More on Tax Reform

We’ve previously commented on Chairman Paul Ryan’s desire to do as much as he can this Congress to lay the groundwork for comprehensive tax reform in 2017. Now, in the Wall Street Journal, he gives us a better sense of what that groundwork looks like.

“There’s a big difference between our view and the president’s view. He believes we should have higher tax rates on individuals. We think they should be lower. And when eight out of 10 businesses in America are what we call pass-throughs, LLCs, sole proprietors, sub S corporations, their top effective tax right now because of this president is 44.6%.

The international average tax rate on businesses is 25%. So we have to get these rates down across the board. That is something that the administration doesn’t share with us. So there’s an impasse.

The question is what can we do in the meantime that gets us a step in the right direction.

And as we’re looking at that, we’re looking at the international system. We want to move to an exemption system [where companies can repatriate foreign earnings without paying U.S. taxes on them]. We want to make every day a repatriation day for firms.”

Rep. Ryan’s remarks included his refusal to enact business tax reform without lowering the rates for pass-throughs, saying that corporate-only reform would “exacerbate the disparity” in rates between C corporations and pass-throughs.  Amen to that!

On extenders:

Ryan told the Journal audience that the Ways and Means Committee intends to address expired tax deductions, credits, and incentives “as early as possible in the fall” to avoid a repeat of last year’s legislative process in which “taxpayers had to wait until December 11 to find out if these provisions were being extended.” He also emphasized that some temporary tax provisions, such as the research and experimentation credit and enhanced section 179 expensing, should be extended permanently.

With comprehensive reform unlikely until 2017, extenders and international reform appear to be the next-best options for action this year.  S-Corp has commented extensively on the unique place S corporations with foreign operations have in the Tax Code (here, here, and here) and we’ll be spending the next several weeks highlighting those comments with the Ways and Means Committee and other tax writers.

 

Highway Trust Fund Funding

For months now, we’ve been hearing of an idea to use deemed (read “forced”) repatriation of overseas corporate earnings to help pay for a multi-year extension of the highway funding.  To give readers an idea of the challenge, policymakers would need to raise $92 billion in new revenues to keep highway funding level for six years.  According to the JCT, a properly structured repatriation could raise twice that amount.

At a June 24th hearing, the Ways and Means Subcommittee on Select Revenue Measures more closely analyzed the use of repatriation for highways and the net result was to leave attendees even more in doubt that this was the best source of the funding.

Chairman Reichert cautioned against standalone repatriation in his opening statement:

“However, as you will hear today, current repatriation proposals are not that simple nor are they without serious policy implications. That is why we are having this hearing-to drill down on what people mean when they say repatriation and how the different forms of repatriation work. A key, but often overlooked, part of this is that repatriation includes taxing earnings that have been reinvested abroad.

“What we know to be true is that repatriation cannot be done as a standalone; it must be part of a transition to a more competitive system. I expect to hear today that, taken outside of the context of a transition, mandatory repatriation would be a tax increase. A tax increase that American companies would be forced to pay unlike their foreign competitors.”

In his testimony, Curtis S. Dubay, Research Fellow in Tax and Economic Policy at The Heritage Foundation, echoed Rep. Reichert:

“If Congress changed repatriation policy as a stand-alone measure to cover a hole in the HTF, it would create less incentive to change the tax policy from a worldwide system to a territorial system. Instead, Congress should focus on establishing a territorial system and reserve changes to repatriation policy for aiding that sizable improvement to the tax code.”

Meanwhile, several large trade groups, including the National Association of Manufacturers and the National Retail Association, submitted strong statements against using repatriation for highways, leading Republican Tom Reed to observe that “If the stakeholders are going to be adamantly against [repatriation], it’s going to be difficult.”

So, if repatriation will not be used for funding the HTF, what will? And would any of these measures affect businesses? Deloitte’s summary of hearings from the previous week touch on a wide variety of potential funding sources:

Witnesses at the hearings – who, in addition to former Transportation Secretary LaHood, included president of the American Trucking Association and former Kansas Gov. Bill Graves, CBO officials, and think tank policy analysts – discussed a variety of other options for long-term funding, including mileage-based user fees, financing mechanisms such as Build America bonds and municipal bonds, devolving infrastructure responsibility to the states, public-private partnerships, and raising money from oil drilling rights on some federal lands. However, they noted that these methods would generally take time to implement and/or scale up and so were not immediate solutions.

Without a consensus, another short-term extension seems likely-the signal from Rep. Ryan is that it’s “unavoidable.”

 

Where the top 2016 Candidates Stand on Taxes-So Far

Wondering what the presidential candidates are doing on the tax front.  With official announcements from Hillary Clinton and Jeb Bush in the past week, we thought it would be a good time to review where the major candidates stand:

  •          Rubio’s plan, which we analyzed in an earlierWashington Wire, is the most in-depth. Check out thescoring from our friends at the Tax Foundation for a refresher-in short, it’s one of the most pro-growth, pass-through friendly plans we have seen in a while.
  •          The Tax Foundation also looked at Rand Paul’s plan, which would be a complete overhaul of the current code in favor of a flat tax on individuals and a type of VAT on corporations. While the Tax Foundation determined Paul’s plan would bring over 9% of additional growth in the economy over 10 years, the revenue loss, even using dynamic analysis, is over $1 trillion!
  •          Rand Paul is not the only candidate with a flat tax proposal-Ben Carson has one, as does Sen. Ted Cruz.
  •          Christie’s plan came in the form of a Wall Street Journal Op-Ed. It appears to be a close cousin to Rubio-Lee, and would reduce the marginal individual rate to 28%.
  •          Mike Huckabee would scrap the income tax altogether in favor of the “FairTax,” a national sales-tax. He ran on this platform in 2008, when he generated some early momentum against Sen. John McCain.
  •          Republican contenders Jeb Bush and Scott Walker have yet to release their own tax plans. It’s still early, so we’ll be sure to provide analyses as these campaigns heat up.
  •          On the Democratic side, neither Hillary Clinton nor Sen. Bernie Sanders have released full plans. During her campaign announcement last week in New York, Clinton promised to rewrite the tax code so that it “rewards hard work, and not quick equities trades or money stashed away overseas.” The only specific so far is a $1,500 tax credit for each apprentice that a business hires-a measure similar to bills introduced by Sens. Tim Scott and Cory Booker as well as Sens. Maria Cantwell and Susan Collins.
  •          As for Sanders, all indications from his interviews and record in the Senate point to increasing revenue for the government. During an interview on Charlie Rose, Sanders said that he would raise the marginal tax rate for individuals “above 50%.”  Ouch.