Tax Policy in 2014: Two Developments That May Set The Table For the Future

At first glance, 2014 seemed like a tax policy wasteland, but two developments may have set the stage for important future initiatives.  A wave of tax-driven corporate inversions showed one reason why tax reform is necessary.  A detailed plan by House Ways & Means Committee chairman Dave Camp (R-MI) showed how tax reform could be done, but also how tough it will be to achieve.

The beginning of the year was marked by Camp’s sweeping tax reform proposal.  Camp and his staff had studied the issue for several years and put together a package that followed, in broadest outline, the canonical formula for tax reform, reducing rates and broadening the tax base in a manner that was roughly revenue- and distributionally-neutral in the 10 year budget window.

The plan would have reduced the number of income tax brackets to three, repealed the alternative minimum tax, slashed or eliminated dozens of targeted tax breaks, reworked the taxation of low-income households, and cut tax provisions that helped state and local governments. On the corporate side, it would have cut the top rate to 25 percent and moved to a territorial system, where income and costs generated in foreign countries are not subject to U.S. taxes.

Nobody loved all of the details of the plan. And it included some gimmicks that may have made it a regressive revenue-loser in the long term.  Still, as my Tax Policy Center colleague Howard Gleckman and I wrote, Camp’s most important contribution to reform was the high bar he set.  By proposing a specific plan, he made it more difficult for others to promise trillions of dollars in tax cuts without explaining how they would pay for the revenue loss.  If and when Congress does pass tax reform, it will likely build on Camp’s hard work.

Part of the case for reform was made, inadvertently, by a wave of tax-driven corporate inversions.  An “inversion” occurs when a U. S. company is bought by a foreign firm, and thus qualifies as a non-U.S. company for tax purposes.  This is not quite a “stroke of the pen” transaction, but inversions can be accomplished without moving actual factories or human resources to another country.

Most observers believe that companies invert for tax reasons.  Some argue the companies are showing a lack of patriotism.  After a few well-publicized inversions, and in the absence of Congressional action, the Obama Administration issued new regulations that limited the practice.  These new regulations and the potential threat of additional ones may have slowed several planned inversions. Still, Congress has not addressed the underlying tax causes of inversions, including high statutory U.S. corporate tax rates.

These two stories, and the hanging threads in each of them, may drive future reform efforts. Camp’s proposal provides the means to think seriously about tax reform. The inversion debate offers a reminder of why tax reform could be beneficial.  Whether progress is made on these issues in 2015 is an open question.  But despite long odds, many political leaders seem motivated to pursue it in the coming year.    If they succeed, the events of 2014 may look much more important than they appear today.


Holiday Wishes for… Tax Reform

Congress is adjourned. The Daily Deduction will appear Mondays until it reconvenes. What might the White House tax reform plan look like? We may find out soon. President Obama says he will soon present some “pretty specific proposals” to revamp the US tax code in the new Congress. His plan will  build  on “what we’ve […]


Magical Thinking on Tax Reform

Everybody loves the idea of tax reform. And tax reform can be very good policy. But advocates often turn to magical thinking about how good tax reform can be, and a recent column by George Will offers two examples of this problem. First, Will writes that “if America’s long-term economic growth [rate] were 3.5 percent, […]


Clip ‘N Save: Orrin Hatch’s Tax Reform Principles

In a few weeks, veteran Utah Republican Orrin Hatch will become chair of the Senate Finance Committee. Soon after, the panel may begin tackling tax reform. While there is good reason to be skeptical about how far a tax code rewrite will get in the next Congress, it is worth keeping track of Hatch’s views on […]


They Saved the Must-Pass for Last

Congress has adjourned. The Daily Deduction will post on Mondays until the 114th Congress convenes.    Expired tax breaks: Renewed for 2014. Last night the Senate passed a $42 billion package of expired tax breaks by a vote of 76-16. In two weeks’ time, the tax breaks will expire. Again. Senate Finance Committee Chair Ron Wyden wanted to extend […]


The War on the IRS

The massive 2015 spending bill that President Obama is likely to sign this week continues an ongoing effort to trash the Internal Revenue Service.  It is a cynical recipe for a self-fulfilling disaster: Give the agency more and more work. Cut its budget. Blame it for failing to do its job. Repeat. House GOP Appropriators […]


The Senate Keeps Working…

Still on deck in the Senate: It is expected this week to renew dozens of expired tax breaks, including tax cuts for business research, wind power, and foreign profits. It’s worth remembering that if a $42 billion package like this gets passed every year, the federal deficit could grow by $800 billion over ten years. […]


“They Said That They Would Do It and Indeed They Did.” 


“Oh, what a night…” but no shut down. Ted Cruz and a handful of allies succeeded in delaying the Senate vote on the 2015 budget, but they couldn’t stop it. The $1.1 trillion spending bill was approved late Saturday night by a vote of 56-40. And three months into the fiscal year, most of the […]


Will Immigrants Get A Tax Windfall From Refundable Credits?

In the end-of-the-year congressional scramble, lawmakers scuttled an effort to permanently extend a number of tax breaks—largely because many feared it would open the door to widespread use of refundable tax credits by undocumented immigrants covered by President Obama’s recent executive order.  But is their concern justified? Three sets of rules related to residency and […]


Everybody’s Working for the Weekend

No shutdown, so far. Democrats hated it because of riders weakening Dodd-Frank financial protections and allowing fat-cats to triple their donations to political parties. Republicans hated it because it didn’t stop President Obama from liberalizing immigration laws. But, in the end, the House agreed to fund most of the government through next September, though it […]