Sen. Ernst Says Close Tax Loophole ‘That Goes All the Way to China’

June 30, 2020 Updated: June 30, 2020

China has loaned the United States more than $1 trillion to help cover the federal government’s spiraling national debt, all the while making huge profits in the process, because of an obscure provision of a landmark 1984 tax deal.

“The Department of Treasury maintains a monthly accounting of major foreign holders of U.S. debt that serves as a great reminder of the more than $1 trillion we are in debt to the Chinese,” Sen. Joni Ernst (R-Iowa) said in a June 25 letter to Treasury Secretary Stephen Mnuchin that was obtained late June 29 by The Epoch Times.

“What is not as transparent is how much China profits from our red ink, both in terms of dividends paid on the interest off of Treasury bonds and a special loophole that exempts those profits from taxation,” Ernst told Mnuchin.

“If its government-owned industries were treated the same as a U.S. citizen or small business, China would be required to pay taxes on the interest earned on the Treasury bonds that our government sells as a way to borrow money,” she explained.

“Due to a decades-old trade deal, however, China pays no tax on U.S. Treasuries, which allows it to make off with billions of dollars that would otherwise be owed to the U.S.,” she said.

Ernst encouraged Mnuchin to “begin calculating and publicly posting the amount of interest paid to the top 10 major foreign holders of U.S. Treasury securities, as well as the cost of foregone tax revenues resulting from any exemptions granted by trade deals or other agreements with those nations.”

China, which is owed $1.09 trillion by the United States, is second to Japan, which is the largest foreign holder at $1.27 trillion. The total U.S. national debt is almost $26 trillion.

“Think about that: We are borrowing money from China to pay China for lending us money and sweetening the bargain with a tax loophole that literally goes all the way to China,” Ernst said in a separate statement emailed to The Epoch Times regarding the issue.

Ernst was referring to the agreement negotiated by the Reagan administration in 1984 with Beijing and ratified by the U.S. Senate in 1986. It was the first comprehensive tax treaty agreed to by the two nations, according to President Ronald Reagan in his transmittal letter to the Senate for ratification.

“The agreement will contribute to a long-run expansion of economic relations between the two countries by providing clear rules as to the tax consequences of investing or working in the other country,” Reagan told the Senate.

“It reduces the tax which residents of one country must pay to the other on certain types of income, such as dividends, interest, and royalties and provides limited exemptions for visiting teachers, researchers, and students.

“The agreement also assures non-discriminatory taxation in the host country, and, provides a mechanism for cooperation between the tax authorities to try to resolve any potential problems of double taxation.”

The problem today, according to Ernst, is that China profits off its loans to finance the U.S. deficit with tax dollars paid by U.S. taxpayers, who presently have no way of knowing how much those profits are.

Ernst also is angered that China makes these profits while possibly reneging on its phase one commitments to buy billions of dollars of U.S. agricultural goods and also that the regime tried to cover up its disease prevention failures that allowed the CCP virus—also known as the novel coronavirus—to spread to the United States and the rest of the world.

China agreed late last year as part of a massive trade agreement negotiated by President Donald Trump to purchase as much as $50 billion worth of U.S. agricultural products annually. That amount represents approximately one-third of the $140 billion in agricultural products China imports each year.

A big portion of the $50 billion would be produced by Iowa farmers, a fact that is particularly significant for Ernst, who is seeking election in November to her second term in the Senate.

“The cost of this loophole is vitally important to U.S. taxpayers who are stuck with the bill, as well as U.S. trade negotiators, who might want to remind China of the billions of dollars that could be put at risk if our deals are not adhered to by both sides,” Ernst told Mnuchin.

The Iowa Republican also said June 30 she is awarding the Chinese Communist Party (CCP), which exercises an iron-fisted control of that nation’s government at all levels, her latest “Squeal Award.”

The CCP was named recipient of the June 2020 Squeal Award “for not keeping their end of the deal while benefiting from a tax break bonanza potentially worth billions of dollars every year,” she said.

The award represents Ernst’s promise to Iowa voters when she was first elected to the Senate in 2014 to shine so much light on waste, fraud, and abuse in the federal government that it makes the beneficiaries squeal.

Contact Mark Tapscott at Mark.Tapscott@epochtimes.nyc.