If Charity Begins at Home (Apr. 27)

Update 267 — If Charity Begins at Home,
Tell it to the Congressional Majority First

This month marks the fiftieth anniversary of the Fair Housing Act’s signing.  That landmark Act authorized the Department of Housing and Urban Development (HUD) to limit discrimination in housing.  While HUD has helped millions of Americans find stable, affordable housing, millions of others face crisis conditions in the housing market and housing discrimination persists as a problem for many minority communities.

Republicans in Congress and the administration are attempting to worsen already difficult circumstances for those without secure housing.  Now comes HUD Secretary Carson with the helpful idea of tripling rents. We provide an overview of less novel legislative and administrative developments on the housing market and housing finance below.

Good weekends, all.

Best,

Dana

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Context: Continued Crisis Conditions

The foreclosure crisis plunged national homeownership to new lows.  In the aftermath, millions of Americans still face draining housing expenses.  In many parts of the country, these pressures have yet to abate at all. For over 11 million Americans, rental payments take up more than half their paycheck.  2.5 million Americans annually are evicted and pushed out of the communities in which they work.

Mortgage rate costs are putting homeownership out of reach for too many, a problem that is felt particularly acutely in communities of color.  Increasing numbers of Americans are being forced to leave home and find a place, whether with family members, friends, in cars, or on the street.

All of this occurs in the context of drastic resource shortages.  Of the $200 billion in federal resources devoted to all housing programs, only $50 billion goes to low-income families.  Just a quarter of those who qualify for Section 8 public housing support ultimately receive it.

Fannie Mae and Freddie Mac, the  government-sponsored enterprises responsible for housing finance, have been held under Federal conservatorship since the financial crisis, when they carried $5 trillion in mortgage-backed securities and debt on their balance sheets. Negotiations have long been underway to end this conservatorship and determine the structure of a new guarantee.

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Senate Hurting Low-Income Borrowers?

Legislative action by this given Congress could only put low-income people into a deeper bind.  While S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act was touted as helping the little guy, a look at its provisions reveals the bill is a gift to banks that turns a blind eye to practices that harm financially vulnerable borrowers.

S.2155 – A handful of provisions in S.2155 reintroduce risk to the housing market by:

• Permitting steering by manufactured-home companies to affiliated lenders, increasing cost and risk to financially vulnerable borrowers.
• Eliminating escrow requirements for high-cost mortgages made by banks with assets between $2 billion and $10 billion, removing a protection designed to prevent the likelihood a borrower loses their home due to an unpaid tax lien.
• Exempting loans held in portfolio by these same banks from Qualified Mortgage requirements (they would no longer have to assess a borrower’s ability to repay).
• Exempting 85 percent of lenders from having to report the age, credit scores, and racial and ethnic breakdowns of borrowers. This would end a protection that prevents borrowers from being overcharged or discriminated against.
• Ending appraisal rules for high-risk mortgages in rural areas, introducing risks for rural borrowers.

GSE Reform — Senate Banking Committee members have been working for some time on a Government-Sponsored Enterprise (GSE) reform package that differs from the Federal Housing Finance Agency recommendations.  Legislative time before the midterms is likely too short for Congress to craft a genuine bipartisan deal on GSE but here are the issues at the core of the negotiations:

Building on a 2014 bill passed by the Senate Banking Committee, the Senate agreement that leaked earlier this spring would place Fannie Mae and Freddie Mac into receivership and repeal their charters to replace them with 10 private market guarantors.  The 2014 bill:

• Created the FMIC to ensure continued, widespread availability of an affordable mortgage rate, such as the 30 year fixed-rate mortgage.
• Set eligibility at a credit score around 750 and a 30-year fixed rate mortgage in which borrowers achieve an 80 percent loan-to-value ratio.
• Note: less than 50% of Americans have a credit score that qualifies them.

The deal introduced now would eliminate affordable housing goals in favor of an incentive system to encourage lending to low-and middle-income borrowers.  In addition, Republicans and Secretary Mnuchin have affirmed the importance of the 30-year mortgage, Sen. Warren has said she will not support a housing finance reform unless “it addresses the affordable housing crisis in this country.”

The specifics of the Senate Banking GSE reform package are:

• The 10 private-guarantors model differs from FHFA model, which recommends a limited number of guarantors.
• The agreement would turn these institutions into utilities with access to an explicit government guarantee against catastrophic loss.
• Tension exists regarding affordable housing concepts of “duty to serve” as opposed to a “mortgage assistance fee approach.”  A mortgage assistance fee is the conservative alternative to the Agencies’ mandate to serve underserved areas.

