Friday, July 28, 2017

The latest on "tax reform"

Six Republicans in leadership positions with respect to tax policy - Ryan, McConnell, Mnuchin, Cohn, Hatch, and Brady - have now issued a public statement regarding their plans for significant tax legislation, which they call "tax reform." It appears to promise a more open, conventional, and committee-based process than that which the Republicans used with respect to healthcare. Other than that, here is the key paragraph, broken down sentence-by-sentence with my annotations after each:

"We have always been in agreement that tax relief for American families should be at the heart of our plan."  Comment: This is standard boilerplate. "Tax relief for American families," in the sense that this term is meant to have (e.g., middle-income two-parent households with children), will get only a small percentage of the benefits, if indeed they get any.

"We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones." Comment: This appears to mean that the self-employed, even if they are extremely high-income, will pay lower tax rates than employees. I've commented previously on what a poor design feature this is. But there is admittedly an underlying dilemma here. All else equal, it might make sense to align the tax rates of small business and large business. And it might make sense to lower the tax rates for internationally mobile capital income insofar as it is only lowering the "normal" rate of return. But it makes no sense to tax employees at higher tax rates than the self-employed, and it's also likely to be extremely regressive. There are indeed ways out of the box, but they generally would require more significant structural changes than these folks appear to be contemplating at this point.

"The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas." Comment: They're not committing to how much they'll cut tax rates, but this (unsurprisingly) means as a practical matter that the proposal will lose revenue, requiring it to be phased out after 10 years unless they come up with some trick to avoid that result. "Unprecedented capital expensing" is a consumption tax-like result that would make more sense if accompanied by interest deduction limits, on which they are at this point silent. "Permanence" seems to mean they want to avoid the phaseout if possible, by one means or another, but I think it will be impossible unless they play games with the budget rules. "Bring back jobs" doesn't have a definite meaning unless it refers to lowering the corporate rate. Shifting to a territorial system (which I'd presume they'd want to do) is hard to square with these words rhetorically. The reference to profits taxed overseas presumably means that they anticipate no longer taxing U.S. companies' dividends from foreign subsidiaries - suggesting the enactment of territoriality - perhaps with a deemed repatriation at the transition. I've for years advocated taxing deemed repatriations, to address the foreign profits issue, but I suspect they'd have a very low repatriation tax rate, because otherwise the taxpayers subject to it (who have friends) might be unhappy.

"And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform." Comment: That one speaks for itself. Buh-bye to the destination-based cash flow tax, at least for now. Ryan and Brady would have been politically unwise to fight further on this front.

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