Here are some predictions about tax reform, parsing the over-hyped Big Six joint statement on tax reform.
A corporate rate cut will be the centerpiece.
“The United States has the highest tax rate on business anywhere in the world,” said President Donald Trump. “It’s time to pass a tax cut for middle class families.” He has finally clarified that it is the US corporate rate–not U.S. taxation generally–that is relatively high.
Multinationals have been agitating for a rate cut and a territorial system for a decade. They tried for years with Democrats, then got lucky that Republicans want these tax cuts. There is a Republican president and a Republican majority in both houses. Republicans like to cut taxes.
White House economic advisor Gary Cohn recently stated that he wants a corporate rate less than 23%. That low level is also what multinationals want. The president is calling for a 15% rate. Senate Finance Committee Chairman Orrin Hatch said that 25% would be difficult to achieve. House Ways and Means Committee Chairman Kevin Brady is circumspect about rates.
Lower than 25 percent ain’t gonna happen. The rate will probably settle around 29%, which is too high for some business appetites.
The border adjustment died.
The House Republican plan of last summer called for a cash-flow tax with a border adjustment. The border adjustment was not a necessary component of the plan. Indeed, a border adjustment is easier to implement with a transaction tax or an excise tax. And America will never institute a VAT, no matter how often economists who have never seen the inside of a grocery store bang on about it.
Ryan’s pet project, the border adjustment, is dead because it would have been a great leap into the unknown, and we can’t force the rest of the economy to pay more for everything imported from China to give a permanent tax cut to a handful of large exporters.
The import side of the border adjustment would have been functionally a 20% tariff on imports. That’s what killed it, but that was also supposed to be a revenue generator to offset tax cuts for exporters and businesses generally.
There will be a special rate for partnerships and S corporations.
Half of business income passes through pass-through entities, and is ultimately taxed at a fairly low average rate given the predominance of real estate and investment partnerships in the mix.
Closely-held business lobbyists won’t stand for rate cuts for publicly traded companies without a rate cut for their clients. That being said, there won’t be a special lower rate for hedge funds, venture capital funds, private equity funds, or any other investment funds.
Immediate expensing is a goal.
The Heritage Foundation wants full expensing. Think tanks like Heritage exist to give the patinas of intellectual respectability to changes that lobbyists and legislators want to make. See this thick study that no one read? It says that growth will increase if we [fill in preferred policy option here].
Immediate expensing is not really necessary because current law bonus depreciation gives nearly the same result for the kind of capital equipment that Congress would want to subsidize. Legislators are not going to allow expensing of real estate—which is already self-sheltering. Small businesses are already allowed to expense $500,000 of capital equipment up to a limit.