Jan 24, 2017
Tax Policy Update
NUMBER OF THE WEEK: $7 Trillion
The estimated impact of Trump’s tax plan on the federal deficit according
to an analysis by the Tax Policy Center (TPC). At his confirmation hearing
last week, Steven Mnuchin, Trump’s pick for the Treasury secretary post,
faced questions regarding the budgetary impact of the administration’s tax
proposals. Sen. Mike Bennet (D-CO) cited the TPC’s $7-trillion figure and
asked the nominee whether such a sum was acceptable. Mnuchin explained that
the use of dynamic scoring will ultimately provide a more accurate picture
on the economic impacts of Trump’s tax plan.
In addition to tax policy, Mnuchin fielded a broad range of questions at
the five-hour hearing, sharing his views on potential reforms at the
Internal Revenue Service, the renegotiation of existing trade deals, and
changes to the Dodd-Frank Act. Check out the section below for a
list of key takeaways from the hearing.
Mnuchin Takes the Hot Seat.
Last Thursday, the Senate Finance Committee held a confirmation hearing on
the nomination of Steven Mnuchin to be the secretary of the Treasury.
Democrats on the panel had some tough questions and harsh words for the
nominee, particularly in light of his failure to provide complete
information on all of his business holdings in his financial disclosure
reports to the committee.
Republicans on the panel roundly praised the Trump Administration’s focus
on pro-growth economic policies. Throughout the Q&A portion of the
hearing, Mnuchin restated his commitment to simplify the tax code and
rewrite it so that American businesses can compete globally. For Mnuchin,
making America competitive means lowering tax rates and eliminating most of
the deductions in the code. Below are Mnuchin’s thoughts on other
Mnuchin stated that the administration is very interested in
repatriating the profits currently parked overseas. According to
Mnuchin, Trump, himself, believes the administration can bring back
about $3 trillion. The Trump plan would impose a one-time repatriation
tax of 10 percent—revenue from repatriation would then be reinvested in
the United States to create jobs.
Mnuchin said that he is committed to making sure passthrough entities
are treated fairly. But at the same time, Mnuchin wants to make sure
that large passthroughs and hedge funds will not game the system to
avoid paying taxes.
On the Production Tax Credit.
Sen. Grassley raised the issue of the production tax credit, and
Mnuchin agreed that as part of tax reform, there should be a plan for
phasing out the credit.
On the Border Adjustment Tax.
The only reference to the House GOP’s border adjustment tax proposal
came when Ranking Member Ron Wyden asked which specific products would
be subject to this “35 percent tax.” Mnuchin explained that Trump
recently expressed some concerns with the border adjustment tax and
noted that Trump has never suggested a 35 percent “border tax.”
According to Mnuchin, Trump believes that companies that move jobs
abroad should face some sort of repercussion.
On the other side of the aisle, Democrats are worried that Trump’s business
tax reform plan will end up neglecting the middle class and add to the
national debt. Ranking Member Ron Wyden repeatedly accused Mnuchin of going
back on his promise to not give the wealthy an absolute tax cut. Wyden also
questioned Mnuchin’s qualifications when the nominee failed to provide
details on how he would deal with Medicare and the Earned Income Tax
When Democrats pressed the nominee to give some examples on what tax relief
for the middle class would entail, Mnuchin struggled to cite examples of
possible cuts. Democrats also took turns to criticize Mnuchin’s offshore
holdings, some of which he did not disclose to the committee. Mnuchin
stated that he did not use these entities to avoid paying personal taxes,
adding that such offshore activities are reasons why the tax code needs to
The Senate Finance Committee has not yet announced when it will hold a vote
on Mnuchin’s nomination. In the interim, former Acting Undersecretary for
Terrorism and Financial Intelligence Adam Szubin has assumed the role of
acting secretary at the Department of the Treasury.
Mnuchin Signals Support for Staff Increase at IRS.
At his confirmation hearing, Mnuchin spent a fair amount of time citing
ways he would like to reform the tax collection agency, expressing concerns
with the IRS’s inadequate staffing and poor technology infrastructure.
