Press Room: Tax Release

August 18, 2017

Republicans Pitch Tax Reform to the American People

Former President Ronald Reagan signed the Tax Reform Act of 1986 on August 16, 1986. Now, over three decades later, Ways and Means Chairman Kevin Brady made his pitch for tax reform from Reagan’s ranch in California, the site where former President Reagan signed the Tax Reform Act of 1986 into law. After months of closed-door meetings on tax reform, rank and file Republicans have their marching orders for August – sell the American people on the benefits of tax reform. Their message is simple – tax reform that creates economic growth and a competitive environment for businesses leads to good things for regular Americans. Who doesn’t want more jobs, higher wages, stronger home values, and more charitable giving? Meanwhile, Republicans are carefully avoiding diving into any controversial details, which would divide the Republican base. Rather, Republicans are planning for the White House, Senate, and House of Representatives to present a consensus plan sometime after the August recess.

Competitiveness and Economic Growth

In his speech, Brady called for a redesign of the international tax system to prevent more American headquarters and jobs from moving overseas. He described unprecedented capital expensing and low tax rates as the twin towers of economic growth. Brady said the goal of the consensus tax plan will be to create the greatest growth for the greatest number of years, and that it would generate incremental economic growth of 9% and wage growth of 8% (presumably over the 10-year budget window). In contrast, the Joint Committee on Taxation estimated that the comprehensive tax reform proposal released by Former Ways and Means Committee Chairman Camp would generate additional economic growth of only 1.6% over a 10-year period.

Brady responded to almost every question posed by reporters by referring to the benefits of increased economic growth. When asked whether estate tax repeal might hurt the charitable sector, his response was that the strongest incentive for charitable giving is a strong economy. When asked about proposals to trim back the mortgage interest deduction, his response was that a strong economy creates rising home values. Brady also renewed calls for a simple and certain tax code, one that could be completed on a postcard.

What’s On and What’s Off Republican’s Postcard?

Tax reform details will continue to be scarce while Republican leaders work to develop their consensus plan. The chart below provides some insight with respect to the direction Republicans appear to be heading on key tax reform proposals.

  Likely On Likely Off Comments
Overview Tax reform that creates significant additional economic growth as compared with the current law baseline Bipartisan tax reform effort – Republicans summarily rejected Democratic conditions for participation in a bipartisan tax reform bill, including revenue neutrality and no tax cut for the top 1% Tax reform will likely move through a budget reconciliation process that requires only a simple majority vote in the Senate; these rules preclude legislation that increases the federal deficit beyond the 10-year budget window
Temporary vs. Permanent Measures As permanent as possible Commitment to no temporary measures Republicans, including Speaker Paul Ryan, noted that some unspecified provisions may need to be temporary to ensure that the tax reform package complies with budget reconciliation rules
Individual Income Tax Rates A rate structure similar to Trump’s proposed three tax brackets: 10%, 25%, and 35%; repeal of alternative minimum tax (AMT) White House advisor Steve Bannon’s proposal for a 44% top rate for individuals earning over $5 million While an increase in tax rates has been rejected, many higher income taxpayers may see a net tax increase due to repeal of itemized deductions
Individual Itemized Deductions Retain deductions for charitable giving and mortgage interest; repeal all other itemized deductions Trump’s proposal for a $200,000 (married) / $100,000 (single) overall cap on itemized deductions Lowering the cap on mortgage debt from $1 million to $500,000 is possible; new incentives to encourage charitable giving are being discussed; the state and local tax deduction still seems to be on the chopping block despite political pressures
Investment Income No change from present top capital gain rate of 20%; anti-carried interest legislation; mark-to-market and ordinary regime for derivatives Blueprint proposal to tax capital gains, dividends, and interest as ordinary income with a 50% exclusion has not been given much airtime and is likely off the table A potential reduction in rates applicable to long term capital gains seems unlikely given the political climate and concerns of moderate Republicans in the Senate
Net Investment Income Tax (NIIT)   Eliminate 3.8% net investment income tax (NIIT) as part of tax reform legislation Any elimination of the NIIT would be a part of separate healthcare legislation which is currently stalled in the Senate
Estate Tax Repeal   Estate tax would likely be accompanied by disallowance of stepped-up basis for estates over $10 million by providing carry over basis to the inheritor
Passthrough Business Active passthrough business rates as low as possible   Reasonable compensation subject to individual rates; scope of proposal still unclear
Corporate Rates as close to Trump’s proposed 15% top rate as possible but no higher than 25%   Corporate integration does not seem likely but Brady said it is being considered
Capital Expensing Unprecedented capital expensing Blueprint proposal for 100% expensing for all capital investment, including intangibles Expanded expensing is a driver behind increased business investment, which creates growth; a more traditional approach seems likely, possibly akin to existing bonus depreciation provisions for tangible property
Repeal of Net Interest Expense Deduction Unclear – a thin-capitalization rule for multi-nationals may be substituted for the complete disallowance of interest as proposed in the Blueprint; for example, the Camp draft included a limitation on the deductibility of interest expense based on how leveraged the U.S. company is relative to the worldwide group The Blueprint 100% expensing proposal was paired with a disallowance of the net interest deduction; backing away from full expensing may leave room for a targeted curtailment of the interest deduction
Other Business Tax Base Broadeners Eliminate most tax preferences except research credit and LIFO inventory method Camp’s proposals to raise revenue though requiring capitalization and amortization of research expenses, advertising expenses, and lengthening amortization periods for intangibles Given the focus on economic growth, proposals that would increase the cost of capital across the board seem unlikely, unless the effective date was set in the future
International Territorial or dividend exemption system for multinational corporations; one-time deemed repatriation at a reduced rate; unspecified anti-base erosion measures Border adjustment was officially abandoned in a July 27th statement by the Big Six Anti-base-erosion policy such as a current minimum tax on all or certain types of foreign earnings similar to that proposed by Camp or Obama seems most likely

 

For a discussion of the Big Six’s Joint Statement on tax reform, see August Has Arrived, But Tax Reform Details Remain Scarce (August 1, 2017). For a discussion of the White House’s prior statement on tax reform, see our prior Tax Release. For an analysis of the House’s tax reform Blueprint and comparison to President-Elect Trump’s pre-election goals for tax reform, see our November 2016 Tax Release.

The Takeaway

Closed door tax reform discussions are ongoing with respect to tax reform details, including rate specifics (individual, corporate, and passthrough), revenue impacts, capital expensing proposals, the shift to a territorial system with anti-base-erosion measures, and middle class tax relief. Republicans seem to be walking back from their aggressive timeline to pass tax legislation in 2017 while they attempt to generate public support for their tax reform effort. More details may emerge later in September or could be kept under wraps for a longer period of time as Republican leaders try to build a consensus. Republican leadership still is calling for a comprehensive tax reform bill to reach President Trump’s desk by the end of the year. Congress must also act to lift the debt ceiling and fund the government to avoid a shutdown on October 1 when fiscal year 2018 begins. Given the crowded legislative agenda, the timeline for tax reform is aggressive. That being said now is the time to start planning for potentially significant tax changes, including a reduction in rates on business income.