ATR Statement on Permanent Tax Extenders Bill
Americans for Tax Reform expressed qualified support for the permanent tax extender agreement reached Tuesday on Capitol Hill.
The agreement dramatically lowers the tax revenue baseline, makes permanent all of the “must pass” tax extenders that often drive bad policy, and secures full expensing of business purchases for small employers.
But the deal also phases down 50 percent “bonus depreciation” over the next five years, fails to immediately kill the wind production tax credit, and increases spending in the form of permanently expanded refundable credits.
The biggest win of this bill is that it will make conservative tax reform easier by permanently lowering the current-law revenue baseline. This means that conservative reformers can design a pro-growth tax system less destructive of liberty and which steals less money from the American people.
Highlights of the bill include:
Permanent tax relief. The bill permanently reduces taxes. This is expected to reduce the current law tax revenue baseline. That's real money in the hands of businesses and families. A lower revenue baseline means pro-growth tax reform is easier to write.
Dozens of Tax Extenders Made Permanent. This bill makes many tax extenders permanent. These tend to be the ones that are the most politically popular and which drive tax extender packages.
Common sense, middle class tax extenders made permanent. These include the state and local tax deduction, IRA contributions to charities, and transit benefit parity.
Small business tax extenders made permanent. These include a new $500,000 limit on expensing of business equipment, 15 year depreciation life for restaurants and leasehold improvements, fairness for Subchapter-S corporations, and a 100 percent capital gains exclusion for small business start-ups.
Permanent Research and Experimentation credit. The oldest and most politically charged extender is for research and experimentation expenses. This is made permanent, along with an exception for active financing of overseas lending. These two extenders, along with a look-through provision for controlled foreign corporations (extended five years) alone drove most of the politics of extenders. The extenders package of the future will be handled in a far more serene manner.
Reining in the IRS. This extenders package provides a number of restrictions on IRS abuse. The most notable is a prohibition on any IRS attempt to impose gift tax on contributions to 501(c)(4) non-profits like Americans for Tax Reform.
There's also a streamlined process for startup non-profits to get tax status quickly. This is important for conservatives in light of the Lois Lerner affair.
Helping prevent identity theft on tax returns. The bill provides a number of process changes that should help prevent a repeat of the 2015 tax season, when a record number of taxpayers found that fraudulent returns had already been filed on their behalf by identity thieves.
It also beefs up anti-fraud provisions related to refundable tax credits, even as the bill makes those refundable tax credits permanent.
Expansion of tax free savings. The bill expands 529 college savings plans to permit money to be used to buy computers and similar equipment, while making 529s easier to manage. It also expands ABLE accounts, which are 529s for persons with disabilities.
Finally, the bill permits rollovers into SIMPLE IRA plans often operated by small businesses.
Delay of Obamacare tax hikes. The bill delays by two years the Cadillac plan excise tax and the industry tax on health insurance. It also suspends for two years the medical device tax.
It's important to note that delay of the Cadillac plan tax was a major priority of organized labor. In two years, they will again have to be cooperative on taxpayer priorities if they want another delay.
The bill, however, does contain two problematic provisions:
Bonus depreciation draw down. 50 percent bonus depreciation becomes 30 percent bonus depreciation over the next five years. Under this provision, businesses can expense (as opposed to slowly deduct, or "depreciate") some of their business investment costs, with the rest being subject to the usual depreciation rules.
This bill extends the 50 percent level in 2015, 2016, and 2017. In 2018, it drops to 40 percent. In 2019, it drops to 30 percent. After that, bonus depreciation is scheduled to expire.
ATR has called bonus depreciation the "crown jewel" of the extenders package because it gets us very close to ideal tax policy on business investments, namely immediate and full expensing. Back sliding here is the opposite of tax reform.
Wind PTC not killed, but phased out. The worst tax policy in the extenders package is the Wind Production Tax Credit, or Wind PTC. Instead of being allowed to expire in 2015, it is extended for several more years.
These two provisions--the phasedown of bonus depreciation and the new lease on life for Wind PTC--give ATR a great deal of pause in evaluating a bill we are supportive of overall.
