Senator Hatch and Tax Reform

Senator Orrin Hatch (R-UT)

Senator Hatch, chair of the Senate Finance Committee, has done the following regarding tax reform:

• Study and hearings on corporate integration as a way to reduce the corporate tax burden. The proposal (per statements rather than a report) is a dividends paid deduction with withholding.
• Hearing on 5/24/16 - Debt vs. Equity: Corporate Integration Considerations (+ JCT report).
• Hearing on 5/17/16 - Integrating the Corporate and Individual Tax Systems: The Dividends Paid Deduction Considered (+ JCT report).
• 6/16/17 – Press release asking for people to submit suggestions for tax reform by 7/17/17. He seeks recommendations in four areas:
• “1. Providing much-needed tax relief to middle-class individuals and families through reforms to the individual income tax system;
• 2. Strengthening businesses – both large and small – by lowering tax rates and broadening the relevant tax base in order to put the economy on a better growth path and create jobs;
• 3. Removing impediments and disincentives for savings and investment that exist in the current tax system; and
• 4. Updating our international tax system in order to make our nation more competitive in the global economy and preserve our tax base.”
• 6/27/17 – In a speech on the Senate floor, Hatch said he is “committed to ensuring a robust process in the Senate for developing, considering, and passing any tax reform package.  That is how the Senate functions best, and that is what I intend to see happen.” He also noted that he has “been working to involve all the Republican members of the Senate Finance Committee in this effort.  We have a number of great senators on the committee, many of whom have put in years of work on different areas of the tax system.” 
• He also noted he had given assignments to some SFC members, such as:
• ·         Enzi and Portman – international tax
  ·         Grassley – individual tax
  ·         Thune – business and estate taxes
  ·         Heller and Cassidy – energy tax policy
  ·         Roberts – agriculture tax issues
• Senator Hatch noted that tax reform would not be a “closed-door exercise” in the Senate. He also wants members outside of the Senate Finance Committee to be involved and he wants “to see Democrats at the table” and a “bipartisan process that renders a bipartisan result..
• His final remarks:

“At the end of this process, no one should be able to credibly claim that they were unable to participate or that they didn’t have enough information about the bill.  So, I hope this puts to rest any claims or suppositions that the tax reform process is going to be secretive in nature.  Because, if I have my way, this process will be both open and bipartisan. 

The goal of everyone in this body with respect to tax reform ought to be to help the American people by providing tax relief to American families, simplifying the tax system, improving our business tax system to allow American businesses to compete in the global economy, and create stronger growth in the economy, wages, jobs, and opportunity.  

I hope more of my colleagues will join me in supporting this important effort.”

What do you think? Will we see permanent, comprehensive tax reform this year?

How many times to tax business income?

A recent post (8/26/16) on the Tax Justice website was titled - Why we must close the pass-through loophole? That caught my attention as I was trying to think what the "loophole" might be?  A loophole is a provision that can be used beyond its intended purpose because the rule is not written specifically enough. When a rule is being used as intended, it is not a loophole. For example, sometimes the mortgage interest deduction is called a loophole, but it is not. People deducting interest on the mortgages on their primary and vacation homes is using the rule as intended.

The "loophole" that was the subject of the blog post is large businesses operating as partnerships rather than as corporations. Partnerships, S corporations and sole proprietors do not pay corporate income tax. Instead, the income is taxed directly to the owners and only one level of income tax is paid at the federal level (and state level). In contrast, C corporations pay the corporate income tax AND when they distribute earnings (dividends) to shareholders, the shareholders pay income tax. Thus, C corporation income is taxed twice.

That just happens to be the way it works in the US tax system. It doesn't have to work that way and not all countries double tax corporate income. In the US, there is some relief in that qualified dividends received by individuals are subject to the lower capital gains tax rate.

Over the years, there have been numerous studies by the government and various organizations on how to integrate the corporate tax meaning have corporate income taxed only once.  There are numerous ways this can be done.  Two easy ones would be to not have a corporate tax (only tax dividends) or not tax dividends (only tax corporate income at that level when earned).  Neither is ideal because not all corporations pay dividends and not all corporate shareholders are taxable (a lot of corporate stock is owned by tax-exempt organizations).

The Tax Reform Act of 1986 called for Treasury to study corporate taxation. This resulted in two reports issued in 1992 on corporate integration (January 1992 and December 1992).  Most recently, Senator Hatch, chair of the Senate Finance Committee reports he is working on a plan for corporate integration and the SFC held two hearings on an approach called the dividends paid deduction model (5/17 and 5/24; also see Joint Committee on Taxation report prepared for the hearings).

Some of the advantages of corporate integration include:

• Treats all business entities similarly (although this also depends on the corporate versus individual tax rates applicable to business income).
• Removes or lessens a corporation's tax preference for debt over equity.

So, I ask the question differently from the Tax Justice blog post - why not eliminate double taxation of corporate income and find a way to tax all business entities similarly.  And there are many ways of doing that.  More later on that.

What do you think?