VAT’s Under Discussion  (Mar. 23)

Mike & Co. –

In a stark departure from political history since Reagan and Goldwater, the Republican Party this year has struggled to come up with a unified tax message. Perhaps more odd, still, are the abrupt change in tone surrounding the tax debate, from the traditionally robustly pronounced to a muted, tentative, and confused message.

From Presidential debates to the House of Representatives, GOP members are trying to sell their colleagues on some form of a VAT tax, the same tax that Grover Norquist joked was “French for ‘big government.’”

Ways Means joined in on the cacophony  yesterday.  What bills and trends are worth spotting here and what are their implications for Democrats?  More below.

Best,

Dana

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VAT Tax, Flat Tax, No Tax?

The House Ways and Means Tax Policy subcommittee held a hearing yesterday to explore three proposals by GOP Representatives to push the country toward a consumption-based tax code. The three proposals include:

  •  a “cash flow” plan (H.R. 4377) California Rep. Devin Nunes, currently the third-ranking Republican on Ways and Means, which would abolish the IRS, income taxes, capital gains taxes, and more
  •  a flat tax plan (H.R. 1040) from Rep. Michael Burgess of Texas to tax businesses and individuals at 17 percent
  • a Fair Tax (H.R. 25) from Rep. Rob Woodall of Georgia, to abolish the IRS and create a national sales tax in place of income tax

Why was this hearing important, even for Democrats?  It signals further pressure within the GOP to shift away from established income and payroll taxes and toward alternatives like VATs.  Notably, Sen.  Cruz has propose a “not” VAT tax, while former candidates Bush and Rubio both supported cash-flow consumption taxes in their campaigns.

Yesterday’s proposals are also novel because they pitch GOP against a special interest that is normally an ally – business.  In order to take advantage of dynamic scoring methods and to prevent de facto negative tax rates, these proposals replace deductions on interest payments with deductions on investment.  This is a boon for capital-heavy industries like manufacturing, but has businesses in financial services and real estate seeing red.  Some suggest that conservatives are advocating these taxes because they are easier to raise than income or property taxes in the long run.

Economics Driven by Dynamic Models

If tax writers kept both investment and interest deductions they would essentially be paying companies to purchase machinery.  Instead, Congress has decided to embrace the investment write off provision because it offers the best bang for the buck in dynamic tax models.  Dynamic modeling, a sweetheart of conservatives and often seen in analyses by AEI and the Tax Foundation, considers the economic effects of changes to the tax code.  That doesn’t mean that all “pro-growth” changes are equal, however – the Tax Foundation’s model places greater emphasis on the immediate deduction of investments, for example.

What’s the difference in the end?  The latter groups tend to fund their operations through loans, meaning the interest deduction has a far greater effect on their tax bill than the ability to expense investments, even if that expense can be made all at once.  Manufacturers are required to make huge investments in machinery and other physical property which pay off only gradually – an upfront expensing of that investment should help match expenditures to income.

Just because a tax plan scores well on a dynamic model doesn’t mean it is good economics, however.  Economists on both sides have expressed doubts about the level of economic impact certain models predict, and others have stressed that the type of economic growth we experience is as important as the rate of growth.

A VAT Obsession

A VAT is, at its simplest, a “multi-stage” sales tax where taxes are collected at each stage of production process.  Its full name, Value Added Tax, is indicative of this nature – at each point that value is added to a product, a tax is levied.  The tax has been a mainstay of revenue generation in Europe for generations.

Though GOP has become increasingly enamored with VAT taxes of late, there remains some disagreement regarding what exactly a VAT tax should look like or whether one concept is a true VAT.

But the concept has gained a lot of traction within GOP circles because the tax system is considered more equitable than taxing income – a person’s tax burden is determined by how much they consume rather than how much they earn.  Some see a VAT tax as a simpler alternative to an income tax system, but there may be some catches to that understanding.

There are a number of ways to accomplish a VAT tax, including the imposition of a national sales tax (which is not a tax on added value, like a VAT, but a simple tax on consumption) – HR 25 does this.  Rubio’s “X Tax” is a variation on a VAT as well, which is includes wage deductions for businesses and progressive levels for workers.

Democratic Demurral

Democrats have not felt the call of the VAT tax, in keeping with the long-held belief within the party that “flat taxes” are inevitably regressive.  The grand Republican dream of eliminating all taxes in favor of a single flat, or VAT, tax would be too unpalatable for the Democrats.  If the party ever supports such a tax, it would have to be as part of a reform that maintains liberal favorites like capital gains, estate, or progressive income taxes.

Politics Trump Governance

Yesterday’s hearing was also important because it showed the future of GOP tax orthodoxy is moving rapidly toward consumption tax codes.  While the calls to abolish the IRS and have states administer these programs are easily dismissed as farce, observers should not dismiss the overarching themes seen here.