Fact Checking Tammy Baldwin on Carried Interest Tax Hikes
Earlier this week, Senator Tammy Baldwin (D-Wis.) went on Morning Joe to shill for a capital gains tax hike on a type of partnership capital gain known as a "carried interest."
There's even an explainer video below put out by the Center for Freedom and Prosperity and featuring ATR's own Miriam Roff as narrator.
No matter what you think about the issue, we should all be able to agree to get the facts right. Unfortunately, Baldwin and her uncritical hosts got many wrong:
Carried interest is not a "loophole." This is the term used over and over again by Baldwin and others who want to raise the capital gains tax. All we're talking about is the capital gain earned inside of an investment partnership. The capital gain is, like any other partnership income, divvied up by the partners according to the partnership agreement. The part of the capital gain allocated to the managing partner is his share of the profit. This is called a "carried interest." Of course it's taxed at the capital gains rate--it's a capital gain, after all.
Republican presidential candidates. There's a graphic they put up in which virtually every GOP presidential candidate is said to support "closing the carried interest loophole."
Only one major candidate--Jeb Bush--has called for a tax rate increase on all carried interest capital gains, from 23.8 percent today to 28 percent under his plan.
Donald Trump has called for a limited tax increase on this type of income, but only for short-term, speculative hedge funds. He has carved out investment partnerships that buy businesses and real estate for long term investment, the actual target of Baldwin and others. Even then, the rate hike is minimal, from 23.8 to 25 percent.
That's it. No other candidate has called for a higher tax rate. Many have explicitly ruled it out:
There is no indication that Dr. Ben Carson would support an increase in taxation on carried interest.
Senator Ted Cruz's recently released tax plan taxes carried interest as capital gains income. As recently as July 16th of this year, Senator Cruz voted AGAINST amendment S.A. 2177, which called for an increase on the carried interest tax treatment to offset spending for a new federal program. Host Joe Scarborough repeated the incorrect statement that Cruz supports a higher capital gains tax on anyone.
Governor Bobby Jindal would tax all capital gains as ordinary income – at a lower rate - under a three-tier tax rate plan. It's deceptive to say he's for a higher tax rate on carried interest capital gains, because he's for a lower one.
A tax hike consensus that doesn't exist. Baldwin referenced a "fundamental agreement" in the Senate to raise the capital gains tax on partnership capital gains.
Maybe in the Democrat cloakroom.
On July 16th, the Senate actually voted on this idea. Every single Republican voted against it.
Fun with fake numbers. Baldwin uses a completely made up score, repeated in a Morning Joe graphic, to claim that raising the capital gains tax rate on partnership capital gains will raise scads of tax revenue.
She says that "nearly $457 billion" will be raised by this tax hike. In fact, that's the sum total of ALL the tax increases in President Obama's budget. Oops.
In fact, that same budget indicates that this devastating tax increase would raise a little more than $2 billion per year in additional tax revenue--adding a rounding error to a total tax revenue take of well over $3 trillion. That's enough to pay for about 6 hours a year of government.
Hedge funds managers don't pay the capital gains tax today. Under our tax system, there's only a lower rate on capital gains if the underlying asset sold was owned for one year or more. If you buy and sell assets in less than a year, you pay ordinary income tax.
Baldwin says that hedge fund managers--who fit that latter description to a tee as their business is all about short-term speculation--benefit from the capital gains rate on carried interest. They do not, since they tend to buy and sell assets held for less than one year.
Private equity and real estate investment partnerships, by contrast, buy and hold assets for the long run. When they sell these assets, they are taxed as long-term capital gains, because that's exactly what they are.
ATR Supports H.R. 3762, the "Restoring Americans' Healthcare Freedom Reconciliation Act of 2015"
This week, the U.S. House of Representatives will consider H.R. 3762, the “Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015.” This bill would gut the major provisions of Obamacare and essentially make it unworkable. It’s a bill that conservative House Members should support. H.R. 3762 is a net spending cut, a net tax cut, and would reduce the national debt.
What the bill is not. H.R. 3762 is not a full repeal of Obamacare. The House already voted on a full repeal of Obamacare back on February 3rd. It’s been languishing ever since. The House has voted to repeal Obamacare in full several times, and no doubt will do so again.
