Tax Policy Update

May 2, 2017

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A Whole Lot of Nothing. Remember those days in college when you used to mess with the font size and margins to stretch out your essays so that they hit a certain page requirement?

That’s sort of the deal with President Donald Trump’s tax reform plan released on April 26. The one-page document was reportedly typed up on the eve of the release. To call it a tax plan might be overzealous — absent were the details that tax policy observers and lawmakers have been itching to see (e.g., repatriation rate, border adjustment tax, etc.).

If the tax plan looks familiar, that’s because it’s a regurgitation of what Trump proposed on campaign trail and what’s in the House GOP tax reform blueprint, albeit with some slight changes.

Amid all the ridicule for the anti-climactic rollout, Treasury Secretary Steven Mnuchin has defended the one-page proposal, saying that “the only reason we didn’t put out all the details is because we’re determined to work with the House and the Senate to turn this into a bill — and that’s the reason why we didn’t put out the details.”



A Whole Lot of Nothing (cont’d).After having kept the public in suspense since February,the White House has finally unveiled its own tax reformplan on April 26. To the surprise of no one, Trump’s planis sparse on details. The one pager is a mere outline ofhigh-level principles for tax reform and a plan of actionfor the administration and congressional Republicans.

To the disappointment of tax nerds in Washington, the plancontains no mention of the controversial border adjustmenttax (“BAT”) or any other form of border tax, immediateexpensing, and interest expense deductibility.

The talking point circulating amongst Republican leaders atthe moment is that Trump’s tax plan is 80 percent alignedwith the House GOP tax blueprint. So let’s take a look athow the president’s tax plan compares with the Houseblueprint:

Proposed Tax Changes on the Business Side

Trump Tax Plan

House GOP Blueprint

  • End worldwide system of taxation
  • Shift to a territorial system
  • End worldwide system of taxation
  • Shift to a territorial system
  • Deemed repatriation of profits held offshore – no details on rate
  • Deemed repatriation of profits held offshore – one-time rate of 8.75%
  • Corporate/Pass-through Tax Rate: 15%
  • Corporate Tax Rate: 20%
  • Pass-through Tax Rate: 25%
  • Eliminate most credits and deductions.
  • Eliminate most credits and deductions.
  • Keep R&D credit (potential modifications)
  • No details on interest deductibility
  • No details on immediate expensing
  • Eliminate net interest deduction
  • Allow for full and immediate expensing
  • Eliminate the Alternative Minimum Tax
  • Eliminate the Alternative Minimum Tax
  • No border adjustment tax
  • No details on border adjustment tax
  • Impose a border adjustment tax


Proposed Tax Changes on the Individual Side

Trump Tax Plan

House GOP Blueprint

  • Individual tax brackets: 10%, 25%, 35%
  • Individual tax brackets: 12%, 25%, 33%
  • 20% capital gains rate
  • Eliminate the 3.8% net investment tax
  • 20% capital gains rate
  • Eliminate the 3.8% net investment tax
  • Provide for a 50% deduction for capital gains, dividends, and interest income
  • Eliminate the 3.8% net investment tax
  • Doubles the Standard Deduction
  • Nearly doubles the Standard Deduction

Eliminate most credits and deductions. Keep the following:

  • Charitable giving deduction
  • Mortgage interest deduction
  • Unspecified tax breaks for child and dependent care expenses

Eliminate most credits and deductions. Keep the following:

  • Child Tax Credit (with increase)
  • EITC
  • Mortgage interest deduction
  • Charitable giving deduction
  • Unspecified incentives for higher education and retirement
  • Repeal estate tax
  • Repeal estate tax
  • Eliminate the Alternative Minimum Tax
  • Eliminate the Alternative Minimum Tax

“We will get back to you with…with definitiveanswers on all these details.”
This is what NEC Director Gary Cohn said as he struggled toanswer some of the reporters’ questions at the tax reformpress briefing last week. “You’re going into very microdetails on some of these,” Cohn snapped at one point. Butdetails are critical at this juncture, especially if theadministration and GOP lawmakers want to enactcomprehensive tax reform by the end of the year.

Last week’s tax plan rollout did little to address some ofthe open questions and concerns with the GOP’s tax reformefforts. For example, the call for a 15 percent corporatetax rate has prompted deficit-conscious folks to wonder howsuch a dramatic rate reduction will be paid for. By theTax Policy Center’s estimate, a 15 percent rate coupled with the elimination of the AMTwould cost at least $3 trillion.

To be sure, no one seriously thinks the 15 percentcorporate rate will be enacted. The administration, itself,conceded that the 15 percent rate is only the startingpoint for negotiations. Most tax policy observers would saythat the corporate tax rate will fall somewhere between20-28 percent.

The issue of offsets exposes one of the key disagreementsbetween the administration and congressional Republicans ontax reform. Since the release of Trump’s tax plan,Republican leaders have been telling reporters that theWhite House and Republican tax writers agree on roughly 80percent of the key issues. So what are the issues that makeup the 20 percent?