Pieces of the proposals mentioned in the hearing, such as eliminating the interest deduction, could already gain bipartisan support in Congress.  The trick here would be to agree on the relative levels of change – assuming that legislators are content with partial, rather than comprehensive, reform.

Congress is sure to continue moving toward bipartisan comprehensive tax reform, however slowly.  Assuming that proposals moving forward emphasize consumption tax systems, compromise might be found in a small VAT tax that has a specific funding requirement and is progressive in the sense that certain goods are exempt (most already exempt financial services, so that’s not a big stretch, admittedly) or weighted with equitable outcomes in mind.

Tax Bills on the Hill (Mar. 11)

Mike & Co. —

Yesterday, House Ways and Means chair Kevin Brady released a “budget savings package designed to cut taxes.”  Brady’s gambit reflects the growing buyers remorse regarding the omnibus agreement within the Freedom Caucus.  Hard liners have objected to the spending levels set in the Obama-Boehner deal; this package is meant to buy their cooperation in the larger negotiations between parties.

It’s one of a number of tax proposals getting attention and generating debate on the Hill.  A review of the tax issues on the table is below.

Good weekends all.  Don’t hesitate to let me know if there’s an issue you think should be covered in an upcoming update.

Best,

Dana

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Tax Legislation in 2016

Tax reform advocates entered 2016 with a great deal of fanfare – optimistic talk of comprehensive, bipartisan, pro-growth tax reform abounded.  What’s happened since New Year’s Day?  A lot of interesting proposals have come forward to fix critical but narrow issues, and the bold talk of comprehensive reform has remained just that – talk.

Given the developments since Paul Ryan and Kevin Brady called for comprehensive tax reform – Justice Scalia’s death, the rise of the Donald, and the stalled budget – it’s unlikely that sweeping legislation will take form.  More likely we’ll see smaller bills focused on particular issues.

International

President Obama, Senator Wyden, and Rep Brady, long ago hammered home the need for international tax reform.  Their proposals include finding a way to repatriate foreign-held profits of US-based multinationals, dealing with corporate inversions, and setting up a new international tax code.

The key to reaching an agreement on the proposals below likely lies in determining where revenue will go after foreign earning are brought back to the US.  Brady has said before that he wouldn’t support a proposal in which any tax is levied on foreign earnings, while Wyden says the opposite – revenue is a requirement.  There is so much pressure for this to happen it’s hard to believe they can’t compromise.

•   taxing foreign earnings:  Competing proposals exist between parties.  President Obama’s FY17 budget includes a 14 percent repatriation holiday with 19 percent tax thereafter on all foreign earnings.  Brady has said he’d rather these earnings come home with no tax attached, so that they can be used for investment.  Sen. Wyden proposes that the income be repatriated, taxed, and the revenue be used for infrastructure development.  A recent bill by Schumer and Brown (below) would tax the foreign income of any company that moves its headquarters overseas.

•  preventing inversions:   Sen. Wyden proposes making the ownership minimum for a corporate inversion 50% (current law is 15%).  Reps Levin and Van Hollen have announced legislation to prevent “earnings stripping” by reducing the tax preference for interest payments.

Sens. Schumer and Brown have announced they will introduce two pieces of legislation to tackle inversions – one to impose an exit tax on companies moving their address overseas, and another to limit earnings stripping.  The exit tax proposal enforces the full 35 percent tax rate on all foreign earnings for companies that move abroad; their earnings stripping legislation limits the tax-deducibility of interest payments to 25 oercent, down from the current 50 percent.

•  territorial system: Brady has mentioned repeatedly that the US must adopt a territorial system to remain competitive, whereby earnings from abroad are not taxed in the US.  It’s been a perennial favorite of Republicans but likely will remain a non-starter for Democrats.

Corporate Tax Reform

Many issues solved in international tax reform proposals would affect corporate tax reform efforts – often the two are considered indelibly linked.  Prominent policymakers agree that the corporate rate must be lowered, but the final size of the tax and how it is aimed differ.

Republican proposals generally have rates between 0 and 20 percent, with Democrats above those at 24 percent and 28 percent for Wyden and Obama respectively.  New rules on depreciations of assets – specifically replacing the Modified Accelerated Cost Recovery Systems with something less generous – are being floated as well.  Ending the tax-deductibility of debt is a dual-purpose proposal – useful for preventing inversions (see above) as well as encouraging businesses to fund themselves using equity rather than credit.

Earned Income Tax Credit

A favorite of both Democrats and Republicans – and notable of Paul Ryan and President Obama.  They were rumored to discuss the issue during their first meeting, this past February, after Ryan’s ascension to Speaker.