Secretary Carson’s Rent Hike

On Wednesday, Housing and Urban Development (HUD) Secretary Ben Carson, introduced a sweeping housing subsidy reform. This follows the executive order that President Trump signed earlier this month directing federal agencies to expand work requirements for low-income Americans receiving Medicaid, food stamps, public housing benefits and welfare. The administration cynically dubbed these administrative efforts “Welfare Reform 2.0.”

Sec. Carson’s initiative would raise rent for tenants in subsidized housing to 35 percent of gross income, up from the current standard of 30 percent of adjusted income. HUD officials estimate that about half of the 4.7 million families receiving housing benefits would be affected by this change. In some cases, rent for the nation’s poorest families would triple, increasing from a minimum of $50 per month to $150 per month.

This increase, which HUD argues is necessary to streamline its operations, would amount to about $3.2 billion in slashed benefits from the rent increase. This rediscovered Republican concern with spending rings hollow in the wake of their $1.5 trillion tax giveaway to corporations and the ultra wealthy. To the GOP, deficits are only a concern when they benefit the country’s most vulnerable.

HUD’s Rampage on Rental Assistance

While Sec. Carson is busy raising the financial burden on the most vulnerable Americans, he has been derelict in his duty to execute legislation that has been passed by Congress. Most notably, Carson is delaying the implementation of the Housing Opportunity Through Modernization Act of 2016 (HOTMA), which was passed with bipartisan support. The measure would streamline the formulas for calculating rents, deductions, and other factors for housing aid, ensuring that rental assistance continues to make housing affordable for low income families.

The House Joins In

Carson’s delayed implementation of HOTMA provisions buys time for congressional Republicans to undercut the act. On Wednesday, a House Financial Services, Housing Subcommittee hearing was held to discuss draft legislation, the Promoting Resident Opportunity through Rent Reform Act (PROTRRA). PROTRRA would significantly weaken housing choice vouchers and sweep aside many HOTMA reforms by creating a tiered rental system that could raise minimum rent 11 times higher than under current law.

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Looking Ahead through the Midterms

Democrats have developed proposals around housing that they can campaign on this fall. Last year, Rep. Ellison introduced the  Common Sense Housing Investment Act. This legislation would change the mortgage interest deduction to a 15 percent credit and increase the amount of homeowners who receive the credit from 43 million to 60 million. The bill lowers the deductible cap on allowed interest expense paid on a mortgage from $1 million to $500,000, which would help to ensure that wealthy homeowners no longer get such disproportionate favored treatment.

It is unlikely that significant housing legislation will advance during this Congress. Republican GSE reform seems to be on the back burner while housing programs passed by the House are redundant next to Sec. Carson’s actions to triple rental costs.  With housing facing a severe crisis, Republican leadership makes itself vulnerable as voters weigh the impact of their policies.

GOP Double-Down Hair-Doo (Apr. 17)

Update 264 — GOP Double-Down Hair-Doo:


Liked the Tax Cut?  How about a Perm?
While today marks the last day Americans will file their taxes under the old tax code, a number of Americans have already seen their paychecks influenced by lower tax withholdings.  Republicans wasted little time celebrating the Tax Cuts and Jobs Act (TCJA) before turning to tax reform 2.0 — the next round of tax cuts.
On the theory that nothing succeeds like success, the GOP seems to be staging a sequel.  What does entail substantively and will Americans want to see this movie again. And again…?

Best,

Dana

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Tax Cuts Round Two

Lead by Rep. Mark Meadows, Chair of the House Freedom Caucus, Republican leadership is grating up a “phase two” of tax slashing in anticipation of the upcoming midterm elections.  This tax cut 2.0 is likely to be rolled out on two fronts: individual permanence and the indexing of capital gains.

Individual Permanence

The TCJA was a massive restructuring of the American tax code that significantly cut corporate taxes and provided more modest relief for individual filers.  Because no Democrats could be sold on it, the GOP had to pass the tax Act along party lines through the reconciliation process. Using reconciliation required tax drafters to adhere to the Byrd rule and ensure that their legislation did not add to the deficit beyond a ten-year window.

Making the individual tax cuts permanent would cost approximately $1.5 trillion in the decade after 2025.  Republicans hope this maneuver will put Democrats in an awkward position come November, because allowing the cuts to expire in 2025 would see the bottom 80 percent of income earners paying higher taxes than if the law had never passed in the first place (see more below).  This is a dangerous political game, however, as such a ploy would double the cost of the TCJA and further balloon the deficit.

Indexing Capital Gains

Beyond individual rate permanence, Republicans also seek to reduce the capital gains rate in a second round of tax cuts.  One initiative spearheaded by Sen. Ted Cruz would deflate capital gains for inflation. GOP lawmakers have long sought to slash the capital gains rate in the name of increasing investment.  But Trump railed against the preference on the campaign trail. National Economic Council Director Larry Kudlow has gone so far as to argue that the President could index capital gains via executive order.

