their income. The most immediate effect would be a substantial increase in the amount of money our team members keep. Currently, a portion of their tip income is subject to federal and, in some cases, state income taxes, as well as payroll taxes.
Removing these taxes would mean they retain the full value of their tips.
I am particularly grateful that Members of Congress have recognized that it is important to provide parity across businesses where tipping is common.
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Other Policy Concerns - Joint Employer
Finally, I would like to highlight a regulatory issue that has the potential to not only strengthen the franchise business model. That is, to permanently extend the 2020 National Labor Relations Board's joint employer rule.
As you are aware, in October 2023, the NLRB issued its final joint employer rule, which rewrote the standard for determining how brands and owners could be jointly responsible for the same employees under the National Labor Relations Act (NLRA). The rule threatened the ability of hundreds of thousands of local small business franchise owners, like mine, to make their own employment decisions - as it would ultimately lead to higher costs, less autonomy, and less equity for franchisees. When the joint employer standard was similarly expanded from 2015 to 2017, it cost franchised businesses $33 billion per year in operational costs and led to a 93% increase in lawsuits.
Recognizing the harm this rule would bring, both the House and Senate voted to overturn the joint employer rule in early 2024 using the Congressional Review Act (H.J. Res. 98), which I and other members of IFA commend. Then later in March 2024, a U.S. District Court judge struck down the 2023 NLRB rule, allowing for the former 2020 rule to be reinstituted.
While a reprieve from the previous NLRB's joint employer rule has been welcome news, I wanted to stress the importance that the current, common sense standard in federal labor law has on franchisees, like mine, and state that any action towards permanently preserving the current NLRB rule would not only protect both businesses and workers, but also create the regulatory conditions that allow both franchisors and franchisees to thrive, grow, and create jobs and opportunities in the communities that they serve.
Legislation such as the Save Local Business Act would help franchise small businesses tap into their potential to be an economic power engine and further assist the workforce issue. This important piece of legislation would keep the hard-earned equity of business owners like myself invested into their stores, community, and workers.
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Conclusion
It is no surprise that for many small business owners like me, the TCJA provisions have been a lifeline. It has provided a sense of stability, allowing me to reinvest in my businesses, hire new employees and provide better benefits, and weather economic fluctuations. The prospect of losing that feels like a rug being pulled out from under me. The anxiety of potentially facing a significantly higher tax burden is a heavy weight to bear, especially for those who operate on tight margins.
In the already volatile economic climate, the added layer of tax uncertainty creates a sense of anxiety. Small business owners are accustomed to taking risks, but the threat of a significantly higher tax burden feels like an unfair and unpredictable obstacle.
Franchise businesses contribute significantly to our nation's economy, creating a diverse range of employment opportunities from entry-level positions to management roles. In addition, by offering a platform for individuals to become small business owners with lower risks than starting a business from scratch, franchises encourage entrepreneurship, which in turn creates more jobs and enhances local economies. It is critical that Congress continue tax policies that support franchising, and all small businesses. IFA and I are ready to be a resource in this effort. Thank you again for the opportunity to testify. I am happy to answer any questions you may have.
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Original text here: https://www.sbc.senate.gov/public/_cache/files/d/4/d496342b-2a95-4f17-abb6-8892f59944b2/088588BFAE52F54387E4553BB3FA90FE6EA3543BEC96BD72A0BD19A163004EC3.akers-testimony.pdf
Ex-FDA Commissioner Kessler Testifies Before House Oversight & Government Reform Committee
WASHINGTON, April 18 -- The House Oversight and Government Reform Committee released the following written testimony by David Kessler, former commissioner of the Food and Drug Administration, from an April 9, 2025, hearing entitled "Restoring Trust in FDA: Rooting Out Illicit Products":
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Chairman Comer, Ranking Member Connolly, and Members of the Committee:
My name is Dr. David Kessler. I have had the privilege of working for both Republican and Democratic presidents. I was appointed by President George H. W. Bush and reappointed by President Bill Clinton as Commissioner of the U.S. Food ... Show Full Article WASHINGTON, April 18 -- The House Oversight and Government Reform Committee released the following written testimony by David Kessler, former commissioner of the Food and Drug Administration, from an April 9, 2025, hearing entitled "Restoring Trust in FDA: Rooting Out Illicit Products": * * * Chairman Comer, Ranking Member Connolly, and Members of the Committee: My name is Dr. David Kessler. I have had the privilege of working for both Republican and Democratic presidents. I was appointed by President George H. W. Bush and reappointed by President Bill Clinton as Commissioner of the U.S. Foodand Drug Administration (FDA or the Agency). Under my leadership, FDA was responsible for establishing accelerated approval, user fees, Nutrition Facts food labels, and regulation of tobacco products. In January 2021, I had the privilege of returning to federal service and co-leading Operation Warp Speed.
Mr. Chairman, I am in full agreement with you regarding significant concerns about the safety and efficacy of illicit, and sometimes licit, drug products originating from overseas, particularly China. Counterfeit drugs, devices, and precursor substances are reaching our shores and pose a serious health risk. As this Committee knows, e-cigarettes, that have never been authorized, are easily available.
But if we are serious about these concerns, we have to discuss the loss of critical functions and missions due to the radical reductions to staff at FDA. Given the lack of transparency and accounting, it is difficult to even see the full scope of impact. But we do know a few concrete examples of how these reduction in force (RIF) actions will cripple key functions and missions at FDA, particularly regarding oversight of illicit and counterfeit products. Let me give you a snapshot of how some of these FDA Centers and offices and key personnel supported critical public health oversight and what we, as a nation, will miss.
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Licit, illicit and counterfeit imported products
As you can see from Figure 1, only four percent of active pharmaceutical ingredients (API)--the key component of a drug--are produced in the United States. In my opinion, we have been conducting a reckless national experiment with compounded new weight loss drugs (GLP-1s). It is my understanding that there are not routine FDA surveillance testing of the GLP-1 products that are being imported into the United States from China for compounding to assure what is in the product. We cannot have full confidence in imported compounded GLP-1 drugs.
We need to take enforcement actions on illicit products. While we have heard that no inspectors were eliminated, it takes more than inspectors to ensure safe products enter this country. As we have seen, bad actors are frequently using or modifying their tactics for importing illicit products into the U.S. Strengthening enforcement against illicit products often requires analyzing the Agency's authorities and enforcement tools against these tactics. In many cases, this has required modifying or proposing new policy to better enable FDA to deter or prevent these products from entering the U.S.
For example, to address the avalanche of flavored vapes, FDA officials with decades of experience came up with a plan to enable regulatory action on products like "Iced Lemonade" ecigarettes.
Industry objected, and FDA fought all the way to a victory at the Supreme Court last week. Key staff at FDA's policy shops and the Center for Tobacco Products, including Center Director Brian King who led this strategy, were all cut last week.
I agree that we need to improve-and yes, streamline-FDA's oversight and response to illicit products. But the cuts last week are not streamlining. They are not improving. If you remove the people doing the work to ensure the safety of products entering this country's supply chain, it is not hard to project that more illicit and counterfeit products will enter this country as a result of last week's haphazard cuts.
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Infant formula and food safety
If we want to talk about the safety of imported goods, we also need to talk about food safety. Food safety experts at FDA identified salmonella in cucumbers that sickened 551 Americans as well as raw pet food that infected pets. We have had lead in applesauce traced to imported cinnamon. I think we all agree we do not want lead in baby food. Secretary of the Department of Health and Human Services (HHS), Robert F. Kennedy, recently launched Operation Stork Speed, which will be testing infant formula for heavy metals, among other actions.
At the same time, FDA's food testing laboratory in Alameda, California was cut. This lab was testing for contaminants in baby food and for avian flu in other food products.
Again, how does FDA address food safety, and what is the impact of last week's cuts?
For any food safety threat, FDA has to identify the crisis. This can mean responding to whistleblower complaints, such as the four infants that died in 2022 at the outset of the infant formula crisis. This can also mean using data to track and detect outbreaks, including partnering with the Centers for Disease Control and Prevention (CDC) or states to integrate their data signals. But you need staff to receive the whistleblower complaints and data. You need experts and teams to review those whistleblower complaints and data. You need staff to sample products and identify the source of contamination. We are all still trying to understand who was cut last week, but it appears that key staff at the Human Foods Program (HFP) who work on food safety were lost. Some of the experts who would support a food outbreak response were housed in policy offices, and data experts in the "Office of Digital Transformation".
FDA also has to communicate with the public, industry, and government officials to address a crisis. For many outbreaks, this means a team of scientists and communications specialists work, often weekends or overnight, to issue advice and warnings to the public, including recalls and notifications to Congress. Members of these interdisciplinary teams have specialized experience and are not interchangeable. Much of these communication and legislative teams are gone.
The Agency also sometimes needs to create policy in the midst of crises to address the emergency. For infant formula, FDA policy experts worked nights and weekends to issue new enforcement discretion policy to enable importation of formula from around the world. That imported formula - over six million pounds - helped alleviate the shortages of formula on the shelves. It appears that HFP's Office of Policy and International Engagement was cut by more than half. Among other things, this office works on rules and policy documents related to food safety, infant formula, "generally recognized as safe", nutrition, and chemical safety. Key staff that write food safety rules and guidances are gone, including staff that work on international regulatory partnerships and other key policy initiatives.
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Avian flu response and Center on Veterinary Medicine
The recent RIFs also seem to have unknowingly dismantled the FDA's avian flu (also referred to a H5N1) response.
The staff in the Office of the Director at Center on Veterinary Medicine (CVM) was cut drastically. This includes the FDA's Chief Veterinary Officer, who was co-leading the Agency's response to avian flu, and another senior veterinarian working to coordinate lines of effort and data between state and federal partners. They were put on administrative leave with no plan for transition of this important work.
As noted above, critical to any Agency action is communicating with consumers, manufacturers, and local officials. Communications staff who made sure recall notices about pet food contaminated with avian flu linked to cat illness and deaths reached consumers and veterinarians were cut, as were key staff who communicated ways the pet food industry can keep products safe from avian flu.
Senior veterinary leadership responsible for making tough decisions to keep animals and humans safe from growing threat of avian flu were also cut, including veterinarians who designed the first studies that tested retail milk, showing that pasteurization works against avian flu.
All these teams have been affected by the cuts -communications, policy, as well as veterinary teams, laboratories, and food safety regulatory experts working on critical reforms. We have heard that inspectors were not cut. But inspectors are highly trained in sciences, not trained logistics experts to support trips to China or other foreign facilities. Without key support staff, they will have less time to do inspections. Travel cards were limited to $1 without clearance.
Laboratories--the ones that remain open--cannot purchase the products they need to test if the food is safe. Imagine if all the staff of Congress were dismissed and every expense over $1 needed to be approved.
Let me tell you about one committed public servant at FDA - Dr. Elise Ackley - who was sent a RIF notice. She is a veterinarian working on chemical safety and contamination in food - supporting the current Administration efforts including reforms of the "generally recognized as safe" framework. Dr. Ackley is a military spouse married to an active-duty Army veterinarian, both grads of Louisiana State University. The loss of her expertise in support of FDA and its mission to make sure our food system is safe poses risk that we are just now beginning to fully understand.
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Product approvals
One of the reasons we have been able to lead the world in health sciences is due to a strong FDA and its rigorous standards. One of my goals as Commissioner was to ensure that if you needed access to a life-saving drug and you lived in the United States, you would have access to it before anyone else in the world. We saw that in COVID-19, for example, with monoclonal antibodies. This new treatment appears to have saved President Trump's life back in October 2020. Dr. Peter Stein, who led FDA's Office of New Drugs, made that drug available to the president and thousands of others. Dr. Stein was removed from his office in the recent round of cuts, as were thousands of others. It is no way to restore trust in FDA when you cut the person who may have saved the president's life.
Dr. Stein is but one of the people FDA fired last week. We lost thousands of FDA employees last week. Each of those employees brought years or decades of experience and knowledge on how to execute FDA's mission. That is thousands of years of experience and capabilities that we have lost, including a wealth of experience that could help us root out illicit and counterfeit products.
The scientific independence of FDA - paired with the best scientists in the world who earned that independence - has been the key to FDA's gold standard status around the world. We are losing both.
We have lost key scientists. The departure of Dr. Peter Marks, the former director of the Center for Biologics Evaluation and Research (CBER), was widely reported, but key deputies at FDA's Oncology Center of Excellence (OCE) also resigned, in part because an entire division was decimated by departures even before last week's RIF actions. These were talented, brilliant scientists who helped make life-saving medicines available for someone's mother, father, or child.
I also want to say a couple more words on Dr. Marks - his letter and concerns have been widely reported - but I want to talk about what FDA has lost as an Agency. Dr. Marks is a hematologistoncologist and, under his leadership, CBER approved the first genetically modified cell therapy for children with leukemia who had no other treatment options. This approval occurred during the first Trump Administration. This whole category of cell and gene therapy is a vibrant new class of innovative treatments that did not really exist before Dr. Marks - and his support has been critical.
The scientific independence of FDA has been a bipartisan value, one that industry and consumers alike have fought for and defended. We heard last week about a hold on the Novavax application. I have no idea whether or not Novavax should be approved - but I can tell you this should be a decision by scientists and physicians within the Center for Biologics.
FDA has depended on transparency to help the public understand and have confidence in its decision making. However, the administration also cut the communications and policy staff, which undermines a longstanding practice of regulatory independence. I fear these cuts may enable more political interference. This could delay regulatory actions or undermine the public's ability to get science-based information.
I was hopeful when Secretary talked about "radical transparency". But press reports suggest that advisory committees may not meet because the staff to support them were fired. The very people who support a public process of analyzing data to determine a recommendation about whether a product should be approved. These firings will lead to less, not more, transparency. And equally as important, this radical change in the process will deprive developers of the predictability of the process they have come to depend on. Ultimately, by creating chaos in the system, it will be American patients who suffer.
Industry knows this matters. Biotech stocks fell four percent with the departure of Dr. Marks.
Analysts at Cantor Fitzgerald were deeply concerned at Dr. Marks departure, saying that "pushing out one of the most trusted leaders of the FDA to promote an anti-science agenda is a step too far for us...", and highlighting the "disruptive, destructive and chaotic decision-making" of this current HHS.
Other senior Agency officials at CBER were also cut-- this team was working on a policy framework for accelerated approval for gene therapy for rare diseases such as muscular dystrophies and other pediatric neurodevelopmental conditions. This team was also working on fully standing up FDA's Rare Disease Innovation Hub, and issuing guidance on platform technologies, as well as development of policy on the use of artificial intelligence in regulatory decision making. To be clear, these individuals were enabling innovations in science and technology, and, with their departures, we may lose that edge.
The current processes at FDA rely on user fees to ensure timely review and consideration of lifesaving technology and innovations. According to Politico's AgencyIQ, about half of those individuals who were negotiating and overseeing implementation of the user fee commitments have left the Agency, including key senior leaders. And even more concerning, the cuts to FDAfunded staff could cause FDA to miss negotiated triggers necessary to collect user fees from industry. If the federal government is not paying for their share of funding, FDA will be required to refund industry's share to them as well - compounding the losses well beyond the cuts already. If that happens, all medical product reviews could be dramatically slowed - we could go back to 2-3 years for review rather than the six months we see right now for groundbreaking drugs and biologics.
Now, in a world where Congress committed to replacing that $3.3 billion in user fees, you could argue that having full public funding for the Agency might be a good bipartisan policy goal. But if that were the goal, this should go along with an appropriations package with a radical increase in FDA funding.
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Conclusion
The conventional wisdom is that illicit cheap copies coming from China are a major threat to our health and safety. The more significant threat, Mr. Chairman, is that China is attempting to surpass the U.S. in the sciences. As shown in Figure 2, the highly respected Nature Global Index reveals that eight of the top 10 universities in terms of impactful research in the natural sciences are located in China. Specifically in chemistry, all 10 of the highest ranked universities are in China. Only in the health sciences does the U.S. hold the lead.
I was fortunate to grow up at a time when, following the launch of Sputnik, the United States recognized the need to invest heavily in the sciences.
I know this is a committee that has strong views on both sides of the aisle. Still, I hope that we can come together and recognize that China is poised to surpass us in the sciences, and we need to act quickly to make the necessary investments to shore up our competitiveness and avoid putting our nation at risk.