The EITC is a part of Obama’s budget proposal for this year; he suggests to expand the EITC for childless workers and create a $500 “second earner” tax credit. The total cost would be $150 billion. Ryan has proposed something that is very similar. In addition to that, there have been five recent congressional proposals (introduced by Senators Sherrod Brown and Richard Durbin, by Rep. Richard Neal, by Rep. Charles Rangel, by Rep. Danny Davis, and by Senators Patty Murray, Jack Reed, and Sherrod Brown) that would substantially strengthen the EITC for childless workers. All of them, including Ryan’s and Obama’s, would lower the eligibility age to 21, and all would raise the maximum credit — the Obama and Ryan proposals to about $1,000 and the other proposals to somewhat higher amounts.

The recent focus on the issue makes it likely that something will be done on it soon. If Ryan and Obama can work together on this, it will be a bipartisan light in the gridlocked darkness.

Carried Interest

Senator Tammy Baldwin has released a proposal to tax carried interest as a regular income rather than capital gains.  Historically this has been a particularly divisive issue, with lawmakers on the right refusing to entertain the idea.  However, recently Republicans have begun to soften on this position – perhaps after seeing the populist sentiment inspired by their presidential candidates’ own call to end the loophole.

Baldwin released her proposal in conjunction with Sander Levin, who released a version of the bill in the House as well.

The Bottom Line

Any piece of tax reform legislation put forward which reduces revenues would have to find a way to offset its costs.  In light of the Obama-Boehner deal on spending limits for 2016 this may be a particularly important issue – especially as GOP leaders try to keep their right flank in order as they tussle over the spending rules.  Conversely, any reform which raises revenue will face strong calls from Republicans to fund tax cuts, and from Democrats to fund infrastructure or other initiatives.

As the year drags on the prospects for comprehensive reform dwindle further – they were never that great to begin with, despite enthusiasm from party leaders.  Even the more modest proposals laid out here may be too divisive to survive, especially in a political environment like this one.  Senators can’t be blamed for focusing their efforts on Supreme Court nominees, the budget, their own party candidates, and more.

 

Tax Talk of the Town (Feb. 3)

Mike & Co. —

Upbeat tax talk is as common this time of year as predictions that this year the Cubs will win the World Series this fall.  The word is that Messrs. Ryan and McConnell want to run a smooth, efficient, maybe even a productive ship this year on the theory that voters will reward the GOP in November and that they will forget the record of the last seven years.  The Speaker and the President have had a recent meeting and mini-meeting of the minds on taxes.  That might create the right climate for passage of broad tax reform. 

But really the gravitational pull is not toward gravitas, but away from the center, away from the Hill itself.  The GOP presidential nominee might very well have to run against any bipartisan (“Washington”) compromise on tax policy, making for an embarrassing intraparty policy conflict at the time the leadership most needs to project unity.

Amid the turbulence of the broader campaign, where do the various tax discussions in the Hill stand, what bills night come up for votes, is there anything that might pass?

Best,

Dana

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Forms of Reform under Discussion

  • Comprehensive— Defined as involving a bipartisan trade-off between lowering taxes and broadening the base; closing exemptions, deductions, credits, etc.  Both Democratic candidates have outlined plans to reduce loopholes, such as the “Romney loophole” and the “Bermuda loophole,” which allow very rich Americans to avoid paying their fair share.
  • Corporate —Many of the issues with the corporate tax system could be addressed through international tax reform, because so many companies earn capital abroad. However, corporate tax reform at home deals with issues like taxing dividends and leveling the playing field between small and large businesses.
  • International – Deals with foreign earnings of American firms abroad. Specifically, current international tax reform aims at preventing inversions and coming up with a more successful way to tax foreign capital earned by American companies, as well as finding ways to encourage companies to move profits home from abroad.

Forums for Tax Reform

  • Ways & Means:  Kevin Brady became Chair of the Committee in November 2015. He reportedly hopes to have an international tax reform proposal out of Ways and Means this year.  He says he wants to allow American companies to bring their foreign profits back and invest at home and to lower the corporate tax rate to less than 20 percent.

Brady gave the opening statement at a hearing on “Reaching America’s Potential.”   For what it’s worth, he laid out six goals for his committee in the coming months — and they are ambitious:

  • Tax reforms to boost investment and job creation;
  • Welfare reforms to help more people join the workforce and achieve the American dream.
  • Health reforms to truly make health care more affordable and accessible; 
  • Trade expansion to open more foreign markets to American goods and services;
  • Entitlement reforms to strengthen Medicare and Social Security for the long haul and;  
  • Government reforms to boost efficiency and effectiveness instead of stifling jobs and higher wages.

