Tax Reform Legislation Policy, explained
By Nick Esposito
There is a debate on the corporate tax rate, and how low it should be. Paul Ryan, a longtime deficit hawk, is in favor of keeping the deficit under control, he is pushing for a corporate tax rate between 20 and 25 percent.
Speaker of the House Paul Ryan has spent the past year carving out the groundwork for tax reform. In June 2016, House Republicans introduced, “A Better Way: Our Vision for a Confident America.” This agenda included six major policies, with the boldest one being tax reform. The House plan has three major ideas: Simplifying the tax code, creating more jobs and boosting economic growth, and a service-first IRS. Trump ran on a similar plan during his 2016 presidential campaign, advocating for middle-class tax cuts and slashing the corporate tax rate from 35 percent to 15 percent.
The “Big Six” are leading the way for tax reform. This group includes the two tax writers in Congress, Kevin Brady in the House and Orrin Hatch in the Senate. Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, House Speaker Paul Ryan, and Senate Majority Leader Mitch McConnell complete the group. The group is in agreement on the general outline of a tax reform bill; to lower tax rates for individuals and businesses, and to reform the tax code to make American companies more competitive abroad.
The Trump Administration also released their broad outline of tax reform back in April, which is almost identical to the “A Better Way” plan Paul Ryan and House Republicans released. The top priorities in the Trump plan include growing the economy and creating millions of jobs, simplifying the tax code, providing tax relief to American families, and cutting the business tax rate to one of the lowest in the world.
Although there are similar plans in both the House and the White House, there will surely be disagreements between the Freedom Caucus, the House’s most conservative group, and the Tuesday Group, which includes moderate Republicans. There is also a debate on the corporate tax rate, and how low it should be. Paul Ryan, a longtime deficit hawk, is in favor of keeping the deficit under control, is pushing for a corporate tax rate between 20 and 25 percent, while the White House is adamant on the rate be cut to 15 percent. The moderates will most likely be in favor of a corporate tax rate that Ryan is pushing for, as it will not add to the budget deficit as much as a 15 percent rate would.
Another key disagreement that has been presented already is the Border Adjustment Tax, also known as the B.A.T tax. The tax is designed to reduce corporations’ incentive to offshore their profits and to balance the loss of money from trade across borders. The purpose of this tax is to offset the estimated $1.2 trillion worth of tax rate costs over the next ten years, which was introduced by Paul Ryan. Since there major pushback from the White House advisors on this, the tax to be in the reform bill this year is highly unlikely.
There is also speculation that the “full expensing” provision may be left out the bill entirely. This provision was in Trump’s tax plan during his campaign, but in the outline released by the administration, the provision is notably absent, a signal that the administration is moving towards being in line with the House GOP plan. Full expensing allows businesses to deduct the full cost of all their investments in the year they are purchased.
The full expensing provision could also help spur economic growth across all sectors and could grow U.S. gross domestic product (GDP) by 5.4 percent. There is already pushback on this provision from conservatives, who want to simplify the tax code and lower tax rates. Conservatives are also worried how they will sell this to the public, saying that the more straightforward the tax plan is, the easier it will be sold to the public. Other Republicans are saying this could help bolster the economy if the corporate rate is cut to 20 percent.
Although there are some disagreements on some parts of the tax reform bill, the debate will begin to heat up once Congress is back in session. The “Big Six” have already made significant progress before Congress returns for the Fall. The group has reached a consensus on the best ways to lower individual and corporate tax rates, such as capping the mortgage interest deduction for homeowners and people’s choice to deduct state and local taxes.
For businesses, full expensing will be phased in, while eliminating their ability to deduct the interest. The Trump tax plan also includes child and dependent care tax breaks and eliminating the carried interest loophole, which allows private-equity managers to be taxed at 23.8 percent (20 percent net capital gains tax plus 3.8 percent net investment tax) instead of a potential top rate of 43.4 percent (39.6 percent individual rate plus 3.8 percent net investment tax).
Under the current system, the lower rate is considered to be taxed as capital gains, instead of salary and wages income, which is taxed at a much higher rate. Trump is also considering a repeal of the 3.8 percent tax on net investment income, which went into effect in 2013 under the Affordable Care Act. A one-time repatriation tax is also being discussed, which allows companies to bring back earnings from overseas at a one-time tax rate.
The Trump Administration is struggling to achieve a legislative success, especially after the failed health care reform effort. Tax Reform is their next target for a victory, and the pressure is on both the White House and Congress to pass and sign into effect common sense legislation on Tax Reform.
Photo by Jomah Thomas