By Sean J. Brennan, CPA
This is the third blog in a continuing series from PICPA’s Federal Taxation Committee planned for the next few months to keep our members informed about the tax reform effort, with only the facts and no political spin.
Every day seems to bring new details and information concerning federal tax reform. Bills from both the House of Representatives and the Senate have been issued since our last report. There are significant differences between the two, and the process of reconciling the differences has begun … and so has the lobbying.
The White House has publicly stated that it prefers the Senate bill. This may or may not bring political pressure to steer toward a favored bill, but the organized lobbying directed at both houses of Congress and the president ultimately will determine the final tax bill. President Franklin Roosevelt was once quoted as telling a lobbyist, “Okay, you’ve convinced me … Now go out there and bring pressure on me.” Roosevelt was saying that, even if an elected official agrees with a particular course of action, nothing can be accomplished until enough political pressure is exhibited. This process of creating political pressure is what’s now taking place. The “winners” in this process will be those who deftly apply the most political pressure.
Charitable institutions, higher education, real estate developers, corporations, and even state and local governments are just a few of the groups pressing elected officials to maintain specific benefits within the U.S. Tax Code. These “sacred cows” include charitable deductions, education credits and deductions, mortgage interest and real estate tax deductions, and the deduction for state and local taxes.
The initial House Bill released on Nov. 7 contained major reform provisions. These provisions were noted in our previous blog.
Once released, analysts jockeyed for media time to make the case for or against the plan. Kevin McCarthy (R-Calif.), the House Majority Leader, opined, “The challenge to the American public is what is the truth about this bill … I think what’s most important is we should state the facts.”1 But when it comes to tax reform, it is also important to remember the words of Sir Arthur Conan Doyle: “There is nothing more deceptive than an obvious fact.”
Certain “facts” become deceptive when data is manipulated for purely political goals. Crafting an argument purportedly based on facts for the purpose of manipulating public policy is beyond lobbying. It is a deceptive and detrimental practice that erodes public confidence. We as CPAs, rather than take sides in manipulating the debate, should provide healthy professional skepticism to the “obvious facts” presented in the media from both political parties.
Here is one example: a continuously manipulated “fact” is that the country must reduce corporate income tax because it will increase real wages. One way to approach this assertion is to question, with professional skepticism, “What impact did previous corporate tax cuts have on real wages?” Certainly, past performance is not necessarily an indication of future results, but historical evidence is a better place to begin one’s analysis than merely accepting political rhetoric as fact.
So, it is worth noting that in 1986, when corporate tax rates were lowered from 46 percent to about 34 percent, no corresponding increase in real wages occurred. Furthermore, since World War II, productivity and wage growth have been significantly greater in periods of higher corporate income taxes.2
You may still support a decrease in corporate tax rates, but that should not require dissembling information. CPAs will better serve the public by applying our analytical skills to the tax reform debate and providing the public with more insightful answers.
Senate vs. House
We can now discern with relative certainty (as of this writing) the differences between the House bill and the newly released Senate bill. The Senate bill, released two days after the House bill, was immediately critiqued for its dramatic differences with the House bill.
The major differences in the Senate bill are as follows:
- All state and local tax deductions are eliminated.
- The mortgage interest deduction remains, as does education relief for grad students.
- The estate tax is not eliminated.
- The corporation tax rate is lowered to 20 percent in 2019, not 2018.
- Medical deductions remain.
- The pass-through entity tax break is expanded.
- Seven tax brackets are kept instead of four, and the top rate is lowered to 38.5 percent for incomes over $1 million.
- The child tax credit is doubled from $1,000 to $2,000 (as opposed to $1,600 and a limited $300 under-17 dependent credit).
- The Affordable Care Act (ACA) individual insurance mandate is repealed.
The final difference noted above – the repeal of the ACA individual mandate – was added to the Senate plan on Nov. 14 as a revenue “sweetener” to help Congress achieve a required $1.5 trillion limit on increasing the federal deficit.
Repealing the ACA individual mandate may indeed lower the federal deficit by an estimated $318 billion, but a not-so-obvious fact should be mentioned: 13 million more individuals will not have health insurance, so premiums will rise for everyone else. This is a serious matter to consider.
Also something to consider, on Nov. 15 the first Republican, Sen. Ron Johnson of Wisconsin, stated he will not support the Republican tax plan due to its "offensive process." Johnson’s defection is significant due to the slim majority Republicans hold. The Senate is controlled by a Republican majority of 52-48. It would not take many more defections to entirely kill the tax reform bill.
That is a fact about this process that no one can challenge.
1 From The New York Times, Nov. 7, 2017.
2 From an Economic Policy Institute study
Sean J. Brennan, CPA, is president of Brennan and Company CPA PC in Philadelphia, and is chair of the PICPA Federal Taxation Committee.
Other blogs in the Federal Taxation Committee Series:
For more information on 2017's landmark federal tax reform, check out the Federal Tax Reform Guide
presented by the Pennsylvania CPA Journal