Mnuchin believes that the agency needs to improve its customer service,
cybersecurity, and technologies. For Mnuchin, good customer service means
that the IRS should have the technology to allow taxpayers to interact or
communicate with the agency electronically. Most importantly, the agency
should have the right tools to protect taxpayers’ data from cyberattacks.
The Trump Variable to the GOP Constant.
Since winning the presidential election, Donald Trump has been a wildcard
for the GOP establishment. Within the span of a week, Trump went from
criticizing the House GOP’s border adjustment tax to confirming that some
sort of border tax will definitely be imposed on those who ship jobs
"If you go to another country and you decide that you're going to close and
get rid of 2,000 people or 5,000 people ... we are going to be imposing a
very major border tax on the product when it comes in," Trump said.
Trump is yet to release concrete details on his ideas for a border
adjustment tax. In December last year, he tweeted out plans to impose a 35
percent import tariff on the sale of goods back into the U.S. as a punitive
measure against companies that ship jobs overseas.
Though Trump’s plan differs significantly from that of the House GOP, Ways
and Means Committee Chairman Kevin Brady seems confident that Trump will
come around. Brady noted that the Trump team is currently diving into the
tax reform plan and the “big, revolutionary” proposed changes that will
“get us back in the game.”
Despite differences in their approach to the issue, both Trump and the
House GOP seem to be on the same page on one thing: making products in the
U.S. Recently, in a speech before business leaders visiting the White
House, Trump noted that there “will be advantages to companies that do
indeed make their products here.”
Both Trump and the GOP are eager for some version of a border adjustment
tax and moving to a territorial system because it reduces incentives for
corporations to move their operations abroad. It also eliminates the need
for Congress to curb base erosion and profit shifting via legislation.
As the GOP ramps up to sell tax reform and the border adjustment tax
outside the Beltway, the backlash against these proposals has already
started. Amongst large retailers that may be negatively affected are Best
Buy, Gap, Levi Strauss, and Target. Additionally, the conservative Koch
Brothers have publicly opposed the tax, throwing another wrench into GOP
plans for reform.
As the debate continues, the GOP is also mindful that its border adjustment
tax may run afoul of World Trade Organization rules. In order to avoid
this, experts suggest a tax that closely mirrors a value-added tax (VAT).
For a border adjustment tax to comply with WTO guidelines, it must be
structured correctly – preferably as a VAT with a wage credit. Under these
circumstances, it is likely that a border adjustment tax would withstand
WTO scrutiny. However, the current GOP tax plan skirts a gray line, since
it contains elements that differentiate it from a VAT. Until now the GOP
has been reluctant to use the term “VAT,” fearful that people will see it
as a new tax, rather than a completely new system. It remains to be seen
whether they might change their tune in order to gain approval from the
Trump Presses ACA’s Self-Destruct Button.
The Trump Administration recently issued an executive order giving the
Department of Health and Human Services (HHS), the IRS and other agencies
the authority to dismantle the Affordable Care Act to the fullest
extent permitted by the law – effectively gutting the law from within.
When the Obama Administration enacted the healthcare law, it relied heavily
on guidance from agencies like the HHS to implement it. While this gave the
administration wide latitude and control over key decisions, it is now the
law’s Achilles Heel. The Trump Administration now has the same power to
reverse every decision made at the executive level to start weakening the
law, without any Congressional action.
Unfortunately, for proponents of the ACA, some of the cornerstones of the
law were enacted through federal regulation. For example, the Trump
Administration could stop subsidizing health care costs such as co-pays and
deductibles for ACA participants under a certain income threshold. A
decision to discontinue these payments would essentially cause health
insurers to flee the exchanges or significantly increase premiums, making
them unaffordable for many Americans. Essentially, the decisions made by
federal agencies may cause the health care law to implode, leaving millions
uninsured before Republicans have a replacement plan.
