Tax Reform Issues

Speaker Ryan explaining tax reform at 10/4/17 Facebook Event,
holding the postcard form (see my comment below though)

There are a lot of uncertainties in trying to fully understand tax reform with a few pages of ideas where lots of important information is missing. Don't get me wrong, tax reform is needed as our system is too complex, inequitable, inefficient and doesn't collect all of the tax owed (leaves about $385 billion uncollected annually).

On 10/10, Speaker Ryan noted 5 ways that tax reform will save people taxes in 2018. Each seems correct, but each has uncertainty connected with it because we don't have legislative language yet or hides that the framework, despite suggestions of modernization, doesn't fully modernize our tax system. Here are his five items:

1. Bigger standard deductions - He says it will be "nearly doubled." The framework indicates, for example, that the standard deduction for a single person will be $12,000. It is $6,300 today. What he doesn't say though is that the personal and dependency exemptions go away. Today, that's $4,050 per person. While the child credit is supposed to increase and apply to more families, today, it only applies to children under age 17 while the dependency exemption can cover some children up to age 23. So, not enough details yet to indicate that any individual paying income tax today will see lower income taxes in 2018, particularly if they have a few children and lose itemized deductions that would have been larger than the new standard deduction.

2. Lower individual rates - The framework suggests rates of 12%, 25% and 35% and perhaps a higher rate for high income individuals. Today, the lowest rate is 10%.  Actually, the lowest rate today and under the plan is 0%. If someone today has income too low to pay income taxes, that should continue under the framework. These folks - about 45% of individual filers, won't see bigger paychecks. There is no talk of lowering the 15.3% payroll tax. Some of these zero bracket filers might be getting a larger refundable child credit, but they won't see that until they file their tax return. Also, we don't know where the rate brackets start and end so we don't know for sure if everyone drops income into lower rates.

3. Capped rate on small business of 25% - Leading up to the release of the framework, there was talk that this would not apply to all businesses and perhaps some personal services, such as accounting, would not get the cap. Again, depending on where the individual rates start and end, most small business owners should not be in the 35% rate because they are not today. [TaxProToday, 9/13/17]

4. Immediate write-offs for business investments - The framework suggests allowing expensing of capital investments. Ideally, this would also include intangibles and both acquisition of new and used depreciable property.  Details are missing.

5. Increased child tax credit - Apparently, this is to adjust for repeal of the dependency exemption. The dependency exemption though can apply to more than your child. Also, the current child credit covers a narrower age range than the dependency exemption.

Speaker Ryan also notes that if compliance costs go down, that is also a tax cut. I'm not sure we'll see a significant drop in compliance costs. There are still complexities such as the child tax credit and hopefully, the Earned Income Tax Credit remains. Promotion of IRS VITA sites and other low-income tax preparation clinics would help keep compliance costs down for many.

Caution - A postcard size return doesn't say anything about the complexity level of a system. We could file on postcards today if the IRS would take less information on the components of our taxable income. The postcard in the Republican blueprint of June 2016 didn't have a place to sign or a penalty of perjury statement or information about the taxpayer or where to deposit any refund.  AND, why are we modernizing our tax system to fit on a postcard rather than to use today's technology to not even have to file for most people because the system already has enough information to just sent a bill or deposit the overpaid taxes in your account or send you a secure debit card?

There is a lot of good about tax reform and it would be good to hear more about that rather than claims that don't seem completely accurate or complete.  And there is a lot of information often missing such as the effect on the deficit and debt, distribution of the tax cuts among different income levels, transition, timing, and more. Speaker Ryan's 10/10 post includes a video of him explaining the tax system and notes many good ideas, we just need to be critical listeners and watch for missing pieces.

What do you think?

Note: These views are mine and not necessarily those of my employer or any organization I'm involved with.

