The Tax Reform Man Cometh, and Goeth
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Columbia Law School Scholarship Archive Faculty Scholarship Faculty Publications 2017 Heading off a Cliff? The Tax Reform Man Cometh, and Goeth Michael J. Graetz Follow this and additional works at: https://scholarship.law.columbia.edu/faculty_scholarship Part of the Law and Economics Commons, Taxation-Federal Commons, and the Tax Law Commons Recommended Citation Michael J. Graetz, Heading off a Cliff? The Tax Reform Man Cometh, and Goeth, AMERICAN INTEREST, VOL. 13, NO. 3, P. 15, 2018; YALE LAW & ECONOMICS RESEARCH PAPER NO. 585; COLUMBIA LAW & ECONOMICS WORKING PAPER (2017). Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2327 This Working Paper is brought to you for free and open access by the Faculty Publications at Scholarship Archive. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Scholarship Archive. For more information, please contact [email protected]. INSTITUTIONal healTh IN The age Of TrUmp The coming tax “reform” cannot possibly be the great and simplifying stimulus to economic growth its proponents claim. Te Tax Reform Man Cometh, and Goeth Michael J. Graetz resident Trump has recently been tak- But just a few weeks later, Trump’s tax plan ing breaks from tweeting and golfing is heading toward a precipice. Everyone knows Pto travel around the country promoting that tax reform is easier than health care re- his ideas for “tax reform.” On September 27, form: No one is going to stand up in a town for example, he traveled to Indiana to promote hall and claim that he will die if the legislation his tax plan, which he described as “historic is enacted. But that doesn’t make enacting tax tax relief for the American People.” “We are legislation easy. going to cut taxes for the middle class, make Both the White House and congressional the tax code simpler and more fair for every- Republicans are desperate for a “win”—any day Americans, and we are going to bring back win—but they don’t have a lot of votes to the jobs and wealth that have left our coun- spare. If three Republican Senators vote “no,” try,” he said. “There’s never been tax cuts like Trump’s promises of “tremendous” tax cuts what we’re talking about,” he bragged. “Our will slip away. Bob Corker, the retiring Senator explicit commitment,” he promised, is “that from Tennessee, has said that if the tax legisla- tax reform will protect low-income and mid- tion adds even one penny to the deficit, “There dle-income households, not the wealthy and is no way in hell, I’m voting for it.” Arizona’s well-connected.” John McCain, like Corker, has frequently feuded with Trump, and he says that he wants Michael J. Graetz is professor of law at Columbia to see “regular order” and some Democratic Law School and professor emeritus at Yale Law votes. That’s a long shot. And more than a few School. He served as a top tax policy official in the other Republican wild cards occupy the Sen- George H.W. Bush Administration. This article is ate: Susan Collins of Maine and Kentucky’s derived from the author’s keynote lecture to the Sec- Rand Paul are two. And on December 12, tion of Taxation and Section of Real Property and the wildest card of all, Roy Moore of Alabama Trusts and Estates of the American Bar Association may take the seat now held by Luther Strange, in Austin, Texas, on September 16, 2017. a sure “yes” vote. WINTER (JANUARY/FEBRUARY) 2018 15 Electronic copy available at: https://ssrn.com/abstract=3059945 INSTITUTIONAL HEALTH IN THE AGE OF TRUMP With only a handful of “legislative” weeks everyone knows is lower than it will actually be, remaining before year’s end, no one knows by at least 5 and maybe 10 percentage points. exactly what a new tax law might contain. In So things were going very smoothly, just like April, President Trump gave us one page of prin- the GOP effort to “repeal and replace” the Af- ciples and another half page that outlined some fordable Care Act. specific goals. Three months later, at the end Then, on September 27, the day of Trump’s of July, the so-called Big Six—Secretary of the Indiana speech, the Sixers released their “Uni- Treasury Steven Mnuchin, National Economic fied Framework for Fixing our Broken Tax Council (NEC) Director Gary Cohn, Sen- Code.” In its nine pages (about one-third of ate Majority Leader Mitch McConnell, Senate which was blank space) they set forth a list of Finance Committee Chairman Orrin Hatch, their proposed tax changes. The proposals in- Speaker of the House Paul Ryan, and Ways and clude a corporate tax rate of 20 percent and a Means Chairman Kevin Brady—who had been special 