I recognize that there are limitations to those rankings and that China may have been citing papers in a way that increases its standing. Increasingly, U.S. scientists I have spoken to see much higher quality work coming out of their country. Refer to Figure 3, which illustrates their increasing investment in research and development, currently at approximately $500 billion as of last year. In contrast, from 2004 to 2016, our investment in the National Institutes of Health (NIH) increased only slightly. Whatever needs to be fixed, let's fix it, but we need to make a marked increase in our investment--this is Sputnik 2.0, but with China.
These recent cuts to federal science workforce and investments appear to me as devastating, haphazard, thoughtless, and chaotic.
We need to be clear-eyed about the threat that China poses to American exceptionalism, especially in the sciences. We cannot afford to be haphazard in our support of the American scientific enterprise - not when China's commitment to the sciences is more real than it has been in the past.
The competition - America's real competition - in the sciences is China. We simply cannot afford to lose our focus. It is important that President Trump and this White House, as well as Congress, understand the nature of that competitive challenge, and respond strategically, thoughtfully, and with appropriate strength.
Thank you for your attention to making sure FDA continues to be a strong scientific and regulatory agency serving the American people.
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Original text here: https://oversight.house.gov/wp-content/uploads/2025/04/Kessler-Written-Testimony.pdf
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Chairman Comer, Ranking Member Connolly, and Members of the Committee:
My name is Dr. David Kessler. I have had the privilege of working for both Republican and Democratic presidents. I was appointed by President George H. W. Bush and reappointed by President Bill Clinton as Commissioner of the U.S. Food ... Show Full Article WASHINGTON, April 18 -- The House Oversight and Government Reform Committee released the following written testimony by David Kessler, former commissioner of the Food and Drug Administration, from an April 9, 2025, hearing entitled "Restoring Trust in FDA: Rooting Out Illicit Products": * * * Chairman Comer, Ranking Member Connolly, and Members of the Committee: My name is Dr. David Kessler. I have had the privilege of working for both Republican and Democratic presidents. I was appointed by President George H. W. Bush and reappointed by President Bill Clinton as Commissioner of the U.S. Foodand Drug Administration (FDA or the Agency). Under my leadership, FDA was responsible for establishing accelerated approval, user fees, Nutrition Facts food labels, and regulation of tobacco products. In January 2021, I had the privilege of returning to federal service and co-leading Operation Warp Speed.
Mr. Chairman, I am in full agreement with you regarding significant concerns about the safety and efficacy of illicit, and sometimes licit, drug products originating from overseas, particularly China. Counterfeit drugs, devices, and precursor substances are reaching our shores and pose a serious health risk. As this Committee knows, e-cigarettes, that have never been authorized, are easily available.
But if we are serious about these concerns, we have to discuss the loss of critical functions and missions due to the radical reductions to staff at FDA. Given the lack of transparency and accounting, it is difficult to even see the full scope of impact. But we do know a few concrete examples of how these reduction in force (RIF) actions will cripple key functions and missions at FDA, particularly regarding oversight of illicit and counterfeit products. Let me give you a snapshot of how some of these FDA Centers and offices and key personnel supported critical public health oversight and what we, as a nation, will miss.
* * *
Licit, illicit and counterfeit imported products
As you can see from Figure 1, only four percent of active pharmaceutical ingredients (API)--the key component of a drug--are produced in the United States. In my opinion, we have been conducting a reckless national experiment with compounded new weight loss drugs (GLP-1s). It is my understanding that there are not routine FDA surveillance testing of the GLP-1 products that are being imported into the United States from China for compounding to assure what is in the product. We cannot have full confidence in imported compounded GLP-1 drugs.
We need to take enforcement actions on illicit products. While we have heard that no inspectors were eliminated, it takes more than inspectors to ensure safe products enter this country. As we have seen, bad actors are frequently using or modifying their tactics for importing illicit products into the U.S. Strengthening enforcement against illicit products often requires analyzing the Agency's authorities and enforcement tools against these tactics. In many cases, this has required modifying or proposing new policy to better enable FDA to deter or prevent these products from entering the U.S.
For example, to address the avalanche of flavored vapes, FDA officials with decades of experience came up with a plan to enable regulatory action on products like "Iced Lemonade" ecigarettes.
Industry objected, and FDA fought all the way to a victory at the Supreme Court last week. Key staff at FDA's policy shops and the Center for Tobacco Products, including Center Director Brian King who led this strategy, were all cut last week.
I agree that we need to improve-and yes, streamline-FDA's oversight and response to illicit products. But the cuts last week are not streamlining. They are not improving. If you remove the people doing the work to ensure the safety of products entering this country's supply chain, it is not hard to project that more illicit and counterfeit products will enter this country as a result of last week's haphazard cuts.
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Infant formula and food safety
If we want to talk about the safety of imported goods, we also need to talk about food safety. Food safety experts at FDA identified salmonella in cucumbers that sickened 551 Americans as well as raw pet food that infected pets. We have had lead in applesauce traced to imported cinnamon. I think we all agree we do not want lead in baby food. Secretary of the Department of Health and Human Services (HHS), Robert F. Kennedy, recently launched Operation Stork Speed, which will be testing infant formula for heavy metals, among other actions.
At the same time, FDA's food testing laboratory in Alameda, California was cut. This lab was testing for contaminants in baby food and for avian flu in other food products.
Again, how does FDA address food safety, and what is the impact of last week's cuts?
For any food safety threat, FDA has to identify the crisis. This can mean responding to whistleblower complaints, such as the four infants that died in 2022 at the outset of the infant formula crisis. This can also mean using data to track and detect outbreaks, including partnering with the Centers for Disease Control and Prevention (CDC) or states to integrate their data signals. But you need staff to receive the whistleblower complaints and data. You need experts and teams to review those whistleblower complaints and data. You need staff to sample products and identify the source of contamination. We are all still trying to understand who was cut last week, but it appears that key staff at the Human Foods Program (HFP) who work on food safety were lost. Some of the experts who would support a food outbreak response were housed in policy offices, and data experts in the "Office of Digital Transformation".
FDA also has to communicate with the public, industry, and government officials to address a crisis. For many outbreaks, this means a team of scientists and communications specialists work, often weekends or overnight, to issue advice and warnings to the public, including recalls and notifications to Congress. Members of these interdisciplinary teams have specialized experience and are not interchangeable. Much of these communication and legislative teams are gone.
The Agency also sometimes needs to create policy in the midst of crises to address the emergency. For infant formula, FDA policy experts worked nights and weekends to issue new enforcement discretion policy to enable importation of formula from around the world. That imported formula - over six million pounds - helped alleviate the shortages of formula on the shelves. It appears that HFP's Office of Policy and International Engagement was cut by more than half. Among other things, this office works on rules and policy documents related to food safety, infant formula, "generally recognized as safe", nutrition, and chemical safety. Key staff that write food safety rules and guidances are gone, including staff that work on international regulatory partnerships and other key policy initiatives.
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Avian flu response and Center on Veterinary Medicine
The recent RIFs also seem to have unknowingly dismantled the FDA's avian flu (also referred to a H5N1) response.
The staff in the Office of the Director at Center on Veterinary Medicine (CVM) was cut drastically. This includes the FDA's Chief Veterinary Officer, who was co-leading the Agency's response to avian flu, and another senior veterinarian working to coordinate lines of effort and data between state and federal partners. They were put on administrative leave with no plan for transition of this important work.
As noted above, critical to any Agency action is communicating with consumers, manufacturers, and local officials. Communications staff who made sure recall notices about pet food contaminated with avian flu linked to cat illness and deaths reached consumers and veterinarians were cut, as were key staff who communicated ways the pet food industry can keep products safe from avian flu.
Senior veterinary leadership responsible for making tough decisions to keep animals and humans safe from growing threat of avian flu were also cut, including veterinarians who designed the first studies that tested retail milk, showing that pasteurization works against avian flu.
All these teams have been affected by the cuts -communications, policy, as well as veterinary teams, laboratories, and food safety regulatory experts working on critical reforms. We have heard that inspectors were not cut. But inspectors are highly trained in sciences, not trained logistics experts to support trips to China or other foreign facilities. Without key support staff, they will have less time to do inspections. Travel cards were limited to $1 without clearance.
Laboratories--the ones that remain open--cannot purchase the products they need to test if the food is safe. Imagine if all the staff of Congress were dismissed and every expense over $1 needed to be approved.
Let me tell you about one committed public servant at FDA - Dr. Elise Ackley - who was sent a RIF notice. She is a veterinarian working on chemical safety and contamination in food - supporting the current Administration efforts including reforms of the "generally recognized as safe" framework. Dr. Ackley is a military spouse married to an active-duty Army veterinarian, both grads of Louisiana State University. The loss of her expertise in support of FDA and its mission to make sure our food system is safe poses risk that we are just now beginning to fully understand.
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Product approvals
One of the reasons we have been able to lead the world in health sciences is due to a strong FDA and its rigorous standards. One of my goals as Commissioner was to ensure that if you needed access to a life-saving drug and you lived in the United States, you would have access to it before anyone else in the world. We saw that in COVID-19, for example, with monoclonal antibodies. This new treatment appears to have saved President Trump's life back in October 2020. Dr. Peter Stein, who led FDA's Office of New Drugs, made that drug available to the president and thousands of others. Dr. Stein was removed from his office in the recent round of cuts, as were thousands of others. It is no way to restore trust in FDA when you cut the person who may have saved the president's life.
Dr. Stein is but one of the people FDA fired last week. We lost thousands of FDA employees last week. Each of those employees brought years or decades of experience and knowledge on how to execute FDA's mission. That is thousands of years of experience and capabilities that we have lost, including a wealth of experience that could help us root out illicit and counterfeit products.
The scientific independence of FDA - paired with the best scientists in the world who earned that independence - has been the key to FDA's gold standard status around the world. We are losing both.
We have lost key scientists. The departure of Dr. Peter Marks, the former director of the Center for Biologics Evaluation and Research (CBER), was widely reported, but key deputies at FDA's Oncology Center of Excellence (OCE) also resigned, in part because an entire division was decimated by departures even before last week's RIF actions. These were talented, brilliant scientists who helped make life-saving medicines available for someone's mother, father, or child.
I also want to say a couple more words on Dr. Marks - his letter and concerns have been widely reported - but I want to talk about what FDA has lost as an Agency. Dr. Marks is a hematologistoncologist and, under his leadership, CBER approved the first genetically modified cell therapy for children with leukemia who had no other treatment options. This approval occurred during the first Trump Administration. This whole category of cell and gene therapy is a vibrant new class of innovative treatments that did not really exist before Dr. Marks - and his support has been critical.
The scientific independence of FDA has been a bipartisan value, one that industry and consumers alike have fought for and defended. We heard last week about a hold on the Novavax application. I have no idea whether or not Novavax should be approved - but I can tell you this should be a decision by scientists and physicians within the Center for Biologics.
FDA has depended on transparency to help the public understand and have confidence in its decision making. However, the administration also cut the communications and policy staff, which undermines a longstanding practice of regulatory independence. I fear these cuts may enable more political interference. This could delay regulatory actions or undermine the public's ability to get science-based information.
I was hopeful when Secretary talked about "radical transparency". But press reports suggest that advisory committees may not meet because the staff to support them were fired. The very people who support a public process of analyzing data to determine a recommendation about whether a product should be approved. These firings will lead to less, not more, transparency. And equally as important, this radical change in the process will deprive developers of the predictability of the process they have come to depend on. Ultimately, by creating chaos in the system, it will be American patients who suffer.
Industry knows this matters. Biotech stocks fell four percent with the departure of Dr. Marks.
Analysts at Cantor Fitzgerald were deeply concerned at Dr. Marks departure, saying that "pushing out one of the most trusted leaders of the FDA to promote an anti-science agenda is a step too far for us...", and highlighting the "disruptive, destructive and chaotic decision-making" of this current HHS.
Other senior Agency officials at CBER were also cut-- this team was working on a policy framework for accelerated approval for gene therapy for rare diseases such as muscular dystrophies and other pediatric neurodevelopmental conditions. This team was also working on fully standing up FDA's Rare Disease Innovation Hub, and issuing guidance on platform technologies, as well as development of policy on the use of artificial intelligence in regulatory decision making. To be clear, these individuals were enabling innovations in science and technology, and, with their departures, we may lose that edge.
The current processes at FDA rely on user fees to ensure timely review and consideration of lifesaving technology and innovations. According to Politico's AgencyIQ, about half of those individuals who were negotiating and overseeing implementation of the user fee commitments have left the Agency, including key senior leaders. And even more concerning, the cuts to FDAfunded staff could cause FDA to miss negotiated triggers necessary to collect user fees from industry. If the federal government is not paying for their share of funding, FDA will be required to refund industry's share to them as well - compounding the losses well beyond the cuts already. If that happens, all medical product reviews could be dramatically slowed - we could go back to 2-3 years for review rather than the six months we see right now for groundbreaking drugs and biologics.
Now, in a world where Congress committed to replacing that $3.3 billion in user fees, you could argue that having full public funding for the Agency might be a good bipartisan policy goal. But if that were the goal, this should go along with an appropriations package with a radical increase in FDA funding.
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Conclusion
The conventional wisdom is that illicit cheap copies coming from China are a major threat to our health and safety. The more significant threat, Mr. Chairman, is that China is attempting to surpass the U.S. in the sciences. As shown in Figure 2, the highly respected Nature Global Index reveals that eight of the top 10 universities in terms of impactful research in the natural sciences are located in China. Specifically in chemistry, all 10 of the highest ranked universities are in China. Only in the health sciences does the U.S. hold the lead.
I was fortunate to grow up at a time when, following the launch of Sputnik, the United States recognized the need to invest heavily in the sciences.
I know this is a committee that has strong views on both sides of the aisle. Still, I hope that we can come together and recognize that China is poised to surpass us in the sciences, and we need to act quickly to make the necessary investments to shore up our competitiveness and avoid putting our nation at risk.
I recognize that there are limitations to those rankings and that China may have been citing papers in a way that increases its standing. Increasingly, U.S. scientists I have spoken to see much higher quality work coming out of their country. Refer to Figure 3, which illustrates their increasing investment in research and development, currently at approximately $500 billion as of last year. In contrast, from 2004 to 2016, our investment in the National Institutes of Health (NIH) increased only slightly. Whatever needs to be fixed, let's fix it, but we need to make a marked increase in our investment--this is Sputnik 2.0, but with China.
These recent cuts to federal science workforce and investments appear to me as devastating, haphazard, thoughtless, and chaotic.
We need to be clear-eyed about the threat that China poses to American exceptionalism, especially in the sciences. We cannot afford to be haphazard in our support of the American scientific enterprise - not when China's commitment to the sciences is more real than it has been in the past.
The competition - America's real competition - in the sciences is China. We simply cannot afford to lose our focus. It is important that President Trump and this White House, as well as Congress, understand the nature of that competitive challenge, and respond strategically, thoughtfully, and with appropriate strength.
Thank you for your attention to making sure FDA continues to be a strong scientific and regulatory agency serving the American people.
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Original text here: https://oversight.house.gov/wp-content/uploads/2025/04/Kessler-Written-Testimony.pdf
Center for Truth in Science Board Chair Williams Testifies Before House Oversight & Government Reform Committee
WASHINGTON, April 18 -- The House Oversight and Government Reform Committee released the following written testimony by Richard A. Williams, board chair of the Center for Truth in Science and senior affiliated scholar with the Mercatus Center, from an April 9, 2025, hearing entitled "Restoring Trust in FDA: Rooting Out Illicit Products." FDA is the Food and Drug Administration.
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Chairman Comer, Ranking Member Connolly and members of the committee, thank you for this opportunity to testify. My name is Richard A. Williams, and I am retired from the Food and Drug Administration after serving ... Show Full Article WASHINGTON, April 18 -- The House Oversight and Government Reform Committee released the following written testimony by Richard A. Williams, board chair of the Center for Truth in Science and senior affiliated scholar with the Mercatus Center, from an April 9, 2025, hearing entitled "Restoring Trust in FDA: Rooting Out Illicit Products." FDA is the Food and Drug Administration. * * * Chairman Comer, Ranking Member Connolly and members of the committee, thank you for this opportunity to testify. My name is Richard A. Williams, and I am retired from the Food and Drug Administration after servingfor 27 years. I am currently the Chairman of the Board for the Center for Truth in Science and a Senior Affiliated Scholar with the Mercatus Center. I am also the author of Fixing Food: An FDA Insider Unravels the Myths and the Solutions.
