Comprehensive tax reform has been underway in the House and Senate for several years. But what steps are required to enact tax reform? Economist Mark Mazur, formerly the Assistant Secretary for Tax Policy at the U.S. Department of Treasury, explained the three steps to tax reform at a recent Washington Conference.
First, legislators must agree there is a problem. Members of the House and Senate recognize the U.S. has the highest corporate tax rate in the industrialized world. During the three decades since the last comprehensive tax reform in 1986, other industrial nations have lowered their corporate tax rates. Generally, the top corporate tax rates for other first world nations are about 15% to 25%, while the U.S. top corporate tax rate remains at 35%.
Both the current White House and the previous administration have recognized that this high tax rate reduces employment in the U.S. It also encourages large corporations to move jobs overseas. Therefore, the first step for both parties is to recognize a problem; that step now has been taken.
Second, there must be available solutions. In 2013, the House Ways and Means Committee and then-Chairman Dave Camp (R-MI) developed a tax reform bill. Their general strategy was to lower corporate and personal income tax rates by reducing or eliminating various credits and deductions. Current House Ways and Means Chairman Kevin Brady (R-TX) and Speaker of the House Paul Ryan (R-WI) have promoted a similar tax plan called "A Better Way." Brady held hearings in May to discuss the principles that could apply to a comprehensive tax reform bill.
Third, a viable coalition needs to support the proposed tax reform plan. In 1986, a Republican President and a Democratic Chairman of the House Ways and Means Committee worked together to pass a bipartisan bill. While the May hearing on tax reform produced bipartisan support for reducing corporate taxes with the goal of increasing employment, there remains great diversity of opinion by members of both parties on the specifics of tax reform.
Comprehensive tax reform will eventually take place. However, it is becoming steadily more difficult for Chairman Brady to build the needed coalition. There still are significant differences of viewpoint between the White House and members of both parties in the House of Representatives. Given this uncertainty, the schedule for tax reform is steadily slipping to late 2017 or even 2018.
Border Adjustable Tax Opposition
At a Washington Conference on May 24, Speaker of the House Paul Ryan was asked about the Border Adjustable Tax (BAT). He replied, "A border adjustment basically taxes the trade deficit."
The proposed BAT is a 20% tax on imports and a 0% tax on exports. Ryan and House Ways and Means Committee Chairman Brady continue to support the BAT. The BAT would produce approximately $1 trillion in revenue over a decade. This funding is a key part of their plan to lower corporate and personal tax rates.
However, Sen. Mike Lee (R-UT) spoke on May 31 with Washington media and highlighted the Senate opposition to BAT. He noted, "The White House doesn't want it. A number of us in the Senate have real concerns with the Border Adjustment Tax."
Lee stated he still hopes to pass tax reform with a 15% top corporate rate. He continued, "I just think we have to do it. Having something be doable and doing it are two different things, and I do think it is important to get there."
On May 31, Office of Management and Budget Director Mick Mulvaney was asked by media if the White House supports a deficit-neutral tax bill. He stated the White House will not hold to a deficit-neutral plan. Mulvaney responded, "In fact, several folks at the White House have said they are interested in pushing a larger tax bill that would add to the deficit."
The House is now facing opposition from both the White House and Senate on BAT. If Speaker Ryan and Chairman Brady do not have the revenue from BAT, the scale of their tax reform bill is likely to be substantially reduced. Given these differing viewpoints, the Washington signals suggest the tax reform train is slowing down.
Will Congress Expand Roth Plans?
As the House Ways and Means Committee continues to hold hearings on comprehensive tax reform, all potential revenue sources are being examined. One option is to move most or all of the existing retirement plans to Roth IRAs or Roth 401(k) plans. This option is called "Rothification" by Washington commentators.
The Employee Benefit Research Institute (EBRI) published a press release on Rothification and is continuing to research the potential impact of this change. In an April release, EBRI stated it is "concerned with Congressional proposals that call for dramatic changes to the retirement system in America, such as replacing pre-tax contributions with after-tax Roth contributions."
EBRI is researching the impact of retirement plan changes. In an April press release it stated, "A drastic shift to Roth contributions could undermine the entire retirement system in this country and undo the progress that has been made through widely favored pre-tax 401(k) plans. Decreasing the incentive to save for retirement would have devastating effects on retirement security, thwarting decades of effort by employers and employees to improve planning, saving and investing responsibly."
Under current law, many employers offer both a traditional 401(k) funded with pre-tax contributions and a Roth 401(k) funded with after-tax amounts. Representative Jan Jacobson of the American Benefits Counsel (ABC) noted, "Right now you can offer Roth and you can offer pre-tax, and employees can choose which direction they want to go."
EBRI continues to research important questions. What rules are likely to be enacted for employer contributions and employee contributions? Will the level of employer or employee contributions change substantially if the law is modified?
When an actual tax reform bill is drafted, it is scored by the Joint Committee on Taxation (JCT). There is inevitably a last-minute effort to find additional funding. Changing from the current system with mostly pre-tax funding of retirement plans to a Roth system with after-tax funding will raise substantial current revenue. However, it will reduce future revenue when Roth plan owners retire.
Applicable Federal Rate of 2.4% for June -- Rev. Rul. 2017-12; 2017-23 IRB 1 (17 May 2017)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2017. The AFR under Section 7520 for the month of June will be 2.4%. The rates for May of 2.4% or April of 2.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here