The Tax Act's Marketer in Chief

President Trump advised Congressional Republicans to make their tax legislation palatable by communicating simply, the Washington Post reports. Talk tax cut, not tax reform. A big, beautiful tax cut. Biggest ever (well, not quite, but still pretty big).

To his great credit, the President questioned the Walmart-pricing approach to setting tax rates. What's with this 39.6%, 38.5% nonsense?

Reportedly, the President feels the most marketable tax rates are multiples of five. Congressional Republicans didn't achieve that simplicity, but at least the new rates are free of percentage points.

HNWIs Will Have Seven Years to Die Prudently

The rush to pass the tax bill sows confusion. David Leonhardt in the NY Times, for instance, assumes the doubling of the federal estate tax exemption, like the lowered income tax rate for corporations, is intended to be permanent.

Not so, according to this Times report and other sources. Along with the personal income tax changes, the higher estate exemption will expire after 2025.

Grey-haired High Net Worth Individuals may wish to plan their demise accordingly.

Tax Plans Stranger Than Fiction

 Generally, well-compensated employees should pay income tax at higher rates than business owners and investors. 

However, certain high-income business owners should pay tax at a marginal rate of 85.2%.

Haste and input from billionaires have produced weird taxation possibilities.

Fun and Taxes

The tax legislation being hurried through Congress is serious business. Still, haste sometimes makes humor.

Reinventing the bubble that killed the 1986 tax reform
Back in '86, last-minute tinkering increased the nominal top income-tax rate from 28% to 33%. But it was just a "bubble" – for the highest incomes, the rate dropped back to 28%. Without this silliness, the '86 reforms might have survived longer.

So what did House Republicans just come up with? A new bubble that would raise the current top tax rate of 39.6% to 45% before dropping back to 39.6%. (Members of Congress will do anything for a laugh.)

Before-tax loss, after-tax gain
Senate Republicans propose delaying the 20% corporate tax rate for a year while allowing immediate deductions of some business expense from income taxable at 35%. Professor Dan Shaviro of New York University Law School gave the NY Times an example of the fun possibilities:

Normally no one would invest $100 to earn only $90 back. But under the Senate plan, where some business expenses could be immediately deducted at a 35 percent rate, you would get $35 back in 2018. So your actual cost is $65. By the time your $90 earnings are paid in 2019, though, the tax rate would be 20 percent. That would cost you $18 in taxes, and leave $72 in your wallet. So even though your investment lost $10, you are still coming out ahead: with $72 on a net investment of $65.)

Best new tax acronym

"To reduce their home tax bill, " the Times reports, "companies like Google and Pfizer, for instance, often relocate patents and copyrights in tax havens and then sell use of that intellectual property back to their American subsidiaries at eye-popping prices." This Global Intangible Low-Tax Income is known as GILTI.

The tax bill will seek to cut off GILTI, but the restrictions could prompt companies to move more research and manufacturing off shore.

This Year 50 to 80 Family Farms or Businesses Face Estate Tax

Most owners of family farms or businesses needn't worry about federal estate tax. Most, but not all.

The Center on Budget and Policy Priorities estimates that 50 estates consisting mostly of a farm or business will pay the death tax this year. Data from the Tax Policy Center suggest the number is 80.

Repeal of the estate tax would make life easier for those 50 to 80 families. But repeal would also allow more than 5,000 other wealthy families to retain their diversified wealth tax free.

At the moment, chances of repeal have dimmed. The House version of the tax bill leaves the federal estate tax in place for seven years, albeit with a doubled exemption. The Senate version deletes the delayed repeal.

Tax Reform‘s Fierce Foe

Alarmed by talk of lost deductions for mortgage interest and state and local taxes in the Republican tax bill, the National Association of Home Builders flexed its lobbying muscle to promote a homeownership tax credit. No luck, apparently, but give the builders full credit for chutzpah.

Homebuilders don't like the current effort at tax reform any better than they liked the 1986 version. They blame the '86 act, explains Damian Paletta, for discouraging real estate investment and thus triggering the savings and loan crisis.

