Some Hard Realities Guard the US from Real Tax Reform

Raising the federal debt ceiling and passing a budget are Congressional priorities that will precede tax reform, an issue as politically challenging as health care reform

Before Congress can realize the ubiquitous promises of U.S. tax reform, they will have to deal raise the federal debt limit and pass a budget. It’s a tall order under any circumstances, but the current environment of partisanship, punctuated by presidential threats to shut down the government over funding for a border wall that almost nobody in Washington wants, do not bode well.

Newsweek’s political editor, Matthew Cooper, says, “Sweeping tax reform is unlikely to pass. Why? It’s among the most difficult tasks that Congress can do, because it requires taking on myriad special interests at once and in a way that’s immediately recognizable to their bottom lines. It’s as complicated as health care and more threatening to business and family finances, which is why several attempts at tax reform have been defeated since the last success in 1986.”

The most pressing Congressional priority will be raising the debt ceiling by the September 29 deadline. The Trump administration wants a “clean” debt limit hike – one with no preconditions – but Republicans and Democrats have plenty of them in mind.

“In all likelihood, the best that can be expected is a reduction in the corporate rate, something that’s widely supported in both parties because it’s among the highest in the world,” Cooper writes. “Getting beyond that is pretty much impossible.”

Brian Faler, senior tax reporter for Politico, writes that President Trump has said he wants to cut the corporate tax rate to 15%, while House Republicans have proposed a 20% rate. But so far the administration and Congress’ Republican leadership have offered few details of their tax plans.

A 25% to 30% corporate tax rate is more likely, assuming Congress limits its actions to changes that won’t add to the deficit.

Trump argued that his plans to cut the 35% corporate tax rate (convoluted tax regulations mean most companies actually pay 17% to 22%) for the first time in 30 years would benefit regular wage earners by putting more money in corporate coffers, which he said business leaders would then use to hire more people and raise wages.

But most economists say companies’ shareholders would be the primary beneficiaries of a corporate tax rate cut. That’s because it would make companies more profitable, which would boost their stock price while also leaving them with more money to pay out dividends.

But the official Joint Committee on Taxation, as well as the Treasury Department and the independent Tax Policy Center, all say shareholders bear roughly three-quarters of the burden of the corporate tax, and therefore would be the main winners were it cut.

The administration rejects those studies, pointing to other analyses showing workers bearing the brunt of the tax.

“Multiple economic studies have shown that over 70% of the cost of the corporate tax are actually born by the worker,” Treasury Secretary Steven Mnuchin said in May, contradicting his agency’s analysis.

Joe Nocera, in a Bloomberg View opinion piece says there is one aspect of tax reform that both Republicans and Democrats agree on: the need to repatriate the trillions of dollars in corporate profits that reside abroad. Getting that money back to the U.S. where it can be – one hopes – reinvested will require some form of temporary tax relief for corporations. Democrats seem inclined to go along.

What Will Be In Trump's Tax Reform? (August 9, 2017, Forbes)