Michigan Ross Professor Explains Trump, House GOP Tax Proposals, and New Details in His Book’s Fifth Edition

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Professor Joel Slemrod scores the tax plans of President Donald Trump and the House Republicans.

A big priority for the new Trump Administration and House Republicans is tax reform. The last major overhaul of the tax code was in 1986, and with Republicans controlling the White House and Congress, many are eager to begin the hard work. Business taxes are a particular focus.

But tax reform is notoriously difficult and consensus might be hard to find even with one party in effective control of the executive and legislative branches.

Michigan Ross Professor Joel Slemrod just published the fifth edition of his book, Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, with Jon Bakija, professor of economics at Williams College. In this Q&A, Slemrod explains the various tax reform ideas afloat and their chances of passing.

Slemrod

Congress and the president have both made tax reform a priority. In your book you talk about the difference between a tax cut and true tax reform. Are the proposals reform?

Slemrod: Trump’s plan so far is a one-page blueprint, and from what I can see it’s mostly a set of tax cuts, with most of the cut in dollars going to high-income earners. The House GOP plan has some fundamental changes in business taxes. For one, it eliminates deducting business interest and replaces the depreciation of capital with an immediate write-off. The second big item, and the most controversial, is the border adjustment tax. Under that provision, a business would not be able to deduct the cost of an imported business input, but there would be no tax on exports.

The U.S. imports more than it exports, so this could raise a lot of money. One problem is that this proposal likely violates WTO rules that are aimed at keeping policy from favoring goods produced within one’s own country. However, economic logic suggests exchange rates would adjust to the new rule so that in the end exports might not be much more attractive, and imports might not be much less expensive. Nevertheless, U.S. companies that import are stridently opposed to the border adjustment, apparently unconvinced by the exchange-rate adjustment argument.

Right now the U.S. corporate tax rate sits as one of the highest in the industrialized world. Whatever you might say about the House GOP plan, it represents a fundamental change in how business is taxed.

You write in your book that the tax code can’t encourage everything, that we might have overdone the idea of enacting social goals through the tax code via deductions and credits. Do the proposals address that?

Slemrod: Both Trump’s outline and the House GOP plan get rid of some deductions, such as the deduction for state and local taxes, but I wouldn’t say that either constitutes a comprehensive weeding out of the bells and whistles that proliferate in the current tax system.

How would you compare this to the 1986 tax reform?

Slemrod: So far it’s nothing like the Tax Reform Act of 1986. I was on the senior staff of the Council of Economic Advisers in 1984 and 1985, and that effort started with a three-volume study from the Department of Treasury with hundreds of proposals. The Trump administration has started with an outline, so that indicates that the serious debate hasn’t really even begun.

The 1986 effort was designed to be revenue-neutral. Broadly, it reduced individual taxes but raised corporate taxes by about the same amount. The Trump plan would add $6.2 trillion to the deficit over the next decade. It’s harder to score the House Republican Plan, but it does have provisions that would raise revenue, such as the border adjustment.

Also, in 1986 there was wide consensus that the tax code needed to be fixed. President Ronald Reagan thought rates were too high, and Democrats thought the base was a mess with all the loopholes. Eventually, after a lot of work, they came together and lowered rates and broadened the base. I don’t see that kind of bipartisan consensus right now.

What are the chances of enacting tax reform?

Slemrod: I would put the chances of anything substantive passing this year at less than 10 percent; a simple reduction in rates has a better chance. You need at least somewhat of a bipartisan consensus to get tax reform through the House and Senate in a bill the president will sign. The chances of that happening diminish week by week.

Why did you update the book now, and what are the biggest new additions?

Slemrod: There have been a number of changes in tax law since the last edition, and we wanted to talk about all the major tax proposals from the 2016 campaign. We also beefed up our discussion of international tax issues, because economies are more globalized than ever and countries are very focused on the competitiveness of their tax systems. For example, the GOP House plan would shift to a territorial tax system, which most industrialized countries have now. Under current U.S. law, if Ford has a French subsidiary it would owe French taxes, but if the French rate is lower than the U.S. rate, it owes the IRS the difference. Under the territorial plan, that French operation would owe only French taxes.

After the financial crises there was also a lot of focus on the use of tax havens. So Congress passed the Foreign Account Tax Compliance Act in 2010 that requires foreign financial institutions to report on accounts of U.S. citizens to the IRS. It forces compliance by slapping a 30 percent withholding tax on any U.S. transaction for institutions that don’t play ball. So far 270,000 foreign financial institutions have registered to comply with FATCA. It’s a fascinating piece of legislation, and I have a contract with the IRS to analyze the data on FATCA compliance that is now flowing in. The Panama Papers case and other leaks of tax haven data have kept the issue of tax evasion using offshore accounts in the news in many countries.

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