Brady’s statement that tax reform will come up in the coming weeks, coupled with Ryan’s recent visit with Obama (specifically to find areas of cooperation), may indicate a broad-based reform package making its way forward in 2016.  Another interesting bullet point is trade expansion, despite McConnell’s promise that TPP won’t be voted on before November.

  • Senate Finance:   The Senate Finance Committee has its focus set on bipartisan working groups designed to produce tax reform on multiple levels — individual, corporate, and international. However, there have been many challenges and stalemates along the way because of the stringent partisanship currently ailing the Senate.

This election has been defined, more so than others, by the massively diverse set of tax policies proposed by each candidates – from flat taxes, capital gains reforms, financial transaction taxes and more.  Sen. Hatch, Chair of Finance, has already called for reform efforts in 2016, targeting international corporate rates specifically – but it’s possible that Brady is trying to shift him and others toward more ambitious proposals.  Any high profile move Ryan makes here will likely be a controlling factor on tax policy.

  • Between the Branches — Speaker Ryan and Pres. Obama met yesterday to discuss a variety of issues, one of which was related to the Earned Income Tax Credit.  Both hope to expand the credit to include low-earning workers who DON’T have children.  It’s unclear how successful their cooperation will be, but at the very least, they share a common goal.

Politico portrayed the meeting as campaign kabuki: “Rather than cut any deals with Obama, Ryan’s hoping to spend 2016 developing what he’s calling a detailed GOP agenda on poverty, taxes, health care and other issues he’s hoping will factor into the presidential campaign and provide a blueprint for House Republicans as they grapple with a new president next year.”  It’s not surprising to see this given the pressure this election will put on the new Speaker.  He needs to set a strong foundation for his own future, and helping Obama score a tax touchdown on him is not on the top of his list of objectives.

During a statement before he met with Obama, Ryan said “We will take our conservative principles and we will apply those conservative principles to the problems of the day to offer our fellow citizens solutions to the problems in their daily lives …. These are not going to be things that we will be able to accomplish with this president still in the White House. It is an agenda for what we will do next year with a Republican president to get our country back on track. This is what 2016’s all about. It’s going to be a year of ideas.”

Political Realities

William Gale and Aaron Krupkin, researchers at Brookings, recently wrote a paper titled “Major Tax Issues in 2016;” Keeping in mind both the current political climate and the probable environment for legislation in 2016, the two researchers write that “Comprehensive tax reform is easy to talk about, but hard to do. The pursuit of sweeping tax simplification is a noble goal, but quixotic.”

At the end of the day 2016 is an election year and any legislative proposals that come forward during it will reflect that.  There are many exciting possibilities for tax reform in 2016, but there is also no reason to think that the political gridlock that has defined Washington for so long will ease up enough while both parties vie for control of the country by drawing contests.

2016 Tax Agenda on the Hill (Jan. 16)

Mike & Co., 

The hopes of even the most zealous advocate of tax reform must be modest this year, but brave talk is heard from some well-placed members.  Almost any reform would be seen as a crowning accomplishment for the new Speaker but the maw of election year politics militates against anything bipartisan and ambitious.

Below is a look at the state of play for the major tax legislation likely to see votes in 2016.  Tomorrow we look at the same issue from the campaign perspective in a pre-debate update.  

Best,

Dana

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Legislative Tax Prospects for 2016 
Senate Floor 

  •  Customs Bill and Internet Moratorium

Early in the session, the Trade Facilitation and Trade Enforcement Act conference report, to which the House added a permanent Internet Tax Moratorium, will hit the Senate floor.   Sen. Durbin thinks he has enough votes to sustain a Budget Act point of order to knock that out, preserving slim odds of moving the Marketplace Fairness Act.  Most Senate Democrats will vote against cloture and for a Budget Act point of order against the report.   Democrats cite language discouraging the inclusion of climate change provisions in future trade agreements and weakened human trafficking language.  A permanent Internet Tax Moratorium, if enacted, would kill any chance for adding the Marketplace Fairness Act to subject Internet sales to state sales and use taxes.

Sen. John Thune:  “I think that, in the end, if the Customs conference moves—and I think it will move soon—then the Internet-tax moratorium will be included in it as it was reported from the House.”  Regarding the Budget Act point of order against the Internet Tax Moratorium, he says:  “Right now, I think the vote count is probably fairly close on that. There are a lot of groups who are interested in that that are whipping it, and it could be a close vote, but I think in the end there will be 60 votes for keeping that in the bill.”

Senate Finance

 

  •  Tax Extenders:The passage of the tax extenders package through to the end of 2016 should give Senate Finance some breathing room to pursue comprehensive tax reform legislation in the coming year.  Thirty-two more expire at the end of this year, so look for another extenders bill during next December’s lame duck session of Congress.