In Reputation and Power, Daniel Carpenter said, "Over the late twentieth century, few regulatory agencies of any sort, in any nation, possessed or exercised the power of the Food and Drug Administration. ... The regulatory power stems in large measure from a reputation that inspires praise and fear.i I saw this regularly during my time at the FDA. When Congress threatened to take governance of seafood away from FDA and give it to USDA in the 90s, FDA implemented a huge regulatory program (HACCP) for seafood. When I suggested that it was not going to make seafood safer, the answer was, "It doesn't matter, we are doing this to keep seafood at FDA." When, after a year of trying to find some health or safety benefits for a rule to regulate dietary supplements and failing, I was told we had to regulate dietary supplements because, "We have to get them somewhere." It wasn't about safety; it was about power.
I see it on the other side as well. When addressing hundreds of small business owners in Atlanta about the then upcoming food labeling regulations, I ended my presentation and asked for questions or comments. Not one hand went up. I ended the conference and immediately was surrounded by participants. They explained to me that they didn't want to give me their name or their company's name for fear that they would be targeted by the FDA. I was dismayed by the obvious fear of the FDA.
Rather than using its regulatory authority to exercise the maximum amount of control over a massive amount of the economy, the FDA must refocus on regaining the trust of the American people. To do so, the FDA needs to take advantage of advances in technology and focus on their programs that achieve real results. We have been increasing funding for food safety and nutrition for decades and not getting the results consumers should expect. It is time to demand results but results, such as making food safer, have not been demanded of FDA.
Each year, FDA presents budget requests that describe new challenges but never discusses how they have used previous budgets to make food safer or how nutrition has improved. I discuss below how FDA resisted the change required under the Bush Administration's Performance Assessment's Rating Tool (PART) that would have required such results.
In addition to making the United States more competitive in world trade, particularly against our enemies, the answer is to reshape the FDA's culture and programs. This will require the agency to focus on research and sharing information on best practices, encouraging invention and innovation, rethinking their approach to regulations, and focusing on targeted risk-based compliance.
These sweeping cultural changes within the agency and Congressional oversight of FDA's outcomes will do much to restore America's faith in the FDA.
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Research and Information Sharing
The FDA needs to be reoriented to be an information agency first, and an enforcement agency second. Ensuring that accurate information is readily available is one of the FDA's most important tools when it comes to minimizing harm and improving food safety. This level of transparency is also critical to building trust.
Back in the early 2000s, CFSAN (now the Human Foods Program) epidemiologists did a deep dive into the root causes of one particular foodborne disease outbreak. Coming up with the original cause of the outbreak, they posted the cause of the outbreak on the FDA website. A food industry executive later told me how food producers all around the country pounced on that solution to see if it applied to their own process. It had an immediate impact and where applicable, companies changed their practices. To the best of my knowledge, FDA has not followed up with similar investigations of outbreaks, at least not sharing them this way. Companies don't want to poison their customers, recall a product, or end up in a courtroom. Starting with root cause investigations, FDA can help to gather information not readily available to consumers and stakeholders and make it freely available on the web.
Creating an easily accessible, central location for vetted information doesn't require the FDA to issue new regulations. But this change could empower food producers to proactively take steps to ensure food safety. Shared information would not be guidance or legally enforceable in any sense. However, with that information, companies could, on their own, determine whether the information applies to their products.
FDA should also be available for consultations to help where asked. One group to benefit from this kind of help will be small businesses who do not have large research and regulatory staffs. The United Kingdom, when implementing a shortened form of Hazard Analysis Critical Control Points (HACCP) for small businesses, started a program where the first visit was always to help, not inspect.
FDA also needs better science to identify actual risks that need to be addressed in regulations and enforcement. In 2016, FDA decided to include fruits and vegetables that had never had a food safety outbreak.ii Ignoring their own risk assessment, they decided to include those that had never had an outbreak to be precautionary because, as was explained to me by an FDA official in 2019, "anything could happen at any time." Another example is given by FDA's focus on food and color additives in the last several years that results from conservative risk assessments and failure to pay attention to alternative risks.iii When we test additives with high dose animal studies, giving rodents 700 or 800 times the amount that humans normally eat, about halfiv of all natural and synthetic foods are found to "cause cancer" in rodents.v That does not establish causation, and it is amazing that the founding principle of toxicology from Paracelsus is so often ignored: "What is there that is not poison? All things are poison and nothing is without poison. "Solely the dose determines that a thing is not a poison."
It's not only the lack of risk of the additive, removing them from the market ignores the downside of these policy choices. The question that should be asked is, "what will replace substances removed from the market?" When something is regulated so that the price goes up, or they are removed from the market entirely, something will take its place. It's called risk/risk trade-offs. For example, synthetic red food dyes banned because of high-dose animal studies will be replaced by carmine. Carmine is a natural red food dye made from crushed up beetles that live on prickly pear cactus, in other words "beetlejuice." And, of course, it is a chemical. Carmine is also an allergen for some causing delayed allergic reactions although, like synthetic red food dyes, it appears to be perfectly safe.vi Carrageenan is a "natural food additive from seafood that has side effects on gut health and inflammation.vii
FDA, perhaps in petitions from activist organizations, also uses results from the International Agency for Research on Cancer (IARC). IARC's assessment does not include the risks associated with exposure: meaning it ignores the probability of getting cancer at actual levels of exposure. This has resulted in everything they have examined being called a cancer-causing agent except for one. As for food and color additives, as Walter Willett recently noted, "rigorous regulations are in place to ensure that these substances do not pose risks to human health." Too frequently, regulations are not supported by the best science. Examples of using poor science include selecting only those studies that support the regulation (cherry-picked), conservative risk assessments, using correlation instead of causation,viii or ignoring risk tradeoffs.ix Using poor science is an easy way for the FDA to erode Americans' trust.1 Another issue is ignoring science for the sake of slogans. Regulatory programs such as FDA's "Closer to Zero" is an example of ignoring evolutionary and toxicological science.x "Closer to Zero" is a program to reduce exposure to children from arsenic, lead, cadmium and mercury as close to zero as possible.
Over the course of evolution, our bodies have developed repair mechanisms such that, for the millions of times we are assaulted daily through air, water, food and other exposures, we repair the damage over 99.99 percent of the time (although these mechanisms decline in efficiency as we age). Not only do we repair almost all chemical and microbiological assaults, but in the case of all radiation and over half of all chemicals, low doses provide medicinal benefits - called hormesis. Cadmium, included in FDA's Closer to Zero program, exhibits hormetic properties. Another example is sulforaphane, a phytochemical that protects against oxidative stress at low doses.xi There are many synthetic chemicals that are hormetic, but this principle has been marginalized in current risk assessment practices.xii Ignoring thresholds and hormesis based on well-established biological mechanisms has led to regulations and enforcement that are both unnecessary and, given trade-offs, potentially harmful.
With better science, including risk/risk analysis, fewer regulations should show that their benefits exceed costs, resulting in fewer regulations.
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1 Unfortunately, too often regulatory economists are forced to use cherry-picked or weak science to generate benefits for regulations.
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Encouraging Invention and Innovation
Precision Health
Health scientists are beginning to realize that "one-size-fits-all" does not work for health. Some foods may have hormetic responses for one person while being toxic for another. Most foods that are allergenic for some are perfectly safe for others. In nutrition, some people lose weight on a low-fat diet, others gain.xiii Even twins respond differently to food.xiv Precision health also includes medicine where a disease shared by many may have different molecular causes for individuals. Human variability includes genetics, epigenetics, age, sex, health conditions, environment, microbiomes and, for behavior change, preferences.
This kind of variation means, in some cases, we cannot try and protect some people from exposure that theoretically may be harmful when they aren't helpful to others or actually harm them. For nutrition, it means that there are most likely zero diets that will work for everyone. Precision health ultimately will help us all to live longer. FDA should incorporate this science into all of their regulatory activities.
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New Technologies
Another way that the FDA hurts their credibility with the American people is lagging behind in implementing technical solutions to improve food safety. FDA has finally engaged in tech-enabled traceability of food but there is so much more they should be considering.xviiixv For example, smart packagingxvi using nanomaterial biosensors can either alert consumers to a spoiled food or even kill growing pathogens.xvii Smart devices can connect food processing machines to allow centralized monitoring. New designs for production machines can remove places where pathogens grow or make them easier to clean. Robots and other automation can be used in restaurants to prepare food or to clean plants - eliminating error-prone or sick humans. New food preservation technologies, like hydrostatic pressure, ultraviolet radiation, pulsed UV light and hydrostatic pressure can be used to treat foods including those that are sold as "fresh." Foods produced in factories, not farms, are much less likely to be contaminated with pathogens. These include, for example, foods produced with precision fermentation or in indoor farms. Genetically modified foods deliver higher yields, are drought resistant, use fewer pesticides and can produce healthier foods to feed a growing world population.
These are the solutions that will drive food safety, not more regulation.
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Rethinking FDA's Approach to Regulation
Achieving maximum control over firms drives many FDA actions. The result is a huge mixed bag of regulations - some that are effective and many that are not. Some were produced at the behest of larger companies actively trying to put smaller ones at a competitive disadvantage and, as I've previously mentioned, some regulations are based on weak scientific support.
Besides better science, some process changes may help eliminate bad regulations.
Most regulations should be preceded by an advanced notice of proposed rulemaking (ANPR) where the agency identifies a problem and suggests one or more possible solutions. This ensures that the agency is not committed to any particular course of action prior to receiving comments. If, after that, they identify a course of action that will result in a major regulation, there should be a pilot program, where feasible, to determine whether the regulation is likely to be effective.
At the proposal stage, the regulation should include: 1) an outcome goal; 2) an explanation of how that goal will be achieved; 3) the time necessary to achieve the goal; and 4) a Regulatory Impact Analysis, including a risk/risk Analysis.
As with formal rules, stakeholders should have a chance to object to them prior to being enacted.
This process should result in regulations being rare and, when implemented, have a much better chance of being effective.
Current regulations and programs should be reviewed, under the auspices of a Congressional agency, to determine which ones are outdated, duplicative or not effective.xix If a regulation or program is not successful in improving outcomes, it is simply a costly burden on the public.
An example of an outdated program is food standards: recipe standards that govern about half of all foods in the United States. Do we really need to ensure that ice cream is at least ten percent milkfat, that reflects how "mother used to make" them in the 1930s?xx Since food labeling has failed to stop the growth of obesity and chronic disease, should FDA continue to tinker with it? Currently, every manufacturer of low acid canned foods must submit paperwork on every food, in every size container. Is it still necessary?xxi With these regulatory and program reforms in place, the 800 pages of the FDA Investigations Operations Manual could probably be shortened considerably.xxii A simplified manual will make it easier for agency staff to focus on the critical processes that Americans rely on to keep food safe.
Recent reorganization efforts to modernize FDA's food program should be examined to see if they eliminated ineffective programs.xxiii
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Targeted, Risk-Based Compliance
With fewer regulations that effectively address existing resources, resources should be freed up to do more and more effective inspections.
When I started at FDA in 1980, I was told "We are cops." It's a role FDA cannot shirk and will always be important. To do so effectively, they must have risk-based inspections including both domestic and international foods. Internationally, we should focus on those who are intentionally trying to do us harm by poisoning our foodxxviixxviiixxiv or who are trying to gain a competitive advantage by undermining American companies.xxv The later harm may occur by influencing regulatory agencies,xxvi investing in tort trials, or stealing technology (e.g., stealing GM seeds). Improved information sharing would also allow the FDA to help American consumers stay informed of potential threats.
Addressing these threats will be strengthened if FDA shares best practices, science, and issues found with foreign suppliers with consumers and manufacturers. Such sharing is likely to be more effective than regulations and inspection.
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Accountability and Oversight
In addition to the cultural changes I've outlined above, Congressional oversight is key to ensuring that the FDA regains public trust.
There are three products of government programs: inputs, outputs and outcomes. For food safety:
* Inputs are the number of people who worked on regulations or inspections;
* Outputs are the number of regulations and inspections; and,
* Outcomes are the reduction in the number of cases or deaths from foodborne diseases reduced.
Outcomes are what consumers and taxpayers who fund this activity care about. Unfortunately, an agency's success is too often measured by their inputs or outputs. In 2007, President George W. Bush attempted to address this issue with an Executive Orderxxix called the Program Assessment Rating Tool (PART) to assure accountability in federal agencies. It was done in conjunction with the Government Performance and Results Act.
The Executive Order required agencies to have outcome goals and to track and report their progress. Agencies, including FDA, fought this requirement, as failure to comply with the E.O. was to be directly tied to reduced agency funding. I was briefly tasked with creating outcome measures for the foods program until the Deputy Center Director found out we would be required to actually achieve a health benefit by reducing consumption of trans fatty acids. The measure was changed to making people aware that trans fatty acids exist.xxx The program was discontinued by the next administration in 2009.
For FDA's food safety program, the outcome goal is simple, reducing the number of illnesses and deaths from food. Bring PART back and ensure that a Congressional committee charged with overseeing the budget uses the results of outcome-based goals to establish agency budgets.
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Additional Areas of Oversight for Congressional Consideration
Operation Stork Speed - Two problems have plagued infant formula: failure to maintain a plant free of pathogens resulting in shortages and high prices that affect low-income consumers. To ensure a consistent supply and that infant formula prices remain low, Congress should make sure FDA's policies encourage new competitors.xxxi More producers will ensure that supply disruptions, such as occurred recently, will not happen again. Also, more competitors will help to keep prices down so that less well-off consumers do not end up trying to extend infant formula with water, a danger to infants who rely on this sole source of nutrients.
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Pathogens
In terms of food making people sick, the biggest problem is still pathogens. After years of increased funding, the rates of foodborne disease are about the same. Unfortunately, the Hazard Analysis Critical Control Points or HACCP has, so far, not appeared to make much difference. It made no difference in the first mandated version for seafood because there were no critical control points for raw seafood like oysters. However, as mentioned above, knowing more about root causes could make a difference. Artificial intelligence may also help with predicting likely areas of outbreaks. Another step forward can be making foods in sanitary environments, like precision fermentation. Also, more targeted, risk-based inspections of plants and facilities could help.
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Single Food Agency
Recognizing it will upset the committee structures in Congress, there is still a great opportunity to clean up enabling laws (e.g., get rid of food standards, get rid of visual observation of meat preparation) by pulling together FDA's Human Food Program, USDA's FSIS, and pesticides from EPA. This would allow greater prioritization of resources, end duplicative or confusing inspections, and perhaps reduce overall expenditures.
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Nutrition
No evidence I have found shows that existing government tools including food labels, the Food Guide Pyramid and the Dietary Guidelines have been effective. We are eating more, getting heavier and chronic diseases have been increasing. If Congress continues to fund FDA's work on nutrition, it must hold the FDA responsible for improving health outcomes. Creating new foods will help but so will devices that will monitor what we eat, keep track of all of the relevant factors such as biomarkers and dietary preferences, and will make recommendations on what to eat. The problem for these devices is that they will fall under the restrictions of FDA's onerous medical device rules. See, for example, US Medical Devices; Choices and Consequences."xxxii
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Summary
In every budget season, FDA presents challenges, and the only question is how much should the budget be increased? There are new challenges but a change in FDA's culture of trying to control everything can lead to better management with existing funds.
New challenges include discovering which, if any, of the various forms of microplastics and PFAS chemicals that occur in food or bottled water are dangerous. There are also food issues from China and other countries that are harming American consumers. The use of new technologies like blockchain for traceback and artificial intelligence to help predict food safety weaknesses, perhaps using data from critical control points, needs further exploration. If artificial intelligence can be used for drug approvals, it should also be applicable to food additive approvals.xxxiii New foods created with precision fermentation and genetic modification offer exciting nutrition possibilities but should be evaluated for food safety challenges.
Better science can identify real risks and separating risks from hazards (terminating the precautionary approach) will help to reduce the rate of new regulations. Reducing the rate of new regulations, the stock of existing regulations, and eliminating outdated programs such as food standards can free up resources to meet new challenges. Both pre-market approvals and regulatory programs should be examined to see where new food and food technologies are being strangled by overly precautious rules.
Importantly, in an increasingly competitive international trade market, FDA can help to encourage new companies that are more competitive for both imports and exports by having fewer, more effective rules.
The FDA will never be able to improve Americans' health outcomes if they are not seen as an effective and trustworthy agency. To help consumers eat safer food and American businesses compete, FDA must shift its focus to public health, rather than simply amassing power.