H.R. 3762 is a reconciliation bill. This type of bill is possible because the House and Senate passed a budget resolution earlier this year. The budget resolution allows for a reconciliation bill to proceed under two basic special rules: first, a reconciliation bill only needs 51 votes to pass the Senate–no 60 vote filibuster to worry about. Second, a reconciliation bill can only deal with budgetary matters.
Much of Obamacare is not fiscal in nature–it’s regulatory. Under the consensus expert opinion here, that means only the tax and spending provisions of Obamacare are on the table.
What does the bill repeal? H.R. 3762 repeals most of the heart of Obamacare. The individual and employer mandates and their attendant tax penalties are gone. The medical device tax is repealed. The “Cadillac plan” excise tax is prevented from coming into effect (more on that later).
On the spending side, H.R. 3762 repeals some unaccountable Obamacare slush funds, shutters IPAB (the Medicare rationing board that Sarah Palin called a “death panel”), and ends Obamacare auto-enrollment. Importantly, it also defunds Planned Parenthood for the fiscal year.
At a markup for the bill, liberal Congressmen went apoplectic at the effect H.R. 3762 would have on Obamacare. Top House Ways and Means Democrat Sandy Levin (D-Mich.) said that the bill ”effectively guts [Obamacare].” Congressman John Lewis (D-Ga.) said, “this bill really is pulling the legs from under [Obamacare]. It is a deliberate, systematic attempt, not just to repeal, but to destroy [Obamacare].”
What the Senate will bear. There are several fiscal provisions of Obamacare not repealed by H.R. 3762.
The first is that only a few of the twenty new or higher taxes in Obamacare are struck down. The reasoning here is that to include these tax increase repeals would deepen the tax cut aspect of H.R. 3762, but would swing the bill’s score toward a deficit increase instead of a deficit decrease. That matters for Senate viability of the bill. Without getting 51 votes in the Senate, this bill is meaningless. The whole point is to send the bill to the president’s desk so he can own these provisions all over again by vetoing their repeal. The most painful tax hike repeals were chosen especially for this reason.
The second major fiscal omission in H.R. 3762 concerns coverage provisions. It does not repeal the Medicaid expansion under Obamacare, nor does it repeal the refundable tax credit regime for the purchase of private sector Obamacare exchange plans. Again, it’s what the Senate can bear. To repeal these provisions without a replacement mechanism would mean essentially kicking 20 million people off their current health insurance. Doing that would create enough pressure on the Senate that odds of getting to 51 votes would be endangered, to say the least.
Don’t get BTU’d, or Capandtaxed. Some would argue that this is too hesitant, and that these coverage provisions should be repealed. There’s the good news. When the Senate receives H.R. 3762, senators will have a chance to offer up or down floor amendments. There is little doubt that a senator or senators will offer an amendment to include repeal of the Medicaid expansion and/or the exchange tax credits. If this attracts majority support in the Senate, all the better. The more of Obamacare that can be repealed and gotten through the Senate the merrier.
But there’s no reason for the House to include politically difficult provisions only to see them stripped by the Senate later on in the process. That’s happened twice in the past two decades, and House Members have paid a price for it each time.
Back in 1993, the House included an energy tax on all sources of energy as measured by British Thermal Units, or BTU. This was stripped out in the Senate, and it absolutely killed energy state Democrats in 1994. The same thing happened in 2009 when Nancy Pelosi forced her caucus to vote on “cap and trade” energy regulations and taxes, only to see it die in the Senate.
Let the Senate show they can handle it first.
Keeping promises. When the Republicans took the Senate in the 2014 elections, there was a lot of talk about moving bills from Capitol Hill to the President’s desk to force showdowns with the White House. That hasn’t happened, largely because Senator Harry Reid (D-Nev.) has bottled up the Senate in 60 vote purgatory.
The one area he cannot do that is on a privileged budget reconciliation bill like H.R. 3762. For the first time, the President will have to put his money where his mouth is on the individual mandate, the employer mandate, Planned Parenthood, the Medicare rationing panel, the medical device tax, and the Cadillac plan tax. That’s huge, as Donald Trump might say.
But we can’t send him all of Obamacare to veto. Because Reid will filibuster, we need the reconciliation bill’s procedure, with all its advantages and disadvantages. Reconciliation is for fiscal items only, and it can only be a permanent change if it doesn’t increase the deficit. We also can only send Obama those parts of Obamacare which can garner 51 votes to repeal.
