President Donald Trump has promised, both while on the campaign trail and since he’s been in office, to aggressively pursue tax reform. This has been a key GOP priority for decades: the last major tax reform undertaken by Congress came under the Reagan administration in 1986.
However, the squabble over how the tax code ought to be reshaped has thrown a wrench into the process. Now, it increasingly looks like the administration and Congress may not deliver on Trump’s tax promise before the year’s end.
Private Equity vs. the Financials
By and large, the battle centers on how taxes will be reformed, not the notion of tax reform itself. (Of course, some Democrats in Congress may disagree with this assessment.) Republicans have long touted the benefits of lower taxes, and Trump is right in line with the party on this front. The president has called for slashing the corporate tax rate to a more competitive level, perhaps 15%.
Yet the path to this new tax regime is still far from clear.
One of the main points of contention is the border-adjustment tax that has been widely floated by congressional Republicans. To oversimplify the measure: it would reward exporters and punish importers. Even Trump himself has expressed some confusion or hesitance about this kind of tax. However, there is even more disagreement over a separate tax proposal that would expand “taxable income” to include interest payments on loans, which are currently treated as tax-deductible.
While financial institutions like banks and insurance companies have apparently been promised to be exempt from this provision, private equity firms have not. The latter rely heavily on leverage and access to credit, meaning this proposed rule change could seriously harm their bottom line. Beyond the importer-exporter rift over the possible changes to tax law, there could be an even more fierce tax battle between financials and private equity.
The new tax on interest would be paired with immediate tax relief (i.e. deductions) for capital expenditures such as buying new equipment or building new facilities. It would not provide such tax deductions for stock buybacks by companies, which is sometimes seen as a way to inflate share prices when that capital is probably better allocated to research and development.
In this way, the provision would treat debt and equity as essentially the same for tax purposes—an idea that is quickly being seen as the GOP consensus position. Moreover, it wouldn’t directly affect consumers the way punishing U.S. importers would if the eventual tax bill settles on the border-adjustment measure.
One possible resolution would be a grandfather clause that allows firms who are already doing so to keep taking tax deductions on their existing debt. The exemption would likely expire when that debt had been fully serviced.
Getting Work Done
Speaker of the House Paul Ryan has faced considerable difficulties in trying to unify House Republicans behind whatever tax plan that the GOP ultimately puts forth. Ryan has undoubtedly had problems getting the new presidential administration on the same page with his caucus, as well.
Tax reform is among Rep. Ryan’s most intimate areas of expertise. He was once the chair of the House Ways and Means Committee, which writes much of the tax law that Congress votes on. Now that Republicans control both chambers on Capitol Hill and the White House, the public is expecting results from Ryan et al.
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