Tax Reform Framework Observations

Press conference on release of tax reform framework on 9/27/17

On September 27, the "Big 6"* released their tax reform framework. It doesn't add much more than we have known for the past 16 months other than:

• Top corporate rate is 20% rather than President Trump's 15%. The 20% rate should help us be more competitive internationally, particularly along with a shift from a worldwide system to a territorial one (15% would be better, other than for the budget effect).
• The individual brackets will be 12%, 25% and 35% and perhaps something higher than 35%. In April, President Trump suggested 10%, 25% and 35% while last June the House Republicans suggested 12%, 25% and 33%. Today's lowest bracket (other than zero) is 10%. Seems odd to try to sell tax cuts with a higher lowest rate, but the effect also depends on where the brackets start and end and a few other provisions.

There are lots of cautions to exercise in dealing with this brief framework:

• There is a lot missing such as where individual tax brackets start and end, whether the head-of-household filing status will be repealed (it is not mentioned in the framework), what "additional tax relief" will be provided "during the committee process," the rate that applies to capital gains and other investment income, and whether interest expense of businesses operating as other than C corporations will be limited.
• While the standard deduction will be doubled, the personal exemptions and additional standard deduction (for age and blind) are removed. So, for example, today, a single person has a personal exemption of $4,050 and standard deduction of $6,300 for a total of $10,350. Doubling the standard deduction to $12,000 and removing the exemption means an increased deduction of $1,650 rather than $6,300.
• The dependency exemption is removed and replaced with a "significantly" larger child tax credit but it doesn't say how much higher.  Also, the child tax credit is for children under age 17 while the dependency exemption covers up to age 23 and perhaps even higher in some instances.
• A more accurate measure of inflation will be used to adjust brackets, the standard deduction and phase-outs. This makes sense but does mean that future adjustments will be less than we have today (this is a revenue raising provision).
• Will repeal of the estate tax also include repeal of the step-up (or down) in basis at date of death or similar measure to ensure that gains at death don't escape both the estate tax and the income tax which would be a tremendous benefit to wealthy individuals?

Another big caution - don't believe everything you hear. For example, when President Trump announced the framework while in Indiana, he noted that it would not help him, implying that it helps the middle class (see Washington Post article of 9/27/17).  Not true at all.  The rate cut helps him. Also, he likely holds his vast business operations in many different types of entities including partnerships and S corporations and will benefit from the top rate of 25% on such income even after paying himself reasonable compensation. Also, if he is still carrying forward a net operating loss, repeal of the AMT helps him. And repeal of the estate tax is a tremendous tax cut for him. The Tax Policy Center's analysis of the framework indicates that about 75% of the tax benefits of the framework go to the top 25% of income earners in 2018 and 87% by 2027, with the top 1% benefiting the most. Of course, due to missing details, they had to make some assumptions, such as where the individual brackets start and end.

Speaker Ryan says many individuals will have a postcard size tax return - unlikely but perhaps shorter. But why are we talking about fitting a 21st century tax system on a postcard return rather than having a just-in-time filing system?

And, we don't have a cost estimate - will the plan raise or lower revenue. Most likely it will lose revenue (the framework is almost all tax cuts rather than noting many revenue raisers). The Senate budget plan includes $1.5 trillion over the next ten years for tax reform - meaning that it is okay to lose $1.5 trillion. The Committee for a Responsible Federal Budget estimates that that framework might lose $2.2 trillion over ten years ($2.7 trillion when interest on the new borrowing is included). Also, how will any tax reductions for low and middle-income individuals compare to increased health insurance and health care costs due to weaknesses in the Affordable Care Act and the costly income exclusion for employer-provided health insurance that are not addressed?

And, when will we see details? Speaker Ryan has suggested we'll have a new tax system before 2018. Let's see. There is still a lot of work to figure out the details, draft the legislative language, hold hearings, and gain support of both parties (the framework indicates that bipartisan support and participation is encouraged). All possible, we'll see.

What do you think?