There were numerous causes of the savings and loan crisis, but the home builders aren’t the only ones that think the 1986 tax law is a precipitating factor. During congressional testimony in 1991, then-real estate developer Donald Trump made the same argument. He called the 1986 tax law an “absolute catastrophe.” 

"It has taken all the incentive away from investing in real estate," Trump complained. Nevertheless, he soldiered on for another twelve years before launching his career on reality TV.

The Sound of Trial Balloons Popping

Every Congress has to learn the lesson: Cutting income tax rates is easy; expanding the tax base is difficult. Every tax break has beneficiaries who claim they can't live without it.

Legislators seeking ways to limit the cost of President Trump's tax plan  realize that citizens regard deductions for mortgage interest and charitable gifts as inalienable rights.

Could SALT, the deduction for state and local taxes, be a candidate for elimination? Nope. Republicans from high-tax states wouldn't hear of it.

Next trial balloon: a suggestion that the annual limit for contributions to 401(k) plans be cut from $18,000 to $2,400. Pop! After widespread criticism, that idea has suffered death by tweet.

Back in the Reagan years, cutting tax rates was relatively quick and easy.  Cutting rates and broadening the tax base in the 1986 tax reform act was not.

We hate taxes. The Internal Revenue Code is our punishment

Every four years. it seems, a fringe presidential candidate jumps on the same populist platform: “Abolish the IRS!”

We Americans hate and despise taxes. Yet we know we can’t get rid of them. So we dream of doing away with the tax collector.

The punishment for our tax hatred? An incredibly convoluted Internal Revenue Code. Thousands and thousands of rules and sub-rules and exceptions and exceptions to the exceptions. Our federal income tax is infinitely more complicated than it ought to be.

Instead of a rational system, we have a tax code made monstrous by Congress. Yet every time Congress adds another complication it is merely doing our bidding, as summed up by Russell Long: ‘Don’t tax you, don’t tax me. Tax that other fellow behind the tree.”

Could we have a less hateful tax code? Yes. In A Fine Mess T. R. Reid points out that fiscal engineers around the world have determined the most tolerable tax system: BBLR. Broad base, low rate. Some describe the ideal as a modest tax on income, broadly defined, plus a consumption tax such as a VAT.

Whoa! If you think Americans hate the income tax, try mentioning a Value Added Tax. The levy offers no escape. If the purchase of a Tesla is subject to a VAT, every Tesla buyer has to pay it – you, me, the fellow behind the tree, the neighborhood drug dealer, everybody!

Yet a VAT could be almost likable in terms of fairness. And a simple, broad-based income tax would make filing tax returns child’s play.

Within living memory, Congress has attempted serious tax reform only once, in 1986. Even that effort produced nothing like a truly simple BBLR system. Could our hatred of our current tax mess ever lead to full-fledged reform? Seems like an impossible dream.

As Theodore Roosevelt once observed, “Americans learn only from catastrophe and not from experience."

Tax Reform – The Impossible Dream?

To dream the impossible dream
To fight the unbeatable foe
To bear with unbearable sorrow
To run where the brave dare not go

                * * *

This is my quest, to follow that star,
No matter how hopeless, no matter how far. . . .

– Joe Darion, "The Impossible Dream (The Quest)"

Those in the know say the chances of meaningful tax reform this year are none to negative. Worst case: a tax bill that leaves the complexities and lowers the tax rate for regular income that's filtered through Limited Liability Companies and other "pass throughs." (The president is reported to have hundreds of LLC's.)

Yet the need to prune and simplify the Internal Revenue Code persists. Even if meaningful tax reform remains a dream, it's worth pursuing.

Start by joining me in reading T. R. Reid's A Fine Mess. The Washington Post reporter explores how other countries handle taxation. Sometimes they goof; more often they manage to separate taxpayers from their money in simpler, friendlier fashion than we do.