Such an effort would only serve to make the Republican tax reform effort less equitable. According to the Tax Policy Center, nearly two-thirds of the gains from the Tax Cuts and Jobs Act will accrue to the top 20 percent of earners.  Increasing the preference on capital gains will double down on this upward redistribution because nearly 70 percent of all capital gains income is claimed by households making at least $1 million.

Gratuitous, if Deficit-Financed, Stimulus

CBO estimated this month that the country will hit trillion-dollar annual deficits by 2020, mostly thanks to Republican tax efforts and the recently passed omnibus.  Many economists view this level of stimulus as risky given where we are in the business cycle. The Fed is likely to continue to raise interest rates as the unemployment rate hits four percent, and rising debt combined with rising interest rates means rising interest costs.

The GOP has already started deflecting blame for its fiscal profligacy, with House Ways and Means Chair Kevin Brady claiming that “we don’t have a revenue problem in Washington, we have a spending problem.”  Brady then pointed to entitlement spending as an example of out-of-control spending, an indication that Republicans plan on making the middle class pay for their tax cuts twice – straddling future generations with huge deficits, and contemporary ones with entitlement cuts.

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Politics of Tax 2.0

GOP Fecklessness — This new round of tax cuts is additional evidence of a fundamental truth: it is in the Republican DNA to cut taxes.  The GOP has shown that its fiscal hawkishness during the Obama administration was nothing more than a political ruse.  Since assuming power they championed tax legislation that will increase the debt by $1.5 trillion over a decade and next negotiated a spending Act that will bring the deficit to $1 trillion in the next fiscal year.  All told CBO expects the debt to balloon to $33 trillion by fiscal 2028.

Legislation in the Works — Legislation to make individual rate cuts permanent has been introduced in both houses.  Senator Ted Cruz introduced a Senate bill to this effect, while Congressman Rodney Davis introduced a House version that makes pass-through rates permanent in addition to individual rates.  Republicans will use this legislation to chide Democratic candidates who decried the fact that the TCJA’s made corporate cuts permanent while setting individual cuts expiration date at 2025.  GOP leadership will suggest this is the Democrats’ opportunity to support making individual rates permanent. Don’t expect Democrats to bite.

The Democrats’ Take — Democrats are currently not going to support anything that does not fix more fundamental problems with the TCJA.  As Rep. Lloyd Doggett, member of the Ways and Means Committee, stated, the Republican proposals only “will make this debt situation even worse.” Senate Democrats have introduced legislation to roll back major parts of the TJCA.

Tax Plays Into Midterms

The push for a second round of tax cuts is nothing more than a political re-run in an election year.  As in the first round, Republicans did not involve Democrats in these talks. While they did not need Democratic support to pass the original TCJA, they need 60 votes this time around – a threshold they surely will not clear.  In short, Republicans always knew individual rate cuts would expire while corporate cuts would be permanent.

Nevertheless, polling trends indicate Democrats should prepare for the tax cuts’ growing popularity.  In December, the TCJA polled poorly, with just 33 percent approving. By January, that figure had increased to 46 percent approving somewhat or strongly.  February polls revealed a shrinking Democratic lead in generic Congressional control surveys alongside approval ratings for the TCJA reaching over 50 percent.  Since February, approval for the Act has leveled off marginally, with just four in ten Americans saying they like it.

By reopening the tax debate, Republicans run the risk of suffering the consequences after a winter where they were viewed as doing the bidding of the wealthiest.  It is hard to know which direction public opinion on taxes will go after tax day, but as always, but it is unlikely the Act will be resoundingly popular and a fair chance it may be associated with voters with entitlement reform and retirement insecurity.

Trump Tax Plan: Billionaire’s Bounty (Aug. 19)

Mike & Co.,
 
As Donald Trump continues the drawn-out process of providing details of his tax agenda, it has become abundantly clear that his plan stands to benefit the rich at the expense of lower- and middle-class Americans.  Even more audacious — he  appears to be running with three Achilles heels: the Trump loophole, whereby pass-through companies qualify for a reduced corporate rate; the repeal of the estate tax; and the combination of business interest deduction and expensing.

The below analyzes each of the three proposals and their impact on Trump and other wealthy Americans.  We can only estimate how many billions of dollars Trump stands to gain from his own tax plan as he has yet to release his tax returns but it’s not chump change. 

I hope this finds you headed for a weekend with at least some time out of the office.

Best,

Dana

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The Trump Loophole

• Pass-Through Relief for the Wealthy

Arguably the largest, Achilles heel in the tax plan is the so-called “Trump Loophole,” his proposal to reduce the top marginal corporate tax rate from 35 percent to 15 percent.  Under the Trump plan, pass-through entities would qualify for the corporate rate, instead of paying a much higher individual rate.  This is a boon for the wealthy who can report large portions, if not all, of their income as “business income” thereby avoid the higher rates faced by average Americans earning wages and salaries. 

