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.  

More Accounting Tricks to Avoid Paying Tax by U.S. Multinational Corporations

As noted in this blog, the difference between tax evasion and tax avoidance is a fine line.  To assist in drawing the line properly and legally, corporations and individuals employ tax attorneys and accountants to minimize their tax liabilities.

As previously discussed in this blog, the triumvirate of "legal" tax dodging by U.S. Multinational Corporations ("USMNCs") is Inversions, Transfer Pricing and Earnings Stripping.  Another less publicized tool used by accountants of USMNCs is the "stock option loophole".  As the Citizens for Tax Justice ("CTJ") reports, USMNCs have utilized the "stock option loophole" to reduce their taxable income in the amount of $64.6 billion over the past 5 years.

Notable (Top 5) USMNCs which have utilized the stock option loophole include:

USMNC	Stock Option Tax Benefits from 2011-2015
Facebook	$5,665,000
Apple	$4,673,000
Google	$1,951,000
Goldman Sachs Group	$1,775,000
J.P. Morgan Chase & Co.	$1,666,000

The CTJ list documents 310 other companies that have reduced their federal and state corporate income taxes by a combined $64.6 billion dollars over the last 5 years.

What is the "stock option loophole"?  Simply put, it is an accounting mechanism to "track" stock options and to deduct the expense of stock options.  Why is this a loophole? The simple answer is that there is a disparity between the price the employee pays for the stock option and the price the stock options are worth.  For a more technical explanation see this PricewaterhouseCoopers (Accounting Firm) explanation.  Based on the PWC article, the USMNCs deduct this difference between the exercised price and the price their employees paid for the stock on the corporate taxes in the year that the options are exercised.

CTJ questions why the USMNCs are allowed a deduction fro giving their employees a benefit but in reality does not cost the USMNCs anything.  CTJ also states that reversing this may help to minimize the Tax Gap.

If you have specific and credible information about a company failing to pay its tax liabilities, contact our firm about filing an IRS Whistleblower claim to assist the IRS in holding the company liable for the taxes they should be paying.

Taxing the Individual vs. Taxing Corporations: History shows the burden is on Individuals and not Corporations

As discussed in the TaxProfBlog the Joint Committee on Taxation has released its overview of the federal tax system.  Noteworthy in the JCT’s finding is in table A-1 on pg. 23, the corporate income tax revenues received by the IRS has steadily declined since 1950, while individual income taxes and social security taxes continue to rise.  See the chart below:

One possible explanation for the decline in the corporate tax receipts may be the erosion of the corporate tax base by U.S. multinational corporations (“USMNCs”) and their profits shifting from the United States.  See TaxProfBlog and Kimberly A. Clausing (Reed College), Profit Shifting and U.S. Corporate Tax Policy Reform.

Clausing argues that the U.S. is losing over $100 billion dollars a year due to profit shifting efforts of USMNCs.  See Chart below.

Ms. Clausing states that 98% of the profit shifting occurs by USMNCs to jurisdictions that taxes the USMNCs at less than 15%.  Finally, she states that the revenue decrease has grown 5 times over the past decade due to increase profit shifting by USMNCs. 

To combat the erosion of profits to offshore jurisdictions, Ms. Clausing proposes the following small changes to the current taxing regime:

1. Repeal the check the box regulations that facilitates income shifting [for more information on check the box regulations and use in international tax planning, see this Wikipedia article];
2. Tougher earnings stripping laws [Treasury has already instituted additional regulations to curb earnings stripping, see my blog]; and
3. Anti-inversions rules such as an exit tax [See my earlier blog about imposing an exit tax to dissuade corporate inversions]. 

Ms. Clausing also advocates for the following fundamental changes to the existing taxing regime:

1. Worldwide consolidation of corporate returns for tax purposes
2. Formulary apportionment of international corporate income, using a method similar to that used by U.S. states in taxing national income.

Ms. Clausing’s proposal suggests that the U.S. should move to a territorial tax system.  While some have advocated the territorial tax systems would create jobs and raise wages for U.S. workers, see this article by Curtis S. Dubay and the Heritage Foundation, others (Center on Budget and Policy Priorities) have advocated that such a transition would: 1) create greater incentives for USMNCs to invest and book profits offshore, 2) reduce wages in the U.S., 3) would cause larger budget deficits by draining corporate tax revenues, and 4) would shift the tax burden to domestic businesses and small businesses.

Regardless of the solution proposed by either side, the simple fact still remains that individuals in the U.S. continue to bear the brunt of the tax burden, while corporations continue to avoid paying taxes.

If you have specific/credible information about corporations avoiding the payment of tax through transfer pricing, inversions and earnings stripping, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (through transfer pricing, inversions and earnings stripping).   Contact us if you want to file a tax whistleblower claim.