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?

What's simple about a postcard size tax return?

The House Republican tax reform blueprint touts that the individual system would be so simplified that individuals would have a postcard-sized return. Speaker Paul Ryan's 5/19/17 op ed in the Kenosha News states: "Imagine being able to file your taxes on a postcard." 

This isn't a new suggestion. The Hall-Rabushka flat tax first introduced in 1982 touts that both individuals and businesses would file postcard-size returns (also see chapter 3 of their Flat Tax book).

My concerns with the postcard size return include:

• It sounds like something filled out by hand and mailed in. Why not instead say that it will be so simple that your tax adviser or if you chose, the IRS, can compute your taxes for you and securely text or email you the amount owed which you can use your bank app or Paypal or some type of debit card option to receive a refund or pay an amount owed.
• The size of the return is not tied to complexity. Even today, we can file on a postcard if the IRS would be fine just knowing our AGI, taxable income, total credits (including withholding), tax and amount owed or to be refunded.
• The House blueprint postcard is missing a lot of information such as the taxpayer's name and contact information, signature line, where you want your refund (if any) deposited, and the penalty of perjury statement.
• Gen Z filers might wonder what a postcard is.

What is a better / alternative message to sell simplification via tax reform to individuals?  Letting taxpayers know they can log into their secure online IRS account by February 1 to see their tax calculation based on all of the information returns the IRS has including W-4 information on filing status and number of dependents. If they have other transactions, they can easily add them in. If they prefer, they can set up with a tax return preparer or software provider to have this information show up on an account the taxpayer has created with them. This would also aid the filer with state tax obligations and more complicated aspects of income tax calculations such as dealing with partnership or other business income, retirement plan deductions or distributions, etc. 

Another part of the message that can help, perhaps is that the standard deduction is higher and personal and dependent allowances are in the form of a single tax credit (rather than having deductions and credits).

What do you think?

Prospects for federal tax reform in 2017

We have a new Congress and new President - all of the same party.  Tax reform discussions and hearings have been held for the past six years. In June 2016, the House Republicans released their "blueprint" for tax reform. So, will we see tax reform in 2017? If yes, what might it look like?

I offer my update and thoughts in an AICPA Insights piece.

What do you think?

House Republican Blueprint and Postcard Size Tax Return

On June 24, 2016, the House Republicans released their tax reform blueprint, the last part of their "Better Way" plan. The plan includes reasons for tax reform and the basics of the plan. There is no legislative language so the details are not all there.  But, here are some highlights:

• Aims to be revenue and distributionally neutral. The revenue target is the baseline that assumes current temporary tax provisions will not expire. This allows the target to be $400 billion less than the CBO baseline which assumes that the temporary provisions expire on schedule. (page 16)
• Dynamic scoring will be used in measuring the revenue effect. (page 16)
• Both the corporate and individual AMT are repealed.
• The corporate tax rate is a flat 20%.
• Individual tax rate structure – 0, 12, 25 and 33%. The 0% rate is the effective rate if income is below the standard deduction threshold and child credit amounts. Capital gains are taxed at the same rate but only 50% of investment income is taxed.
• Active business income of an individual is taxed at no more than 25%.
• Standard deduction for MFJ is $24,000, $18,000 for HH and $12,000 for Single.
• Credits: EITC, modified child credit and some type of education benefit to be designed by House Ways & Means Committee.
• Repeal the estate and generation-skipping transfer taxes; no mention of gift taxes or treatment of gains and losses at date of death.
• Businesses - immediate expensing of assets other than land and inventory. LIFO remains.
• Section 199 deduction and most credits other than for research are repealed.
• Move to a territorial system and more of a consumption tax system with a goal of being allowed to tax imports and exempt exports from tax. Details missing.
• Businesses only deduct interest expense to extent of interest income with excess carrying forward (under a true consumption tax, no interest income or expense would be reported).
• NOLs carryforward forever adjusted by an interest factor. NOLs can't reduce taxable income by more than 90%.

There are 15 specific areas where the House Ways & Means Committee is instructed to create the rule including for consolidating retirement plan rules and creating transition rules.

A centerpiece of the individual change is a postcard size return! I view this as telling us little and mostly being misleading. Our current tax system could be filed on a postcard. The size of the return submitted to the IRS just depends on how much summary information can be tolerated. Today's postcard could have the taxpayer's identification information, taxable income, tax, aggregate credits, refund/payment, signatures. That says nothing about the complexity of calculating all of these figures.

Here is the proposed postcard from the Republican Blueprint:

There is a lot missing from the postcard:

• Taxpayer's name, address and Social Security number.
• Dependent information.
• Business, rental and partnership information (Schedules C, E, and F).
• Capital gains and loss and Schedule D.
• Schedules for computing the credits (today forms exist for the EITC and education credits).
• What to do with the refund (today's return has information for direct deposit of the refund).
• Penalty of perjury statement.
• Taxpayer and preparer signatures.

And of course, as most people file using software and file electronically, it is not so much the size of the final return which they might not even print out, but the number of questions required to get the return completed and the number of records to be gathered and maintained to prove income, deductions, credits and estimated tax payments.

I'll have more soon in an article I'll post.

There are many items in the plan worthy of discussion. A lot more details are also needed for that discussion.

What do you think?