Alan Auerbach: Five Questions for Congress on Tax Reform

Must-Read: I wish that the extremely sharp Alan Auerbach would turn his concern knob up a bit more—in fact, I wish he would turn it up to 11. He says: “change in the guise of [tax] reform has the capacity to make things worse, and the secretive, often chaotic nature of the current process provides ample opportunity to do so…” I wish he would say: “the secretive and constantly chaotic nature of the current tax reform process makes it inevitable that it will end up making things worse…” Nobody should have any illusions that Republican congressional leaders know what they are doing—any more than they knew what they were doing with their health care fiasco:

Alan Auerbach: Five Questions for Congress on Tax Reform: “Congressional leaders say they’re working on a corporate tax reform…

…Yet… they’re keeping their plans under wraps until the last moment, with rumors and leaks serving as the main form of advance discussion…. A framework so we can quickly assess any proposals that emerge…. Does the plan have temporary provisions, and how are they justified?… The “big six” proposal… would allow companies to fully deduct short-lived capital investment… “for at least five years”… presumably because a permanent tax break would look a lot more expensive…. This is worse than a mere budget trick: The temporary nature of the measure would also distort investment incentives and increase uncertainty. This week’s fiasco over reducing the limit on contributions to 401(k) retirement accounts was also about the timing of tax revenues… Roth 401(k) accounts… are taxed up front…. Does the plan pay for itself in the long run, using realistic forecasts?… How does the plan address the deductibility of interest?… A 2016 proposal from House Republicans offered a sensible… scrap the interest deduction, but allow companies to fully expense all capital investments…. The big six proposal, by contrast, calls for only a partial limitation on interest deductions for C corporations, with no details provided…. How would the plan prevent companies from avoiding taxes by moving their operations or profits abroad?… There’s a simple and complete solution: Levy tax based on where a company’s products are services are used…. Unfortunately, the big six has already rejected this approach….

How would the plan prevent people from using pass-through businesses to avoid personal income tax?… To prevent this from happening, any plan will have to include serious enforcement measures—such as taxing a certain share of reported business income as ordinary income.

The U.S. business tax system sorely needs reform, particularly in the way it deals with multinational corporations. But we must pay close attention to what Congress and the Trump administration propose. Change in the guise of reform has the capacity to make things worse, and the secretive, often chaotic nature of the current process provides ample opportunity to do so.