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.
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.
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.”