Monday November 20, 2017
Ryan and Brady Barnstorm for Tax Reform
During the August recess, both the House Ways and Means Committee Chairman Kevin Brady (R-TX) and Speaker Paul Ryan (R-WI) are barnstorming America to promote tax reform.
Ryan met with Wisconsin voters in a public forum on August 21. He expects tax reform to be easier than healthcare reform. Ryan noted, "Tax reform is different. The entire tax reform bill can go into one bill through the House and the Senate. So procedurally, it makes it much easier."
Ryan also expressed a sense of urgency for tax reform. He explained that America is "losing businesses left and right" because of the high corporate tax rate. Ryan continued, "The biggest business we had in Wisconsinpublically tradedwas Johnson Controls. The thermostat here is probably a Johnson Controls thermostat. They are now an Irish company. Their worldwide tax rate is 12 ½%."
Brady spoke in Dallas on August 23. He acknowledged that the agreement by the White House and House and Senate leaders to eliminate the border adjustable tax (BAT) will cause many challenges. Eliminating the BAT would reduce revenue by $1 trillion and create a pressing need to find other revenue. Brady explained, "Without the border adjustment revenue, it means we are scrubbing the business side of the tax code to look for the provisions that are not as pro-growth or that, because we are now lowering the rates significantly, just do not pack the punch that they did before."
Nevertheless, Brady agreed that it was important to give up the BAT because "there were too many unknowns, especially for those who import."
Brady also promised to continue an effort to reach out to the Ways and Means Committee Democrats. He previously met with Committee Democrats to discuss potential areas of agreement. Brady stated, "The areas they are looking at as high priorities are ours as well." He pledged to hold more Ways and Means Committee hearings on tax reform.
Speaker Ryan traveled to Oregon and spoke at an Intel manufacturing plant on August 23. Because semiconductors are a very competitive business, he emphasized the need to pass a tax bill to assist American industry. Ryan noted, "We have two to three trillion dollars of American profits parked overseas that cannot come back to be reinvested in our communities because of our tax laws. We are convinced that if we get our tax rates down on all of our businesssmall businesses, big, and everything in-betweenthen we can be far more globally competitive, and we can keep our companies based in America."
Editor's Note: It still may be possible to pass a comprehensive tax reform bill by the end of the year. Sen. Dean Heller (R-NV) suggested it may not happen until December 24. He stated, "I believe leadership is going to tell us you are not going home for the holidays until you pass tax reform."
Top Personal Rate is 43.4% - Or 50.9%
In an August 21 letter to Tax Analysts, Federal Policy Group Managing Director Kenneth Kies explained current top tax rates. His letter referred to a comment by former White House aide Steve Bannon suggesting a substantial top tax rate.
Kies was formerly Chief of Staff for the Joint Committee on Taxation (1994-1998). He reviewed the top rates for both personal income and short term capital gains tax.
Personal income is subject to a top ordinary rate of 39.6%, a Medicare tax of 2.9% and for single filers with incomes over $200,000 or married couples with incomes over $250,000, the additional Medicare tax of 0.9%. The total rate for upper income persons is 43.4%.
Short term capital gains are taxed at a top rate of 39.6%. There also is a Medicare tax on passive income and capital gains of 3.8%. The total rate is again 43.4%.
In addition, 43 states levy an income tax. The taxes range from 3.07% in Pennsylvania and a high of 13.3% in California.
Kies noted, "If one were to assume an average rate of 5% - which on a weighted basis is almost certainly low, given the share of U.S. income that is earned by persons in states with rates far above this (for example, California, New Jersey (8.97%), and New York (8.82%)) - then this would mean that the average actual top individual tax rate (combined) is 48.6% (a number that very nearly has a "5" in front of it)."
Editor's Note: One of the key factors driving tax reform is that the U.S. has a higher individual and corporate tax rate than other first-world nations. A high-income person in California may have a combined federal and state rate of 50.9%. If the Pease, PEP and other phase-outs are considered, the actual rate could be even higher.
Three "Misconceptions" on Tax Reform
Scott Greenberg, Senior Analyst with the Tax Foundation Center for Tax Policy, recently published a white paper claiming there are several "misconceptions" about tax reform.
Misconception I - Retroactive Tax Repeal Boosts the EconomySeveral Washington Representatives have advocated making tax reductions retroactive to January 1, 2017. House Freedom Caucus Chairman Mark Meadows (R-NC) stated, "We need to make it retroactive so we unleash the cash and the capital that is sitting there that is ready to be invested."
Media executive Steve Forbes noted, "Very important, the GOP must make these reductions retroactive to beginning of 2017. We want this tax bill to kick up the economy ASAP. And it wouldn't hurt if people got big tax refunds next April."
Greenberg doubts this retroactivity will have the desired impact. If a tax bill is passed in December, workers cannot go back and put in more overtime. Businesses will not be able to change their prior investments and increase the economic return during 2017. Retroactivity appears to have minimal economic effect.
Misconception II - Repatriation will Stimulate IndustryA national media publication suggested that allowing repatriation of corporate funds held overseas could stimulate the economy. The article stated, "Impose a low tax on the repatriation of foreign profits brought back to the United States. This could attract more than $2 trillion to the shores, raising billions for the Treasury while creating new jobs and adding to the United States Gross Domestic Product."
However, Greenburg explains that the companies must do more than simply hold the funds in reserve. The companies still need to believe that investing will lead to profits. Greenberg notes, "Even though a repatriation holiday would put more money in the bank accounts of U.S. companies, it would not change the underlying profitability of making new investments in the United States." He is concerned that the companies would not invest their new profits, but may decide to distribute dividends to their shareholders.
Misconception III - Revenue Neutrality Will Not Grow the EconomyBoth Speaker Ryan and Majority Leader Mitch McConnell (R-KY) have supported a revenue-neutral tax reform act. However, former speaker Newt Gingrich holds a different opinion. He argues against revenue neutrality.
Gingrich stated, "Revenue neutrality, on paper, means the bill must bring in the same amount of revenue as current law. So, if you cut taxes in one place, you must raise them elsewhere. A revenue neutral bill would be a tax shuffle rather than a tax cut - and would do nothing to grow the economy."
Greenberg offers a different perspective. He suggests an example of a tax reform bill that lowers a harmful (job reducing) tax by $100 billion and raises a less harmful tax by $100 billion. He notes, "The bill would be revenue-neutral - it would leave the level of federal revenue more or less the same. But even so the bill would grow the U.S. economy, because it would make the tax system less harmful overall."
Editor's Note: The key tax reformers (Brady, Hatch and Ryan) all believe they can reduce deductions, broaden the base, lower tax rates and produce economic growth. Their challenge is to persuade Representatives and Senators to agree on a complex and detailed tax plan.
Applicable Federal Rate of 2.4% for September -- Rev. Rul. 2017-17; 2017-36 IRB 1 (18 Aug 2017)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2017. The AFR under Section 7520 for the month of September will be 2.4%. The rates for August of 2.4% or July of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.