GOP's Cheez Doodle tax reform: all puff, color and air

GOP's Cheez Doodle tax reform: all puff, color and air
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We’re really making progress; or at least that’s the impression White House officials would like you to think with the release of their tax reform framework.

We’re going to have a 35-percent top individual rate ... but it might be higher.

We’re going to have 12-, 25-, and 35-percent brackets ... but we don’t know where the breakpoints will be.

We’re going to increase the $1,000 child credit ... but we don’t know by how much.

We’re going to let multinationals bring $3 trillion of foreign earnings back home ... but we don’t know what tax rate we will charge them for the privilege.

We’re going to have expensing ... but we not sure for how long or what investment qualifies.

Lastly, there is going to be a lot of economic growth that will help pay for the plan ... but we don’t know by how much because we don’t yet have a specified tax plan, and we don’t even know which economic model to use.

The White House envisions detail will be supplied by the tax-writing committees.

This will be done through regular order:

  • the chairs will present a mark in each committee;
  • amendments will be made in each committee;
  • floor votes will be taken on each committee’s bill (only 51 Senate votes needed because it will be a reconciliation bill);
  • amendments, as long as they don’t violate the Byrd Rule, will be allowed in the Senate;
  • a House-Senate conference committee will resolve the difference between two chambers; and
  • final approval of conference agreement must be obtained in another floor vote in both the House and Senate.

This will put a bill on the president’s desk that everyone knows he will sign no matter what is in it.

The storyline being sold is that negotiators are respectfully giving the committees leeway to make decisions. The truth is the “Big Six” negotiators have no idea how to craft all of this into a coherent whole. Tax reform, people say, is about making tough decisions. So far, our big-talk leaders have made strikingly few.

There are some “hard” provisions that we are supposed to believe are agreed upon. There is the near doubling of the standard deduction to $12,000 for individuals and $24,000 for married couples. But much of the benefit of this is offset by repeal of personal exemptions.

There is a nonrefundable $500 credit for care of elderly and disabled dependents. The individual minimum tax is eliminated. “Most” itemized deductions and “many” credit and exemptions will be eliminated, except those for charitable contributions, mortgage interest, retirement savings, work incentives and education incentives.

As a practical matter, this leaves little more than repeal of the deduction for state and local taxes. The estate tax and the generation-skipping tax will be repealed, but not the gift tax. The gift tax is retained to prevent widespread avoidance of the income tax.

There is a new corporate rate of 20 percent. The corporate minimum tax is repealed, and there will be a new passthrough rate of 25 percent. The document says this is for small business, but there are many large pass-through businesses.

Though undisclosed business tax breaks are expected to be repealed, the research credit and the low-income housing tax credit will not be among them. On the international side, there will be a move to a territorial system. But there will be a minimum tax (rate unspecified, presumably far enough below 20 percent to make all the complexity worthwhile).

We do not know effective dates of the rate cuts or other provisions: January 2017 or January 2018 are the leading candidates. We do not know if rates will be phased-in.The only effective date mentioned is that 100-percent expensing will be available after Wednesday.

There will be some sort of limit on deducting interest — a radical idea in the tax world. But how will it be limited? Give businesses a choice between interest deductibility and expensing? Limit deductions for interest that exceeds a portion of cash flow? Limit interest deductions by a flat percentage? How large will the carve outs be for small businesses and farmers?

Importantly, we do not know any specific rules on the near-impossible-to-solve practical problem of distinguishing profits (taxed at 25 percent) from wages (taxed at a top rate of 35 percent or more) for the 25 million passthrough businesses in this country. This will hardly be simplification for small business.

We do not know which “loopholes” will be closed. One exception that comes as no surprise is the repeal of the deduction for domestic manufacturing. But what about last-in, first-out accounting? Like-kind exchanges? Will derivatives owners be required to mark-to-market?

Will the vast array of energy breaks (both low- and high-carbon versions) be chopped? Do the framers really envision ending the tax exemption for credit unions and eliminating the new markets tax credit?

The enormous tax exclusion for employer-provided health insurance presumably won’t be touched. But would Congress really eliminate the deduction for medical expenses? Does the framework really contemplate repealing tax benefits for adoption, for casualty losses, for the blind and for veterans? Even the hard numbers included in the framework are likely to change.

Will tax writers just admit they are cutting taxes? Or will they try to claim it is deficit-neutral because of dynamic scoring? Who will estimate the dynamic effects? The Joint Committee on Taxation (as is customary)? The chairs of the budget committee (as allowed by law, but never done before with major legislation)? The Treasury (as allowed by law if the budget chairs agree)? Will models be used at all, or will the chairs just pick a number out of the sky?

The reality is the Big Six have produced a framework with small results. It’s a Cheez Doodle tax reform: a lot of puff and color but mostly air.

Martin A. Sullivan is the chief economist for Tax Analysts and contributing editor for Tax Analysts’ daily and weekly publications and blog.