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.