Why Cadillac plan tax repeal? Some have objected to the inclusion of the Cadillac plan excise tax repeal in H.R. 3762. The reasons vary. Some like the idea of a backdoor cap on employer provided health insurance’s tax benefit, even if it’s not what they might have themselves designed. Others wonder why we’re giving away a provision whose chief opponents are Big Labor.
The answer to the first objection is that conservatives are for repealing Obamacare. That means all of it, including the Cadillac plan tax. Certainly most replace plans have alternative ways to cap the employer exclusion, but that doesn’t stop us from repealing this one.
The second objection gets to the heart of the matter–we’re forcing the president to veto Cadillac plan excise tax repeal, a top lobbying target of his biggest allies in organized labor. This is what smart majorities do–drive wedges into the heart of the other team’s coalition.
The bottom line. H.R. 3762 is a net tax cut. It is a net spending cut. It is a net cut in the deficit and debt. It repeals the most essential parts of Obamacare. It cannot be filibustered by Harry Reid. It causes heartburn in the other team. And it will force President Obama to double down on the most unpopular parts of his healthcare law. It’s a bill House conservatives can and should enthusiastically support.
ATR Analysis of John Kasich Tax Plan
Governor John Kasich today released his presidential campaign tax plan. Below is ATR's analysis.
For families. The current seven bracket system is replaced by a three bracket system and a top rate of 28 percent (the same top rate after President Reagan's 1986 Tax Reform Act). Tax deductions for charitable contributions and mortgage interest would be retained at current levels. The earned income tax credit is increased by 10 percent.
Capital gains and dividends rate cut . The capital gains and dividends tax is reduced from 23.8 percent today to 15 percent.
Death tax repealed. The 40 percent death tax is repealed entirely.
Business tax rates lowered. For corporations, the tax rate on profits is cut from 35 to 25 percent. For partnerships, S-corporations, sole proprietorships, and LLCs, the tax rate is cut from 39.6 percent to 28 percent. To make up for the slightly higher rate on flow-through firms, the research and development tax credit is doubled for smaller companies.
Full expensing. All business investments in plant and equipment will be deducted in full in the year of purchase. This will replace a long, multi-year deduction process in place today called "depreciation." No longer will the tax code say that a pencil can be deducted in one year, but a computer will take five years.
Territoriality. The U.S. is one of the only countries in the developed world which seeks to tax income earned in the United States as well as income earned overseas by U.S. companies. The Kasich plan transitions our "worldwide" tax system to the more typical and common sense "territorial" plan. Only income earned in the United States will be taxed by the United States.
In order to finance this transition, overseas deferred earnings will face a one time tax at a low rate.
ATR Analysis of Rick Santorum Tax Plan
Rick Santorum released his presidential campaign tax reform plan this week. Key highlights include:
Top tax rate of 20 percent on all personal and business income. All sources of income: wages, interest, dividends, capital gains, business income, rent, etc. would face the same tax rate of 20 percent.
Wages would also face the Social Security and Medicare payroll tax unchanged from today.
All corporate profits would also face a 20 percent tax rate.
For businesses, that means that corporate and non-corporate businesses would be taxed at the same low rate. This rate, when combined with state business taxes, would move the U.S. to the developed nation average tax rate on companies. We'd have a lower business tax rate than principal trade competitors Japan, Mexico, Germany, and France. We'd be competitive with Canada, the United Kingdom, and China. No longer would our tax rate disadvantage us around the world.
No marriage penalty. Because there is only one tax rate, the marriage penalty is a thing of the past. It won't matter whether both spouses work, or if one stays home with the kids. The tax code will no longer subsidize cohabitation and punish marriage.
No death tax. The 40 percent death tax is fully repealed. This second layer of tax on savings is removed from the code.
No alternative minimum tax (AMT). This parallel bizarro-world tax system is repealed.
Full repeal of all Obamacare taxes. The 20 new or higher taxes in Obamacare are repealed. Notably, this includes the individual and employer mandate surtaxes, the 3.8 percentage point surtax on savings, the higher Medicare payroll tax rate, the Cadillac Plan tax, the medical device tax, and higher taxes on health savings accounts.