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Footnotes:
i Carpenter, Daniel, Reputation and Power: Organizational Image and Pharmaceutical Regulation at the FDA, Princeton University Press, Princeton, N.J. 2010.
ii FDA, "Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption," 2016.
iii Burgoon, Lyle, et. al, "Zero-Risk, Zero Sense: Unscientific Food, Drug Policies Are Nothing New," RealClearScience, March 19, 2025.
iv Ames, Bruce, Science Policy, Bruce Ames, testing for carcinogens | Science Policy.
v Sanders, Robert, "Misconceptions about the causes of cancer lead to skewed priorities and wasted money, UC Berkeley researchers say," Public Affairs, 1997. https://newsarchive.berkeley.edu/news/media/releases/97legacy/11_01_97a.html
vi Sadowska, Beata, et. al., "Carmine allergy in urticaria patients," Advances in Dermatology and Allergology, Nov 13, 2020.
vii Robbins, Robbins, "Common Food Additives in Natural & Organic Foods: Are They Safe?," Food Revolution Network, May 14, 2021.
viii Cox, Louis Anthony, "Objective causal predictions from observational data," Critical Reviews in Toxicology, Vol. 54, 2024.
ix Graham, John D. and Jonathan B. Wiener, editors, Risk vs. Risk: Tradeoffs in Protecting Health and the Environment, Harvard University Press, Cambridge Ma, 1995.
x US FDA, "Closer to Zero: Reducing Childhood Exposure to Contaminants from Foods," https://www.fda.gov/food/environmental-contaminants-food/closer-zero-reducing-childhood-exposure-contaminants-foods
xi Son, Tae Gen, et. al., "Hormetic Dietary Phytochemicals," Neuromolecular Med., Feb 43, 2009.
xii Kim Se-A", et. al., "Evolutionarily adapted hormesis-inducing stressors can be a practical solution to mitigate harmful effects of chronic exposure to low dose chemical mixtures." Environmental Pollution, Feb 2018.
xiii Williams, Richard, "Richard Williams: Nutrition science moves on," TrIb Extra, April 6, 2025.
xiv MedicalNewsToday, "Nutrition: Even identical twins respond differently to food," https://www.medicalnewstoday.com/articles/325521
xv US FDA, "Tech-Enabled Traceability - Core Element 1 of the New Era of Smarter Food Safety Blueprint." https://www.fda.gov/food/new-era-smarter-food-safety/tech-enabled-traceability-core-element-1-new-era-smarter-food-safety-blueprint
xvi Piedmont Plastics, "Technology Trends Revolutionizing Food Safety," https://www.piedmontplastics.com/blog/fda-food-safety?srsltid=AfmBOoqqy_0Dge3V1qgg17dhcQPGKeq6t1EGXXp_hczZZ7Q-KeGD6Ru7
xvii Technology Networks Applied Sciences, "Emerging Technologies in Combating Foodborne Illness, Nov 18, 2021. https://www.technologynetworks.com/applied-sciences/articles/emerging-technologies-in-combating-foodborne-illness-315787
xviii Orth, Steve, "Future of Food Safety: Next-Gen Technologies On The Rise," Food Safety Tech, Dec 3, 2024.
xix Miller, Sofie E. and Susan E. Dudley, "Regulatory Accretion: Causes and Possible Remedies, "Administrative law Review Accord, 67. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.administrativelawreview.org/wp-content/uploads/2016/03/MillerDudley_PublishedVersion-1.pdf
xx US FDA, Code of Federal Regulations, Title 21, Chapter 1, Subchapter B, Part 135. https://www.ecfr.gov/current/title-21/chapter-I/subchapter-B/part-135
xxi US FDA, "Establishment Registration & Process Filing for Acidified and Low-Acid Canned Foods (LACF): Paper Submissions." https://www.fda.gov/food/establishment-registration-process-filing-acidified-and-low-acid-canned-foods-lacf/establishment-registration-process-filing-acidified-and-low-acid-canned-foods-lacf-paper-submissions
xxii US FDA, "Investigations Operations Manual, 2025." chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.fda.gov/media/166525/download?attachment
xxiii FDA, "FDA's Reorganization Approved for Establishing Unified Human Foods Program, New Model for Field Operations and Other Modernization Efforts," May 30, 2024.
xxiv Brevett, Carol S. and Jessica Cox, "Intentional Adulteration of Foods with Chemicals: Snapshot for 2009-2022, Journal of Food Protection, 87/7, July 2024.
xxv Williams, Richard, "How to Beat China at its Own Game," Public Health Without Politics." Mar 6. 2025. https://fixingfood.substack.com/p/how-to-beat-china-at-its-own-game
xxvi Cotton, Tom, Seven Things You Can't Say About China, Broadside Books, 2025.
xxvii U.S. Chamber of Commerce, Institute for Legal Reform, "The ExxonMobil Lawsuit: Foreign Entities Funding Lawsuits to Target American Businesses," Feb 10, 2025.
xxviii Hvistendahl, Mara, "The Scientist and the Spy: A True Story of China, the FBI and Industrial Espionage, Riverhead Books, New York, NY, 2020.
xxix U.S. Government, President George W. Bush, "Executive Order: Improving Government Program Performance, Nov 2007.
xxx Williams, Richard A., Fixing Food, An FDA Insider Unravels the Myths and the Solutions, Post Hill Press, 2021.
xxxi Williams, Richard, "The infant formula blame game," The Hill, 6/4/2022.
xxxii Williams, Richard A., et. al., "US Medical Devices: Choices and Consequences," Mercatus Center. https://www.mercatus.org/research/research-papers/us-medical-devices-choices-and-consequences
xxxiii Pipes, Sally, "Here's How Trump's Pick to Lead the FDA Can Supercharge The Agency," Forbes, Mar 31, 2025.
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Original text here: https://oversight.house.gov/wp-content/uploads/2025/04/Williams-Written-Testimony.pdf
* * *
Chairman Comer, Ranking Member Connolly and members of the committee, thank you for this opportunity to testify. My name is Richard A. Williams, and I am retired from the Food and Drug Administration after serving ... Show Full Article WASHINGTON, April 18 -- The House Oversight and Government Reform Committee released the following written testimony by Richard A. Williams, board chair of the Center for Truth in Science and senior affiliated scholar with the Mercatus Center, from an April 9, 2025, hearing entitled "Restoring Trust in FDA: Rooting Out Illicit Products." FDA is the Food and Drug Administration. * * * Chairman Comer, Ranking Member Connolly and members of the committee, thank you for this opportunity to testify. My name is Richard A. Williams, and I am retired from the Food and Drug Administration after servingfor 27 years. I am currently the Chairman of the Board for the Center for Truth in Science and a Senior Affiliated Scholar with the Mercatus Center. I am also the author of Fixing Food: An FDA Insider Unravels the Myths and the Solutions.
In Reputation and Power, Daniel Carpenter said, "Over the late twentieth century, few regulatory agencies of any sort, in any nation, possessed or exercised the power of the Food and Drug Administration. ... The regulatory power stems in large measure from a reputation that inspires praise and fear.i I saw this regularly during my time at the FDA. When Congress threatened to take governance of seafood away from FDA and give it to USDA in the 90s, FDA implemented a huge regulatory program (HACCP) for seafood. When I suggested that it was not going to make seafood safer, the answer was, "It doesn't matter, we are doing this to keep seafood at FDA." When, after a year of trying to find some health or safety benefits for a rule to regulate dietary supplements and failing, I was told we had to regulate dietary supplements because, "We have to get them somewhere." It wasn't about safety; it was about power.
I see it on the other side as well. When addressing hundreds of small business owners in Atlanta about the then upcoming food labeling regulations, I ended my presentation and asked for questions or comments. Not one hand went up. I ended the conference and immediately was surrounded by participants. They explained to me that they didn't want to give me their name or their company's name for fear that they would be targeted by the FDA. I was dismayed by the obvious fear of the FDA.
Rather than using its regulatory authority to exercise the maximum amount of control over a massive amount of the economy, the FDA must refocus on regaining the trust of the American people. To do so, the FDA needs to take advantage of advances in technology and focus on their programs that achieve real results. We have been increasing funding for food safety and nutrition for decades and not getting the results consumers should expect. It is time to demand results but results, such as making food safer, have not been demanded of FDA.
Each year, FDA presents budget requests that describe new challenges but never discusses how they have used previous budgets to make food safer or how nutrition has improved. I discuss below how FDA resisted the change required under the Bush Administration's Performance Assessment's Rating Tool (PART) that would have required such results.
In addition to making the United States more competitive in world trade, particularly against our enemies, the answer is to reshape the FDA's culture and programs. This will require the agency to focus on research and sharing information on best practices, encouraging invention and innovation, rethinking their approach to regulations, and focusing on targeted risk-based compliance.
These sweeping cultural changes within the agency and Congressional oversight of FDA's outcomes will do much to restore America's faith in the FDA.
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Research and Information Sharing
The FDA needs to be reoriented to be an information agency first, and an enforcement agency second. Ensuring that accurate information is readily available is one of the FDA's most important tools when it comes to minimizing harm and improving food safety. This level of transparency is also critical to building trust.
Back in the early 2000s, CFSAN (now the Human Foods Program) epidemiologists did a deep dive into the root causes of one particular foodborne disease outbreak. Coming up with the original cause of the outbreak, they posted the cause of the outbreak on the FDA website. A food industry executive later told me how food producers all around the country pounced on that solution to see if it applied to their own process. It had an immediate impact and where applicable, companies changed their practices. To the best of my knowledge, FDA has not followed up with similar investigations of outbreaks, at least not sharing them this way. Companies don't want to poison their customers, recall a product, or end up in a courtroom. Starting with root cause investigations, FDA can help to gather information not readily available to consumers and stakeholders and make it freely available on the web.
Creating an easily accessible, central location for vetted information doesn't require the FDA to issue new regulations. But this change could empower food producers to proactively take steps to ensure food safety. Shared information would not be guidance or legally enforceable in any sense. However, with that information, companies could, on their own, determine whether the information applies to their products.
FDA should also be available for consultations to help where asked. One group to benefit from this kind of help will be small businesses who do not have large research and regulatory staffs. The United Kingdom, when implementing a shortened form of Hazard Analysis Critical Control Points (HACCP) for small businesses, started a program where the first visit was always to help, not inspect.
FDA also needs better science to identify actual risks that need to be addressed in regulations and enforcement. In 2016, FDA decided to include fruits and vegetables that had never had a food safety outbreak.ii Ignoring their own risk assessment, they decided to include those that had never had an outbreak to be precautionary because, as was explained to me by an FDA official in 2019, "anything could happen at any time." Another example is given by FDA's focus on food and color additives in the last several years that results from conservative risk assessments and failure to pay attention to alternative risks.iii When we test additives with high dose animal studies, giving rodents 700 or 800 times the amount that humans normally eat, about halfiv of all natural and synthetic foods are found to "cause cancer" in rodents.v That does not establish causation, and it is amazing that the founding principle of toxicology from Paracelsus is so often ignored: "What is there that is not poison? All things are poison and nothing is without poison. "Solely the dose determines that a thing is not a poison."
It's not only the lack of risk of the additive, removing them from the market ignores the downside of these policy choices. The question that should be asked is, "what will replace substances removed from the market?" When something is regulated so that the price goes up, or they are removed from the market entirely, something will take its place. It's called risk/risk trade-offs. For example, synthetic red food dyes banned because of high-dose animal studies will be replaced by carmine. Carmine is a natural red food dye made from crushed up beetles that live on prickly pear cactus, in other words "beetlejuice." And, of course, it is a chemical. Carmine is also an allergen for some causing delayed allergic reactions although, like synthetic red food dyes, it appears to be perfectly safe.vi Carrageenan is a "natural food additive from seafood that has side effects on gut health and inflammation.vii
FDA, perhaps in petitions from activist organizations, also uses results from the International Agency for Research on Cancer (IARC). IARC's assessment does not include the risks associated with exposure: meaning it ignores the probability of getting cancer at actual levels of exposure. This has resulted in everything they have examined being called a cancer-causing agent except for one. As for food and color additives, as Walter Willett recently noted, "rigorous regulations are in place to ensure that these substances do not pose risks to human health." Too frequently, regulations are not supported by the best science. Examples of using poor science include selecting only those studies that support the regulation (cherry-picked), conservative risk assessments, using correlation instead of causation,viii or ignoring risk tradeoffs.ix Using poor science is an easy way for the FDA to erode Americans' trust.1 Another issue is ignoring science for the sake of slogans. Regulatory programs such as FDA's "Closer to Zero" is an example of ignoring evolutionary and toxicological science.x "Closer to Zero" is a program to reduce exposure to children from arsenic, lead, cadmium and mercury as close to zero as possible.
Over the course of evolution, our bodies have developed repair mechanisms such that, for the millions of times we are assaulted daily through air, water, food and other exposures, we repair the damage over 99.99 percent of the time (although these mechanisms decline in efficiency as we age). Not only do we repair almost all chemical and microbiological assaults, but in the case of all radiation and over half of all chemicals, low doses provide medicinal benefits - called hormesis. Cadmium, included in FDA's Closer to Zero program, exhibits hormetic properties. Another example is sulforaphane, a phytochemical that protects against oxidative stress at low doses.xi There are many synthetic chemicals that are hormetic, but this principle has been marginalized in current risk assessment practices.xii Ignoring thresholds and hormesis based on well-established biological mechanisms has led to regulations and enforcement that are both unnecessary and, given trade-offs, potentially harmful.
With better science, including risk/risk analysis, fewer regulations should show that their benefits exceed costs, resulting in fewer regulations.
* * *
* * *
1 Unfortunately, too often regulatory economists are forced to use cherry-picked or weak science to generate benefits for regulations.
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Encouraging Invention and Innovation
Precision Health
Health scientists are beginning to realize that "one-size-fits-all" does not work for health. Some foods may have hormetic responses for one person while being toxic for another. Most foods that are allergenic for some are perfectly safe for others. In nutrition, some people lose weight on a low-fat diet, others gain.xiii Even twins respond differently to food.xiv Precision health also includes medicine where a disease shared by many may have different molecular causes for individuals. Human variability includes genetics, epigenetics, age, sex, health conditions, environment, microbiomes and, for behavior change, preferences.
This kind of variation means, in some cases, we cannot try and protect some people from exposure that theoretically may be harmful when they aren't helpful to others or actually harm them. For nutrition, it means that there are most likely zero diets that will work for everyone. Precision health ultimately will help us all to live longer. FDA should incorporate this science into all of their regulatory activities.
* * *
New Technologies
Another way that the FDA hurts their credibility with the American people is lagging behind in implementing technical solutions to improve food safety. FDA has finally engaged in tech-enabled traceability of food but there is so much more they should be considering.xviiixv For example, smart packagingxvi using nanomaterial biosensors can either alert consumers to a spoiled food or even kill growing pathogens.xvii Smart devices can connect food processing machines to allow centralized monitoring. New designs for production machines can remove places where pathogens grow or make them easier to clean. Robots and other automation can be used in restaurants to prepare food or to clean plants - eliminating error-prone or sick humans. New food preservation technologies, like hydrostatic pressure, ultraviolet radiation, pulsed UV light and hydrostatic pressure can be used to treat foods including those that are sold as "fresh." Foods produced in factories, not farms, are much less likely to be contaminated with pathogens. These include, for example, foods produced with precision fermentation or in indoor farms. Genetically modified foods deliver higher yields, are drought resistant, use fewer pesticides and can produce healthier foods to feed a growing world population.
These are the solutions that will drive food safety, not more regulation.
* * *
Rethinking FDA's Approach to Regulation
Achieving maximum control over firms drives many FDA actions. The result is a huge mixed bag of regulations - some that are effective and many that are not. Some were produced at the behest of larger companies actively trying to put smaller ones at a competitive disadvantage and, as I've previously mentioned, some regulations are based on weak scientific support.
Besides better science, some process changes may help eliminate bad regulations.
Most regulations should be preceded by an advanced notice of proposed rulemaking (ANPR) where the agency identifies a problem and suggests one or more possible solutions. This ensures that the agency is not committed to any particular course of action prior to receiving comments. If, after that, they identify a course of action that will result in a major regulation, there should be a pilot program, where feasible, to determine whether the regulation is likely to be effective.
At the proposal stage, the regulation should include: 1) an outcome goal; 2) an explanation of how that goal will be achieved; 3) the time necessary to achieve the goal; and 4) a Regulatory Impact Analysis, including a risk/risk Analysis.
As with formal rules, stakeholders should have a chance to object to them prior to being enacted.
This process should result in regulations being rare and, when implemented, have a much better chance of being effective.
Current regulations and programs should be reviewed, under the auspices of a Congressional agency, to determine which ones are outdated, duplicative or not effective.xix If a regulation or program is not successful in improving outcomes, it is simply a costly burden on the public.
