Further Queries

German statesman Otto von Bismarck is quoted as having said that “politics is the art of the possible.”  History has amply proven the truth in that statement.  This is particularly the case in the US, where the structure of the government, with its various “checks and balances” and dispersal of political power, makes politics a high art, as evidenced recently in the failed attempt to repeal and replace the Affordable Care Act, better known as “Obamacare”.  It’s not enough for a president to have a plan, that plan has to have congressional support.   That’s the artistry.

 

That the US is in desperate need of tax reform, and particularly corporate tax reform, is acknowledged by most knowledgeable observers.  Indeed, as Director of the National Economic Council Gary Cohn stated in the press briefing for the Trump tax plan, “tax reform is long overdue.”

 

As well, that certainty and predictability in public policy, particularly tax policy, are key elements in building and sustaining both business and consumer confidence is also acknowledged by most knowledgeable observers.  It is against this background that the recently released Trump tax plan is so disappointing.  It does not provide detail on which businesses can predict their futures and plan their affairs, and it does not inspire confidence that it will get the necessary congressional support.

 

A key element announced in President Trump’s proposals is the headline grabbing slashing of the federal rate from 35% to 15%.  As Treasury Secretary Steven Mnuchin stated, the US corporate tax rate is out of sync with what governments in all other developed countries have been doing with their corporate tax rates in recent years, causing the US corporate rate to be an outlier.  Accordingly, a reduction in corporate tax rates is long overdue and would be welcome – were it to be part of a comprehensive, integrated plan that had high prospects of congressional support.  That would be artistry.

 

The proposal to move to a territorial system is also welcome, and is again consistent with the systems in most developed countries.  The current approach of taxing US corporations on their global income has proven to be ineffective in raising revenues and has simply resulted in US corporations keeping outside of the US profits earned abroad.  This too would be welcome were it to be part of a comprehensive, integrated plan that had high prospects of congressional support.

 

But what was not said by Director Cohn or Secretary Mnuchin is probably more important than what was said.  Very little detail was provided for any of the proposals – indeed the entire plan was presented on a single page, which is pretty ambitious for a “massive tax reform”, as Secretary Mnuchin described it.  For example, no detail was provided for how US corporations would be taxed on repatriation of profits currently held outside of the US, with Secretary Mnuchin saying the administration is “working with the House and Senate on that”, but that “it will be a very competitive rate”.

 

A key element, and one that may be the Achilles heel of the proposals in terms of congressional support, will be revenue neutrality.  Again, no detail was provided, but the view from what seems to be a very broad group of commentators and critics is that these proposals will be far from revenue neutral.  Given the large number of deficit hawks on the hill, inability to balance “the biggest tax cut …in the history of [the US]” with new revenues could result in a repeat of the Obamacare repeal and replace failure.

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Taxand's Take

It is important to note that tax cuts does not equate with tax reform.  We’ve seen the proposed tax rate cuts.  We need to see the proposed tax reform, and a proposed tax reform that will address the challenges of the existing US tax system and at the same time can generate the revenues presumably needed to garner the support necessary to pass congress.  We need to see artistry.

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Article tags

International Tax | USA

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