Full business expensing. All business investments in plant and equipment, as well as inventory, will be deducted in full in the year of purchase. This will replace a long, multi-year deduction process in place today called "depreciation." No longer will the tax code say that a pencil can be deducted in one year, but a computer will take five years.
Equal treatment of debt and equity. All debt and equity will be taxed at the same rate. Dividends and interest will not be deductible to companies. All dividends, interest, and capital gains will be taxed at the same 20 percent rate to bond and stock holders. Effectively, this creates an integrated 36 percent flat tax on portfolio income, much lower than today.
Progressivity retained. In order to preserve progressivity in a flat tax code, the plan creates a personal credit of $2750 and retains the $1000 child tax credit. It appears that a family of four with two children would face no income taxation on their first $65,000 of income after applying these credits. Larger families would see even bigger savings.
In addition, all charitable contributions would be fully deductible, and mortgage interest is deductible up to $25,000 per year.
Open Letter to Congress on Bonus Depreciation
Congress now has just over 60 days until end of the year adjournment.There is a lot left to accomplish.
Of key interest to taxpayers is the "tax extenders" package, several dozen tax relief provisions which expired in 2014 and need to be continued before the end of the year.
The extenders package is a mixture of good and bad tax policy provisions. By far, the most important tax extender is the so-called "50 percent bonus depreciation" line item.
What is bonus depreciation? Under tax rules, many businesses cannot immediately write off the cost of business investments in the year of the expenditure. Instead, they have to slowly deduct, or "depreciate," these costs over many years established arbitrarily by Congress.
Computers take five years. Desks take seven years. Buildings take 39 years, unless people live there, in which case it takes 27.5 years.
That's insane. All business costs should be deductible the year they are incurred. That includes business investments.
The 50 percent bonus depreciation tax extender gets us more than halfway there. Under the provision, half the cost of a business investment is written off in full in year one. The remaining half is subject to normal depreciation rules.
Bonus depreciation is the right tax policy. The tax code should be consistent and clear, and not pick winners and losers. It makes no sense for the tax code to say that a wage payment, or a rent payment, or a box of pencils should be deductible on the one hand, and that a computer or desk is not. That's arbitrary and distortive. Most tax experts now believe that a business cash flow system is the right starting point for a better tax base.
Bonus depreciation is good for the economy. The capital stock of the economy grows when businesses and households deploy scarce resources toward investments. When a farmer buys a tractor, or an architecture firm buys a computer, they are investing in their own productivity: the farmer can grow more crops; the architecture company can design better blueprints. This increased productivity results in more company profits, higher wages, new jobs, and an increased return to shareholders in their 401(k)s and IRAs. Capital investment is the mother’s milk of wealth creation.
Bonus depreciation should not only be extended--it should be made permanent. Making bonus deprecation permanent will produce immediate and strong economic benefits. A study released by the Tax Foundation found making bonus depreciation permanent will add $182 billion to the economy, increase federal revenue by $23 billion a year, and create 212,000 new jobs.
Congressman Pat Tiberi (R-Ohio) has introduced H.R. 2510, legislation that would make the 50 percent bonus depreciation tax extender permanent. In turn, this will encourage strong job creation and economic growth. ATR endorses this legislation and urges all members of the Congress to vote for and otherwise support this important pro-growth bill.
Bonus depreciation simply must continue under any circumstances. Under ideal tax policy, all the cost of business investment would be expensed in year one. That's a building block of every conservative tax reform plan from the Fair Tax to the flat tax to everything in between.
To lose 50 percent bonus depreciation would be a crippling loss. It represents the biggest gains the conservative movement has achieved toward a consumption tax base, the goal of all conservative tax reformers.
Bonus depreciation is the most important of all the extenders. If it cannot be made permanent, it at least must be extended.
Puerto Rico Should Adopt Enterprise Zones, Not Austerity Tax Hikes
Puerto Rico is on the verge of a debt-driven collapse in many of its basic governmental structures. This problem is made worse by the fact that Puerto Rican municipalities, unlike mainland cities and counties, have no ability to restructure using federal bankruptcy law.
But Puerto Rico's problems go even deeper. If these issues are to be avoided in the future, the island must transform from a black hole of capital to a magnet for capital.