The disagreement over the need for pay-fors has also led todisagreements on revenue neutrality and permanency betweenthe administration and congressional Republicans. TreasurySecretary Mnuchin has argued that the proposed tax cutswill pay for themselves in the long run through theeconomic growth that is expected to be generated from therate reductions. This line of hopeful thinking on tax cutsis contrary to what the Congressional Budget Office andother outside budget experts believe. Sure, it’s plausiblethat economic growth will pay for some of theproposed tax cuts but definitely not all of them.

The potential cost of the administration’s tax plan hassome Republicans like Rep. Tom Reed (R-NY) worried aboutthe plan’s impact on the deficit. A tax reform plan thatincreases the deficit would put Republicans in a tough spotwhen it comes time to vote on a bill and threatens thepermanency of any rate reductions. As a refresher, theGOP’s plan to use the budget reconciliation process to passtax reform means that the legislation cannot increase thedeficit outside the 10-year budget window.

Unlike Mnuchin, House Speaker Paul Ryan and House Ways andMeans Chairman Kevin Brady remain committed torevenue-neutral tax reform. “The greatest growth for thegreatest years comes about when tax reform is bold, when itbalances in the budget, and when it’s […] permanent,” Bradysaid.

Ryan and Brady’s commitment to revenue neutrality makes ithard for them to completely give up on the borderadjustment tax — a provision that could raise an estimated$1 trillion — which has been left out of Trump’s tax plan.Its absence has led Sen. John Cornyn to suspect that theBAT is dead. Ryan simply conceded that the provision needsto be modified.

Getting Carried Away. While Trump’s tax plan does not explicitly call for therepeal of carried interest, White House Chief of StaffReince Priebus confirmed in an interview that the presidentdoes want to get rid of it.

Investment managers are generally compensated under a“2-and-20” fee structure – a 2 percent fee for assets undermanagement, which is currently taxed at the ordinary rateand a 20 percent fee for profits interest (the carriedinterest), which is currently taxed at the capital gainsrate.

Eliminating the current capital gains treatment of carriedinterest might actually represent a tax cut for someinvestment managers, unless proper guardrails are in place.

Consider this: Partnerships currently do not pay any federal income tax— rather, partners are allocated their share of thepartnership profits and pay tax on those profits.Individual partners may be subject to a maximum rate of39.6 percent on ordinary income, while paying 23.8 percenton capital gains and carried interest.

Trump has proposed to tax pass-through entities at a rateof 15 percent and to lower the maximum individual top ratefrom 39.6 percent to 35 percent. Trump’s tax plan wouldalso eliminate the 3.8 percent net investment income taxand capital gains would be subject to a 20 percent rate.

Here’s the plot twist: A repeal of the carried interest tax break would meanthat carried interest would no longer be subject to the 20percent capital gains rate. But thanks to Trump’s proposed15 percent pass-through rate, investment managers organizedas partnerships (and those that would soon follow suit)would have carried interest subject to the pass-throughrate of 15 percent. This would represent a tax cut withoutany caveats.

Interesting huh? However, Mnuchin did say at the tax reformplan briefing that the administration will “make sure thatthere are rules in place so that wealthy people can’tcreate pass-throughs and use that as a mechanism to avoidpaying the tax rate that they should be on the personalside.”

Deal! Agreement on FY2017 Spending Bill. House and Senate negotiators have reached a deal on a $1.1trillion omnibus spending package to fund the rest offiscal year 2017. Of note, the spending deal does notinclude funding for the president’s border wall but doesprovide $1.5 billion towards border security. The spendingmeasure steers clear of the controversial political issuesthat would have doomed the bill (e.g., Planned Parenthood,sanctuary cities, etc.).

In the package is also a $25 billion boost for defensespending and an additional $2 billion for the NationalInstitute of Health. Funding for some agencies like the IRSand the SEC will remain the same. The IRS’s budget will befrozen at $11.2 billion and the SEC’s funding will remainat $1.6 billion.

Both the House and Senate are expected to pass the spendingpackage by May 5, when last week’s short-term patchexpires.

Tick Tock. The GOP is once again racing against the clock to repealand replace Obamacare. With the House slated to go onrecess again next week, Republicans are eager to hold avote before they lose the momentum they picked up after theFreedom Caucus endorsed the latest version of the American Health Care Act (“AHCA”)

Last week, GOP leadership unveiled the text of theMacArthur-Meadows amendment, a compromise authored by thechair of the Freedom Caucus and one of the co-chairs of theModerate Tuesday Group. For those who need a refresher, theamendment would permit states to waive Obamacare’sEssential Health Benefits (EHB) standards and communityrating requirements, as long as the state is participatingin a high-risk pool. The amendment would also allow statesto receive automatic approval for waivers within 60 days aslong as they attested that the waiver would lowerpremiums, increase enrollment, stabilize the market,stabilize premiums for people with pre-existing conditions,or increase the choice of health plans in the state.

Since releasing the text of the amendment, the GOP has beenfrantically counting votes to see if they have enough topass the AHCA: Republicans will need to muster up 216votes. Unfortunately, for the GOP, moderates and even somestaunch conservatives are refusing to support the latestversion of the bill.