*Mnuchin, Cohn, Brady, Hatch, McConnell and Ryan

Ryan Foresees Tax Reform Legislation This Year

Today, House Speaker Paul Ryan released a joint statement on tax reform  (from the six folks working behind the scenes on tax reform - Ryan, Brady, McConnell, Hatch, Mnuchin and Cohn). Here is the key portion about tax changes:

"We have always been in agreement that tax relief for American families should be at the heart of our plan. 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. 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. 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."

It appears that the plan will:

• Not be a consumption tax as proposed last June by the House Republicans. Thus, the plan won't deny a deduction for imports or exempt export revenue. And there is no need to deny a deduction for interest expense of businesses. Also, expensing of business assets is not a given, but there may be non-consumption tax reasons for allowing such expensing.  Also, with asset expensing, it's likely not all business interest expense will be deductible (assuming asset expensing is in the final plan).
• Include a rate cut for both businesses and individuals. How much of a tax reduction that translates to for taxpayers depends on what changes are made to deductions and credits, the AMT, and for higher income individuals, what happens to capital gain rates and the net investment income tax. 
• Include a shift to a territorial system. Senator Hatch noted recently that this has bipartisan support and was part of both the House plan and President Trump's 1-page plan.

So, the most significant part of the statement today is the last sentence in the excerpt above - they are not pursuing a border adjustable consumption tax.  The import tax of that was a significant revenue raiser so it also means they need new revenue raisers to support either the 20% corporate rate House Republicans want or the 15% rate President Trump seeks.

But, still lots of questions including what revenue neutral reform means in terms of how much base broadening will be needed and how the effect of changes are measured. The President's budget proposal (page 115) "assumes deficit neutral tax reform." What is the best change approach for economic growth? Will the drafters wait for Senate Finance Committee to review the ideas they received in July?

#trih - tax reform is hard

But with continued hearings, discussion, and work likely already underway on drafting legislative language, perhaps we will see a proposal this year.  And, rate reduction, base broadening and a shift from worldwide to territorial all mean major changes and rethinking for tax compliance and planning. And we'll also need to see what the states do in response to any federal changes.

What do you think?

House Budget Plan and Tax Reform

House Budget Plan

Speaker Ryan's email message and blog post today notes that the House Republican budget plan "paves the way for transformational tax reform." The Budget Committee has a markup session this morning. When Speaker Ryan tours the New Balance factory in Massachusetts on July 20 he will "promote the historic tax reform plan currently being developed by the House, Senate, and Trump administration." [7/17/17 press release] 

Here is what's in the 63-page budget plan released in July, Building a Better America – A Plan for Fiscal Responsibility, related to tax reform [page 22]:

• The FY18 budget resolution “instructs the Ways & Means Committee to produce deficit-neutral tax reform legislation that will reduce tax rates and simplify the tax code to boost economic growth.” 
• The budget plan presents the following reasons to simplify:

·   “Individuals, families, and employers spend more than an estimated 8.9 billion hours and $409 billion a year navigating its labyrinth of special rules, deductions, and tax schedules.”

·   Over 5,800 changes have been made to the IRC since 2001.

·   Tax breaks in the Code cost $1.4 trillion/year while tax collections are about $1.5 trillion.

• A corporate rate reduction is desired to promote competitiveness.
• Ways and Means Committee should develop “specific policies” for “deficit-neutral, fundamental tax reform that:

·  "Simplifies the tax code to make it fairer to American families and businesses and reduces the amount of time and resources necessary to comply with tax laws;

·   Lowers tax rates for individuals and consolidates the current seven individual income tax brackets;

·   Repeals the Alternative Minimum Tax;

·   Reduces the corporate tax rate; and

·   Transitions the tax code from a “worldwide” system to a 'territorial' system.”