Some think the solution lies in tax increases. That would be like giving poison to a dying man.
The best way to fix what ails San Juan is to turn the entire island of Puerto Rico into an enterprise zone.
Initially conceived by the late, great Jack Kemp, enterprise zones are pockets of pro-growth nirvana (especially on tax policy) strategically placed inside economic disaster areas.
What might some elements of a Puerto Rican enterprise zone look like?
Business tax rates. The United States has the highest business tax rates in the developed world (35 percent for corporations, and as high as 43.4 percent for unincorporated firms). There's no reason this shouldn't be 15 percent or even lower in Puerto Rico.
Personal tax rates. You can't have Puerto Rican businesses without Puerto Rican jobs. So the best workers should be attracted to the island by a low tax rate on wages (15 percent or less), a FICA tax holiday, or both.
Capital gains. We want to encourage capital into Puerto Rico, and that means investing in start up ventures and other ownership ventures. To encourage this, Puerto Rico should be a capital gains tax free zone. Even more to the point, there should be no "death tax" in Puerto Rico.
Business fixed investment. Capital investment in Puerto Rico also means buying the hard assets which become the capital stock a growing economy needs. That's why Puerto Rico ought to benefit from 100 percent full business expensing for all the computers, machinery, and buildings investors want to deploy. This would move Puerto Rico away from the slow-deduction "depreciation" regime it labors under today.
If this enterprise zone concept, or anything close to it, was put into place, Puerto Rico would become THE place to do business in America.
It may be in the Caribbean, but it would sure start to look and feel a lot like Hong Kong.
ATR Analysis of Donald Trump Tax Reform Plan
GOP Presidential candidate Donald Trump released details of his tax reform plan today. It features a system with much lower tax rates than current law, and a broadened tax base for high income earners.
“Trump’s plan is certainly consistent with the Taxpayer Protection Pledge,” said Grover Norquist, president of Americans for Tax Reform. “Trump has said he opposes net tax hikes and has made clear that the real problem is spending. This plan is a reform, not a tax hike.”
The plan is not a tax cut, but is rather intended to be revenue neutral under a dynamic score.
Basic elements of the Trump tax plan include:
Carried interest: The plan "ends the current tax treatment of carried interest for speculative partnerships that do not grow businesses or create jobs and are not risking their own capital." Partnerships that do not speculate but rather buy hard assets for the long run will not face a tax increase – for example, private equity firms.
Private equity firms do not speculate, but rather grow businesses and create jobs. Most importantly, private equity partnerships risk their own capital, namely the capital provided by the pension funds, colleges, and charities which invest in them for long term investment returns. These types of investments are vital for workers with traditional pensions, for the colleges Americans send their children to, and for the charities they support.
The carried interest tax hike in the Trump plan is intended to only apply to the type of funds Trump has always said they would apply to: "hedge fund guys." Americans for Tax Reform opposes any change to the tax treatment of carried interest -- including those on hedge fund guys -- but is pleased that the usual target of this left wing ivory tower tax hike proposal--private equity partnerships -- is held harmless in the Trump plan. This is not the case, for example, in Governor Jeb Bush's plan.
As the rest of the GOP field prepares to release their tax plans, they should keep in mind the Left's long term goal to tax ALL capital gains as ordinary income. That's why this carried interest tax hike idea originated in the bowels of leftist academia, and is nearly universally supported by the progressive Left -- it's the camel's nose under the tent toward taxing all capital gains at ordinary rates. Republicans and conservatives should not give aid and comfort to this long term strategy.
Tax rates: Individual tax brackets of 0, 10, 20, and 25 percent (the top rate today is 39.6 percent). The "zero bracket" would apply to married couples' first $50,000 of income (half that for singles).
Capital gains and dividends: By repealing Obamacare's savings surtax, the capital gains and dividends rate is reduced from 23.8 percent today to 20 percent under the Trump plan.
It's also important to note that with a top ordinary income tax rate of 25 percent, the carried interest tax rate hike on "hedge fund guys" is fairly modest, rising from 23.8 percent today to 25 percent under the Trump plan. ATR opposes this tax increase.