25 percent tax rate for partnerships and meeting regularly, released a statement repeating Subchapter S corporations, labeled a special tax their goals for more economic growth through rate for small businesses—even though nearly lower tax rates on businesses and individuals, a two-thirds of the net income of partnerships is reform of international tax rules, greater fairness earned by the largest 1 percent of firms with (principally through lower tax rates on families), more than $50 million in assets.2 On the in- dividual side, the Sixers’ framework was especially The tax debate is liable to be mostly vague. It an- nounced an “aim about numbers, not about the structure to reduce the and function of the tax code as it bears current seven tax brackets, which on the American political economy. range from 10 percent to 39.6 percent, to three tax brackets, and, of course, less complexity.1 Shortly thereaf- ranging from 12 to 35 percent.” But the frame- ter, 45 of the 48 Senate Democrats sent Senator work failed to say at what levels of income these McConnell a letter containing their three prin- brackets would kick in. The framework also ciples for tax reform, two of which were that it promised to double the standard deduction and neither “benefit the wealthiest individuals” nor replace personal exemptions with tax credits “increase the deficit.” McConnell rejected those for children and other dependents. The Sixers constraints in a Kentucky minute. told us that the credit for dependents other than Then, during the first week of September, children would be $500, but it left to Congress Secretary Mnuchin announced that the group the amount for child credits. One large New of six had a “detailed” tax reform plan. The York law firm aptly told its clients that the Six- next day NEC Director Cohn described it as a ers had handed us a frame without a picture. “skeleton” plan—by which he surely meant to The President and congressional leaders suggest that it needed some flesh, not that it had tell us that the forthcoming tax legislation will died and was awaiting burial. On September 15, be a once-in-a-generation event—on a scale Chairman Brady said that the tax plan—sched- equaling or surpassing the Tax Reform Act uled for release during the week of September of 1986. But it won’t. Just as the health care 25—would not say exactly what the new busi- debate hasn’t really been about care but about ness tax rate would be. Secretary Mnuchin then how to pay for health insurance, the tax debate immediately said the plan would announce the is liable to be mostly about numbers, not about tax rate. Meanwhile, Donald Trump said that the structure and function of the tax code as it the business rate would be 15 percent—which bears on the American political economy. 16 THE AMERICAN INTEREST Electronic copy available at: https://ssrn.com/abstract=3059945 THE TAX REFORM MAN COMETH, AND GOETH The 1986 Tax Reform Act spent 53 weeks and base-broadening reforms were mimicked in the Congress. Two years before, the Treasury throughout the OECD. And in the years since, had released more than 600 pages analyzing the other OECD countries have continued to lower various tax reform ideas that led to the landmark tax rates, especially corporate tax rates, while 1986 legislation, and in May 1985 President the United States has largely stood pat. Reagan had released nearly 500 pages detailing But the reforms wrought by the 1986 Act his proposals. Compared to that, the nine pages proved neither revolutionary nor stable. The we have gotten so far from President Trump and 1986 tax law resulted from an uneasy, tempo- the Sixers can only be described as anorexic. rary marriage between the forces of “justice” While they have been very forthcoming in pa- and “virtue.” The conventional Democratic rading apparitions of large tax cuts, so far it’s been tax reformers, who were principally interested all ponies and no manure—with the notable ex- in improving tax equity by broadening the in- ception of their intention to repeal the deduction come tax base so that income would be taxed for state and local taxes. Some of the ponies are similarly regardless of its source, joined together not even real. Donald Trump has insisted that with Republican supply-siders and deregulators, there will be no tax cut for the wealthy. But fewer who were most concerned about incentives and than the richest half of 1 percent of people who wanted to enact lower tax rates “to get govern- die in any year pay the estate tax, which he and ment off the backs” of the American public and congressional Republicans seem determined to American businesses.