The Status of Tax Reform

Carl Hulse in The New York Times:

As Congress prepares to return from a two-week spring break on Monday, the capital is frozen in the shadow of the midterm elections, with large tasks such as revising the tax code dismissed with hardly a hearing.

How Bipartisan Tax Reform Went Bye-Bye

A year ago the near-impossible task of tax reform seemed to gain a bit of traction. Then all politics broke loose.

"The saddest part," writes Dana Milbank, "is that it probably didn’t have to be this way. There is a bipartisan appetite for something very much like what Camp proposed — coupling lower tax rates with an end to tax loopholes and giveaways to the well-connected, all without reducing the progressivity of the tax code."

Tax Reform Breakthrough?

The Democrat heading the Senate Finance Committee has announced that the Congressional Budget Office is now willing to "actually score pro-growth tax reform as generating revenue."

The Republican heading the Ways and Means Committee has introduced a tax reform plan, three years in the making, that would reduce income tax rates to just two, 10% and 25%, for almost all taxpayers. The plan aspires to revenue neutrality.

In theory, tax reform could awaken from its coma.

Recognizing that government can be a beneficiary from pro-growth tax reform makes it possible for Mr. Obama to get more revenues without Republicans having to vote for a tax hike. This is the glue that makes a bipartisan deal possible. 

In practice – well, you try to design a revenue-neutral plan that cuts income tax rates to 10% and 25%. You're eliminating the deduction for mortgage interest? Lots of luck with that!

Two Tax Breaks Too Big to Cancel

We'd all like a simpler, fairer federal income tax. We all cherish our tax breaks. Stalemate!

Guess tax reform will have to wait a while.

In the meantime, Bruce Bartlett has launched a helpful series of Economix posts, explaining how the major "tax expenditures" came to be.

Employer-provided health insurance is the most generous federal income tax break by far. Did you know the exclusion dates back to 1918? Health insurance was a rarity back then because medical expenses (no antibiotics, no artificial joints, no stenting procedures like that performed on George W. Bush) were low. Besides, few Americans needed tax breaks. In 1940 only about 3 percent of the population paid income tax.

During WWII employers started offering health insurance as a way to get around wage controls. When high tax rates persisted after the war, the popularity of the exclusion solidified.

Eliminating the tax break for health insurance, Bartlett points out, would save more than enough to pay all the interest on our National Debt.  Don't hold your breath.

Mortgage interest deduction. The deduction for interest paid on home mortgages has no redeeming virtues. Without it, say economists, the net cost of acquiring a home would remain about the same. The deduction itself is something of a fluke – the sole survivor from times gone by, when interest on all personal borrowing was deductible as the equivalent of a business expense.

One argument for preserving the deduction only for mortgage interest was that Americans weren't saving enough. By buying a home and paying off the mortgage, they would have less expense and more security in retirement. But even if the deduction mildly encourages home buyership, it surely discourages outright ownership. With the rampant use of tax-favored home-equity loans and refinancings, goodbye equity buildup! And in too many cases, goodbye retirement security.

The clean slate approach to tax reform sounds good in theory. In practice all tax expenditures can claim to "help grow the economy, make the tax code fairer, or effectively promote other important policy objectives."

Here's a better approach: Eliminate all tax breaks for some taxpayers unless it can be shown that the result is not unfair to other taxpayers.

Tax Reform? You Should Live So Long

Let's get income tax reform done in 2013, urges the Billings Gazette. This former Congressman believes tax reform can happen. Most taxpayers, not to mention most voters, probably hope he's right.

Before you get your hopes up, read Stan Collender: No Tax Reform Before The End Of This Decade. Collender is an old Washington hand and erstwhile staffer on Congressional tax committees. The last great effort at tax reform took three years to achieve, he points out. And Congress was relatively functional in those days. What's more, the 1986 Tax Reform Act had a dynamic champion in Dan Rostenkowski.

If we can update the corporate tax and classify carried interest as income by the time Obama leaves office, we should count ourselves lucky.