Business tax rate: The tax rate on corporate and non-corporate businesses is 15 percent, down from 35 percent today for corporations and 39.6 percent for pass-through firms.
Death Tax: Repealed.
Alternative Minimum Tax (AMT): Repealed.
Marriage Penalty: Repealed.
The plan is intended to be revenue-neutral under a dynamic analysis. In order to make up the remaining lost revenue, the plan features the following major base broadeners:
Deduction phase out: All itemized deductions except for charitable contributions and mortgage interest will be subject to a steeper means-test phaseout than they face under current law.
Deemed repatriation and an end to deferral: An immediate "deemed repatriation" tax of 10 percent is assessed on the $2.5 trillion of U.S. company profits sitting overseas. Going forward, companies would no longer be able to defer U.S. double tax on profits earned overseas.
According to the OECD, the U.S. business tax rate would fall from highest in the developed world to one of the lowest. When state rates are factored in, the U.S. would face the same tax rate as the United Kingdom, and lower tax rates than trading competitors China, Japan, Canada, Mexico, Germany, and France. We would be far below the developed nation average business marginal tax rate of 25 percent.
The loss of deferral is troubling, but two elements should be kept in mind. First, the new 15 percent tax rate is far lower than the double tax companies face today. Second, businesses will be able to credit against this 15 percent U.S. tax any foreign income tax they have already paid overseas. With one of the lowest tax rates in the developed world, it's very unlikely much if any double taxation will, in fact, occur.
Life insurance tax shelter repealed: Life insurance will no longer be tax-advantaged for high-income taxpayers
Business interest: This deduction will face a phased in cap.
Other deductions and credits: Tax breaks for high-income taxpayers and large firms will also be eliminated, but these are not specified.
No movement to full business expensing: The most disappointing part of the Trump plan is that the tax system would move no closer to full expensing of business fixed investment. Businesses would still be saddled with the complex, distorting, and growth-inhibiting "depreciation" regime where an asset is deducted over several or even many years. Far better would be to move to a full-expensing business cash flow model, where all business inputs including investments are deducted in the year spent. While this is somewhat ameliorated by the far lower tax rates, a lack of progress here is the plan's biggest drawback.
To hear more analysis of Donald Trump's tax plan, listen to the latest podcast of The Grover Norquist Show here.
More from Americans for Tax Reform
BEPS Is a French Acronym for "Tax Hikes"
What is BEPS? BEPS stands for the "Base Erosion and Profit Shifting" project. It is scheduled to be completed in December 2015. It is an information sharing regime among participating European tax authorities.
Why is this a threat to U.S. taxpayers? The information being shared is, by and large, targeted at U.S. companies doing business in Europe. Several changes to the rules governing where and how business income is to be taxed are expected to lead other taxing authorities to claim a right to tax a larger slice of U.S. business income earned overseas.
What does this mean for U.S. tax reform? If the Europeans, through their pernicious BEPS regime, tax away a large chunk of overseas profits of U.S. companies, that's money that can't be brought back to the United States to invest in America. In 2005, a voluntary repatriation tax holiday resulted in $320 billion being returned to this country. By definition, money taxed away by the Europeans is money not available for U.S. tax reform.
What can the United States do? Americans have every reason to expect the U.S. Treasury Department, and other arms of the executive branch, to rigorously defend our companies against vulturine activities by European tax authorities. It's Congress' responsibility to hold the executive branch's feet to the fire. That means robust oversight, hard questions, and preconditions on agency funding.
Obama's Secret Plan to Steal Your IRA
It should come as no surprise that President Obama is no fan of tax-neutral, defined contribution savings plans.
After all, this is the same president who secretly tried to destroy the 529 college savings plan for the middle class back in January 2015. His budget routinely calls for a lifetime accumulation cap on 401(k) plans.
Now Obama's own Department of Labor is pushing a series of new regulations that will have the effect of shutting out newer investors and younger investors from the world of IRAs.
Among other huge problems, this "fiduciary rule" will result in the following:
IRA companies won't be able to even talk to potential investors. Under the rule, if a brokerage company wanted to pitch a Traditional IRA or a Roth IRA to a new investor, they first have to get the prospective investor to sign a bunch of cumbersome paperwork and waivers. No one is going to want to do that, and investors will simply not take the time and effort.