As noted last week, within Senate Finance is a series of working groups organized last year to discuss potential tax reforms in a variety of areas.  The working groups are:

  •  International Tax Reform:The working group proposes ending “the lock-out effect” on international profits by adopting a dividend exemption system.  This and minimum tax proposals are expected to help end base-erosion and tax inversion activities.  The Committee will continue to hold hearings on international tax reform in 2016, but no legislation has been introduced yet.  Chair Hatch:  “I think it’s more likely that we could work out an international tax bill because there are a number of us that want to get rid of the inversion problem … Both Democrats and Republicans ought to want to get rid of the inversions of our larger corporations over to other lower tax jurisdictions.”
  •  Business Income Tax Reform:This group has put forward proposals to lower business income taxes.  The group’s report also catalogued recent legislative proposals, including the cash method of accounting, a pass-through entity business deduction, the research credit, publicly traded partnership rules, and corporate integration.
  • Individual Tax Reform:The working group calls for tax simplification and the adoption of incentivizing tax policies, such as those that encourage charitable giving and saving for education.
  •  Savings and InvestmentThe group’s report lists three goals for policymakers to pursue: (1) increasing access to tax deferred retirement savings; (2) increasing participation and levels of savings; and (3) discouraging early withdrawals from retirement accounts.
  •  Community Development and Infrastructure:The working group has proposed creating an alternative for funding the Highway Trust Fund.  Proposed solutions are meant to increase available funds to “… fix America’s roads and bridges, while also overhauling our broken tax code.”

In the House

  •  International Business Tax— Ways and Means Chair Kevin Brady seems determined to present an international business tax reform bill which addresses dividend repatriation.  Dividend repatriation is expected to pass House Ways and Means this year (more on this below).  Some Representatives have already begun pushing for such reforms; yesterday, Rep. Devin Nunes, with 26 cosponsors, introduced the American Business Competitiveness Act.  He wrote: “The ABC Act has four main components: it will allow 100 percent, same-year expensing for all businesses; lower the maximum business tax rate to 25 percent; eliminate all loopholes and special deals; and switch to a territorial international system.”   Broad tax reform proposals don’t have much viability in the coming year; however, such proposals are important precursors for future tax reform efforts, possibly in 2017.

House Prospects 

Getting the top corporate and individual tax rates down to 30 percent would be difficult, and anything lower would be politically impossible because it would require wholesale elimination of major and very popular tax deductions.  If Brady tries to lower the top corporate rate below the top individual rate, pass-through business entities would oppose the bill, killing any chance for passage.

In any event, dividend repatriation has apparently been ruled out by a Ryan aide.  George Callas, on a Pricewaterhouse Coopers webcast, said it would cost more than $100 billion over ten years, that it would only be considered as part of a broad tax reform, and that “It’s not just a money generator.  It’s a transition rule to deal with old earnings that were earned under the credit and worldwide system when you’re moving to an exemption system.”

House Ways and Means

Brady inherited an odd situation when he took over the Committee in November, coming in almost halfway through a Congress.  But he also replaced now- Speaker Ryan, who took key members of the Ways and Means policy team with him. Brady had to immerse himself in tax extenders negotiations pretty soon after he got the gavel.  The passage of the permanent extenders package will now give Brady a period of relief to get his bearings for a run at other policy priorities.

He must now secure new hires for his office, which lobbyists have said could offer an indication of his intentions. During Ryan’s time on the Committee, fewer resources were committed to tax policy staff.

Obama Overture and the EITC

Meanwhile, President Obama said at the SOTU address: “I’d welcome a serious discussion about strategies that we can all support, like expanding tax cuts for low-income workers without kids.” It was an olive branch to Ryan, who has also made battling poverty one of his signature issues.  On that matter, note that both sides are interested in lowering the eligibility age for the EITC from 25 to 21 and doubling what those recipients can get, from $500 to $1,000.

The stimulus-era expansions of the EITC just became permanent in the tax extenders deal, but GOP concerns about fraud in the program persist.  Ryan has said fraud savings could go toward offsetting the cost of an expansion. Obama proposed paying for the $60 billion 10-year cost of his proposal by changing the taxation of carried interest and eliminating a break self-employed professionals can use to avoid payroll taxes.

Both parties have come to see the EITC as a potent tool in fighting poverty.  In 2013, the EITC pulled about 6.2 million people out of poverty, according to Census data. SNAP benefits (aka food stamps) kept 4.8 million people out of poverty that year.

Wrap-up

Despite the reputation of election years being bereft of significant legislative activity, it looks as if we can expect some interesting actions over the next 12 months on the tax policy side.  Going forward, look for action from Sen. Hatch and Rep. Brady on their pet projects. Speaker Ryan’s well-deserved reputation on tax reform is also a factor in the future of this policy debate.   But there is not much to entertain the electorate in tax reform and Congress lacks for comity.