Speaking of which – Sens. Susan Collins (R-ME) and Bill Cassidy (R-LA)
announced that they have worked out a compromise plan that will provide
more Americans with coverage than the ACA, at no additional cost.
The Cassidy-Collins plan gives states three options: (1) maintain the
status quo under the ACA; (2) reject federal assistance; (3) or transition
to a new system that will automatically enroll certain individuals in a
high-deductible health plan (HDHP) linked to a health savings account
(HSA). While the two senators are yet to release more specifics, their
proposal would keep the ACA’s taxes in place to pay for a replacement and
waiting until 2020 to transition into the new system.
Democrats are wary of the proposal on the grounds that it may not allow
those currently covered by the ACA to maintain their health insurance plans
at current rates. Senator Chuck Schumer stated that the plan was far from
the full replacement plan Republicans have been promising for years.
The plan is likely to be a difficult sell to Republicans as well, who want
to repeal and replace the ACA as soon as possible. Additionally, according
to the latest reports, the GOP has not decided on whether to maintain all
ACA taxes. But based on chatter picked up by McGuireWoods’ tax policy team,
the Cadillac tax will likely remain intact.
Cabinet Nominees to Get Their Hands Stamped.
Senate committees are voting on several cabinet nominees this week, paving
the way for confirmation votes on the Senate floor. Committees are expected
to vote on the following nominees:
Sen. Jeff Sessions nominee to be the U.S. attorney general
Dr. Ben Carson, nominee to be the HUD secretary [approved Jan. 24]
Elaine Chao, nominee to be the Transportation secretary [approved Jan. 24]
Wilbur Ross, nominee to be the Commerce secretary [approved Jan. 24]
Rex Tillerson, nominee to be the secretary of State [approved Jan. 23]
Trump as Mr. Freeze.
After the festivities on Inauguration Day, the Trump Administration moved
quickly to put a halt to the current regulatory agenda. In a memo to all
federal departments and agencies, the administration called for an
“immediate regulatory freeze” in order to give the new administration some
time to review existing regulations. Regulations that have not yet taken
effect will have their implementation dates delayed for 60 days. This means
that the Master Limited Partnership guidance, earnings stripping guidance,
and other recently-released tax rules will be caught in the cross-hairs of
the Trump Administration’s new regulatory freeze. A copy of the memoranda
has not yet been posted on the new White House website. See the memo
Q&A With Cordray.
Consumer Financial Protection Bureau Director Richard Cordray sat down with
the Wall Street Journal today for a Q&A session. Cordray faced
tough questions about the future of the agency and his interpretation of
President Trump’s executive order to freeze new or pending
regulations. While the director mostly reiterated that he could not
answer hypothetical questions, he did emphasize that the bureau is an
independent agency that has been directed by Congress to enforce
certain regulations and protect the interests of consumers. Cordray
cited to statistics that the CFPB has made $12 billion available to 27
million consumers and that regardless of who holds power, the bureau
will continue its mission. With regards to the regulatory freeze,
Cordray stated that the bureau is still digesting these orders and
trying to address them. He added that the agency will continue to
regulate the markets in an even-handed manner as mandated by Congress.
Cordray was also asked about his response to the House GOP’s plans to
change the structure of the agency and subject it to the congressional
appropriations process. Cordray replied that neither he nor the CFPB
have the power to
dictate structure of the agency; only Congress has that power. Cordray
promised to comply with any legislation changing the structure of the
agency. Corday also added that in his opinion, there is considerable
congressional oversight over the agency. He highlighted the fact that he
has testified before Congress over 10 times, complied with numerous
document requests, and always implemented the recommendations set forth in
various GAO and Inspector General reports.
When asked about the bureau’s most important initiatives for 2017, Cordray
said that the CFPB will continue to monitor the Wells Fargo scandal, noting
that the incident illustrated the importance of monitoring performance
incentive programs. Cordray added that the CFPB’s enforcement and
supervisory role is key to all its 2017 initiatives.
U.S. Releases Voluntary Country-By-Country Reporting Rules.