An example of an outdated program is food standards: recipe standards that govern about half of all foods in the United States. Do we really need to ensure that ice cream is at least ten percent milkfat, that reflects how "mother used to make" them in the 1930s?xx Since food labeling has failed to stop the growth of obesity and chronic disease, should FDA continue to tinker with it? Currently, every manufacturer of low acid canned foods must submit paperwork on every food, in every size container. Is it still necessary?xxi With these regulatory and program reforms in place, the 800 pages of the FDA Investigations Operations Manual could probably be shortened considerably.xxii A simplified manual will make it easier for agency staff to focus on the critical processes that Americans rely on to keep food safe.
Recent reorganization efforts to modernize FDA's food program should be examined to see if they eliminated ineffective programs.xxiii
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Targeted, Risk-Based Compliance
With fewer regulations that effectively address existing resources, resources should be freed up to do more and more effective inspections.
When I started at FDA in 1980, I was told "We are cops." It's a role FDA cannot shirk and will always be important. To do so effectively, they must have risk-based inspections including both domestic and international foods. Internationally, we should focus on those who are intentionally trying to do us harm by poisoning our foodxxviixxviiixxiv or who are trying to gain a competitive advantage by undermining American companies.xxv The later harm may occur by influencing regulatory agencies,xxvi investing in tort trials, or stealing technology (e.g., stealing GM seeds). Improved information sharing would also allow the FDA to help American consumers stay informed of potential threats.
Addressing these threats will be strengthened if FDA shares best practices, science, and issues found with foreign suppliers with consumers and manufacturers. Such sharing is likely to be more effective than regulations and inspection.
* * *
Accountability and Oversight
In addition to the cultural changes I've outlined above, Congressional oversight is key to ensuring that the FDA regains public trust.
There are three products of government programs: inputs, outputs and outcomes. For food safety:
* Inputs are the number of people who worked on regulations or inspections;
* Outputs are the number of regulations and inspections; and,
* Outcomes are the reduction in the number of cases or deaths from foodborne diseases reduced.
Outcomes are what consumers and taxpayers who fund this activity care about. Unfortunately, an agency's success is too often measured by their inputs or outputs. In 2007, President George W. Bush attempted to address this issue with an Executive Orderxxix called the Program Assessment Rating Tool (PART) to assure accountability in federal agencies. It was done in conjunction with the Government Performance and Results Act.
The Executive Order required agencies to have outcome goals and to track and report their progress. Agencies, including FDA, fought this requirement, as failure to comply with the E.O. was to be directly tied to reduced agency funding. I was briefly tasked with creating outcome measures for the foods program until the Deputy Center Director found out we would be required to actually achieve a health benefit by reducing consumption of trans fatty acids. The measure was changed to making people aware that trans fatty acids exist.xxx The program was discontinued by the next administration in 2009.
For FDA's food safety program, the outcome goal is simple, reducing the number of illnesses and deaths from food. Bring PART back and ensure that a Congressional committee charged with overseeing the budget uses the results of outcome-based goals to establish agency budgets.
* * *
Additional Areas of Oversight for Congressional Consideration
Operation Stork Speed - Two problems have plagued infant formula: failure to maintain a plant free of pathogens resulting in shortages and high prices that affect low-income consumers. To ensure a consistent supply and that infant formula prices remain low, Congress should make sure FDA's policies encourage new competitors.xxxi More producers will ensure that supply disruptions, such as occurred recently, will not happen again. Also, more competitors will help to keep prices down so that less well-off consumers do not end up trying to extend infant formula with water, a danger to infants who rely on this sole source of nutrients.
* * *
Pathogens
In terms of food making people sick, the biggest problem is still pathogens. After years of increased funding, the rates of foodborne disease are about the same. Unfortunately, the Hazard Analysis Critical Control Points or HACCP has, so far, not appeared to make much difference. It made no difference in the first mandated version for seafood because there were no critical control points for raw seafood like oysters. However, as mentioned above, knowing more about root causes could make a difference. Artificial intelligence may also help with predicting likely areas of outbreaks. Another step forward can be making foods in sanitary environments, like precision fermentation. Also, more targeted, risk-based inspections of plants and facilities could help.
* * *
Single Food Agency
Recognizing it will upset the committee structures in Congress, there is still a great opportunity to clean up enabling laws (e.g., get rid of food standards, get rid of visual observation of meat preparation) by pulling together FDA's Human Food Program, USDA's FSIS, and pesticides from EPA. This would allow greater prioritization of resources, end duplicative or confusing inspections, and perhaps reduce overall expenditures.
* * *
Nutrition
No evidence I have found shows that existing government tools including food labels, the Food Guide Pyramid and the Dietary Guidelines have been effective. We are eating more, getting heavier and chronic diseases have been increasing. If Congress continues to fund FDA's work on nutrition, it must hold the FDA responsible for improving health outcomes. Creating new foods will help but so will devices that will monitor what we eat, keep track of all of the relevant factors such as biomarkers and dietary preferences, and will make recommendations on what to eat. The problem for these devices is that they will fall under the restrictions of FDA's onerous medical device rules. See, for example, US Medical Devices; Choices and Consequences."xxxii
* * *
Summary
In every budget season, FDA presents challenges, and the only question is how much should the budget be increased? There are new challenges but a change in FDA's culture of trying to control everything can lead to better management with existing funds.
New challenges include discovering which, if any, of the various forms of microplastics and PFAS chemicals that occur in food or bottled water are dangerous. There are also food issues from China and other countries that are harming American consumers. The use of new technologies like blockchain for traceback and artificial intelligence to help predict food safety weaknesses, perhaps using data from critical control points, needs further exploration. If artificial intelligence can be used for drug approvals, it should also be applicable to food additive approvals.xxxiii New foods created with precision fermentation and genetic modification offer exciting nutrition possibilities but should be evaluated for food safety challenges.
Better science can identify real risks and separating risks from hazards (terminating the precautionary approach) will help to reduce the rate of new regulations. Reducing the rate of new regulations, the stock of existing regulations, and eliminating outdated programs such as food standards can free up resources to meet new challenges. Both pre-market approvals and regulatory programs should be examined to see where new food and food technologies are being strangled by overly precautious rules.
Importantly, in an increasingly competitive international trade market, FDA can help to encourage new companies that are more competitive for both imports and exports by having fewer, more effective rules.
The FDA will never be able to improve Americans' health outcomes if they are not seen as an effective and trustworthy agency. To help consumers eat safer food and American businesses compete, FDA must shift its focus to public health, rather than simply amassing power.
* * *
Footnotes:
i Carpenter, Daniel, Reputation and Power: Organizational Image and Pharmaceutical Regulation at the FDA, Princeton University Press, Princeton, N.J. 2010.
ii FDA, "Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption," 2016.
iii Burgoon, Lyle, et. al, "Zero-Risk, Zero Sense: Unscientific Food, Drug Policies Are Nothing New," RealClearScience, March 19, 2025.
iv Ames, Bruce, Science Policy, Bruce Ames, testing for carcinogens | Science Policy.
v Sanders, Robert, "Misconceptions about the causes of cancer lead to skewed priorities and wasted money, UC Berkeley researchers say," Public Affairs, 1997. https://newsarchive.berkeley.edu/news/media/releases/97legacy/11_01_97a.html
vi Sadowska, Beata, et. al., "Carmine allergy in urticaria patients," Advances in Dermatology and Allergology, Nov 13, 2020.
vii Robbins, Robbins, "Common Food Additives in Natural & Organic Foods: Are They Safe?," Food Revolution Network, May 14, 2021.
viii Cox, Louis Anthony, "Objective causal predictions from observational data," Critical Reviews in Toxicology, Vol. 54, 2024.
ix Graham, John D. and Jonathan B. Wiener, editors, Risk vs. Risk: Tradeoffs in Protecting Health and the Environment, Harvard University Press, Cambridge Ma, 1995.
x US FDA, "Closer to Zero: Reducing Childhood Exposure to Contaminants from Foods," https://www.fda.gov/food/environmental-contaminants-food/closer-zero-reducing-childhood-exposure-contaminants-foods
xi Son, Tae Gen, et. al., "Hormetic Dietary Phytochemicals," Neuromolecular Med., Feb 43, 2009.
xii Kim Se-A", et. al., "Evolutionarily adapted hormesis-inducing stressors can be a practical solution to mitigate harmful effects of chronic exposure to low dose chemical mixtures." Environmental Pollution, Feb 2018.
xiii Williams, Richard, "Richard Williams: Nutrition science moves on," TrIb Extra, April 6, 2025.
xiv MedicalNewsToday, "Nutrition: Even identical twins respond differently to food," https://www.medicalnewstoday.com/articles/325521
xv US FDA, "Tech-Enabled Traceability - Core Element 1 of the New Era of Smarter Food Safety Blueprint." https://www.fda.gov/food/new-era-smarter-food-safety/tech-enabled-traceability-core-element-1-new-era-smarter-food-safety-blueprint
xvi Piedmont Plastics, "Technology Trends Revolutionizing Food Safety," https://www.piedmontplastics.com/blog/fda-food-safety?srsltid=AfmBOoqqy_0Dge3V1qgg17dhcQPGKeq6t1EGXXp_hczZZ7Q-KeGD6Ru7
xvii Technology Networks Applied Sciences, "Emerging Technologies in Combating Foodborne Illness, Nov 18, 2021. https://www.technologynetworks.com/applied-sciences/articles/emerging-technologies-in-combating-foodborne-illness-315787
xviii Orth, Steve, "Future of Food Safety: Next-Gen Technologies On The Rise," Food Safety Tech, Dec 3, 2024.
xix Miller, Sofie E. and Susan E. Dudley, "Regulatory Accretion: Causes and Possible Remedies, "Administrative law Review Accord, 67. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.administrativelawreview.org/wp-content/uploads/2016/03/MillerDudley_PublishedVersion-1.pdf
xx US FDA, Code of Federal Regulations, Title 21, Chapter 1, Subchapter B, Part 135. https://www.ecfr.gov/current/title-21/chapter-I/subchapter-B/part-135
xxi US FDA, "Establishment Registration & Process Filing for Acidified and Low-Acid Canned Foods (LACF): Paper Submissions." https://www.fda.gov/food/establishment-registration-process-filing-acidified-and-low-acid-canned-foods-lacf/establishment-registration-process-filing-acidified-and-low-acid-canned-foods-lacf-paper-submissions
xxii US FDA, "Investigations Operations Manual, 2025." chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.fda.gov/media/166525/download?attachment
xxiii FDA, "FDA's Reorganization Approved for Establishing Unified Human Foods Program, New Model for Field Operations and Other Modernization Efforts," May 30, 2024.
xxiv Brevett, Carol S. and Jessica Cox, "Intentional Adulteration of Foods with Chemicals: Snapshot for 2009-2022, Journal of Food Protection, 87/7, July 2024.
xxv Williams, Richard, "How to Beat China at its Own Game," Public Health Without Politics." Mar 6. 2025. https://fixingfood.substack.com/p/how-to-beat-china-at-its-own-game
xxvi Cotton, Tom, Seven Things You Can't Say About China, Broadside Books, 2025.
xxvii U.S. Chamber of Commerce, Institute for Legal Reform, "The ExxonMobil Lawsuit: Foreign Entities Funding Lawsuits to Target American Businesses," Feb 10, 2025.
xxviii Hvistendahl, Mara, "The Scientist and the Spy: A True Story of China, the FBI and Industrial Espionage, Riverhead Books, New York, NY, 2020.
xxix U.S. Government, President George W. Bush, "Executive Order: Improving Government Program Performance, Nov 2007.
xxx Williams, Richard A., Fixing Food, An FDA Insider Unravels the Myths and the Solutions, Post Hill Press, 2021.
xxxi Williams, Richard, "The infant formula blame game," The Hill, 6/4/2022.
xxxii Williams, Richard A., et. al., "US Medical Devices: Choices and Consequences," Mercatus Center. https://www.mercatus.org/research/research-papers/us-medical-devices-choices-and-consequences
xxxiii Pipes, Sally, "Here's How Trump's Pick to Lead the FDA Can Supercharge The Agency," Forbes, Mar 31, 2025.
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Original text here: https://oversight.house.gov/wp-content/uploads/2025/04/Williams-Written-Testimony.pdf
American Securities Association President Iacovella Testifies Before Senate Special Committee
WASHINGTON, April 18 -- The Senate Special Committee on Aging released the following testimony by Christopher A. Iacovella, president and CEO of the American Securities Association, from an April 9, 2025, joint hearing with the House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party entitled "Financial Aggression: How the Chinese Communist Party Exploits American Retirees and Undermines National Security":
* * *
Chairman Scott, Ranking Member Gillibrand, Chairman Moolenaar, and Ranking Member Krishnamoorthi:
Thank you for the opportunity to testify ... Show Full Article WASHINGTON, April 18 -- The Senate Special Committee on Aging released the following testimony by Christopher A. Iacovella, president and CEO of the American Securities Association, from an April 9, 2025, joint hearing with the House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party entitled "Financial Aggression: How the Chinese Communist Party Exploits American Retirees and Undermines National Security": * * * Chairman Scott, Ranking Member Gillibrand, Chairman Moolenaar, and Ranking Member Krishnamoorthi: Thank you for the opportunity to testifytoday.
My name is Christopher Iacovella, and I am the President & CEO of the American Securities Association (ASA). Our mission is to promote trust and confidence among America's investors, facilitate capital formation for small businesses, and support competitively balanced capital markets.
For the last eight (8) years, the ASA has been the only financial services trade association calling on Congress and the federal government to take action to protect America's investors and our country from the economic and national security threats posed by the Chinese Communist Party (CCP).
Today, I will describe the risks the CCP poses to American investors and senior savings, what can be done about it, and why a bipartisan Congress must act.
I. The Chinese Threat & Western Capital.
History suggests the free flow of global capital and investment is the best way to lift people out of poverty, promote economic growth, and strengthen the rule of law. It also strengthens relations among nations, which furthers international peace and stability.
Unfortunately, this is not how our economic relationship with China has played out.1 While American capital flows into China have helped lift millions of its citizens out of poverty, the widely expected liberalization of China's political and economic systems never materialized.
In fact, the opposite has happened: Beijing has used the openness of the international financial and economic system to increase its global influence and exert geopolitical leverage over the United States and its allies. This has left the world less open and more authoritarian.
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1 Josh Rogin, Chaos Under Heaven: Trump, Xi, and the Battle for the Twenty-First Century (Boston: Houghton Mifflin Harcourt, 2021).
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The CCP has been engaged in a multi-decade and multifaceted political, economic, and military strategy to achieve "the great rejuvenation of the Chinese nation."2 The ultimate goal of this strategy is to reshape the international world order through economic coercion, subversion, and manipulation to benefit China, while avoiding a 'hot' war.
The strategy is broad-based, and it includes, among other things, intellectual property theft, undermining American cultural values, creating social unrest and division in American society, co-opting American elites and heads of multinational corporations, infiltrating U.S. governmental institutions, and accessing Western markets.3 To carry out this strategy the CCP needed access to Western capital, and that's where Wall Street comes in.4
For over two decades, Beijing has used Wall Street to penetrate U.S. capital markets and obtain the capital necessary to fund its economic, technological, and military rise. In exchange for selling Chinese companies to U.S. investors, Wall Street receives huge fees and access to the Chinese market. It's this quid pro quo that directly threatens America's economic and national security.
The CCP operates modern-day China as a 'Party-State', which intentionally blurs the lines between Chinese industry and the CCP.5 That raises an important question: How is the money American investors send to the CCP used?
Among other things, American investor money funds the CCP's use of forced labor, genocide, and other human rights abuses,6 the ongoing internment of Uyghurs in concentration camps,7 the emission of more greenhouse gases than all developed countries combined,8 weapon systems for the People's Liberation Army,9 a broad-based disinformation campaign to undermine American values,10 subsidies for Chinese companies so they can dump goods into our market at artificially low prices to put U.S. companies out of business,11 and a cyber-army that relentlessly attacks the United States,12 and other nations of the free world.13
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2 U.S. Department of Defense, Office of the Secretary of Defense, Military and Security Developments Involving the People's Republic of China (2022) https://media.defense.gov/2022/Nov/29/2003122279/-1/-1/1/2022-MILITARY-AND-SECURITY-DEVELOPMENTS-INVOLVING-THE-PEOPLES-REPUBLIC-OF-CHINA.PDF
3 Political Warfare: Strategies for Combating China's Plan to "Win without Fighting" Kerry Gershaneck, at https://lccn.loc.gov/2020032647. America First Investment Policy (Feb. 21, 2025). America First Investment Policy - The White House "The PRC is also increasingly exploiting United States capital to develop and modernize its military, intelligence, and other security apparatuses, which poses significant risk to the United States homeland and Armed Forces of the United States around the world"
4 Iacovella, C. A. (2024). "How Wall Street Funds China's Rise". In 2024 China Transparency Report, the Heritage Foundation.