2016 Tax Policy Issues (Jan. 8)

Mike & Co. —

The economy added 292,000 jobs last month, up from 252,000 in November. Unemployment was 5 percent, unchanged, with scant evidence of wage growth.  Labor force participation remained low, 62.6 percent, unchanged from November’s 62.5 percent, close to its lowest level since the 1970s. 

 Spring doesn’t feel around the corner but at least primary politics is the season when a hundred policy flowers bloom.  This is true especially in tax policy, where all the campaigns’ struggle to get a proposal noticed often ends up with novel ideas or a race to the bottom, or top, but usually away from the middle, a vulnerable place to be standing when policies are compared in the primary marketplace. 

We can ignore the flora and fauna since they are mostly for show and focus instead on what tax issues you can expect Congress will have, or may agree, to act on. 

Best,

Dana

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Almost everyone on the political landscape will have something to say about tax policy and priorities in 2016 but for now it is more about ideological positioning and image definition than how to get all the revenue we need to pay for the $3.5 trillion in total annual USG spending.

Republican Tax Proposals

The tax theme for the GOP again in 2016 is simple: cut, cut, and cut.  Most GOP presidential candidates are touting plans which, to a varying degree, cut taxes drastically.  Of the three leaders in Iowa: Trump, Cruz, and Rubio, two promise to both simplify and lower the existing tax bracket system, while the other (Cruz) is pushing to establish a national income flat-tax.  The Republicans have all laid out their tax plans so far; the Democrats not so much yet.

The tax policy debate over the next twelve months is likely to revolve around the proposals set forth by each party’s nominees.   What does that mean for tax policy debate in general?  Expect partisan lines to be drawn on any comprehensive tax reform proposals. There will be little room for sweeping bipartisan legislation.

It’s possible progress will be made in piecemeal fashion, with proposals and legislation focused on specific tax policies with support on both sides of the aisle.

A bipartisan base have waxed and waned in strength on international tax reform in recent years.  Could this be the year?

Senate Finance Chair Hatch: “I think it’s more likely that we could work out an international tax bill because there are a number of us that want to get rid of the inversion problem. We are working on that, to be honest with you. Both Democrats and Republicans ought to want to get rid of the inversions of our larger corporations over to other lower tax jurisdictions. . . I would have it done. We have some ideas that are pretty hard to beat.”

Speaker Ryan has a reputation as an ardent supporter of tax reform but both he and Ways and Means Chair Kevin Brady are saying they believe comprehensive tax reform is only possible if the GOP can take the White House.

Legislative Prospects for 2016

Senate Finance in 2015 set up a series of working groups to discuss potential tax reforms in a variety of areas.  The working groups are listed below:

International tax reform:   The working group proposes ending “the lock-out effect” by adopting a dividend exemption system.  This and minimum tax proposals are expected to help end base-erosion and tax inversion activities.  The Finance Committee will continue to hold hearings on international tax reform in 2016, but no legislation has been introduced yet.

Business income tax reform:   This group has put forward proposals to lower business income taxes.  The group’s report also catalogued recent legislation proposals, including the cash method of accounting, a pass-through entity business deduction, the research credit, publicly traded partnership rules, and corporate integration.

Individual tax:  The working group calls for tax simplification and the adoption of incentivizing tax policies, such as those that encourage charitable giving and saving for education.

Savings and investment:  The group’s report lists three goals for policymakers to pursue: (1) increasing access to tax deferred retirement savings; (2) increasing participation and levels of savings; and (3) discouraging early withdrawals from retirement accounts.

Community development and infrastructure: The working group has proposed creating an alternative for funding the Highway Trust Fund.  Proposed solutions are meant to increase available funds to “… fix America’s roads and bridges, while also overhauling our broken tax code.”

Tax Extenders:  The passage of the tax extenders package through to the end of 2016 could give Congress some breathing room to pursue comprehensive tax reform legislation in the coming year.

Democratic Presidential Candidates

Neither of the Democratic presidential hopefuls have laid out their tax plans in full.  Each has promised to release their plan before Iowa caucuses.  Sen. Sanders has been tight-lipped about his tax plan, promising only to release his proposals “before the Iowa caucuses.”  What we do know is that he plans to raise the estate tax rate to 65% while lowering the estate tax inclusion level to $3.5 million.  He has also said he will raise the net investment income surtax by 10%.

Without having released a comprehensive tax plan, HRC has painted some details of the whole: tax rates on medium-term capital gains (investments held for fewer than six years) will be taxed between 24% and 39.6%.  Tax cuts to companies with profit-sharing programs, lower income taxes on “hard-working families,” and a $2,500 tax cut per student in those families.   HRC also proposes to end the “carried interest” loophole.

