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.