This loophole has largely emerged due to the large reduction of the top marginal corporate rate, without a similar decrease of the top individual rate.  Such discrepancies between the individual and corporate tax codes is “practically a recipe for tax avoidance.”  And while many small businesses are pass-through organizations, at present approximately 70 percent of pass-through income goes to the top one percent of earners.   

•  Benefit to Trump Inc.

Trump’s organizations would stand to gain from this proposal,l and his total tax burden, whatever it may be, would likely be cut in half, though it cannot be confirmed without his tax returns.  Nevertheless, Trump himself has stated, “a lot of the rich are benefitting because of the reduced taxes for businesses.”  Under Trump’s plan, the rich would benefit even more, particularly due to this unchecked loophole.  

As this is a problem of the House Republican tax plan as well, some Republican staffers have acknowledged the problematic situation and are looking into ways to address it.  One idea in the works is a prevention of personal service income from receiving the low corporate rate.  However, Trump and his campaign aides are not seeking to change this provision and any changes in the House Republican plan would not necessarily be reflected in the Trump plan.

 The Estate Tax

•  Relief for the Wealthiest

 A second component of Trump’s plan that conspicuously favors the rich is his proposed repeal of the estate tax.  Trump has called the tax, which applies to estates over $5.45 million for individuals and $10.9 million for couples, “just plain wrong.”  It affects the estates of 0.2 percent of Americans who die each year.  

Trump himself would stand to benefit greatly from such a repeal.  Assuming Trump is worth his stated estimate of over $10 billion, it is likely a 40 percent tax would be assessed on his estate upon the death of both Trump and his wife.  As a result, eliminating the estate tax would save the Trump family approximately $4 billion. 

This $4 billion could be used for a plethora of other efforts, to the benefit of lower- and middle-class Americans.  But a repeal of the estate tax would solely benefit the wealthiest, and the $4 billion would instead continue to go towards the “successful” endeavors of the Trump family. 

•   Benefit to Trump Inc.

Unfortunately, without Trump’s tax returns, it is difficult to determine Trump’s exact net worth.  Bloomberg News has estimated his worth to be far less than $10 billion, at approximately $3 billion instead.  This decreased net worth would result in approximately $1.2 billion in estate tax revenue. 

A Poisonous Combination

•  Interest Deduction Plus Expensing

A third weakness of Trump’s plan is in fact a combination of two policies: continuing to allow businesses to deduct interest, and at the same time permitting immediate write-offs, or expensing, for investment in equipment and buildings.  

Under the first policy, businesses can deduct all interest paid on debts from their tax burden each year.  The proposal to allow expensing on investment deviates from current law, which requires businesses to spread deductions on investments in equipment and buildings over multiple years.  By including both policies in the same plan, Trump would provide negative tax rates for investments financed with debt.  

 This practice could incentivize companies to engage in projects that, without these tax breaks, would no longer be economically beneficial in terms of profits. In essence a business could take high losses in the first year of an investment, while creating ongoing interest deductions.  These losses could then be carried forward and used to offset income in the future.  

• Bipartisan Opposition

NYU law professor and former Obama advisor Lily Batchelder described this policy combination as“insane,” noting that it could “convert the tax code into a direct spending program” for all spending classified as debt-financed business investment. Republican economist Douglas Holtz-Eakin has expressed his confusion over Trump’s reluctance to pair expensing with a termination of interest deductions, calling the union “very weird.”  Alan Viard of the American Enterprise Institute also labeled this generous treatment of businesses as “excessive.”  

• Real Estate Relief

As real estate is one of the sectors that would stand to benefit greatly from such a policy arrangement, Trump would once again be manipulating the tax code to suit his financial interests, and those of his wealthy peers.  As the self-proclaimed “king of debt,” this two policies taken together could allow him to continue to engage in questionable projects and investments. 

While Trump has yet to officially release both policies as part of this tax agenda, he has in the past stated his support for full expensing and his reluctance to eliminate interest deductions.  

 • Benefit to Trump Inc. 

 Estimates for how much Trump would save based on this toxic combination are once again difficult to quantify without information from his tax returns.  But, as those who stand most to benefit in general are those in real estate with high utilization of debt, Trump looks like a prime candidate to reap the rewards.  

Renewed Push for Tax Return Release

Democrats may address Trump’s failure to release his tax to the Senate in September.  Senate Finance Ranking Member Wyden proposed legislation in May requiring major-party presidential nominees to disclose at least three years of tax returns within 15 days of becoming the official nominee.  Should a nominee refuse to release his returns, the Treasury Department would be permitted to disclose them instead.  