A few observations:

• When will the tax reform plan be released and will it be an outline or legislative language?
• Will there also be a lower rate for business income of entities not operating in the corporate form? The House Republican blueprint of June 2016 said yes (page 17, 23 and 27), the budget plan is silent (but brief).
• Will the border-adjusted tax and consumption tax aspects of the June 2016 House Republican blueprint be part of the plan?  Speaker Ryan's press release about visiting New Balance's factory stresses that it's an American factory.
• How will lower rates be addressed with base broadeners for revenue neutrality?
• Will there be distributional neutrality?
• Will there be hearings once there is legislative language? This question was asked by Senator McCaskill at the 7/18/17 Senate Finance Committee hearing. Chairman Hatch said he wasn't sure - he would like to have hearings, but could not guarantee it. Senator Hatch also noted that they were having a hearing right now, to which Senator McCaskill noted that they were not discussing an actual bill. Her questions start at about 2:02 hours into the hearing. All four witnesses - former Assistant Secretaries of Tax Policy at Treasury answered her question that "yes" bipartisan legislation would be good. For the Tax Reform Act of 1986, there were over 100 days of public hearings, markup, subcommittee meetings, and conference meetings (see pages 1 - 4 of General Explanation Of The Tax Reform Act of 1986, (H.R. 3838, 99th Congress, Public Law 99-514 (Bluebook)). That's a lot of hearings. Of course, not all likely were on legislative language. 

What do you think? Will we see tax reform this year? How transformational do you expect it to be?

Ryan says tax reform will happen in 2017

Speaker Paul Ryan speech on tax reform, 6/20/17

On June 20, 2017, Speaker Paul Ryan spoke to the National Association of Manufacturers about tax reform. He has a 1 minute YouTube video of highlights here. The tag line is "Tax reform is happening. Not next year or next Congress. It is happening now, in 2017."

Per his email message of 7/5, "We're not talking about some rinky-dink, watered-down version of reform where the status quo basically remains as is. No, instead, imagine transformational tax reform that closes decades of loopholes, shakes up the IRS, and actually encourages businesses to stay and grow here in America."

His email message of 7/6 includes: "America is losing good-paying jobs as businesses move offshore to foreign competitors with more competitive tax systems. Trillions of dollars—literally, trillions—are being stranded overseas as a result. And hardworking families continue to struggle under a tax code that is far too confusing and expensive. ... This unified Republican government—the House, the Senate, and the White House—are putting together a plan that will grow our economy and create jobs.

Our plan will simplify the code so you can file your taxes on a form the size of a postcard. And it will overhaul or corporate tax system—the worst in the industrialized worlds—in order to stop the drain of American businesses overseas."

Meanwhile, as I noted in my blog post of 7/2, Senator Hatch, chair of the Senate Finance Committee is seeking public input on tax reform ideas by July 17. He also has given assignments to some of the committee members and wants to work with others including Democrats. 

That statement along with Ryan's suggestion of transformational change sounds like they want a plan that can get bi-partisan support so it can be permanent rather than only a 10-year plan accomplished via budget reconciliation.

It would be nice to hear more about the progress of the House Republican blueprint released in June 2016. Is the Senate Finance Committee seeking input because they want something different or just to be sure everyone had an opportunity for input?  What about Senator Hatch's work on corporate integration? What about suggestions to pay for lower tax rates for corporations? Will the House Republican import tax (border-adjustable tax) remain? Which "loopholes" is Speaker Ryan referring to to close? How low can rates go in a revenue neutral manner by closing them?

Timing? The House and Senate are scheduled to be in recess for July 31 to September 4 (Labor Day). But that still leaves lots of days for hearings and markup sessions and conferences. And this process really kicked off in January 2011 with over 90 hearings held since then (see Congressman Camp's "First in a series ..." hearing link), lots of reports, working groups, discussion, etc.  That's more time that was spent on the Tax Reform Act of 1986 which kicked off in January 1984 with President Reagan's state-of-the-union speech and the Treasury issuing its 3-volume, 800+ page report on tax reform (including volume 3 on a VAT!). [See article on the history of TRA'86 and link to old Treasury reports on tax reform.]