On Jan. 19, the IRS released Revenue Procedure 2017-23, allowing the parent
companies of multinational enterprise groups the power to decide whether
they will voluntarily file country-by-country reports. The guidance
provides instructions for parent companies on how to file CBC reports if
they are required to comply with the rules of the U.S. and a foreign
country with an earlier effective date. The U.S. expects other countries to
accept this voluntary regime, despite threats from the European Union to
blacklist the U.S. for its failure to comply with CBC reporting set forth
by the Organization for Economic Cooperation and Development in its action
plan on Base Erosion and Profit Shifting (BEPS). CBC reporting requires
multinational entities to disclose certain tax information in each
jurisdiction where they conduct operations.
President Trump’s two simple rules for his pro-growth economic agenda:
- In a
to the House and Senate tax-writing committees, Sens. Marco Rubio (R-FL)
and Mike Lee (R-UT) said they oppose any child-care tax proposal that might
“privilege wealthier families” or discriminate against parents who choose
to stay at home. The statement is in response to the child-care deduction
proposed under Trump tax plan.
- As the Treasury Department finalizes its estate tax valuation discount
rules, it may consider exempting closely held businesses, according to
Catherine V. Hughes, an estate and gift tax attorney-adviser in the Office
of Tax Policy. Hughes notes that the exemption that the department is
considering “would make most of the objections to these proposed
regulations go away.” The department’s revision of the proposed rules comes
after members of Congress criticized the regulations as being overly broad
during a hearing in December. The release of the final regulations will of
course be stalled by Donald Trump’s regulatory freeze. Hughes expressed
hope that the department will be allowed to continue its comment process so
that they can work out some of the remaining issues before the release of
- On Jan. 19, the IRS published T.D. 9815, final and temporary regulations
on dividend equivalents that clarify the obligations of nonresident aliens
and foreign corporations that hold certain financial products. The agency
notes that the final rules reflect comments from the industry, including
provisions about the substantial equivalence test.
- On Sunday, Kellyanne Conway, White House counselor, admitted that
President Trump is unlikely to release his tax returns, even after audits
are complete. "We litigated this all through the election. People didn't
care," Conway said. A White House petition seeking to make Trump's returns
public already has over a 100,000 signatures — the threshold required for a
comment from the White House.
- Fun fact — if you want a hefty discount on the new Bentley you’ve been
eyeing, look no further than Montana. The state has a law that allows
people to set up a limited liability company in the state in order to make
a purchase, without paying sales tax in their home state. The Montana
Secretary of State’s Office even provides a list of contacts for people
seeking to use this tax planning strategy. Of course, other states have
caught on -- California and a handful of other states have passed
laws that retaliate against Montana LLCs that were set up purely for tax
- Former Saturday Night Live Star, Joe Piscopo, plans to give Gov. Chris
Christie a run for his money by running to replace him as governor. Piscopo
has come out with a revolutionary
new tax plan
to help make his bid competitive – it includes a plan to eliminate the
income tax for firefighters, police officers, and teachers.
- The IRS extended its deadline to claim the health coverage tax credit
for people who lost their jobs due to free trade agreements. In
Notice 2017-16, the agency said that taxpayers who are eligible for the credit from June
30, 2015, to Dec. 31, 2016, have three years to claim it.
- Tax-filing season opened on Jan. 22. The IRS expects to receive
approximately 153 million tax returns. This year, those claiming the Earned
Income Tax Credit and the refundable portion of the Child Tax Credit will
have to wait until Feb. 15, at the earliest, to receive a refund.
Congressional GOP Annual Retreat
GOP lawmakers are heading to Philadelphia for their annual retreat.
Devising and agreeing on a strategy to repeal and replace the Affordable Care Act will be at the top of the meeting agenda.
The council holds a discussion on “Too Big to Fail? The Power of
Transparency in Preventing Future Financial Crises.”
Cato holds a briefing on “The Economics of Health Insurance Reform.”
Washington International Trade Association
WITA holds a discussion on “Border Adjustment Taxes, Tax Reform, and
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