Yesterday, Sen. Wyden and Chris Murphy both stated their intention to push for consideration of the bill on the Senate floor. Sen. Wyden also noted that the Finance Committee routinely seeks the view three years of tax returns as part of their confirmation process for executive branch nominees.  It is unlikely as of now that Majority Leader McConnell will allow this bill to receive floor consideration but stranger things have happened this year. 

Counterprogramming Trump on Taxes (July 21)

Mike & Co.,
In a couple of hours, when Donald Trump takes the stage in Cleveland in a couple of hours to accept the GOP presidential nomination, it’s a good bet he won’t say much about his tax plan.  With good reason: he doesn’t have one.

Yesterday, Trump’s campaign announced  that the candidate is preparing a new tax plan, featuring new taxes on the wealthy and no deficits.  Advisors said specifics have yet to be finalized — the plan isn’t expected to be formally released for weeks after Trump is nominated. 

Below we analyze the details of the new plan available, compare it to Trump’s original proposal, and imagine its reception in the next Congress.

Best,

Dana

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Take Two on Taxes

After releasing a tax plan during the primary campaign with tax cuts that dwarf the GHW Bush cuts of 2001 and 2003, loading trillions onto the national debt, Trump is tacking toward fiscal reality.  Per estimates by the Tax Foundation, the next plan will cost at least $3 trillion over the next decade; his original plan cost $10 trillion.  

Trump advisors reportedly made “tough decisions” on which tax breaks to keep in order to reduce the cost by $7 trillion, and a number of deductions presently enjoyed by wealthy Americans have been eliminated.  They have indicated that the plan will resemble House Speaker Paul Ryan’s recent proposal. Says one, there’s “not a heck of a lot of daylight” between the two proposals.  House Ways and Means Chair Kevin Brady described the plans as “kissing cousins.”  Both plans would reduce the corporate rate to 20 percent, as opposed to Trump’s original 15 percent.  The new tax agenda will reportedly feature a top individual rate of between 30 and 33 percent, higher than the original 25 percent, and in line with Ryan’s proposed 33 percent.  

The new plan is expected to be unveiled a few weeks after the Republican Convention in a speech at the Detroit Economic Club, though a date has yet to be officially announced. 

The revision is seen as an effort to attract support from Congressional Republicans, many of whom have been reluctant to endorse the candidate. Allegedly included in the proposal is a tax credit for children and families similar to one supported by Sen. Rubio in his campaign, supposedly part of framing the plan as beneficial for the middle class.  

 The Original Plan

Trump’s original tax plan would have made sweeping changes to the individual and corporate codes.  The seven tax brackets on the individual side would be collapsed into three, with the top bracket cut from 39.6 to 25 percent.  The standard deduction would be raised to $25,000 for single filers and $50,000 for joint filers.  It would repeal the alternative minimum tax and estate tax, reduce the corporate rate to 15 percent, and impose a tax of up to 10 percent on repatriated revenue.  It would eliminate the 3.8 percent net investment income tax on people with incomes over $200,000, a tax  paying for the Affordable Care Act.  

The Trump campaign website describes his original tax plan as “revenue neutral” with numerous pay-fors, including a reduction in loopholes and deductions for the very rich.  The Tax Policy Center has concluded the proposed loopholes are “nowhere near enough” to overcome the tax-rate cuts, hence the significant costs over a decade.  

An analysis of the original plan and overall economic agenda by Moody’s Analytics found it “fiscally unsound,” resulting in “very large deficits and a much higher debt load.”  It predicted a lengthy recession, enormous job losses, higher interest rates, increased unemployment, a plummeting stock market, reduced long-term growth opportunities, and a “diminished” U.S. economy.  

In May, in repeated interviews, Trump stated his belief that taxes on the wealthiest Americans should be increased, albeit slightly.  However, when later pressured for details, he revealed this “increase” pertained not to current rates, but the rates proposed in his original plan, which are far lower than under present law.  If this intention holds true in his new plan, taxes on the wealthy would still be lower under Trump, assuming the candidate doesn’t change his mind again.

 Personal Profit

It would appear that Trump himself stands to gain a large sum of money as a result of his tax plan.  According to one estimate, the Trump family would gain a tax cut of $7.1 billion.  Such an estimate is necessarily speculative — Trump has shown no evidence that he has paid taxes in nearly forty years.

Looking Forward

No matter what the election outcome, it won’t be easy for Congress to pass a major tax bill in 2017.   

