The GOP Tax Pickle of 2017

The GOP Tax Pickle of 2017

Can they get to a better tax reform solution?

So the GOP has landed itself in a pickle and not the good kind of pickle.  After the, much promised and nothing delivered, Health Care debacle, the GOP leadership knows it has to make good on some sort of tax legislation.  The problem is every step forward is another two steps back this summer. And the Congressional Calendar was already quite packed.

Where does this start?

This pickle started back before 2016 when the GOP wanted to get tax reform and promised it would be revenue-neutral. The House GOP leadership had correctly come to the realization that origin based taxation will always enable corporate tax avoidance. But they were mesmerized by the wrong version, a cash flow tax system with a Border Adjusted Tax (BAT). Once tax reform became a legitimate possibility, retailers quickly determined that the BAT would shift tax reform burden upon them. As they were not the major cause of tax avoidance issues, they were understandably peeved. Summer 2017 negotiations by the major Republican players ended up dismissing the BAT as a revenue. But this leaves a conundrum of choosing a lesser reduction the corporate tax rate or accepting deficit spending.

Meanwhile, politically things are not much better.

The executive branch was expected to lead the charge on promoting tax reform. Unfortunately, the Administration has been weakened dealing with a distracting discussion concerning race and white supremacy. Sen Majority Leader Mitch McConnell is not happy with this new wrinkle in the pickle. And President Trump is not pleased with Sen. McConnell for not accomplishing the goals the President wishes to see accomplished. The tension exacerbates the political situation.

Republicans need voter enthusiasm to accomplish tax reform. They were hoping to build this support base during the summer. But town halls have been far, few and little reported. There is also concern that tax reform is merely an excuse to give tax cuts to the wealthy and major corporations. The GOP was hoping to convince their constituents that a tax cut for Corporations results in jobs. Opposition quickly counters with studies by the Congressional Budget Office, Joint Committee on taxation and the results of previous tax cuts.

No other plans end the tax disparity on businesses

The hidden trap waiting to sink this tax reform plan is the need to end the tax loopholes that allow big corporations to pay half or less of domestic businesses. The GOP leadership was trying to avoid this one with Destination Based taxation. But they didn’t use Sales Factor Apportionment.  Sales Factor ends the loopholes and rebalances the tax system. Such a tax reform shifts the burden to the companies currently avoiding the tax.  Estimates show that Sales factor would recoup a significant amount of lost tax. This could be applied to bring the Statutory Corporate tax down to 25.2% without additional measures.

The GOP might actually get close to a 20% tax rate with their additional tax loophole ending. But Senators and Representatives are hesitant to support such legislation without input from constituents.  It certainly remains a pickle.

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