5 https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector "President issues 'important instructions' to all regions to boost party control over private enterprise and rejuvenate the nation; all firms will need employees from the party to boost law abidance and moral standard". https://archive.nytimes.com/www.nytimes.com/ref/college/coll-china-politics-002.html
6 https://thehill.com/blogs/congress-blog/homeland-security/522443-countering-chinas-forced-labor-practices;/ https://www.cnn.com/2021/01/19/us/us-xinjiang-china-genocide-intl/index.html; https://www.hongkongwatch.org/all-posts/2022/12/5/updated-new-hkw-report-finds-that-msci-investors-are-at-risk-of-passively-funding-crimes-against-humanity-in-xinjiang; https://www.bbc.com/news/world-asia-china-51697800
7 https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U; https://www.bbc.com/news/world-asia-china-51697800; https://foreignaffairs.house.gov/press-release/mccaul-welcomes-genocide-designation-for-ccps-treatment-of-uyghurs/
8 https://rhg.com/research/chinas-emissions-surpass-developed-countries/
9 https://www.cnn.com/2020/10/29/asia/us-election-us-military-indo-pacific-intl-hnk-ml/index.html
10 https://omaha.com/opinion/josh-rogin-u-s-schools-are-waking-up-to-the-china-threat/article_e31c9c07-a491-596f-93d9-575285940893.html
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While the American people overwhelmingly reject this behavior, the money flow continues.14
Unless Congress makes funding the CCP illegal or cost prohibitive, the partnership won't end.
As Upton Sinclair said, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
II. How the CCP Exploits the U.S. Capital Markets.
A. Chinese company listings on U.S exchanges
As of March 2025, there are 286 Chinese companies listed on U.S. exchanges with a collective market capitalization of $1.1 trillion.15 Each of those companies pays a listing and sustaining fee to an exchange to keep its securities trading. Congress enacted the Holding Foreign Companies Accountable Act and Accelerating Holding Foreign Companies Accountable Act to prohibit these companies from having their shares listed on a U.S. stock exchange if they do not comply with U.S. financial reporting, disclosure, and auditing laws.
The ASA worked with members on both sides of the aisle to advance each law. The laws directed the Public Company Accounting Oversight Board (PCAOB) to examine audit firms headquartered in mainland China and Hong Kong.16 Because this happened while COVID lockdowns were still in place, the PCAOB Chair cautioned the American public that the examination was just a beginning.17 This raises questions about whether the PCAOB examiners were able to fully carry out their duties.
Accordingly, the ASA urges Congress to vigorously exercise its oversight role to ensure that both the SEC and PCAOB carry out the laws and prevent further investor harm.
U.S. exchanges also have regulatory authority to protect the U.S. investing public from any non-compliant Chinese company whose stock is listed on their exchange. They can use that authority to delist any company, its subsidiaries, or a fund that includes such companies and has not complied with U.S. laws or been named to a U.S. prohibition list. To date, they have been reluctant to do so.
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11 https://www.voanews.com/a/report-china-spends-billions-of-dollars-to-subsidize-favored-companies-/6587314.html
12 https://www.justice.gov/opa/pr/chinese-military-personnel-charged-computer-fraud-economic-espionage-and-wire-fraud-hacking;%20https:/www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html; https://www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html
13 https://fortune.com/2018/12/19/china-eu-hacking/
14 https://www.wsj.com/articles/china-has-one-powerful-friend-left-in-the-u-s-wall-street-11606924454; https://www.cnbc.com/2021/04/28/a-tidal-wave-of-chinese-companies-rush-into-the-red-hot-ipo-market-in-the-us.html?&qsearchterm=china%20ipo
15 https://www.uscc.gov/research/chinese-companies-listed-major-us-stock-exchanges#:~:text=Summary%3A,market%20capitalization%20of%20%24848%20billion.
16 PCAOB Secures Access to Inspect, Investigate Chinese Firms for First Time in History, available at https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-secures-complete-access-to-inspect investigate-chinese-firms-for-first-time-in-history 17 PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History. Erica Y. Williams (Dec. 15, 2022) https://pcaobus.org/news-events/speeches/speech-detail/pcaob-secures-complete-access-to-inspect-investigate-chinese-firms-for-first-time-in-history
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B. The passive index loophole
According to Bloomberg, "more than 2,000 U.S. mutual and exchange-traded funds--particularly those tracking indexes--have $294 billion invested across Chinese stocks and bonds."18
An index fund is a fund that owns a portfolio of stocks that tracks a financial market index (i.e., S&P 500 or Dow Jones). Index funds significantly impact the flow of global capital, especially in international and emerging markets. Inclusion in an index can lead to billions of dollars being steered into a company or a country through the sale of mutual funds and exchange-traded funds that track the index.19 A regulatory loophole, I call the "passive index loophole", allows non-U.S. companies listed on non- U.S. stock exchanges to be included in an index fund and sold to American investors. This allows the non-U.S. company to avoid the company-specific disclosure, financial reporting, and audit requirements that American companies must comply with to sell stock to American investors.
With knowledge of the loophole, the CCP pressured the index providers20 to create a special index for mainland Chinese companies listed on Chinese exchanges called A-shares,21 and to include those companies as well as the ones listed on U.S. exchanges in international and emerging market indices. A recent study found the dollar amount of foreign investment in Chinese companies was 51 percent higher for those companies in an index.22 As a result, the 'passive index loophole' has funneled billions of American investor dollars to China.23 By blindly including Chinese companies listed on Chinese stock exchanges in an index, neither the index provider, nor the fund issuer, know whether these companies sold to American investors through index funds are Enron-like frauds,24 affiliated with the Chinese military,25 or supporting human egregious rights abuses.26 Most American investors who buy index funds with international exposure have no idea that their investment goes to Chinese companies that don't comply with U.S. transparency laws, are involved in egregious human rights abuses, or pose a national security risk to the U.S.27 And, as the Select Committee pointed out, not only have many of these companies turned out to be frauds,28 but some of the Chinese companies in passive index funds are actually on U.S. government prohibition lists.29 The last two Administrations have tried to address this issue using Executive Order 13959, which forced the de-listing and de-indexing of firms owned or controlled by the Chinese military trading in the U.S. But, as the Select Committee also noted, the companies de-indexed by this order only scratches the surface of Chinese companies found in index funds.30 To end this practice Congress can pass the 'No China in Index Funds Act',31 which would close the 'passive index loophole' and prevent U.S. investor dollars from being funneled into CCP-backed or controlled companies through index funds.
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18 Silla Brush, "BlackRock, MSCI to See Tighter Oversight Over U.S. Investments in China," Bloomberg, August 15, 2023, https://www.bloomberg.com/news/articles/2023-08-15/blackrock-fund-managers-brace-for-even-more-scrutiny-over-china (accessed September 6, 2023)
19 The three largest index providers are MSCI (Morgan Stanley Capital International), FTSE (Financial Times Stock Exchange), and S&P (Standard and Poor) Dow Jones. More info can be found at Index Industry Association, "What We Do," https://www.indexindustry.org/ (accessed September 6, 2023).
20 https://www.wsj.com/articles/how-china-pressured-msci-to-add-its-market-to-major-benchmark-11549195201
21 https://www.investopedia.com/terms/a/a-shares.asp
22 Juan Jose Cortina Lorente et al., "The Internationalization of China's Equity Markets," Policy Research Working Paper No.10513, 2023, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099356306282340403/idu0f0ff0f0d04f82046a8082990c1666e4a8c78?cid=DEC_AL_PolicyResearch_EN_INT
23 https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/4.18.24%20How%20Americsan%20Financial%20Institutions%20Provide%20Billions%20of%20Dollars%20to%20PRC%20Companies%20Committing%20Human%20Rights%20Abuses%20and%20Fueling%20the%20PRC's%20Military.pdf; Peter Pham, "What's China's Secret Source Of Funding?" Forbes, February 12, 2018, https://www.forbes.com/sites/peterpham/2018/02/12/whats-chinas-secret-source-of-funding/?sh=279e7286254b (accessed September 6, 2023).
24 See above.
25 https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/
26 https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U
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C. Variable interest entities
Another scheme the CCP exploits to raise money for its companies is called the variable interest entity (VIE) structure. This scheme essentially removes the equity ownership and voting rights that American investors normally enjoy when they buy a company on a U.S. exchange. Specifically, the VIE structure allows the operating company located in China to control the economic activities of a shell company, usually located in the Cayman Islands, through a contract. The shares of the operating company located in China are not owned by U.S. investors. This makes enforcement of U.S. laws against the mainland Chinese company very difficult and intentionally shields it from legal action by American investors.
The ASA has joined the Select Committee and various investor groups to demand the risks posed by this scheme end.32 While the previous U.S. Securities and Exchange Commission (SEC) Chairman paused its use in new initial public offerings (IPOs), the agency did not stop the use of VIEs by Chinese companies currently listed on U.S. exchanges.33 Congress needs to end this legal fiction and prohibit the listing of any Chinese company on a U.S. exchange that uses the VIE scheme.
D. Business Prohibition Lists & Outbound Investment
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27 http://selectcommitteeontheccp.house.gov/media/press-releases/committee-report-american-financial-institutions-funneled-billions-prc; https://www.institutmontaigne.org/en/expressions/influence-without-ownership-chinese-communist-party-targets-private-sector
28 https://www.reuters.com/article/us-china-stocks-regulation-analysis/chinese-firms-missing-6-billion-tests-regulators-resolve- idUSKCN1SN0OT; https://www.scmp.com/business/companies/article/3024084/why-kangmei-pharmaceutical-found-have- committed-one-chinas; https://finance.yahoo.com/news/one-theme-popping-among-chinese-154155487.html; See also Select Committee Report
29 American Financial Institutions Funneled Billions into PRC Companies Fueling the CCP's Military, Surveillance State, and Uyghur Genocide. Report of the Select Committee on the CCP (April 2024) https://selectcommitteeontheccp.house.gov/media/press-releases/committee-report-american-financial-institutions-funneled-billions-prc
30 https://selectcommitteeontheccp.house.gov/media/press-releases/committee-report-american-financial-institutions-funneled-billions-prc
31 https://spartz.house.gov/media/press-releases/spartz-sherman-introduce-four-bills-address-china-risk-us-stock-market2
32 Gallagher Calls on President Biden to Adopt Restrictions on US Investments to China (August 3, 2023). https://selectcommitteeontheccp.house.gov/media/press-releases/gallagher-calls-president-biden-adopt-restrictions-us-investments-china; https://www.cii.org/files/publications/misc/12_07_17%20Chinese%20Companies%20and%20the%20VIE%20Structure.pdf;
33 https://www.sec.gov/newsroom/speeches-statements/gensler-2021-07-30
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As this Committee and Congress considers policies to counter the CCP's exploitation of our financial markets, I recommend Congress require (1) that an entity placed on one government prohibition list (i.e. OFAC, DOD, Commerce Entity List, and the State Department's Human Rights List) be placed on all lists and automatically allow the Treasury Secreaty to remove that company from our public capital markets,34 and (2) the consolidation of all government business prohibition lists in a general list maintained by the Treasury Department so the public knows what foreign adversary companies are on the consolidated list and the Treasury Secretary can take more immediate action to protect American investors and businesses.
We strongly support efforts by Congress to scrutinize and prevent outbound investments to China made by U.S. individuals and institutions. One bill, the Foreign Investment Guardrails to Help Thwart (FIGHT) China Act,35 allows the Treasury Secretary to prevent American citizens and Wall Street institutions from financing the CCP's cyber army or its military build-up. This bill - in addition to No China in Index Funds Act - will close the scandalous 'passive index loophole'.
E. Mainland Chinese Broker-Dealers with U.S. Customers.
Another risk to retail investors is posed by Chinese-owned broker-dealers operating as a regulated entities in our markets with known ties to the CCP. The Select Committee, State Attorneys' General, and members of Congress on both sides of the aisle have repeated raised concerns about this problem.36 It is shocking that a broker-dealer with operations in mainland China and affiliated with the CCP can be registered to do business in this country.37 If the CCP demands access to the personal and financial information of Americans at these mainland Chinese broker-dealers, then what is to stop the party from using that information to blackmail those Americans or block access to their money unless they agree to spy on this country. This is feature of the CCP's strategy of coercion described above, and it represents the very definition of a national security concern.
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34 This policy is very similar to The Sanction Transactions Originating from Pernicious Chinese Companies and Policies (STOP CCP) Act, cosponsored by Senators Mike Braun and Bill Hagerty and included in Senator Scott's package in March of 2023.
35 https://barr.house.gov/press-releases?ID=7FCD27D4-498D-4F1C-B1BD-DF3EADFC1F05; https://www.cornyn.senate.gov/news/cornyn-cortez-masto-colleagues-introduce-outbound-investment-legislation-to-counter-china/
36 Letter from the House Select Committee on the Chinese Communist Party to Webull CEO, Anthony Denier, (Nov. 25, 2024), available here: https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/Webull%2011.25%20-%20Final.pdf; Letter from Sen. Tommy Tuberville (R-AL) and Rep. Jim Banks (R-IN) to SEC and FINRA (May 3, 2023) ("May 2023 Tuberville-Banks Letter"), available here: https://static.foxnews.com/foxnews.com/content/uploads/2023/05/Tuberville-Banks-Oversight-Letter-to-SEC-FINRA-5.3.20231.pdf; Letters from Sen. Tommy Tuberville (R-AL) to SEC and FINRA (Jun. 5, 2023), available here: https://www.tuberville.senate.gov/wp-content/uploads/FILE_3666.pdf and to SEC and DOJ (July 10, 2023), available here: https://www.tuberville.senate.gov/wp-content/uploads/FILE_3666.pdf; Letter from Sens. Tommy Tuberville (R-AL), Ted Cruz (R-TX), Mike Braun (R-IN), Rick Scott (R-FL), and Roger Marshall (R-KS) to SEC Chair Gary Gensler (Jul. 29, 2022), available here: https://www.tuberville.senate.gov/newsroom/press-releases/tuberville-colleagues-call-for-investigation-into-stock-trading-platforms-with-ties-to-china/; Letter from Rep. Ritchie Torres (D-NY) to SEC IG and GAO (July 13, 2023), available here: https://twitter.com/RepRitchie/status/1679534903661301761/photo/1; Letter from Rep. Sherman (CA-32) to SEC as reported in Capitol Account (Feb. 23, 2023); Letter from Rep. Luetmekemeyer to SEC and FINRA (Sept. 26, 2023), available here: https://luetkemeyer.house.gov/uploadedfiles/20230926181427040.pdf; Letter from Senator Cotton (R-AR) to Director of National Intelligence Avril Haines (Sept. 23, 2021), available here: https://www.cotton.senate.gov/news/press-releases/cotton-calls-for-investigation-of-chinese-stock-trading-app; Letter from Rep. Lawler (R-NY) to Treasury Secretary Yellen (Apr. 27, 2023), available here: https://lawler.house.gov/news/documentsingle.aspx?DocumentID=257 and Letter from Rep. Lawler (R-NY) to Treasury Secretary Yellen (Jul. 21, 2023), available here: https://lawler.house.gov/news/documentsingle.aspx?DocumentID=556; https://www.banking.senate.gov/hearings/09/06/2023/oversight-of-the-us-securities-and-exchange-commission.
37 May 2023 Tuberville-Banks Letter. The Senators wrote: "As you are aware, Webull and Moomoo collect highly sensitive personal information from millions of their U.S. customers, including personally identifiable information (PII) such as Social Security numbers, mailing addresses, and financial account data. . . . In light of Beijing's increasingly strict privacy laws barring many Chinese companies from sharing data with Western regulators, the presence of Webull registered representatives in the PRC raises serious concerns regarding (1) Webull's ability to meet its supervisory obligations under SEC and FINRA rules; (2) the SEC's and FINRA's ability to oversee and examine Webull and its registered representatives and associated persons located in the PRC; (3) the adequacy of Webull's compliance with all SEC and FINRA recordkeeping requirements; (4) the ability of the SEC and FINRA to adequately enforce federal securities laws, including the ability to obtain documents and information from Webull employees located in the PRC; and (5) the potential for U.S. customer PII to be shared or exfiltrated to Webull employees or affiliated entities located in the PRC."