Both Trump and House Republican leadership have stressed their intention to prioritize tax reform, with Chairman Brady noting his preparation for a vote on tax reform in 2017.   But the GOP may not control Congress next year and willy-nilly there is nothing close to consensus on comprehensive reform.  Conservatives will insist on paying for it in full; progressives will emphasize increasing taxes on the wealthiest Americans.  On the corporate side, multinational corporations will lobby for a revised system, with a top rate of no higher than 25 percent and favorable terms for dividend repatriation.  Small businesses will push for equal treatment.  Put all of that together, and you have a very expensive bill that probably can’t pass.  

We don’t know what the tax reform landscape like in 2017, but as the primary campaign and this week’s convention show, tax policy though traditionally a headline GOP issue, has been particularly muted this year.  This may reflect not only Trump’s uncertainty about his revised plan but also an abatement of the popular ardor for tax cuts in recent decades.  Americans may have recognized that tax cuts are not an optimal solution, given the devastation of public services, the further crumbling of an unreliable infrastructure, and exacerbated inequality wrought by the recent recession.

House GOP Tax Reform Plan (June 27)

Mike & Co. —

Last week, the House GOP capped off a month of policy events, announcing a new tax reform plan.  The  proposal is aimed not only at getting the fractious caucus on the same page on an issue long a top GOP priority but also at creating some space between Congressional  Republicans and the party’s presidential nominee to insulate the former against the latter.

No official scoring has been offered estimating the cost of the tax plan, though the authors say they are aiming for revenue neutrality.  The plan is part of Speaker Ryan’s A Better Way policy platform, which includes plans to address poverty, security, health care, and the economy.  While many of its proposals are what you’d expect from a GOP tax plan, some new proposals have made the cut this time around.

What’s in it and what should we expect next?

Best,

Dana

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 Business Tax Proposals

  •  Cut corporate tax rate: The corporate tax rate will be lowered from 35 to 20 percentwhile small businesses will pay 25 percent.
  •  Adopt a territorial tax system: Corporations will not pay taxes on income earned overseas.
  •  Move to a “cash flow” based tax system:  A popular idea among conservative circles, the plan embraces taxes against cash flow as opposed to income.
  •  Allow the immediate expensing of capital investment:This will likely come at the cost of the interest payment deduction for businesses.

Individual Tax Proposals

  •  Institute three tax brackets: The top rate of 39.6 percent moves to 33 percent.  Other brackets are 12 and 15 percent.
  •  Increase the standard deduction, child credit, and EITC:  A larger standard deduction takes the place of many itemized deductions and credits, while GOP favorites, like the EITC, charitable contribution credit, and mortgage interest rate deduction will stay.
  • Eliminate the alternative minimum and estate tax: Itwouldn’t be a Republican tax plan without these two taxes on the chopping block.
  •  Cut rates on investment income: Only half of investment income will be included when calculating a person’s taxable income.  That would create a new rate structure of 6 percent, 12.5 percent and 16.5 percent.

New Features

The plan’s top personal income tax rate is set much higher than previous plans, which often contained provisions of 25 percent or less – 33 percent is a major increase from there.  That higher-than-expected rate is likely more than made up for by the plan’s treatment of investment income

Investment income receives a significant boost in the plan. The ability to deduct 50  percent of all investment income from taxable income is meant to encourage Americans to invest and save but will also certainly be a boon to wealthy taxpayers.

On the corporate side, including a consumption-based tax on businesses is novel.  This type of tax most recently made a splash when a number of GOP presidential hopefuls included them in their plans last year, but they have been gaining support in conservative think tanks for some time now.  The same goes for creating a territorial tax system, whereby international earnings are not taxed against American businesses.

Old Chestnuts

The plan’s more favorable treatment of investment income could more than make up for the plan’s 33 percent income tax on the wealthy.  While that top tax bracket is higher than is usually seen in conservative plans, the ability to discount one-half of all investment income is a major benefit for the most affluent.

Conservatives in general, and Ryan specifically, have long called for an increase in the EITC and the child tax credit.  They also defend the home mortgage interest rate deduction and the charitable contribution deduction.  As such it’s not surprising that these tax incentives were singled out for special mention in their tax plan.  What’s missing is a list of all the other bits of tax code that are supposedly being cut to make room for income tax cuts.

Ending the alternative minimum tax and the estate tax are long-standing goals of the GOP and as such are standard in plans like this.  So is the promise to cut out the many itemized deductions and credits available to individuals and businesses alike – a major pillar in the conservative argument for simplifying the tax code.

Corporate vs. Individual Reform

It’s not surprising that the corporate tax system sees more radical changes in this plan.  Proposals to institute a consumption tax, a territorial taxation system, and to eliminate the corporate alternative minimum tax should make many in the business community happy.  One notable exception: corporate real estate companies and asset managers, who stand to lose money if the interest rate deduction is killed.

