In the case of tax reform, talk can lead to action

By: Rohit Kumar, PwC’s Tax Policy Services Leader

Earlier this week, Speaker Paul Ryan delivered what was positioned as his first major speech in 2017 on tax reform. While he reiterated the priority of tax reform, several sub-themes caught my ear:

  • The politics of tax reform are driven by tax relief for individuals, not businesses — hence the Speaker led with a focus on individual tax rate reduction and the proposed repeal of the AMT and the death tax
  • The importance of simplification — personified by the holy grail of tax returns, one which can be done via postcard
  • The focus on business tax reform through the lens of jobs reinforces the virtues of tax reform from the perspective of the individual voter
  • A strong (if expected) case for permanence — a clear hedge against an emerging narrative that, perhaps, expiring tax relief is an easier, “good enough” alternative to the hard work of reform

Amidst the revolving door of tax reform messaging — it’s dead, it’s alive, it’s on hold — we’re faced with the question: Did his address move the needle? Can tax reform really happen in 2017? On the set of Inside Tax Policy, we discussed all. Catch it here if you missed it.

The short answer, in my opinion, is that signs still point more to yes than no, but I say that with a bold asterisk and a footnote or two. Here’s why:

Though the Speaker’s message focused on the benefits of tax reform — benefits I think most businesses and many individuals will agree are necessary for the United States to remain globally competitive — there was a subtle yet important message that came through: The passage of tax reform will require many tough choices.

It’s my belief that tax reform will only happen in a world that acknowledges that what is doable may be less desirable than what we are all hoping for. The perhaps irrational exuberance around the conversation of tax reform in January — i.e., all our competitiveness problems will be solved! — must give way to the sobering reality of June. Said simply, tax reform is hard (#trih), will take longer than expected, and may leave some feeling somewhat unfulfilled.

Any major tax bill passed before the next election will include some give and take, which means there will be winners and losers, and those in the latter category will complain loudly. The good news is that recognizing this will help bring in to focus the decisions that must be made. If people forgo the false hypothesis that there will be an “everyone wins” scenario, they will be more able to make the tough decisions needed to get this process to completion.

While there’s much that the Administration, as well as House and Senate Republicans agree on, sticking issues remain — issues which were not mentioned in Speaker Ryan’s address. The biggest debate is over the revenue target for reform. Should it be revenue neutral (and thus permanent) or should Republicans go big with a net tax cut that would likely come at the expense of permanence.

Not unrelated is the debate over whether the border adjustment proposal from the Blueprint or some other anti-base erosion rule will win the day. Given the 10 digit revenue number associated with border adjustment, how this question is resolved will have bearing on the revenue question. The challenge with anti-base erosion rules is to acknowledge that this is an area where universal agreement is impossible. The best one can hope for is to find the rule that the most people hate the least.

I happen to think a major tax bill remains an ambitious but achievable goal before the midterm elections. Personally (and here comes the asterisk and footnote I alluded to earlier) I would consider it a win if both chambers pass a bill by the end of 2017. If they do that, they can use the first part of 2018 to reconcile the differences. And from the perspective of effective dates, there’s probably no difference between bills signed just before Thanksgiving 2017 versus one signed just before Valentine’s Day 2018.

At the end of the day, the Speaker’s speech was a reminder to the world that he and the other leaders are very much focused on the issue of tax reform. Seen in that light, I expect the stakeholder community will view it as reassuring. While the speech didn’t do anything to resolve the issues that stand in the way of success, it certainly did not pull any punches on the level of determination to get this done.

Still, reality has set in. To do something truly transformational takes time and, as Speaker Ryan said, this won’t be a path free of obstacles. The more they talk about those obstacles, the more the world will understand them. The more understanding there is, the less likely they’ll be to throw in the towel. It’s this increased level of understanding that will ultimately facilitate turning rhetoric into reality.

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