27 September 2017

Trump Is Finally Rolling Out A Tax Proposal

I have a personal interest in having some clue about what kind of tax policies may be considered or adopted by the Trump administration. I'll be part of a national panel discussing it in early December and have to get my materials in order for that talk in a month. So far, there have been some trial balloons that have mostly fizzled (deservedly), but no real comprehensive proposal, until today.

Now, the New York Times (quoted where indicated by block quotes below) has cribbed the "United Framework For Fixing Our Broken Tax Code" that his Treasury Secretary, a top economic advisor, and half a dozen influential members of Congress have been hammering out behind the scenes for weeks. This process, which kept politically savvy wonks in the room and Trump and his close cronies out of it, has produced the kind of Republican establishment tax reform proposal you'd expect from central casting.

This is a much less radical change than the repeal and replace proposal for Obamacare, so it isn't unthinkable that Republicans will be able to hold together their coalition and get some version of this legislation passed, possibly with some modest Democratic support in exchange for some modest tweaks to the proposals and reductions in the bottom line revenue reductions.

The major substantive points floated at this time are as follows:

Members of the Senate Budget Committee have agreed on a budget resolution that would allow for a $1.5 trillion tax cut over 10 years. Studies of similar plans produced by Mr. Trump and House Republicans have been projected to cost $3 trillion to $7 trillion over a decade.

A preliminary estimate from the nonpartisan Committee for a Responsible Federal Budget found that the policies in the framework would cost between $2 trillion to $2.5 trillion over a decade.
The administration is trying, contrary to all econometric evidence to argue that much of the cost of the cuts will be paid for with increased revenues created by economic growth at an unrealistic sustained 4% per annum.

In fact, there is very little in the proposal for which there is any track record of stimulating economic growth when similar measures were adopted in the past. Empirically, economic growth is associated with higher top marginal tax rates, not lower ones, and the core feature of the plan is to lower top marginal tax rates.

Republicans probably don't have the votes to pass the legislation unless they can reduce the projected revenue losses to at least the Senate Budget Committee proposal levels, for example, by keeping the 39.6% tax bracket, perhaps with a higher income cutoff, and by making capital gains accrued at death immediately taxable for liquid assets.

[T]he plan would collapse the tax brackets from seven to three, with tax rates of 12 percent, 25 percent and 35 percent, administration officials said. The current top rate is 39.6 percent and the lowest rate is 10 percent. The framework also gives Congress the option of creating a higher, fourth, rate above 35 percent to ensure that the rich are paying their fair share.
The alternative minimum tax would be repealed. The standard deduction would double to $12,000 for individuals and to $24,000 for married couples.
It would also increase the child tax credit from $1,000 to an unspecified amount and create a new $500 tax credit for dependents, such as the elderly, who are not children.
It isn't clear whether the earned income tax credit (EITC) would survive. If not, a significant number of working poor taxpayers will actually experience a tax increase, because they will continue to pay FICA taxes or self-employment taxes and won't be able to offset those taxes with the EITC.
Most itemized deductions, including those widely used for state and local tax expenses, would also be eliminated. However, the plan would preserve the deductions for mortgage interest expenses and charitable giving and keep incentives for education and retirement savings plans.

The estate tax and generation skipping transfer tax would be repealed. The future of the gift tax is not expressly mentioned, but presumably it would be repealed as well.

The proposal calls for reducing the corporate tax rate to 20 percent from 35 percent[.] 
A new tax rate would be created for so-called pass-through businesses. These businesses, partnerships and sole proprietorships whose profits “pass through” to their owners, would be taxed at a [maximum] rate of 25 percent, not the individual rate of their owners, like under the current law. 
It will be left to Congress to create safeguards that prevent wealthy individuals from incorporating as pass-through businesses, which would tax their income at a lower rate. Another administration official insisted that measures would be put in place so that there are not “games played” in this regard.
This includes sole proprietorship income. Interest deductions for pass-through businesses might also be limited. 

In practice, preventing "games played" is exceedingly difficult in the proposed framework and the nature of the tax code provisions put in place to prevent revenue from flowing to pass through entities to escape higher tax rates will have a huge impact on the proposal's revenue impact. Much of existing corporate tax law exists precisely to prevent this kind of tax base leakage with only modest success.
Another big change for companies would be a limitation of the deductibility for corporate interest expenses in exchange for the opportunity to immediately expense business investments. The ability to write these expenses off immediately would last only five years, and the limitations for deducting interest have yet to be determined. . . .
Section 199 treatment of "domestic manufacturing" income would end.
The plan also calls on the tax committees to eliminate most of the tax credits that businesses currently use. Among those that would remain are the prized tax credit for research and development and the low-income-housing credit[.]

Currently U.S. individuals and businesses are taxed on their worldwide income less a credit for taxes paid abroad on foreign income and an exclusion for certain wage and salary income earned abroad. This would be replaced by a "territorial tax system". 
In theory this means that companies would not be taxed on their overseas earnings, but to prevent erosion of the tax base, Republicans plan to impose some form of tax on foreign profits at a rate that has yet to be determined. 
The transition to the new system would also include a one-time repatriation tax to encourage companies to bring offshore profits back to the United States. There would be different repatriation rates for different types of assets, but as with many parts of the proposal, the rates would be up to Congress to decide.
It isn't clear how the IRS will continue to tax income from easily moveable intangible assets of big businesses like intellectual property rights, investment income, controlled life insurance companies, and the like.


The New York Times account does not address some other critical questions that could emerge as the details are worked out.

* Will the tax treatment of capital gains change in any way, in terms of special rates, treatment at death, or other policies favorable to capital gains income?

* Will special treatment for "qualified dividends" of corporations change?

* Will the pass-through taxation rate apply to income earned by trusts and estates?

* How will health insurance benefits (especially for the self-employed) be taxed?

* Will the taxes that fund the Obamacare subsidies be repealed?

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