IRA companies won't be able to recommend specific investments for your IRA. Even if you're already a customer at a brokerage firm, the company won't be able to make specific investment recommendations within your IRA. Suppose you don't know which mutual fund to buy from the thousands out there? You're out of luck and you're on your own. After all, robots and search engines are always an option.
You can't get advice on rolling over your 401(k) to an IRA. One of the most intimidating things people do--for fear of screwing it up and wrecking years of retirement and tax planning--is rolling their old 401(k) into an IRA. Thankfully, the IRA companies have experts who can help guide you through the process without a hitch. Until now. These regulations prevent any advice related to IRA rollover. Again, you're on your own.
Small business employees and companies can't get any expert advice on investing. IRA companies also often help smaller firms (fewer than 100 employees) set up 401(k)s, SIMPLEs, and other workplace defined contribution retirement plans. Under the regulation, neither the employer nor the employees could get advice on how to invest in these plans. Again, you're sensing a theme here--you're on your own.
As a result of these regulations, several bad outcomes will occur for taxpayers:
The number of people wanting to bother with IRAs will go down. We've seen this before. After the Tax Reform Act of 1986, IRAs were curtailed. IRA contributions and participation plummeted. If you take away help from people in managing their IRAs, they will either not save at all, or will save in taxable brokerage accounts where they face capital gains and dividends taxes.
Capital gain and dividend taxes today run as high as 23.8 percent on the federal side alone. Compare that, say to a Roth IRA which never faces any tax on earnings if used for retirement. The resulting tax hit will result in high effective tax rates on the savings, and several years of delayed retirement, all else being equal.
Smaller and younger investors will be shut out. These regulations seem targeted at the younger and smaller end of the IRA investment world. That's because the regulations essentially force brokerages to migrate IRA products to a percentage-of-assets payment system, as opposed to a system of per-trade commissions. Most financial advisors, however, have a minimum amount of assets (usually at least $50,000 or $100,000) before they will be compensated this way--there's just not the economy of scale.
Smaller investors will face a horrible choice--pay higher fees in order to keep essential financial advice, or be shut out and on their own.
With 58 percent of small investors seeking financial advice today, there are millions who stand to lose a key source of expertise. Up to 7 million IRAs would not qualify for investment advice under these regulations.
As a result, recent college graduates and workers on the lower end of the earnings spectrum will find themselves shut out from investment advice. These are precisely the people who need it the most.
All of us will pay more. The IRA industry estimates that these regulations will cost $5 billion to implement, and $1 billion annually to maintain.
Companies don't pay taxes--people do. In this case, these deadweight regulatory costs of government will inevitably trickle down to higher investment fees for all of us.
Small businesses won't open retirement plans and employees won't invest with any confidence. Small businesses have a lot to worry about. For many, setting up a retirement plan is a luxury when they are trying to meet payroll month to month.
If they cannot get expert advice on these plans, small firms simply won't make them available. Even if they are set up, employees usually have no idea how to invest. Without expert advice, they are likely to either not participate or have their money sitting as cash.
Massive leakage from workplace retirement plans. Because people will no longer be able to get advice from IRA companies about how to do rollovers, the logical response will either be to keep 401(k) assets at their old employers (which can result in losing track of them), or more likely a cash-out. The latter results in taxes plus a ten percentage point penalty. More importantly, it can short-circuit a lifetime of retirement savings.
According to one study, between 300,000 and 400,000 fewer IRAs will be opened every year as a result of this regulation.
Why is President Obama and his Department of Labor doing this? Quite simply, they don't trust people to manage their own retirement savings. They would rather have most Americans rely on a combination of Social Security and union-dominated traditional pension plans. Not coincidentally, the latter group (unions) happens to be the biggest supporter of President Obama and his allies.
Just like the American people had to rise up in defense of their 529 college savings accounts, now is the time for them to rise up in defense of their IRAs, be they rollover IRAs, Traditional IRAs, spousal IRAs, or Roth IRAs. They need to rise up in defense of their workplace 401(k)s, SIMPLEs, and SEPs.
Building a nest egg for financial independence in retirement is a key cornerstone of the middle class American dream. President Obama's "fiduciary rule" aims to take it away. Don't let him.