Despite lacking the bells and whistles of the corporate side of things, individual rate payers haven’t been neglected.  High Investment income treatment and an end to estate taxes are big benefits for them, not to mention a reduction in income taxes (though it’s not as steep a reduction as we’re used to seeing).

The Plan’s Purpose and Prospects

GOP lawmakers say that they’ve learned from the failure of Dave Camp’s 2014 tax plan.  That experience was the impetus behind this much more radical proposal, which likely won’t be fully fleshed out until 2017.  The plan as it stands today amounts to House Republicans’ opening bid in any tax reform effort.

While no scoring has been released yet, the plan reflects familiar GOP imperatives: no tax increases and no deficit increase.  That means it will rely heavily on optimistic dynamic revenue estimates.  On top of these considerations, any plan to “simplify and flatten” the tax code will require a greater level of enforcement to make sure that taxable income is properly collected.  Creating zero new taxes on exports and profits earned overseas will tempt companies to come up with ways to make their income fit either description.  That goes against the plan’s promise to effectively neuter the IRS.

Moving Forward

Republicans have announced this tax plan late in the game for 2016.  And it’s as much a matter of policy as it is of the political reality facing them.  House leadership may be itching to set out a plan that is seen as more reasonable compared to Donald Trump’s $9.5 trillion slash-and-burn proposal. Additionally, they may be trying to set up a gentle glide path toward a compromise on tax reform with Democrats.  Because of that, don’t expect to see much further development on this plan – a scoring should come in the near future, but real legislation probably won’t come with it.

The Three Tax Buckets for 2017 (May 18)

Mike & Co. — 

Defying a tradition dating back to 1976, presumptive GOP presidential nominee Trump has continuously flipped his answer about whether will or won’t release his tax documents, saying at times absolutely yes.  Or would never dream of it.  Or really wants to but really can’t just yet. 

While we wait, we have a moment to survey tax policy issues and proposals currently under discussion in Congress and assess the Trump factor on the Hill through the prism of tax legislation. 

Best,

Dana 

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Policy Asymmetry or Vacuum

Typically in an election year, tax policy stands as a major pillar of the candidates’ and parties’ platforms.  But that’s not been the case in 2016.  In fact, this Congress has been a rather active tax policy laboratory.  This year the Hill has rapidly become a testing ground and showcase for future initiatives.

This cycle is unusual in that the party in control of Congress does not have any solid indication of where its nominee will end up on major tax issues.  Of late, Trump has begun trying to mix a message of populist anger with pro-Wall Street financial reform promises, leading to a muddied and confused tax platform.  Such basic tax policy positions as he has taken he has taken back. Other positions come with such sketchy detail that large unanswered questions remain.

Consequently, down-ballot candidates still don’t know if they will be running with or away from their nominee’s tax policy. That lack of predictability has led lawmakers to seek shelter in a safe harbor: preparing for 2017.  By fixing their sights on the next Congress, legislators today can spare themselves the risks involved in trying to predict the policies of an unpredictable politician.

Three tax approaches

Members from both sides have focused on developing policy in three major tax areas, all of which have seen proposals, from the comprehensive and bipartisan to the narrow and ideologically tilted.

  •  Corporate tax reform

Senior members of the tax-writing committees in Congress are doing their best this spring to generate buzz around promised bipartisan broad-based corporate tax reform initiatives.  This annual ritual looks like it will come up short again.  But the debate is prologue.

Senate Finance Chair Hatch has said that his own corporate integration plan will be released in the “next several” weeks, and the plan had its own hearing yesterday in Finance.   It enjoyed the support of most of the witness panel, though Ranking Member Wyden did point out with one witness that corporate integration may cause a dip in investment from savers.  Concerns were raised about the impact on Americans’ retirement security.

House Ways and Means Chair Brady has promised to release his own comprehensive tax reform plan by June, a substantial portion of which is expected to address corporate tax issues.  His office has stated that no ideas are off the table: “consumption tax, cash flow tax, reformed income tax, and any other approach that will be pro-growth.”

  •  International tax reform

The name of the game in international tax reform is this: inversions.  Finding a way to curb the corporate maneuver which takes American companies overseas to avoid U.S. taxes has been a major priority of Congress for some time now.

Rep. Sander Levin, Ranking on Ways and Means, recently released his third measure this Congress to address the issue.  Yesterday, he announced a plan that would address “de-controlling” and “hopscotching.”  The former allows foreign companies to reduce the U.S. ownership level of a company to just under the minimum requirement for an inversion to take place; the latter enables a foreign parent company to use overseas earnings of the foreign subsidiaries of a U.S. company without paying tax.

GOP plans focus on solving inversions by drastically reducing the corporate income tax rate and switching to a territorial tax system — which would forego taxing the income earned by companies abroad.  So far no proposal has surfaced this Congress to codify these ideas.

