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.

Carried Interest Strategic Option (May 12)

Mike & Co. —
Returning to taxes before we re-return to tax returns and the eternal audit, we look at a bill gathering support in the Senate — a Democratic priority for close to a decade that everyone from Pres. Obama, Sen. Sanders, Jeb Bush and even Donald Trump has endorsed. 
No one thinks it can clear the Senate this year.  But can Obama circumvent the Senate and close the carried interest loophole by executive order?  Should he?
Best,
Dana
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Carried Interest:  a Strategic Decision
President Obama campaigned in 2008 on the promise of closing the carried interest loophole and it has been included in every one of the President’s budgets in office.  Its life on the list of Democratic priorities  raises the question:  can and, if so, should  the President used executive action to close the loophole?
The President has already used his executive powers to undertake sweeping reforms to immigration, education, and environmental policy — why not handle this the same way?
Executive Action — Parameters
Executive actions are a broad and sweeping power available to the President to direct the executive branch to undertake certain actions.  But the President cannot write his own laws.  While the President cannot use executive action to draft legislation from whole cloth, he can use it to interpret existing laws for the purpose of enforcing them.
So what does this mean for carried interest?  Assuming an executive order follows existing laws, then it’s a viable option for closing the loophole.
Executive orders have been challenged in courts frequently, leaving a rich history of decisions but little in the way of a predictable precedent.  A number of issues do come up repeatedly in these cases: does the order violate constitutional rights? Is the order authorized under existing law? Has the order been applied properly?
In domestic matters, the federal government has a roughly 85 percent win rate, according to a study which included 78 such cases brought before the Supreme Court and the Court of Appeals for the D.C. Circuit.
Executive Action — Options
Tax experts have laid out several avenues for the administration to pursue in an executive action.  The Treasury Department has an array of provisions which could enable it to move on carried interest, that much is clear, but the extent to which one provision is more appropriate than the others is still murky.
For example: Treasury, through the IRS, could pass a rule that changes the way carried interest is taxed by changing the timing of carried interest.  After all it was a 1993 IRS decision regarding gains realized from real estate sales that has been applied to carried interest until now.  Presumably all it would take is for the IRS to issue a new rule that deals with hedge funds specifically to close this loophole. Another option lies in section 707(a)(2)(A) of the tax code, which empowers the Treasury to write regulations addressing how partnerships like private equity firms issue compensation.
Treasury has the legal authority but it would mainly be IRS lawyers actually doing the drafting.  Section 707(a)(2)(A) of the Code, added in 1984, directs the Department of the Treasury to write regulations which address compensatory regulations between a partner and partnership. Treasury understands that it is a regulatory process subject to notice-and-comment under the Administrative Procedure Act, and not just an enforcement decision on the ground.
Both of these avenues would follow from the interpretation of existing statutes.  These cases have historically gone well for the federal government, with a win rate of roughly 90 percent.
Current Legislation
Sen. Baldwin’s Carried Interest Fairness Act, S. 1686, is just the most recent example of a bill aimed at carried interest, but both it and its sister bill (introduced by Sander Levin) are unlikely to pass — not a single GOP member supports them.
The major benefit for waiting on legislation is its permanence relative to an executive order.  If the President steps in to solve the carried interest problem then his successor could reverse his actions just as easily.  It’s much more difficult to repeal an existing law than it is to reverse an executive order.   It may also have value as a legacy issue for the President closing carried interest, but this could cut both ways.  Finally, this is not an either/or — both avenues can be pursued without prejudice.
Suggested Response
 
Q.   Should the carried interest loophole be closed and if so, how?
 
“I have long supported closing the carried interest tax loophole.  It unfairly supplements the salaries of fund managers, many of whom have astronomical salaries to begin with, on the backs of the middle class.
“What do Donald Trump, Bernie Sanders, Jeb Bush and Barack Obama, and Warren Buffett —  who says this loophole is reason he pays a lower tax rate than his cleaning lady — all have in common?  They all favor ending this tax break. It is subsidized by middle-class taxpayers to the tune of over $20 billion over ten years and adds as much to the deficit.
“Now I can do this by proposing it to Congress or by executive action.  I think we need to make it law, to make it stick beyond just my presidency, so I need a Congress that agrees….”