For moderates, though the amendment preserves Obamacare’sguarantee of coverage for people with preexistingconditions, it still allows states to relax the prohibitionon insurers increasing premiums for sick people. To offsetthis risk, the bill includes a $130 billion fund to helplower premiums for people with preexisting conditions.However, various professional medical associations andindustry groups note that high-risk pools intended to treatpatients affected by these patients are underfunded bynearly $20 billion per year.

The GOP’s job has been made more difficult by PresidentTrump who has promised affordable coverage “every bit asgood on pre-existing conditions as Obamacare.” The latestalteration to the AHCA does not keep the president’spromise. Over the weekend, Trump admitted that the bill wasnot “in its final form.” Some have interpreted thepresident’s latest comments as reopening negotiations.Though prominent Republicans, including Rep. Patrick Meehan(R-PA), seemed skeptical that there will be any furtherchanges to the bill. Meehan and 20 other representativesare currently planning to vote against the bill.

One defection in particular, Rep. Billy Long (R-MO), along-time Trump ally, has been a major blow to the GOP.Long comes from a conservative district that voted forTrump, but he will not vote for his version of the AHCA—despite his previous support for earlier versions of thehealthcare bill. Long recently indicated that affordablecoverage for people with pre-existing conditions is one ofthe few things about Obamacare that should be preserved.Many in the GOP wonder if Long’s defection is a harbinger —if a red-state Republican can’t support this version of theAHCA, does the bill have any chance of passing?

GOP leaders remain hopeful, with rumors of a vote swirlingaround Capitol Hill. In an effort to whip votes, VicePresident Mike Pence was on the Hill on Monday. Houseleaders have vowed to only move the AHCA once they canguarantee the 216 votes necessary for passage.

While the GOP is busy counting to 216, the exchangescontinue to hemorrhage insurers, with companies like Aetnapulling out of all but four states. Democrats and insurancecompanies hoped for some certainty by securing funding forcost-sharing subsidies in the FY2017 omnibus spending bill.Cost-sharing subsidies help insurers cover low-incomeenrollees’ deductibles and co-pays. However, Democrats wereultimately unable to secure funding for these payments.Instead, the Trump Administration has promised to continuepayments indefinitely, forcing insurers to rely on theirword as the 2018 rate-setting deadlines loom ahead. Formany insurers, this lack of certainty may cause them toexit the exchanges leaving millions uninsured.


Show Me the Money (or Not). Infrastructure investment advocates waited with greatanticipation last week for the rollout of President Trump’splan for tax reform, hoping to find some buried treasure inthe one-page document released on April 26. While the plandid call for repatriation, there was no discussion ofwhether the revenue would be used for infrastructureinvestment — an idea that has previously been floated byRepublicans and Democrats.

Trump Talks Gas Tax.Instead of rolling his plans for infrastructure investmentinto a tax reform proposal, President Trump hit theinterview circuit this week and professed his “support” fora gas tax increase to pay for infrastructure projects. Thatposition may have failed to make its way back to the WhiteHouse because later that day, White House Press SecretarySean Spicer claimed that his boss was not actuallyexpressing support but rather expressing his considerationof a gas tax increase, which has been suggested to him by agroup that supported the concept.

Secretary Chao Provides Greater Detail onInfrastructure Plan.While Trump is talking gas tax, Transportation SecretaryElaine Chao said the administration’s pendinginfrastructure proposal could be paid for with “otherprograms such as, perhaps, the sale of government assets,”through tax overhaul, or “allowing the private sector toinvest in public infrastructure.” Regardless of how it’spaid for, the secretary also revealed that the plan wouldinclude $200 billion in direct federal funding and thatdetails would be unveiled early this summer.


President Trump’s thoughts on the FY2017 spending packagereleased by House and Senate negotiators:


Congressional Activity

Tuesday, 5/2

House Financial Services Committee
Full committee markup of the Financial CHOICE Act.

Senate Banking Committee
Full committee hearing: “Examining the U.S. — EU CoveredAgreements.”

Agency Activity

Tuesday, 5/2

Federal Reserve
The Federal Open Market Committee (FOMC) holds a closedmeeting, beginning at 9 a.m. The FOMC is the policy-makingarm of the Federal Reserve, May 2-3.

Thursday, 5/4

Internal Revenue Service holds a meeting by teleconferenceof the Taxpayer Advocacy Panel Taxpayer CommunicationsProject Committee on improving customer service at theInternal Revenue Service.

Other Activity

Wednesday, 5/3

American Enterprise Institute
AEI holds an event, “Hard lessons in education reform.”

Thursday, 5/4

Tax Council
Legislative luncheon discussion with special guest Rep.John Larson (D-CT).

National Economists Club
Luncheon discussion on “Currency Conflict and U.S. TradePolicy.”

Friday, 5/5

Brookings Institution
Discussion on “The Quest for Financial Stability a DecadeAfter the Onset of the Global Financial Crisis.

Economic Club of Washington
Discussion with Adena Friedman, president and CEO ofNASDAQ.