Today at 10:15 am, the National Tax Association's 111th annual meeting had a "plenary session" on the topic of Fiscal Policy After the Midterm Elections. The law prof on the panel was originally scheduled to be Michael Graetz, but he got trapped in NYC by the freak November snowstorm, so yesterday afternoon they decided to call for the left-hander, and asked me if I would be able to sub in as a panelist. I said yes, and here is approximately what I said in my 5-minute opening statement on the panel:
I have 5 points to make today about fiscal policy in the aftermath of the 2017 tax act and last week's midterm elections:
1) I don’t call what happened last year “tax reform.” Not because it was bad legislation – although I think that in the main it was, despite some good features – but because the term has become completely empty, and now just means “legislation that the proponents like.”
The 1986 Act was called “tax reform” because it related to a particular conceptual model that had captured the term’s then-agreed meaning, and that involved cutting rates and broadening the base while being at least short-term revenue and distribution neutral.
The 2017 act was unfunded, seems fiscally unsustainable, and in some ways narrowed the base, even from a consumption tax perspective (which I consider an entirely valid one for assessing “base-broadening”). For example, a broad-based consumption tax wouldn’t have industrial policy in it like that from the pass through rules.
2) The 2017 act’s proponents undermined its long-term prospects by allowing it to look unprincipled – For example, it doesn’t look like good faith to cut the corporate rate to 21% without either funding it or attempting to limit the use of corporations as tax shelters by high-earning owner employees. The passthrough rule look like sociological discrimination in favor of business types over professional types and employees, for no discernible reason other than the pass-throughs telling Congress “the C corporations got theirs, so we want ours.” Meanwhile, employees not only pay higher rates than non-employees who are doing the same jobs, but lose all business expense deductions. This is not a defensible policy, even though it’s true that, in practice, actual employee business expense deduction claims may tend to include a lot of junk.
The new restrictions on state and local income tax deductibility might have been viewed less hostilely in the blue states if the overall bill hadn’t looked to so many people as something that was politically targeted and designed in bad faith.
3) It’s hard to see a sustainable budgetary path forward – Democrats are unlikely to play the fools a third time with regard to addressing the fiscal gap, after Clinton was followed by Bush II and Obama was followed by this tax bill. This is dangerous for our country, and reflects a broader breakdown of cooperative political norms that are really vital to our national welfare.
4) The broader destruction of American social capital in recent years has further bad implications for the tax system – If no one believes in a fair, cooperative policy process any more, and the IRS has next to no auditing capacity and an inadequate budget, could we be risking a serious tax compliance breakdown, from changed behavioral norms? It’s not impossible.
5) On a brighter note, thank goodness the unhelpful “worldwide vs. territorial” distinction in international tax policy discussion has been put to bed. By repealing deferral, we replaced “now or maybe later” taxation of foreign source income with “now or never” taxation, but the “now” has been significantly expanded. The new international provisions have serious flaws, but could in principle be cleaned up a lot if we still had a functioning bipartisan legislative process. And they do mostly focus on issues of genuine concern that tend to lack clear answers from a policy standpoint.
It’s also interesting to note that other countries are starting to copy aspects of the BEAT and GILTI. This might be good or bad for the U.S. and for the world, and doesn’t prove that the provisions are good ones, but it is an interesting trend to keep in mind.
It could conceivably betoken a future era of greater global cooperation than we observe right now. And why don’t I close now on that relatively optimistic note.