Mike & Co.
This has been a busy week in Washington especially on the tax front, with more to follow. We’ve already seen a number of hearings and developments on the most salient current tax bills and related proposals in the last two days, which are itemized and vetted for viability below.
Tomorrow, an assessment of which of these, as well as “must-pass” tax items such as the expiring extenders, will make it to Obama’s desk by year-end and a review of Brookings’ panel discussion, “Tax policy in 2016: What’s new and what’s next,” with Ways and Means Chair Kevin Brady and Senate Finance ranking member Ron Wyden.
- International Tax Reform
Probably the most likely tax legislation to pass in 2016, even though it’s still called unlikely by key policymakers. The two parties will have difficulty coming to an agreement on first what to do and then how to do it. Narrower legislation is more likely to succeed than comprehensive reform. Most viable billsin this area:
- Earnings Stripping — On the eve of today’s Ways and Means hearing regarding international tax reform, ranking member Chris Van Hollen and senior member Sander Levin offeredbillsto constrain the practice whereby foreign parent companies extend large loans to their newly acquired U.S. partners and take advantage of the tax-deductible status of interest payment arrangement.
- . Exit TaxBills– Bills seeking to reduce corporate inversions by making them too expensive to make business sense are likely to be introduced before next recess.
- Repatriation — Ryan and Schumer have talked up the idea of introducing legislation to repatriate U.S. multinational profits that are held abroad. A compromise will have to be struck between Democrats seeking reduced tax levels for this purpose and Republicans who cite moral hazard. The Obamabudget for FY2017 includes a proposal to allow overseas profits to come home at a special 14 percent trate, and all overseas profits thereafter be taxed at 19 percent.
- Broader Corporate Tax Reform —
Any successful across the board corporate tax reform would almost have to lower the nominal corporate tax rate of 35 percent. — the highest in the world. Republicans are adamant that the high rate yields corporate inversions. Ways and Means chair Brady has pointed to the corporate rate repeatedly as a sign that the U.S. has a “broken tax code that discourages investment and growth.”
Brady has not yet released his own reform bill, but an op-ed of his published this morning gives an indication of what it will include: “We must address the real root of the problem – our broken tax code that discourages investment and growth … Our sky-high 35 percent corporate tax rate bears much of the blame … We cannot allow American taxpayers to foot the bill for tax revenue grabs in Europe and elsewhere.
Provisions to look for: a lower overall corporate tax rate, language to address European investigations on U.S. businesses dodging taxes abroad. The bill likely won’t include language restricting inversions.
Senate Finance chair Hatch has suggested writing legislation to make dividends tax deductible for corporations, eliminating the so-called “double taxation” of hitting corporate earnings as well as dividend incomes from investors. The proposal faces long odds.
- Earned-Income Tax Credit (EITC) —
One tax provisions in the Obama FY17 budget that has been muted if not mooted this week is his proposal to expand the EITC for childless workers and create a $500 “second earner” tax credit. The cost would be $150 billion over ten years.
During his SOTU, Obama expressed his desire to work with Speaker Ryan on the issue: “I also know Speaker Ryan has talked about his interest in tackling poverty. America is about giving everybody willing to work a chance, a hand up. And I’d welcome a serious discussion about strategies we can all support, like expanding tax cuts for low-income workers who don’t have children.”
The credit is a long-standing darling of both progressives and the GOP establishment. Ryan and President Obama support extending it to childless workers. But they face resistance from not just the hard right but from Sen. Hatch, who say it’s not “necessary” to expand the break.