Tax Update/Upcoming Compensation Issues (Mar. 24)

Mike & Co. –

The revolving door between Manhattan and Washington may be a subject of some import for those reasons this.  It’s also the subject of legislation supported by HRC that delineates a way to engage the best and brightest in government service without creating a tacit quid pro quo or the appearance (or fact) of corruption.  And a subject that HRC has addressed often — the revolving door, an issue at the heart of the conflict between private interest and public trust. 

How does Sen. Tammy Baldwin’s Financial Services Conflict of Interest Act seek to prevent Wall Street firms from offering bounty-style bonuses to their employees who leave for government positions?  How can the issue drive home HRC’s message of transparency and accountability in government?  More below.  

Good weekends all…

Best,

Dana

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Revolving Door — Backdoor Lobbying?

A common progressive proposal, especially since the financial crisis, has been capping or eliminating bonuses provided by Wall Street firms to employees with federal government experience.  HRC has spoken out against the strategy, and last summer, Sen. Baldwin introduced the Financial Services Conflict of Interest Act alongside Rep. Elijah Cummings’ companion House bill

Defense and Offense

Some Wall Street firms claim that bonuses triggered by an employee entering federal employment are just a way to ensure their workers remain valuable.  These arrangements allow them to keep a stable of top experts in their fields, so that they are less likely to be poached by other industries or by competitors.

Those like HRC and Sen. Baldwin, though, see the practice as a “pay to play” system.  They worry that former Wall Street workers will treat their federal government jobs as way stations between high-paying private sector job and may use their government position lobbying on behalf of their former (and future) employer.

Sen. Baldwin’s bill would restrict the use of compensation packages from private-sector employers that are contingent on an employee accepting a position in the government.  The bill also imposes disclosure requirements and requires that regulators recuse themselves in instances where former or prospective employers may benefit from their actions.

Under current law, former officials can become de facto lobbyists when they take jobs as “outside advisors” or “strategic counselors” for firms, often the same firms they used to regulate.  Baldwin’s bill would restrict that practice by forcing those who aren’t lobbyists only by virtue of their job title to register as such.

Further Regulation

Conflict of interest rules for procurement officers, FDIC officials, and federal regulators are expanded under the bill as follows:

  • Prohibits a federal employee from becoming personally and substantially involved with the award or administration of a contract to a former employer for two years after leaving the employer
  • Expands from one to two years the conflict-of-interest restrictions on federal examiners
  • Increases from one to two years the period during which a former federal procurement officer responsible for a particular federal contract may not accept compensation from the contractor, including for lawyering or lobbyist services (this prohibition extends to accepting compensation from affiliates and subcontractors
  • Applies penalties against the supervisor of a large financial service regulatory agency as well as the supervisor of a senior examiner for knowingly accepting compensation during the prohibited two-year period after the individual’s regulatory service ends
  • Bars regulators, for a one-year period from engaging in legal representation, lobbying, or assistance for any person (except the United States) in any judicial proceeding pending under his or her official responsibility as a regulator
  • Bars, for a two-year period, similar activities on behalf of any person (except the United States) before any executive branch agency or Congress in connection with any pending matter

What’s the Next Step?

The bill is far from guaranteed-passage, with just four Senate cosponsors and 16 in the House bill — all Democrats.  But that does not diminish the impact the bill can have on the national debate.

As you recall, HRC came out strongly in August 2015, co-authoring an op-ed piece on the Huffington Post website with Sen. Baldwin.  In that article, they wrote that we must “make sure those who do the people’s work in Washington are actually doing it — not worrying about former or future bosses at the public’s expense.”  Clinton and Baldwin advocated fines for corporations and executives, responsible for infractions, putting their pay on the line, clawing back bonuses.

HRC’s fervent support for Sen. Baldwin’s legislation demonstrates the priority of her commitment to regulating both Wall Street and Washington, as well as holding those who pass through the revolving door more accountable for their actions.

 

 

 

 

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.