  •  Financial reform through taxes

This is a part of tax reform which is firmly in the hands of progressive members.  A number of proposals seek to close tax loopholes which benefit the wealthy (such as carried interest, below) or to add a surcharge (the Buffett Rule), in particular for those who gained wealth through work in financial services.

Sen. Baldwin’s Carried Interest Fairness Act of 2015 aims to close the loophole allowing hedge fund managers to claim their income as capital gains.  Sen. Warren aims to fund one-time emergency social security payments by eliminating tax deductions for “performance-based” wages at America’s biggest companies.

Yesterday, Sen. Wyden released a proposal aimed at preventing “sophisticated” taxpayers from avoiding paying taxes on investments by streamlining the rules for taxing derivatives.  Some taxpayers have been able to take advantage of the complexity of rules in this area to reduce the amount of taxes they have to pay.

Under the proposal, derivative contracts would be treated as if they had been sold and bought again at the end of each year, and the gains and losses would be taxed as ordinary income.  The discussion draft is targeted toward those trying to avoid taxes and not toward those hedging business risks, employee stock options or derivatives in pension funds. JCT estimates that the proposal would raise $16.5 billion over a decade.

Let a Thousand Tax Plans Bloom (May 17)

Mike & Co.,

Word this afternoon is that Senate Banking will take another shot at a conformations votes for five regulatory nominees, including two for SEC commissioner, perhaps as soon as this week.  This follows an aborted April 7 vote, in which four Democrats (Schumer, Menendez, Warren, and Merkeley) withheld support for their own party’s nominee at the last minute.  While a new vote hasn’t been scheduled yet, it is now expected in the coming days.

Should the nominees clear the Committee, it’s unclear they can get any floor time in the Senate.  Observers have predicted that they will need to pass by unanimous consent — meaning that just one Senator can block their confirmation.

Meanwhile, once again, the main legislative developments of note are on the tax front. We try to bring you up to date below. 

Best,

Dana

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Today marks the beginning of a series of tax hearings in Congress as Democrats begin to position themselves for what could be a power swap in 2017.  Per Todd Metcalf, minority chief tax counsel for Senate Finance:  “We are putting together the building blocks hopefully so that we will be ready when in 2017 or whenever the opportunity arises, we are ready.”

Democrats in Congress  are using 2016 as a staging area to gauge reaction to their plans for next year – drafts are being  circulated and released so offices and gather feedback and make the necessary changes to improve the odds of pet projects’ passage in 2017, where circumstances are likely to improve, possibly markedly.

The GOP is up to the same thing. The corporate integration plan to end double taxes on corporate income from Senate Finance Chair Hatch and the tax blueprint by House Ways and Means Chair Brady are being developed to carry forward priorities while awaiting the right moment.

What’s Been Released, What’s Ahead

Senate Finance ranking member Wyden has been busy this year, releasing a number of proposals.  On April 26, he released a proposal changing the rules on capital depreciation, simplifying the schedules currently in use; earlier in the year he proposed changing the minimum ownership stake require for a company to invert.

Wyden is expected to introduce draft legislation to revise taxes on financial products like derivatives in short order. The draft is said likely to resemble, at least partly, proposals offered in early 2013 by former Ways and Means Chair Dave Camp, while incorporating some of the changes sought to Camp’s bill.

Sen. Wyden and other Democrats have also talked regularly about legislation to tackle inversions and related cross-border income issues.   Last year, Wyden published a report saying legislation to mark all derivative instruments to market and tax the resulting gains or losses as ordinary income would end the manipulation of timing and income character that derivatives allow.  On wash sales, the Wyden report said rules could be updated to apply to forward contracts, swaps and derivatives involving commodities and currencies, and additional legislation could address immediately replacing a loss position.

Sen. Schumer is focused on achieving some sort of tax overhaul that would be linked to infrastructure investment.  His plan for 2016 —  “Let people know how great the need is on both sides to straighten out the international system, for the inversions and everything, but also how demanding our need for infrastructure is and to marry the two.”

In a moment of bipartisan success, and perhaps a view of what we stand to lose as we wait for 2017, the Senate passed a bill on May 10 allowing tariff relief for goods that domestic manufacturers cannot find inside the United States.  The bill took longer than expected, but has been hailed as a way to allow American manufacturers to remain competitive.

The Landscape for 2016

Congress is on an abbreviated schedule for this election year and it’s sloped heavily toward the spring side of 2016.  Legislative days are in short supply already and whatever time for compromise existed in 2016 is fast disappearing.  It is likely that we will have to wait even for a hint of bipartisan agreement on tax reform issues until after the November election.  Even if 2016 turns out to be a year for preparing and showcasing legislative ideas in Congress, but that doesn’t mean it will be a boring one for legislation.