Tax Talk of the Town (Jul. 27)

Update 196: Tax Talk of the Town

What Have the Secret Six Unveiled?

The Administration is in critical straits. While fending off accusations of Russian collusion, dithering and infighting, ignoring its half-filled sub-cabinets, reversing constitutional rights via Twitter, and failing even to repeal the ACA, they have had little time to deal with tax policy. This is an embarrassment, especially because Republicans have long seen cutting taxes bigly as the holy grail of policy.

 

At the moment, the administration and Republicans on the Hill need a win.  Short of that, they now feel they need to change the national conversation, as healthcare continues to vex and fester, a kind of BP accident with no win in sight.

 

But tax talk is heard in town again.  The Secret Six Republican tax negotiators issued a long-awaited Joint Statement today.   Is this where the rubber finally meets the road and we actually get a tax policy roadmap at long last?  See below.

 

Best,

 

Dana

 

______________________________

 

Bleak Preview

 

The Secret Six were thought to be ready to unveil their plan for wide-ranging tax changes tomorrow.  In lieu of an actual plan, today the White House and the Six released a “joint statement” in the form of a 640-word soundbite lacking policy specificity.

 

In regards to what their tax plan will entail, the empty announcement reinforces the impression that the Six is as far from consensus and a viable proposal as their colleagues are on health care.

If you were waiting on tomorrow’s big announcement, wait no longer: there is nothing here that we haven’t heard before.  The only clear policy initiatives in the statement are the abandonment of the Border Adjustment Tax, which experts already knew was dead on arrival, and a generic commitment to cut taxes on businesses of all types.

 

Where have the Six tried and failed to reach agreement?

 

•  Fiscal Policy

 

The Secret Six has been saying it intends to pursue tax changes that are deficit neutral, permanent, and comprehensive.  But it is increasingly likely the group will instead pursue a sharp, deficit-financed tax rate cut over the short-run, with the intention to do tax reform to make up for lost revenue later.  The reality is any subsequent attempt to pay for large tax cuts for the rich would come on the backs of the middle class or would not happen altogether, leaving us in a fiscal disaster.  But Republicans feel their central purpose in life is to cut taxes for the wealthy and may simply cut the corporate rate from 35 percent to 15 percent and double the standardized deduction. A serious risk is the prospect the GOP may cut the payroll tax, putting the Social Security trust fund at risk just as baby boomers enter retirement in large numbers.

 

•  Top Corporate Tax Rates

 

Based on the one-pager released this spring, the president seeks to cut the corporate rate from 35 percent to 15 percent. Just a ten percent corporate rate cut would reduce revenues by $1 trillion.  Trump’s policy would cost the federal government well over $2 trillion in revenues.  Paul Ryan’s 2016 plan would reduce the rate to 20 percent, costing the federal government at least $1.5 trillion in revenue just to reward the wealthiest one percent.

 

•  International Taxation

 

Many prominent Republicans, including Paul Ryan, have repeatedly shown their support for a territorial tax system, under which the US would not tax U.S. multinationals on their non-U.S. earnings.  Companies wouldn’t pay any additional tax on active income when moving money from overseas back into America.  Trump, who argued during the campaign that US companies should be taxed at the same rate on both domestic and foreign income, now supports a territorial system as well. He and Ryan believe this system would encourage investment in America and aid the American worker and point out that it is one of the only major developed countries that doesn’t already use this system.

 

Countries with so-called territorial systems actually have hybrid tax systems in that they include provisions to tax income that is shifted offshore to tax havens. At the same time, the U.S.’s worldwide system collects less revenue than many territorial systems because it allows corporations to indefinitely defer payment of tax on foreign earnings. However, ending taxation of offshore profits would exacerbate the current problem with profit-shifting and international tax gaming, and it is highly unlikely that congressional Republicans would enact anti-abuse provisions that would have any teeth.

 

•  The Pass-Through Provision

 

Based on the one-pager released this spring, the President seeks to cut the pass-through rate on S-corps and limited liability corporations from 35 percent to 15 percent.  Pass-through reductions are notoriously costly and prone to abuse (see the fiasco in Kansas where this was tried and failed), and a payroll tax credit instead of a rate reduction would encourage job growth.  A 20 percent pass-through rate cut could cost the federal government $1.94 trillion over ten years.  Paul Ryan’s 2016 plan would reduce the pass-through rate to 25 percent, costing the federal government $660 billion in revenue over ten years.

 

•   The Interest Expense Deduction

 

The White House and the House GOP have disagreed on the interest deduction for business. Secretary Mnuchin and Gary Cohn promoted maintaining it. The House GOP blueprint eliminates it in order to allow for a full write-off of investment expenses. Neither the Mnuchin approach (leaving it be) nor the House approach would generate enough revenue over ten years to accommodate revenue cuts.  The Tax Policy Center projects the net gain in tax revenue over the next 20 years would be just $100 billion, after a whopping $1 trillion loss in the first 10 years.

 

•  The State and Local Deduction

 

Eliminating State and Local deduction is an unfunded mandate on the tax side because it makes it more difficult for states to raise revenue.  It could have an indirect effect on the charitable and other itemized deductions, hitting blue states the hardest. Eliminating the SALT deduction would likely fail, as Republicans in these states have already written a letter objecting to the policy.  If adopted, eliminating this deduction would raise $1.3 trillion in federal revenue over 10 years, which is not enough to make up for the pass-through and corporate rate reductions.

 

•  Border Adjustment Tax

 

The infamous BAT has finally retired to its grave.  After putting up an honorable fight, the doomed policy has been put to rest by the administration. Paul Ryan may be sad about it, but we are definitely not. This policy had little to no hope from the start and now we can stop pretending it has a pulse.

 

•  Online Sales Tax

 

A late entry.  In the last 24 hours, news has come out that Sec. Mnuchin is closely examining the prospect of an online sales tax.  Most of the buzz came from a comment he made during the Senate Appropriations hearing Wednesday morning.  Currently, states don’t collect tax revenue from online sales.  Secretary Mnuchin has noted that changing this policy would create tax revenue that states could use to fund infrastructure spending. Senators on both sides of the aisle have expressed their support for this change.

 

Populist Tax Slips in Bannon Appeal

 

In another out-of-left-field proposal, the Secret Six is said to be considering Steve Bannon’s proposal to tax those earning over $5 million annually at 44 percent.  The proposal is not going to be accepted by congressional Republicans, whose central organizing principle in their political careers is cutting taxes for the rich.  The fact that the Secret Six even considers such an idea demonstrates how unwieldy their planning process is.

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