Speaking recently, Secretary Clinton said “”As President, I’ll do what it takes to make sure the super-wealthy are truly paying their fair share. The Buffett rule is one idea that would help achieve greater fairness in our tax system, and in the coming weeks, I will be laying out additional proposals that go beyond the Buffett rule.” With a promise to set out her plans sometime in the coming month, it’s a solid bet that we will have her full proposal before the Iowa Caucuses.

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A Brookings paper released in November studied potential key areas of tax reform to be addressed in 2016, laying out proposals covering five aspects of tax policy, a short description of each, along with their political potential are laid out below.

Raising long-term revenue

  • Increase revenue by looking past increasing income taxes; enact a VAT tax or reduce specialized credits and deductions in the tax code.
  • The passage of the Protect Americans from Tax Hikes (PATH) Act of 2015 extended for two years, and in some cases indefinitely, a number of tax credits and refunds;while a VAT tax may find some support from Republicans, some Democratic lawmakers will consider such a tax to be regressive.

Increasing Environmental Taxes

  • Environmental advocates, not to mention economists, have long pushed for a tax on the use of carbon, since President Obama’s “cap and trade” program’s failure there has not been a significant push for legislation of this type.
  • While many are in agreement that a carbon tax is an especially efficient way to make up for the externalities which arise from fossil fuels, that does not mean the idea has widespread political appeal; this is also considered a regressive tax, it would face strident opposition from the Oil & Gas sector, and it would need to be packaged with some sort of international agreement from other highly polluting countries to be seen as fair and effective.

Reforming the Corporate Tax

  • Beyond lowering the corporate income tax to levels which either match or beat other developed countries, policy-makers might also consider changes to the tax structure which avoids so-called “double taxation” (taxing both corporate income and shareholder dividends) or even to change the corporate income tax to a corporate cash-flow tax.
  • This is one area of tax reform that may be moved on in 2016, with Senate Finance Chair Orrin Hatch speaking favorably of its chances.  Don’t expect a change to a cash-flow tax, look for policies against inversion deals and which favor repatriation of profits at low tax rates.

Treating Low- and Middle-Income Earners Equitably

  • This group lies in the gray area in which increased earning can trigger a reduction in government support payments; potential fixes for this problem include making more government assistance programs “work-based,” expanding eligibility for the EITC, and changing the Child and Dependent Care Credit into a refundable benefit.
  • Republicans have long supported an increase in the Earned Income Tax Credit (EITC) and at least two presidential candidate (Sen. Rubio and HRC) have voiced support for increasing tax credit amounts for either the parents of children or families with students in college; it’s possible for these proposals to gain a footing in 2016.

Appropriately Tax High-Income Households

  • The simple argument is that taxes against the wealthy are lower now than since the 1970’s, while their share of the national income has risen.  Thus, any increase in incomes will disproportionately benefit the wealthy, leading to an even greater difference in effective tax rates than now exists.
  • This is a non-starter for Republicans, and is the least likely of any of the above categories to see any movement throughout 2016.  HRC and Sen. Sanders have hinted that their tax plans will include increases in the tax burdens faced by high-income earning Americans.

Keeping in mind both the current political climate and the probable environment for legislation in 2016, Brookings concludes  that “comprehensive tax reform is easy to talk about, but hard to do. The pursuit of sweeping tax simplification is a noble goal, but quixotic.”   Senate Majority Leader McConnell put the point bluntly, saying at the National Multifamily Housing Council annual luncheon this week, saying “The chances of this Congress doing tax reform with this President is zero.”

Ryan and Tax Reform (Nov. 4)

Mike & Co. —

The most significant personnel question opened up by Paul Ryan’s promotion was resolved this evening when the GOP members of House Ways and Means elected Kevin Brady of Texas the Committee’s new Chair, succeeding Ryan.  

So the parlor game now is what this means for comprehensive tax reform.  Some say just fast forward to 2017 and tell me which is the president’s Party.  But for some play-by-play, below is speculation about whether conditions for reform are propitious in the new regime. 

Best,

Dana

———–

Almost no one thinks sweeping tax change will happen this year, with Congress staring at a stack of unfinished business — or next year, when the 2016 election will loom larger.  But it’s suddenly a lot more likely in the early years of the next presidency, especially if the Republicans win the White House.   “It certainly comes as close to guaranteeing it as possible,” said a senior Republican staffer. “It’s his No. 1 priority — it’s what he cares about most.”

He is Paul Ryan, who as Speaker would be able to move a tax bill to his liking.  What that is is no mystery — he aims to cut both individual and corporate tax rates in exchange for ending scores of credits, deductions and other special provisions.  Ryan was a driving force behind Republicans’ promises to cut the top individual and corporate tax rates to 25 percent, a pledge that debuted in one of his annual budgets.

