Tax Strategy: Tax reform crawls forward

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July 27, 2017, saw the release of the most recent government document on tax reform. It was a joint statement by Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Speaker of the House Paul Ryan, Senate Majority Leader Mitch McConnell, Senate Finance Chair Orrin Hatch and House Ways and Means Committee Chair Kevin Brady.

The good news is that, rather than separate proposals coming from the Trump administration, the House and the Senate, as has been the case up until now, these six individuals all agreed to some common tax reform goals, which it states that President Trump also endorses. The bad news is that, seven months into 2017, they did not have a lot to say.

The single-page statement provides even less detail than the last single-page statement on tax reform released by the administration this past April. The latest statement, released just before the August recess, is supposed to provide the framework for congressional staff to busily draft tax reform legislation over the recess break so that the tax-writing committees can get off to a strong start when they return in September. But the staff will find very little in the joint statement to guide the detailed drafting required for tax reform legislation. The statement does provide some hints as to the general direction that tax reform might take, while providing little assurance that we will ever get there.


The statement includes several overall goals for tax reform: to ensure that ordinary Americans keep more of their hard-earned money; to encourage employers to invest, hire and grow; to grow our economy; to help the middle class get ahead; and to fix our broken Tax Code for families, small business, and American job creators competing at home and around the globe. There had been some tension in the tax reform proposals thus far as to whether most of the benefit was going to the wealthy, rather than the middle class. This language appears to try to focus on the middle class, but the language is also broad enough, by including small business and job creators, to encompass most of the tax reform proposals put forward so far.

Protect American jobs. The first stated mission of the tax committees is to protect American jobs. This is further amplified in the statement by stating that the goal is to create a system that encourages American companies to bring back jobs and profits trapped overseas. The only details provided on how this is to be done are to exclude two possibilities: a new domestic consumption-based tax will not be considered and the idea of a border adjustability tax has been dropped. It appears that a move to a territorial tax system and repatriation of untaxed earnings held overseas remain key elements of this proposal.

Make taxes simpler, fairer and lower. The second stated mission of the tax committees is to make taxes simpler, fairer and lower for hard-working American families. All of the tax reform proposals have included tax rate reductions for individuals, as well as for businesses. That takes care of the “lower” part, although Mnuchin has stated that lower rates for wealthier individuals will be offset by lost tax breaks, a goal that does not appear to have been achieved by tax reform proposals thus far.

Proposals to increase the standard deduction and eliminate some tax breaks, such as the state and local tax deduction and certain other itemized deductions except mortgage interest and charitable contributions, would tend to make the tax return simpler — although those affected by the elimination of the state and local tax deduction and other areas might not think simpler is fairer.

Again, however, not much guidance is given to the drafters here as to how simplification should be achieved. Making the tax system fairer may be the most difficult of all, since fairness means different things to different people. A flat tax seems fairest to some; a progressive tax seems fairest to others.

Lower the tax rate for small businesses. The statement calls for a lower tax rate for small businesses so they can compete with larger ones. Both the House and administration proposals have included a new, lower tax rate for pass-through entities. Those proposals had included specific, although different, rates. This statement does not specify any rates. Although commentators have pointed out a number of issues with creating a new rate for pass-through entities, such as how to prevent employers and employees from reclassifying relationships on an independent contractor basis to try to qualify for the lower rates, it appears that this concept is still an element of the tax reform proposal.

Lower rates for all American businesses. The statement also calls for lower rates for all American businesses so they can compete with foreign ones. Corporate rate cuts have been a key element of the prior tax reform proposals. Of course, if you are lowering rates for small businesses to help in competition with larger businesses at the same time that you are lowering rates for larger businesses, you would have to lower rates for small businesses more than you would lower rates for larger businesses to achieve the proposed improved competitive environment. While that was also an element in the administration and House tax proposals, again at different rates, the latest statement avoids any suggestion of specific rate reductions.

Reduce tax rates as much as possible. The statement states only that tax rates should be reduced as much as possible. This seems to be acknowledging that some of the rate reduction proposals in prior tax reform proposals from the administration and Congress may not be realistic, especially given the elimination of the border adjustability tax from consideration without suggesting any new sources of revenue. Some are suggesting that, given the slow process on tax reform so far this year, the most that might be accomplished in 2017 is a token rate reduction, while putting off fundamental tax reform to a later time.

Allow unprecedented capital expensing. The statement includes the somewhat ambiguous statement that tax reform should allow unprecedented capital expensing. Given that prior proposals have called for complete expensing of capital acquisitions, this language seems to be hedging a little on that goal and perhaps also the simplicity that would have come with complete expensing. The administration had tied complete expensing to the controversial loss of the interest deduction. The statement is silent on the interest deduction, which may be another reason it is hedging on complete expensing.

A priority on permanence. All of the tax reform proposals to date have contemplated permanent tax reform, and this statement is no exception. Permanence, however, becomes more difficult to achieve if the budget reconciliation process is utilized for tax reform (to avoid the filibuster rules in the Senate) and the legislation is not fully paid for.

Unlike the House tax reform proposal and like the administration tax reform proposal, this latest statement does not reflect revenue neutrality as a goal. Given the difficulty in coming up with revenue sources to replace border adjustability, revenue neutrality may no longer be being viewed as essential.

Putting a priority on permanence does not seem to be quite the same as insisting on permanence. The Democrats have included a demand that any tax cuts in tax reform be fully paid for, but the effort to do tax reform under budget reconciliation, as well as the lack of involvement of any Democratic congressional leaders in the drafting of this tax reform statement, indicates that the Republicans are still primarily focused on drafting a tax reform package that would not require Democratic support.

The statement invites the Democrats to participate in the tax reform effort, but, given the difference in tax reform focus that the Democrats are likely to bring to the table, the Republicans, as with health care repeal and replace, appear to be willing to try to proceed without them.

Encourages American companies to bring back jobs and profits trapped overseas. The most recent administration proposal and the House proposal both called for a move to a territorial tax system and a tax on unrepatriated earnings. The language in the statement encouraging American companies to bring back jobs and profits trapped overseas may refer to those proposals. There have also been other proposals to more directly attack companies that move jobs overseas or that do corporate inversions and move their corporate headquarters overseas. These have not been included in prior Republican tax reform proposals and it is unlikely that this language is intended to add those additional proposals to tax reform now.


The tax reform process has not advanced much in the last seven months. We seem to have been able to achieve more agreement on tax reform only by eliminating more details. Although there appears to be optimism among the drafters of this latest statement on tax reform that tax reform can move quickly through congressional committees in the fall, the lack of agreed details at this point makes quick progress look unlikely to outside observers.

There will certainly be pressure to achieve something by the end of 2017 to show that at least something had been accomplished, but that something might look more like token tax cuts than fundamental tax reform.

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