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III. Taxing Outbound Investment.
As the reconciliation debate heats up and Congress looks for new ways to raise revenue, it can do so while protecting American investors and our national security. Congress should examine how much revenue can be raised by imposing a foreign adversary capital gains tax on the realized proceeds of any type of public or private investment made in China, in a Chinese company, or in a registered investment fund that owns Chinese securities.
Increasing the tax burden on any American money that funds Communist China's global ambitions would significantly change the cost for American companies to do business with this nefarious foreign adversary.
IV. A Word About Fiduciary Duty.
Institutional investors and asset managers owe a fiduciary duty of loyalty to those who entrust them with their money.38
This duty requires fiduciaries to conduct thorough due diligence on any company or fund in which they invest, and that is very difficult to do in China.39
The duty also requires those managing money to evaluate the legal protections and enforceability of the law in the country where they choose to send investor money. Americans who lose money because a Chinese company commits fraud, or the government appropriates their funds have little chance of recovering their money. Additionally, many American investors don't realize the scope of liability associated with owning a U.S.-listed company that does business in China under U.S. law, international law, or otherwise.40 The fiduciary duty also requires American investors to evaluate the political and reputational risks associated with U.S. companies doing business with the CCP specifically, or in China generally. This would include a scenario where China decides to invade, quarantine, or act aggressively with respect to Taiwan,41 and the U.S. government responds by imposing economic sanctions that prohibit American companies from doing business in China (as it did after Russia invaded the Ukraine).42 In this scenario, bond funds would be forced to remove dollar-denominated Yuan bonds from bond indexes sold to American investors.43
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38 https://www.americansecurities.org/post/asa-letter-to-wsj-real-audits-for-chinese-firms-listed-in-the-u-s.
39 https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/
40 https://www.justsecurity.org/74388/genocide-against-the-uyghurs-legal-grounds-for-the-united-states-bipartisan-genocide- determination/; https://www.washingtonexaminer.com/news/state-department-china-committing-uyghur-genocide-wont-say-if- ongoing; https://cja.org/what-we-do/litigation/legal-strategy/the-alien-tort-statute/
41 https://www.uscc.gov/hearings/deterring-prc-aggression-toward-taiwan
42 https://www.state.gov/ukraine-and-russia-sanctions/
43 "In order to be considered for inclusion in the Global Aggregate Index, a local currency debt market must be classified as investment grade and its currency must be freely tradable, convertible, hedgeable, and free of capital ontrols." https://www.bloomberg.com/company/press/bloomberg-add-china-bloomberg-barclays-global-aggregate-indices/
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American investors could also lose billions if the CCP responds to sanctions by imposing capital controls on foreign money or on the retained earnings of U.S. company subsidiaries located in China.44 Senator Scott's 'Protecting American Capital Act' could help investors understand the true nature of the financial exposure U.S. listed companies have to Communist China if these scenarios were to materialize.45
V. Combating State-Sponsored Fraud.
The amount of fraud perpetrated against Americans, and especially seniors, is staggering. The Federal Trade Commission (FTC) estimates that Americans lost over $158 billion to fraud in 2023 alone.46
Fraud has gone from an individual criminal act to a business opportunity funded by state-sponsored actors across the globe.47 It has become so lucrative that Deloitte estimates Americans will lose $40 billion to AI-enhanced fraud by 2027.48 Because these criminals are now funded by nation-states like China and Russia they have become increasingly sophisticated in their techniques using generative AI and other means. 49 Many types of scams exist and unfortunately, those who are routinely targeted and most likely to be victimized are the most vulnerable among us, namely our senior citizens.
Despite efforts by regulators to warn investors about the latest scams,50 the level of cunning and the nonstop evolution of the scams these fraudsters employ continues to leave private companies, law enforcement, and investors playing catch-up.
ASA member firms are increasingly grappling with scams that target their employees, their customers, and their firms. For example, it is not uncommon for scammers to pose as personnel from a licensed U.S. Broker-Dealer (BD) after they know a person has been a victim of another scam (perhaps also perpetrated by them or their associates). The criminals then present a deceptive offer of forensic and recovery services, ostensibly to assist the victim in recouping their losses. In reality, they exploit the victim's desperation, extracting multiple payments without providing any genuine assistance or recovery of funds.
Scammers have also begun to hack into customer email accounts and give trade instructions from an email account on file with the BD. Because scammers have access to email history, scammers can pose very credibly as customers and seem to know things specific to the customer. The scammers set up a 'rule' in the customer's email forwarding all incoming email to the customer from the BD to the scammers' fake email account, so the customer will not discover the
activity. The scammers then submit wire requests to the BD to be sent to a bank account in the customer's name that the scammer has opened and controls. By the time the customer and/or BD discover the depth of this scam, the funds have been moved and are extremely difficult to recover.
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44 https://www.cnn.com/2023/03/06/business/mark-mobius-china-capital-controls/index.html
45 https://www.rickscott.senate.gov/services/files/78A1BB15-8B96-4940-A288-66707BAEAAD9
46 https://www.sec.gov/files/20250306-isc-fraud-briefing-iac-meeting.pdf
47 https://www.csis.org/analysis/cyber-scamming-goes-global-unveiling-southeast-asias-high-tech-fraud-factories
48 Id.
49 https://www.sec.gov/files/20250306-isc-fraud-briefing-iac-meeting.pdf; https://www.sec.gov/newsroom/press-releases/2024-196 ""SEC Office of the Investor Advocate Issues Report on Nationally Representative Survey of Investors and Continues Focus on Investment Fraud";
50 https://www.finra.org/investors/insights/gen-ai-fraud-new-accounts-and-takeovers; https://www.finra.org/investors/insights/artificial-intelligence-and-investment-fraud
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The only way to try to combat the sophistication of this ever-changing criminal activity going forward is to promote an open, honest and trustworthy partnership between the private sector and government.
VI. Conclusion.
Congress must end Communist China's use of American investor savings to fund its geopolitical ambitions. Every day that we don't act, the economic and national security threat to our country and the American way of life increases.
I would like to thank each committee for holding this joint hearing and I look forward to answering your questions.
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Original text here: https://www.aging.senate.gov/imo/media/doc/713d6dee-b247-ab39-387e-35005767f950/Testimony_Iacovella%2004.09.251.pdf
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Chairman Scott, Ranking Member Gillibrand, Chairman Moolenaar, and Ranking Member Krishnamoorthi:
Thank you for the opportunity to testify ... Show Full Article WASHINGTON, April 18 -- The Senate Special Committee on Aging released the following testimony by Christopher A. Iacovella, president and CEO of the American Securities Association, from an April 9, 2025, joint hearing with the House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party entitled "Financial Aggression: How the Chinese Communist Party Exploits American Retirees and Undermines National Security": * * * Chairman Scott, Ranking Member Gillibrand, Chairman Moolenaar, and Ranking Member Krishnamoorthi: Thank you for the opportunity to testifytoday.
My name is Christopher Iacovella, and I am the President & CEO of the American Securities Association (ASA). Our mission is to promote trust and confidence among America's investors, facilitate capital formation for small businesses, and support competitively balanced capital markets.
For the last eight (8) years, the ASA has been the only financial services trade association calling on Congress and the federal government to take action to protect America's investors and our country from the economic and national security threats posed by the Chinese Communist Party (CCP).
Today, I will describe the risks the CCP poses to American investors and senior savings, what can be done about it, and why a bipartisan Congress must act.
I. The Chinese Threat & Western Capital.
History suggests the free flow of global capital and investment is the best way to lift people out of poverty, promote economic growth, and strengthen the rule of law. It also strengthens relations among nations, which furthers international peace and stability.
Unfortunately, this is not how our economic relationship with China has played out.1 While American capital flows into China have helped lift millions of its citizens out of poverty, the widely expected liberalization of China's political and economic systems never materialized.
In fact, the opposite has happened: Beijing has used the openness of the international financial and economic system to increase its global influence and exert geopolitical leverage over the United States and its allies. This has left the world less open and more authoritarian.
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1 Josh Rogin, Chaos Under Heaven: Trump, Xi, and the Battle for the Twenty-First Century (Boston: Houghton Mifflin Harcourt, 2021).
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The CCP has been engaged in a multi-decade and multifaceted political, economic, and military strategy to achieve "the great rejuvenation of the Chinese nation."2 The ultimate goal of this strategy is to reshape the international world order through economic coercion, subversion, and manipulation to benefit China, while avoiding a 'hot' war.
The strategy is broad-based, and it includes, among other things, intellectual property theft, undermining American cultural values, creating social unrest and division in American society, co-opting American elites and heads of multinational corporations, infiltrating U.S. governmental institutions, and accessing Western markets.3 To carry out this strategy the CCP needed access to Western capital, and that's where Wall Street comes in.4
For over two decades, Beijing has used Wall Street to penetrate U.S. capital markets and obtain the capital necessary to fund its economic, technological, and military rise. In exchange for selling Chinese companies to U.S. investors, Wall Street receives huge fees and access to the Chinese market. It's this quid pro quo that directly threatens America's economic and national security.
The CCP operates modern-day China as a 'Party-State', which intentionally blurs the lines between Chinese industry and the CCP.5 That raises an important question: How is the money American investors send to the CCP used?
Among other things, American investor money funds the CCP's use of forced labor, genocide, and other human rights abuses,6 the ongoing internment of Uyghurs in concentration camps,7 the emission of more greenhouse gases than all developed countries combined,8 weapon systems for the People's Liberation Army,9 a broad-based disinformation campaign to undermine American values,10 subsidies for Chinese companies so they can dump goods into our market at artificially low prices to put U.S. companies out of business,11 and a cyber-army that relentlessly attacks the United States,12 and other nations of the free world.13
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2 U.S. Department of Defense, Office of the Secretary of Defense, Military and Security Developments Involving the People's Republic of China (2022) https://media.defense.gov/2022/Nov/29/2003122279/-1/-1/1/2022-MILITARY-AND-SECURITY-DEVELOPMENTS-INVOLVING-THE-PEOPLES-REPUBLIC-OF-CHINA.PDF
3 Political Warfare: Strategies for Combating China's Plan to "Win without Fighting" Kerry Gershaneck, at https://lccn.loc.gov/2020032647. America First Investment Policy (Feb. 21, 2025). America First Investment Policy - The White House "The PRC is also increasingly exploiting United States capital to develop and modernize its military, intelligence, and other security apparatuses, which poses significant risk to the United States homeland and Armed Forces of the United States around the world"
4 Iacovella, C. A. (2024). "How Wall Street Funds China's Rise". In 2024 China Transparency Report, the Heritage Foundation.
5 https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector "President issues 'important instructions' to all regions to boost party control over private enterprise and rejuvenate the nation; all firms will need employees from the party to boost law abidance and moral standard". https://archive.nytimes.com/www.nytimes.com/ref/college/coll-china-politics-002.html
6 https://thehill.com/blogs/congress-blog/homeland-security/522443-countering-chinas-forced-labor-practices;/ https://www.cnn.com/2021/01/19/us/us-xinjiang-china-genocide-intl/index.html; https://www.hongkongwatch.org/all-posts/2022/12/5/updated-new-hkw-report-finds-that-msci-investors-are-at-risk-of-passively-funding-crimes-against-humanity-in-xinjiang; https://www.bbc.com/news/world-asia-china-51697800
7 https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U; https://www.bbc.com/news/world-asia-china-51697800; https://foreignaffairs.house.gov/press-release/mccaul-welcomes-genocide-designation-for-ccps-treatment-of-uyghurs/
8 https://rhg.com/research/chinas-emissions-surpass-developed-countries/
9 https://www.cnn.com/2020/10/29/asia/us-election-us-military-indo-pacific-intl-hnk-ml/index.html
10 https://omaha.com/opinion/josh-rogin-u-s-schools-are-waking-up-to-the-china-threat/article_e31c9c07-a491-596f-93d9-575285940893.html
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While the American people overwhelmingly reject this behavior, the money flow continues.14
Unless Congress makes funding the CCP illegal or cost prohibitive, the partnership won't end.
As Upton Sinclair said, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
II. How the CCP Exploits the U.S. Capital Markets.
A. Chinese company listings on U.S exchanges
As of March 2025, there are 286 Chinese companies listed on U.S. exchanges with a collective market capitalization of $1.1 trillion.15 Each of those companies pays a listing and sustaining fee to an exchange to keep its securities trading. Congress enacted the Holding Foreign Companies Accountable Act and Accelerating Holding Foreign Companies Accountable Act to prohibit these companies from having their shares listed on a U.S. stock exchange if they do not comply with U.S. financial reporting, disclosure, and auditing laws.
The ASA worked with members on both sides of the aisle to advance each law. The laws directed the Public Company Accounting Oversight Board (PCAOB) to examine audit firms headquartered in mainland China and Hong Kong.16 Because this happened while COVID lockdowns were still in place, the PCAOB Chair cautioned the American public that the examination was just a beginning.17 This raises questions about whether the PCAOB examiners were able to fully carry out their duties.
Accordingly, the ASA urges Congress to vigorously exercise its oversight role to ensure that both the SEC and PCAOB carry out the laws and prevent further investor harm.
U.S. exchanges also have regulatory authority to protect the U.S. investing public from any non-compliant Chinese company whose stock is listed on their exchange. They can use that authority to delist any company, its subsidiaries, or a fund that includes such companies and has not complied with U.S. laws or been named to a U.S. prohibition list. To date, they have been reluctant to do so.
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11 https://www.voanews.com/a/report-china-spends-billions-of-dollars-to-subsidize-favored-companies-/6587314.html
12 https://www.justice.gov/opa/pr/chinese-military-personnel-charged-computer-fraud-economic-espionage-and-wire-fraud-hacking;%20https:/www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html; https://www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html
13 https://fortune.com/2018/12/19/china-eu-hacking/
14 https://www.wsj.com/articles/china-has-one-powerful-friend-left-in-the-u-s-wall-street-11606924454; https://www.cnbc.com/2021/04/28/a-tidal-wave-of-chinese-companies-rush-into-the-red-hot-ipo-market-in-the-us.html?&qsearchterm=china%20ipo
15 https://www.uscc.gov/research/chinese-companies-listed-major-us-stock-exchanges#:~:text=Summary%3A,market%20capitalization%20of%20%24848%20billion.
16 PCAOB Secures Access to Inspect, Investigate Chinese Firms for First Time in History, available at https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-secures-complete-access-to-inspect investigate-chinese-firms-for-first-time-in-history 17 PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History. Erica Y. Williams (Dec. 15, 2022) https://pcaobus.org/news-events/speeches/speech-detail/pcaob-secures-complete-access-to-inspect-investigate-chinese-firms-for-first-time-in-history
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B. The passive index loophole
According to Bloomberg, "more than 2,000 U.S. mutual and exchange-traded funds--particularly those tracking indexes--have $294 billion invested across Chinese stocks and bonds."18
An index fund is a fund that owns a portfolio of stocks that tracks a financial market index (i.e., S&P 500 or Dow Jones). Index funds significantly impact the flow of global capital, especially in international and emerging markets. Inclusion in an index can lead to billions of dollars being steered into a company or a country through the sale of mutual funds and exchange-traded funds that track the index.19 A regulatory loophole, I call the "passive index loophole", allows non-U.S. companies listed on non- U.S. stock exchanges to be included in an index fund and sold to American investors. This allows the non-U.S. company to avoid the company-specific disclosure, financial reporting, and audit requirements that American companies must comply with to sell stock to American investors.
With knowledge of the loophole, the CCP pressured the index providers20 to create a special index for mainland Chinese companies listed on Chinese exchanges called A-shares,21 and to include those companies as well as the ones listed on U.S. exchanges in international and emerging market indices. A recent study found the dollar amount of foreign investment in Chinese companies was 51 percent higher for those companies in an index.22 As a result, the 'passive index loophole' has funneled billions of American investor dollars to China.23 By blindly including Chinese companies listed on Chinese stock exchanges in an index, neither the index provider, nor the fund issuer, know whether these companies sold to American investors through index funds are Enron-like frauds,24 affiliated with the Chinese military,25 or supporting human egregious rights abuses.26 Most American investors who buy index funds with international exposure have no idea that their investment goes to Chinese companies that don't comply with U.S. transparency laws, are involved in egregious human rights abuses, or pose a national security risk to the U.S.27 And, as the Select Committee pointed out, not only have many of these companies turned out to be frauds,28 but some of the Chinese companies in passive index funds are actually on U.S. government prohibition lists.29 The last two Administrations have tried to address this issue using Executive Order 13959, which forced the de-listing and de-indexing of firms owned or controlled by the Chinese military trading in the U.S. But, as the Select Committee also noted, the companies de-indexed by this order only scratches the surface of Chinese companies found in index funds.30 To end this practice Congress can pass the 'No China in Index Funds Act',31 which would close the 'passive index loophole' and prevent U.S. investor dollars from being funneled into CCP-backed or controlled companies through index funds.