Like Obama, Ryan wants to expand the earned income tax credit, a wage supplement to the working poor.  He’s seconded the administration’s call to expand the program for childless workers, and increasing the maximum aid.

Earlier this year, he pushed for a corporate-only tax reform, arguing it was one area of the code in which Republicans might be able to work with the administration.  When that failed, he tried a more narrow reform with Sen. Schumer focused on rewriting the tax rules for multinational corporations.  That has stalled as well.

Ryan wants to kill a long-standing deduction for state and local income taxes, something especially important to high-tax — and Democratic-leaning — states like California and New York. The federal government should not be forcing people elsewhere to subsidize them, Ryan has argued.

He’s pushed to pare back the so-called tax extenders, the mishmash of ostensibly temporary breaks for big banks, charities, teachers, energy companies and sundry others that Congress has been rolling over for years.

To be sure, Ryan will have plenty on his plate as speaker to keep him busy, and some predict his move will actually hurt the cause of tax reform.  A GOP Hill staffer said:  “If you don’t have your best mind on tax reform devoted to it, and instead have to run the entire House, then it certainly diminishes the prospects. Tax reform isn’t just a matter of the will of the House — it’s also the work of the committee,” [and Ryan is] uniquely qualified to go through all the nuts and bolts of this, and knows where the bodies are buried and who’s going to hate what, and who has to be accommodated here versus there.

The opposite view says Speakers can involve themselves in whatever issue they like. And though Ryan said he wants to decentralize power by having the committees take the lead in writing legislation, many predict he would be heavily engaged in any overhaul, even if he’s not running Ways and Means.

 

 

Bush Tax Plan (Sep. 10)

As you know, Jeb Bush delivered a comprehensive tax reform proposal in a speech in North Carolina and op-Ed in the Wall Street Journal yesterday.  The headline provisions may be familiar by now and they will likely help raise and frame the debate on tax and related issues for the much of the campaign

Bush’s plan would:

•  cut individual rates from seven brackets to three, taxing income at 28 percent, 25 percent and 10 percent — which he says would move 15 million Americans off the tax rolls.

•  cut the corporate tax rate from 35 percent to 20 percent — a lower rate than the House GOP proposed this year and Romney ran on in 2012

•  limit itemized deductions sharply, capping them at two percent of AGI, exempting the charitable deduction as well as employer-sponsored health insurance and the Child Tax Credits, but applying to the mortgage-interest deduction (yes, you read correctly).  That is a fiscal pot of gold — $54 billion a year, $46 billion of which would come from capping the mortgage deduction.

•  eliminate the deduction for state and local taxes entirely — another big ticket item currently projected to cost the federal government $1.1 trillion from 2014 to 2023

•  abolish the AMT and the estate tax and make marriage more beneficial for tax purposes

•  double the standard tax deduction that most filers take

•  end the system of worldwide taxation  that Bush blamed for the trend of corporate “inversions” and provide a one-time 8.75 percent holiday raye for repatriated profits (the Congressional Joint Committee on Taxation has estimated that such a holiday would cost upward of $50 billion over ten years)

•  end the taxation of carried interest as fund manager compensation at capital gains rate (which just about puts that durable loophole on political life support)

Economists who do not apply dynamic scoring methods to fiscal projections are estimating a price tag of $3.4 trillion over ten years for the plan, more than twice the cost of his brother’s 2001 tax cut package.  Jeb says the tax cuts would cost $1.2 trillion net over ten years and attributes the $2.2 trillion in new revenue over the decade to the supply-side stimulus growth effects of the plan — an attribution some might question.

If his plan is familiar, it should be.  Bush, like Romney in 2012, wants to cut the top rate to 28 percent, from 39.6 percent.  Romney sought to cut the corporate rate to 25 percent, and now Bush wants to cut it to 20.  Romney proposed ending the estate tax and the ATM as well.  Both plans proposed to limit tax deductions for the highest earners as a way of reducing their gains from tax cuts, partially mitigating the effects on the federal budget deficit.

The proposed deduction cap is a surprising, perhaps even a welcome addition to the broader deficit reduction debate.  Opponents may seize on the cap and the closing of the state and local tax deduction as tax increases — at over $150 billon in new revenues a year, they could be tempting targets.  And a certain real estate mogul might have something to say about capping the mortgage interest deduction.

But aside from the carried interest provision, an increase for EITC, and the deductions cap, little in the proposal challenges longstanding GOP tax policy orthodoxy.  And It is not clear how the plan could get economic growth anywhere near Jeb’s ambitious goal of four percent a year.  Post-war American growth has generally been faster during periods when the top marginal tax rate was also higher and lower when tax rates were substantially lower.