What do you think? Will bi-partisan, transformational tax reform occur in 2017? What do you think it will look like?

One Year Anniversary of House Republican Tax Reform Blueprint

On June 24, 2016, the House Republicans released their "A Better Way" blueprint for tax reform. Obviously as part of an election strategy. On November 9, 2016, with Republican victories all around, I thought there would be fast track activity to draft legislative language to be released early in the 115th Congress.  We haven't seen any legislative language yet although I suspect some exists.

The details of the plan can be found in the full report of the Republicans and a July 2016 article I have on it. The blueprint seems to have hit a few roadblocks, most notably the tax on imports. Note that this is not a tariff. Instead, imports are taxed by not allowing a deduction for them. Likewise, exports are tax-free by removing export revenue from the tax base. The goal is to make the business tax a consumption tax that can be border-adjustable (per the report).

Many taxpayers are not in favor of the import treatment, most notably retailers with lots of imports, as well as oil companies (and others). For example, see the National Retail Federation's website on "BAT is a Bad Tax." [BAT = Border Adjustable Tax]

The import tax though generates a lot of revenue to help pay for lowering the corporate tax from 35% to 20% and the maximum tax on passthrough business income from 39.6% to 25%.  So, it is an important part of tax reform.

The blueprint includes several simplifications and several open questions to be resolved. Drafting legislative language is difficult as changes have effects on several other parts of the law, transition rules must be addressed, and there were several questions left open in the report.

Meanwhile, it it not identical to President Trump's plan and the Senate doesn't yet have a formal plan. However, this past week, Senate Finance Committee Chairman Hatch formally asked for suggestions - due by July 17.

Also, on June 20, Speaker Ryan delivered a speech on tax reform to the National Association of Manufacturers. He would like to see tax reform by the end of 2017 [CNBC, "Speaker Paul Ryan tries to save 'crown jewel' of GOP agenda: Tax reform," 6/20/17.]

There are additional agenda items for Congress and President Trump for this year, including work on the Affordable Care Act, passing a budget, and dealing with the debt ceiling.

What do you think? Will we see tax reform by the end of the year?

Tax reform for 2015? Seems unlikely

Tax reform looked like a possibility when at the end of 2014, the new tax committee chairs spoke positively about it. For example, Senator Hatch issued his seven principles of tax reform and Congressman Ryan noted it might be doable by summer.  The Senate Finance Committee has held a few hearings on the topic. But ...

• There is still insufficient consensus on what tax reform should look like and how to pay for it.
• New ideas continue to be issued.
• Congress continues to propose and even pass lesser reforms, such as making the sales tax deduction permanent, even though tax reform will most likely involve repealing the itemized deduction for all state taxes.

I've got a short article in the AICPA Tax Insider - Tax reform for 2015: One step forward, two steps back? (6/11/15).  It summarizes what has happened from December 2014 through May 2015 on tax reform, as well as summarizes some bills passed in the House and a sampling of those introduced that seem to indicate more that it is business as usual. For example, do we need the Hearing Aid Assistance Tax Credit Act (I have nothing against hearing aids, but why bog down the tax law with a subsidy for them and why have a subsidy for them at all)?  Also, it is contrary to tax reform of broadening the base and lowering rates.

What do you think about the tax reform agenda and timetable?  [article link]

Questions along the "Path to Prosperity"

Last month, the House of Representatives passed a budget resolution (H.R. Con. Res. 112, 112th Congress (3/29/12)) that included a general call for tax reform along with a few specific reforms. A week earlier, the House Budget Committee voted favorably on a budget proposal that also endorsed the report of Chairman Paul Ryan (WI-R), titled, The Path to Prosperity (3/21/12 committee vote). I've got a short article in the AICPA Corporate Taxation Insider this week (4/26/12) that provides an overview to the tax aspects of this budget resolution and observations on what is missing from the proposals.

Like much talk about tax reform today, most details are missing.

Article - Many questions about the "Path to Prosperity"  

What do you think?