Is True Tax Reform Likely in 2017?

Is true Tax Reform likely in 2017?

As recently released (See USA Today Article, and White House website), the President would like to pass a tax cut package.  The tax reform proposed by the President plans on addressing the following changes:

  1. reduce the top rate on business income to 15 percent, from the current 35 percent rate on corporate income and 39.6 percent rate for other businesses;
  2. cut individual income tax rates; 
  3. raise the standard deduction; abolish the alternative minimum tax (which snagged Trump for over $30 million in 2005, according to tax return data leaked a few weeks ago); and
  4. abolish the estate tax.

Analysis of the Plan

See this article by William Gale, Hillary Gelfond and Aaron Krupkin of the Brookings Institute, which attempts to analyze the President’s Tax proposals.  Their analysis reflects 4 problems of the Trump Tax Reform Plan, as they see it:

  1. The Trump plan would balloon the federal budget deficit.  The article cites an analysis of the Trump campaign’s tax policy plan nu the Tax Policy Center that estimates a $7 trillion deficit over the first decade.  The article also cites a guess by the Center for a Responsible Federal Budget stating a deficit of $5.5 trillion over 10 years.
  2. The Trump plan would create the largest tax shelter for businesses.  The article states that the plan would encourage business owners to cut wages and pay profits instead of wages.  The article points out how despite the Trump Administration’s position to limit income shifting, the policy would encourage income shifting and how income shifting would be difficult to block.
  3. The Trump plan would create a race to the bottom for corporate rates.  The article explains that while the US rate would be lower than most other countries, history has shown that the other countries would just enact changes and lower their corporate rates, so that the perceived benefits of lowering the US rate to match international tax rates would be minimized. 
  4. The article claims that the Trump plan is very regressive.  It claims the Trump plan would give huge cuts to the wealthy and virtually nothing to the low-income households. 

Likelihood of Passage:

Regardless of the effects of the proposed Trump Tax Plan, one author doubts that the President will be able to implement his proposed tax reforms.  In his Law Review article in the Illinois Law Review, Daniel Hemel argues that the President likely won’t be able to implement the reforms because of key obstacles: 

  1. President Trump has failed to fill key tax policy positions at the U.S. Treasury;
  2. President Trump’s refusal to release his own tax returns has provided the opposition and/or moderate Democrats with cover from supporting his tax plan; 
  3. President Trump’s Tax Plan deviates dramatically from other Congressional tax reform plans and alienates Congressional members; and
  4. Because President Trump doesn’t have the requisite support to avoid a filibuster in the Senate, he must use the budget reconciliation process to propose his tax reforms, and that further alienates Congressional members.

Hemel starts his article by citing that former Presidents Reagan and Bush (George W Bush) did not have majorities in both the House and Senate, but were able to pass tax reforms by day 206 of Reagan’s presidency and day 139 of Bush’s presidency.  

With respect to the first obstacle, Hemel states that President Trump has yet to fill key tax policy positions at U.S. Treasury, citing this Vox article, but that President Reagan’s nominee was confirmed on day 67 of his presidency (March 27, 1981) and President Bush’s nominee was confirmed on day 41 of his presidency (March 1, 2001).  Hemel states President Trump is pushing his tax reform policy without a tax policy team in place.  

Additionally, Hemel states that the President’s refusal to release his own tax returns has provided cover for moderate Democrats facing re-election to oppose the President.  Hemel states that President Trump’s refusal to follow tax transparency permits the Democrats to use a sound bite, namely, “we won’t vote for tax cuts until you release your returns”, and transform opposition to tax cuts (usually a political liability for Democrats) into a political asset by claiming that support is unwarranted unless the Democrats can see the effects of the President’s proposal on the President’s returns.  

Hemel also argues that President Trump’s plan fails to build support even within his own party’s Congressional leaders, as it deviates from other highly publicized and analyzed Congressional plans.  Hemel argues that instead of using House Speaker Paul Ryan’s 2016 proposed tax reform plan or Senator Orrin Hatch’s proposal as the Chair of the Senate Finance Committee, Trump has discarded the work done by the Congressional republicans and has forged an independent tax reform proposal that will ultimately depend on the same Congressional leaders he alienated to pass his proposals. 

Finally, Hemel argues that by lacking the support in the Senate to overturn a filibuster, Trump must use the Budget Reconciliatory Process, which limits legislation that would create a deficit outside a 10 year period from the passage of the legislation (so a temporary bill that would have no long term impact on the budget).  Hemel argues that since the Trump Proposal implies huge budget deficits, the Trump proposal may face opposition from Republicans deficit hawks, let alone Democrats, and so this is another reason why Trump’s tax reform plan is highly unlikely.

Alternative Explanation of why Tax Reform is unlikely in 2017:

In addition to Hemel’s article, Bloomberg’s Jonathan Bernstein, adds 7 reasons why tax reform is unlikely based on the Republican’s inability to repeal Obamacare (aka the Affordable Care Act).  Bernstein cites the following 7 reasons:

  1. Trump Doesn’t Care about Policy: Bernstein cites President Trump’s appearance on Face the Nation discussing healthcare as evidence that President Trump is only focused on buzzwords and doesn’t care about the nuts and bolts of the policies.
  2. Trump isn’t getting much help:  Bernstein cites the fact that it appears as if the White House and the rest of the Trump Administration have not been involved in the negotiations regarding health care.  He questions how a one page tax plan will spur tax reform by Congress.
  3. Watch the House of Representatives:  Bernstein argues that the real players are in the House and not the White house.
  4. Congressional Districts Still Matter:  Bernstein argues that House members still consider the impact of decision would have on their constituents and re-election prospects.
  5. Congressional Republicans aren’t really good at policy:  Bernstein argues that House Republicans still don’t understand tax reform to know how to implement actual tax reform.  He states that many House Republicans still rely on party, committee, or faction leaders to assess the value of legislation. 
  6. Side deals aren’t happening in the House:  Bernstein argues that House leadership is unable to provide the requisite inducements for House members to vote together to repeal Healthcare, and which can also cause the same problems or tax reforms.
  7. Caring about the issue at hand matters: Bernstein argues that few Republican politicians advocated for the repeal of healthcare because that’s not what they really wanted to accomplish.  He states that tax reform/cuts might be different to motivate House Republicans to enact change, but that still remains to be seen. 

These two different viewpoints cast doubt as to whether real tax reform will occur in 2017.  

CONTACT US TO FILE YOUR TAX WHISTLEBLOWER CLAIM

Irrespective of your personal feelings about the Trump Tax Plan or the likelihood of its passage, If you have SPECIFIC AND CREDIBLE information of someone who is not paying their taxes, CONTACT US to discuss the filing of a Tax Whistleblower Claim on your behalf.  The IRS pays between 15-30% of the proceeds it collects from the tax violators if the IRS uses your information.