What ‘Super Tuesday’ means for US tax reform
As the Democratic contenders battle for their party’s nomination, the future of the Tax Cuts and Jobs Act (TCJA) hangs in the balance. The 2020 election could cement or demolish US tax reform.
‘Super Tuesday’ has clarified the Democratic primaries with a third of delegates chopped up in one night. Establishment candidate Joe Biden came out on top with eight states and 453 delegates, while the outsider Bernie Sanders won four states and 382 delegates.
In distant third place, Elizabeth Warren won 50 delegates but failed to breakthrough in any states, whereas Mike Bloomberg won American Samoa and just 44 delegates. However, all these candidates are committed to reversing US tax reform albeit to different extents.
“The future of the tax code depends entirely on the results of the election, not only the presidential part of the election, but on which party controls Congress,” said Robert Willens, a Wall Street tax advisor and former managing director at Lehman Brothers.
The Trump administration has both the advantage and disadvantage of having to defend its fiscal record from the challengers. The TCJA cut the corporate tax rate to 21% and imposed the base erosion anti-abuse tax (BEAT) and the global intangible low-taxed income (GILTI) rules.
It’s easy for Republicans to mobilise their supporters around tax cuts, however, it is just as easy for Trump’s critics to take apart the TCJA. American business leaders were always anxious that US tax reform would be overturned.
“If Republicans win the White House and Congress, the prospects for the tax code remaining as it is, or becoming even more business-friendly, are obviously pretty high,” Willens told ITR.
“There could be further reductions in the corporate tax rate and further incentives to ‘repatriate’ companies and assets ‘back to the US’,” he explained. “We have already seen several companies that had ‘inverted’ during the expatriation boom, [subsequently] re-domicile in the US.”
Such multinational companies (MNEs) include Allergan, Broadcom, Mylan and Wright Medical. Even household names such as Apple have expanded their US presence to reap the rewards of US tax reform and improve their reputation on tax planning.
“A Republican victory in November, and further incentives to conduct business in the US, could easily accelerate the ‘reverse inversion’ process,” said Willens.
Meanwhile the US deficit has continued to expand under the Republican Party. Yet the Democratic candidates show no sign of appetite for spending cuts, but they are hungry for tax revenue. Another dramatic fiscal expansion is on the menu if the GOP lose in November.
Where do the candidates stand?
All of the Democratic candidates are promising to raise taxes in key areas and reverse aspects of the TCJA in a bid to raise tax revenue for much greater public spending. Nevertheless, there are important differences between the candidates on the ‘how’ and ‘what’ of tax policy.
There are clear results arising from such policy changes, if the Democrats win in November. The TCJA would be either repealed or diluted after a change of government.
“Restoring the wide disparity in tax rates between the US and other countries that had existed prior to the tax reform would have the predictable effect of causing MNEs to devise ways to ‘shift’ income from the US to more favourable foreign environments,” said Willens.
“New methods of income shifting, which may not be effective, will have to be devised,” he added. “In short, a Democratic clean sweep would almost certainly lead to sharply higher tax burdens being borne by MNEs.”
Former Vice President Joe Biden has presented proposals to raise more than $3.4 trillion in tax revenue. Yet the plans are far more modest than those advocated by rivals Sanders and Warren.
The Biden tax plan will raise revenue by closing capital gains tax loopholes, closing deductions for the fossil fuel industry, ending the disparity between taxing capital gains and dividend income compared to personal income. Biden would also raise the corporate tax rate to 28%.
He would establish a 15% minimum tax rate established on reported profits of more $100 million a year. This is similar to Warren’s proposal for a ‘real corporate profits tax’. This is on top of Biden’s proposal to double the GILTI tax rate from 10.5% to 21%.
At the same time, Biden has advocated US sanctions against foreign tax havens to pressure them into complying with international standards. This is an interesting position for Biden, since he represented Delaware – a state known for its tax advantages – in the US Senate for 46 years.
Bernie Sanders has pledged to reverse the Trump tax cut and return the corporate rate to 35%. This is just where it starts with the Sanders campaign. The Vermont socialist has proposed an annual 1% wealth tax on households with a net worth of $32 million, with a staggered increase to 8% on fortunes above $8 billion.
The Sanders plan would raise the estate tax on those worth more than $1 billion to 77%. This is alongside plans to institute a financial transactions tax and a 0.5% higher corporate rate on companies that pay their CEOs 50 times more than their average worker.
Perhaps the most radical idea in the Sanders plan is the proposal to redistribute share ownership among the workers of large companies. It would obligate all publicly-traded companies that make more than $100 million a year to redistribute 20% of their shares to employees.
This would be a de facto tax on corporate equity comparable to the UK Labour Party’s proposal to create inclusive ownership funds.
Unlike other candidates, New York billionaire Mike Bloomberg is not advocating a wealth tax. However, he is committed to reversing key parts of the TCJA in order to raise revenue – including a corporate tax increase from 21% to 28% and restore the personal rate from 37% to 39%.
The Bloomberg campaign has laid out a $5 trillion tax plan to support spending increases on infrastructure, healthcare and education. These three areas are crucial for getting American companies to reinvest in the US rather than offshoring, according to Bloomberg.
The most innovative change in Bloomberg’s tax plan is the creation of a 5% surtax on income above $5 million. This surtax would hit less than 0.1% of taxpayers (including Bloomberg himself). During Bloomberg’s decade as New York mayor, the city saw tax increases on property and higher rates for the rich. He favours a special 0.1% tax on all Wall Street financial transactions.
As part of the plan, Bloomberg favours taxing capital gains at the same rates as personal tax for taxpayers with $1 million or more in income. He would also lower the estate tax threshold and end the ‘step-up’ basis for capital gains, thereby raising the tax liability on property passed down to heirs.
Tulsi Gabbard supports eliminating corporate tax breaks for offshoring assets, yet she has not taken positions on capital gains taxes, tax credits or wealth taxes. She voted against the TCJA and criticised it for granting a tax cut for corporations at a massive cost to the US Treasury.
Gabbard’s voting record has been defined by efforts to block the repeal of taxes and rate cuts. However, she has voted against proposals to increase tax rates on middle-class earners. Though the Hawaiian congresswoman has stressed the importance of balanced budgets in the past.
This may make Gabbard the most restrained Democratic candidate on tax reform. However, her lack of comment on these matters gives her the most room to manoeuvre. Gabbard could be a flexible option for a running mate depending on who wins the nomination.
Massachusetts Senator Elizabeth Warren is running on a progressive tax plan, which is more modest than the Sanders campaign in some ways. However, it would be a mistake to view the entirety of the Warren plan as a watered down version of the Sanders tax plan.
For example, Warren favours a 2% wealth tax on households with assets worth more than $50 million and a higher rate of 3% for fortunes above $1 billion. This latter rate goes further than the Sanders proposal for an 8% rate on wealth above $8 billion.
Just like Sanders, Warren would reverse the Trump corporate tax cut and return it to 35%. She would create a 7% surtax on corporate profits based on financial statements – what she calls a ‘real corporate profits tax’ – and impose a 14.8% tax on investment income for individuals earning more than $250,000 a year and couples making more than $400,000.
At the same time, Warren would raise capital gains tax to match personal tax and eliminate a cap on social security taxes for high earners. The campaign’s signature wealth tax would raise an estimated $2.75 trillion over 10 years.
French economists Emmanuel Saez and Gabriel Zucman, both based at the University of California, Berkeley, helped the Warren campaign design its wealth tax.