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18 Silla Brush, "BlackRock, MSCI to See Tighter Oversight Over U.S. Investments in China," Bloomberg, August 15, 2023, https://www.bloomberg.com/news/articles/2023-08-15/blackrock-fund-managers-brace-for-even-more-scrutiny-over-china (accessed September 6, 2023)
19 The three largest index providers are MSCI (Morgan Stanley Capital International), FTSE (Financial Times Stock Exchange), and S&P (Standard and Poor) Dow Jones. More info can be found at Index Industry Association, "What We Do," https://www.indexindustry.org/ (accessed September 6, 2023).
20 https://www.wsj.com/articles/how-china-pressured-msci-to-add-its-market-to-major-benchmark-11549195201
21 https://www.investopedia.com/terms/a/a-shares.asp
22 Juan Jose Cortina Lorente et al., "The Internationalization of China's Equity Markets," Policy Research Working Paper No.10513, 2023, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099356306282340403/idu0f0ff0f0d04f82046a8082990c1666e4a8c78?cid=DEC_AL_PolicyResearch_EN_INT
23 https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/4.18.24%20How%20Americsan%20Financial%20Institutions%20Provide%20Billions%20of%20Dollars%20to%20PRC%20Companies%20Committing%20Human%20Rights%20Abuses%20and%20Fueling%20the%20PRC's%20Military.pdf; Peter Pham, "What's China's Secret Source Of Funding?" Forbes, February 12, 2018, https://www.forbes.com/sites/peterpham/2018/02/12/whats-chinas-secret-source-of-funding/?sh=279e7286254b (accessed September 6, 2023).
24 See above.
25 https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/
26 https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U
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C. Variable interest entities
Another scheme the CCP exploits to raise money for its companies is called the variable interest entity (VIE) structure. This scheme essentially removes the equity ownership and voting rights that American investors normally enjoy when they buy a company on a U.S. exchange. Specifically, the VIE structure allows the operating company located in China to control the economic activities of a shell company, usually located in the Cayman Islands, through a contract. The shares of the operating company located in China are not owned by U.S. investors. This makes enforcement of U.S. laws against the mainland Chinese company very difficult and intentionally shields it from legal action by American investors.
The ASA has joined the Select Committee and various investor groups to demand the risks posed by this scheme end.32 While the previous U.S. Securities and Exchange Commission (SEC) Chairman paused its use in new initial public offerings (IPOs), the agency did not stop the use of VIEs by Chinese companies currently listed on U.S. exchanges.33 Congress needs to end this legal fiction and prohibit the listing of any Chinese company on a U.S. exchange that uses the VIE scheme.
D. Business Prohibition Lists & Outbound Investment
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27 http://selectcommitteeontheccp.house.gov/media/press-releases/committee-report-american-financial-institutions-funneled-billions-prc; https://www.institutmontaigne.org/en/expressions/influence-without-ownership-chinese-communist-party-targets-private-sector
28 https://www.reuters.com/article/us-china-stocks-regulation-analysis/chinese-firms-missing-6-billion-tests-regulators-resolve- idUSKCN1SN0OT; https://www.scmp.com/business/companies/article/3024084/why-kangmei-pharmaceutical-found-have- committed-one-chinas; https://finance.yahoo.com/news/one-theme-popping-among-chinese-154155487.html; See also Select Committee Report
29 American Financial Institutions Funneled Billions into PRC Companies Fueling the CCP's Military, Surveillance State, and Uyghur Genocide. Report of the Select Committee on the CCP (April 2024) https://selectcommitteeontheccp.house.gov/media/press-releases/committee-report-american-financial-institutions-funneled-billions-prc
30 https://selectcommitteeontheccp.house.gov/media/press-releases/committee-report-american-financial-institutions-funneled-billions-prc
31 https://spartz.house.gov/media/press-releases/spartz-sherman-introduce-four-bills-address-china-risk-us-stock-market2
32 Gallagher Calls on President Biden to Adopt Restrictions on US Investments to China (August 3, 2023). https://selectcommitteeontheccp.house.gov/media/press-releases/gallagher-calls-president-biden-adopt-restrictions-us-investments-china; https://www.cii.org/files/publications/misc/12_07_17%20Chinese%20Companies%20and%20the%20VIE%20Structure.pdf;
33 https://www.sec.gov/newsroom/speeches-statements/gensler-2021-07-30
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As this Committee and Congress considers policies to counter the CCP's exploitation of our financial markets, I recommend Congress require (1) that an entity placed on one government prohibition list (i.e. OFAC, DOD, Commerce Entity List, and the State Department's Human Rights List) be placed on all lists and automatically allow the Treasury Secreaty to remove that company from our public capital markets,34 and (2) the consolidation of all government business prohibition lists in a general list maintained by the Treasury Department so the public knows what foreign adversary companies are on the consolidated list and the Treasury Secretary can take more immediate action to protect American investors and businesses.
We strongly support efforts by Congress to scrutinize and prevent outbound investments to China made by U.S. individuals and institutions. One bill, the Foreign Investment Guardrails to Help Thwart (FIGHT) China Act,35 allows the Treasury Secretary to prevent American citizens and Wall Street institutions from financing the CCP's cyber army or its military build-up. This bill - in addition to No China in Index Funds Act - will close the scandalous 'passive index loophole'.
E. Mainland Chinese Broker-Dealers with U.S. Customers.
Another risk to retail investors is posed by Chinese-owned broker-dealers operating as a regulated entities in our markets with known ties to the CCP. The Select Committee, State Attorneys' General, and members of Congress on both sides of the aisle have repeated raised concerns about this problem.36 It is shocking that a broker-dealer with operations in mainland China and affiliated with the CCP can be registered to do business in this country.37 If the CCP demands access to the personal and financial information of Americans at these mainland Chinese broker-dealers, then what is to stop the party from using that information to blackmail those Americans or block access to their money unless they agree to spy on this country. This is feature of the CCP's strategy of coercion described above, and it represents the very definition of a national security concern.
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34 This policy is very similar to The Sanction Transactions Originating from Pernicious Chinese Companies and Policies (STOP CCP) Act, cosponsored by Senators Mike Braun and Bill Hagerty and included in Senator Scott's package in March of 2023.
35 https://barr.house.gov/press-releases?ID=7FCD27D4-498D-4F1C-B1BD-DF3EADFC1F05; https://www.cornyn.senate.gov/news/cornyn-cortez-masto-colleagues-introduce-outbound-investment-legislation-to-counter-china/
36 Letter from the House Select Committee on the Chinese Communist Party to Webull CEO, Anthony Denier, (Nov. 25, 2024), available here: https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/Webull%2011.25%20-%20Final.pdf; Letter from Sen. Tommy Tuberville (R-AL) and Rep. Jim Banks (R-IN) to SEC and FINRA (May 3, 2023) ("May 2023 Tuberville-Banks Letter"), available here: https://static.foxnews.com/foxnews.com/content/uploads/2023/05/Tuberville-Banks-Oversight-Letter-to-SEC-FINRA-5.3.20231.pdf; Letters from Sen. Tommy Tuberville (R-AL) to SEC and FINRA (Jun. 5, 2023), available here: https://www.tuberville.senate.gov/wp-content/uploads/FILE_3666.pdf and to SEC and DOJ (July 10, 2023), available here: https://www.tuberville.senate.gov/wp-content/uploads/FILE_3666.pdf; Letter from Sens. Tommy Tuberville (R-AL), Ted Cruz (R-TX), Mike Braun (R-IN), Rick Scott (R-FL), and Roger Marshall (R-KS) to SEC Chair Gary Gensler (Jul. 29, 2022), available here: https://www.tuberville.senate.gov/newsroom/press-releases/tuberville-colleagues-call-for-investigation-into-stock-trading-platforms-with-ties-to-china/; Letter from Rep. Ritchie Torres (D-NY) to SEC IG and GAO (July 13, 2023), available here: https://twitter.com/RepRitchie/status/1679534903661301761/photo/1; Letter from Rep. Sherman (CA-32) to SEC as reported in Capitol Account (Feb. 23, 2023); Letter from Rep. Luetmekemeyer to SEC and FINRA (Sept. 26, 2023), available here: https://luetkemeyer.house.gov/uploadedfiles/20230926181427040.pdf; Letter from Senator Cotton (R-AR) to Director of National Intelligence Avril Haines (Sept. 23, 2021), available here: https://www.cotton.senate.gov/news/press-releases/cotton-calls-for-investigation-of-chinese-stock-trading-app; Letter from Rep. Lawler (R-NY) to Treasury Secretary Yellen (Apr. 27, 2023), available here: https://lawler.house.gov/news/documentsingle.aspx?DocumentID=257 and Letter from Rep. Lawler (R-NY) to Treasury Secretary Yellen (Jul. 21, 2023), available here: https://lawler.house.gov/news/documentsingle.aspx?DocumentID=556; https://www.banking.senate.gov/hearings/09/06/2023/oversight-of-the-us-securities-and-exchange-commission.
37 May 2023 Tuberville-Banks Letter. The Senators wrote: "As you are aware, Webull and Moomoo collect highly sensitive personal information from millions of their U.S. customers, including personally identifiable information (PII) such as Social Security numbers, mailing addresses, and financial account data. . . . In light of Beijing's increasingly strict privacy laws barring many Chinese companies from sharing data with Western regulators, the presence of Webull registered representatives in the PRC raises serious concerns regarding (1) Webull's ability to meet its supervisory obligations under SEC and FINRA rules; (2) the SEC's and FINRA's ability to oversee and examine Webull and its registered representatives and associated persons located in the PRC; (3) the adequacy of Webull's compliance with all SEC and FINRA recordkeeping requirements; (4) the ability of the SEC and FINRA to adequately enforce federal securities laws, including the ability to obtain documents and information from Webull employees located in the PRC; and (5) the potential for U.S. customer PII to be shared or exfiltrated to Webull employees or affiliated entities located in the PRC."
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III. Taxing Outbound Investment.
As the reconciliation debate heats up and Congress looks for new ways to raise revenue, it can do so while protecting American investors and our national security. Congress should examine how much revenue can be raised by imposing a foreign adversary capital gains tax on the realized proceeds of any type of public or private investment made in China, in a Chinese company, or in a registered investment fund that owns Chinese securities.
Increasing the tax burden on any American money that funds Communist China's global ambitions would significantly change the cost for American companies to do business with this nefarious foreign adversary.
IV. A Word About Fiduciary Duty.
Institutional investors and asset managers owe a fiduciary duty of loyalty to those who entrust them with their money.38
This duty requires fiduciaries to conduct thorough due diligence on any company or fund in which they invest, and that is very difficult to do in China.39
The duty also requires those managing money to evaluate the legal protections and enforceability of the law in the country where they choose to send investor money. Americans who lose money because a Chinese company commits fraud, or the government appropriates their funds have little chance of recovering their money. Additionally, many American investors don't realize the scope of liability associated with owning a U.S.-listed company that does business in China under U.S. law, international law, or otherwise.40 The fiduciary duty also requires American investors to evaluate the political and reputational risks associated with U.S. companies doing business with the CCP specifically, or in China generally. This would include a scenario where China decides to invade, quarantine, or act aggressively with respect to Taiwan,41 and the U.S. government responds by imposing economic sanctions that prohibit American companies from doing business in China (as it did after Russia invaded the Ukraine).42 In this scenario, bond funds would be forced to remove dollar-denominated Yuan bonds from bond indexes sold to American investors.43
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38 https://www.americansecurities.org/post/asa-letter-to-wsj-real-audits-for-chinese-firms-listed-in-the-u-s.
39 https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/
40 https://www.justsecurity.org/74388/genocide-against-the-uyghurs-legal-grounds-for-the-united-states-bipartisan-genocide- determination/; https://www.washingtonexaminer.com/news/state-department-china-committing-uyghur-genocide-wont-say-if- ongoing; https://cja.org/what-we-do/litigation/legal-strategy/the-alien-tort-statute/
41 https://www.uscc.gov/hearings/deterring-prc-aggression-toward-taiwan
42 https://www.state.gov/ukraine-and-russia-sanctions/
43 "In order to be considered for inclusion in the Global Aggregate Index, a local currency debt market must be classified as investment grade and its currency must be freely tradable, convertible, hedgeable, and free of capital ontrols." https://www.bloomberg.com/company/press/bloomberg-add-china-bloomberg-barclays-global-aggregate-indices/
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American investors could also lose billions if the CCP responds to sanctions by imposing capital controls on foreign money or on the retained earnings of U.S. company subsidiaries located in China.44 Senator Scott's 'Protecting American Capital Act' could help investors understand the true nature of the financial exposure U.S. listed companies have to Communist China if these scenarios were to materialize.45
V. Combating State-Sponsored Fraud.
The amount of fraud perpetrated against Americans, and especially seniors, is staggering. The Federal Trade Commission (FTC) estimates that Americans lost over $158 billion to fraud in 2023 alone.46
Fraud has gone from an individual criminal act to a business opportunity funded by state-sponsored actors across the globe.47 It has become so lucrative that Deloitte estimates Americans will lose $40 billion to AI-enhanced fraud by 2027.48 Because these criminals are now funded by nation-states like China and Russia they have become increasingly sophisticated in their techniques using generative AI and other means. 49 Many types of scams exist and unfortunately, those who are routinely targeted and most likely to be victimized are the most vulnerable among us, namely our senior citizens.
Despite efforts by regulators to warn investors about the latest scams,50 the level of cunning and the nonstop evolution of the scams these fraudsters employ continues to leave private companies, law enforcement, and investors playing catch-up.
ASA member firms are increasingly grappling with scams that target their employees, their customers, and their firms. For example, it is not uncommon for scammers to pose as personnel from a licensed U.S. Broker-Dealer (BD) after they know a person has been a victim of another scam (perhaps also perpetrated by them or their associates). The criminals then present a deceptive offer of forensic and recovery services, ostensibly to assist the victim in recouping their losses. In reality, they exploit the victim's desperation, extracting multiple payments without providing any genuine assistance or recovery of funds.
Scammers have also begun to hack into customer email accounts and give trade instructions from an email account on file with the BD. Because scammers have access to email history, scammers can pose very credibly as customers and seem to know things specific to the customer. The scammers set up a 'rule' in the customer's email forwarding all incoming email to the customer from the BD to the scammers' fake email account, so the customer will not discover the
activity. The scammers then submit wire requests to the BD to be sent to a bank account in the customer's name that the scammer has opened and controls. By the time the customer and/or BD discover the depth of this scam, the funds have been moved and are extremely difficult to recover.
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44 https://www.cnn.com/2023/03/06/business/mark-mobius-china-capital-controls/index.html
45 https://www.rickscott.senate.gov/services/files/78A1BB15-8B96-4940-A288-66707BAEAAD9
46 https://www.sec.gov/files/20250306-isc-fraud-briefing-iac-meeting.pdf
47 https://www.csis.org/analysis/cyber-scamming-goes-global-unveiling-southeast-asias-high-tech-fraud-factories
48 Id.
49 https://www.sec.gov/files/20250306-isc-fraud-briefing-iac-meeting.pdf; https://www.sec.gov/newsroom/press-releases/2024-196 ""SEC Office of the Investor Advocate Issues Report on Nationally Representative Survey of Investors and Continues Focus on Investment Fraud";
50 https://www.finra.org/investors/insights/gen-ai-fraud-new-accounts-and-takeovers; https://www.finra.org/investors/insights/artificial-intelligence-and-investment-fraud
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The only way to try to combat the sophistication of this ever-changing criminal activity going forward is to promote an open, honest and trustworthy partnership between the private sector and government.
VI. Conclusion.
Congress must end Communist China's use of American investor savings to fund its geopolitical ambitions. Every day that we don't act, the economic and national security threat to our country and the American way of life increases.
I would like to thank each committee for holding this joint hearing and I look forward to answering your questions.
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Original text here: https://www.aging.senate.gov/imo/media/doc/713d6dee-b247-ab39-387e-35005767f950/Testimony_Iacovella%2004.09.251.pdf