Let me start with a prediction: the United States will have a 20% corporate income tax rate in 2018. Exactly how that political “sausage” will be made—and potential opportunities for both US and non-US businesses arising from Tax Reform—is the subject of this series of posts.
But lets talk about recent history for a moment. Remember, this all started on the campaign trail, when (now) President Trump promised H-U-G-E tax reform. He released a one-page “plan” on April 26 seeking, among other things, a 15% corporate tax rate. The House of Representatives had already been discussing features of a “plan” which included the now-deleted Border Adjustment Tax. Layer into this timeline the utter failure of a Republican-majority Congress and Republican White House to repeal the Affordable Care Act a/k/a “Obamacare” after two bites at the apple.
The ACA is estimated to cost $338 billion over 10 years; so if it had been repealed Congress would have had an “extra” $338 billion to pay for tax cuts. But it wasn’t repealed, the ruling party failed to even muster the 51 votes of its Republican senators to accomplish what was a major promise of the Trump campaign. Congress then turned to budget resolutions.
Who cares about budget resolutions?? Everyone who is interested in tax reform does, that’s who! Congress must agree on a budget for 2018 before it can cut taxes, in the same way that you need to know how much money you need to live on in 2018, before you decide whether you can quit that side-job mowing lawns. The US government is the same. It needs to know how much money it will need in 2018 to pay for things like grandma’s Social Security checks before it can decide how much money it needs to bring in from tax revenues—or more to the point, how much money the government is going to have to borrow to increase an already historic national debt.
As of this writing, no budget has been agreed, but Congress is oh-so-close. The Senate has agreed to a budget resolution that would allow for a $1.5 Trillion decrease in revenue over 10 years. Did you understand that? The Senate is considering a budget that starts with the assumption that tax revenues will not be enough to pay for $1.5 Trillion in federal government spending over 10 years! Why would they do this?—so they can enact tax reform that decreases taxes and decreases federal revenues from taxes by $1.5 Trillion! OMG! LOL!
Which is why on September 27 Republicans were able to release their 9-page “Unified Framework for Fixing Our Broken Tax Code” (only politicians could devise such a name so I will call it: “U.F.O.” in shorthand). And guess what? The UFO is estimated to produce a budget deficit of $1.5 Trillion over 10 yearsJJJ! What a coincidence!
That’s like telling your parents you’re going to quit your job at precisely the same time that you tell them your bar tab is going to increase. And while I admit I did that in college, I wasn’t trying to legislate tax reform at the time. Where’s that money going to come from? Bonds, Treasury Bonds specifically. Which is how the United States finances its budget deficits creating a GDP to debt ratio of 106%, one of the highest of the OECD countries.
Cut to the chase Alex! What tax reform is being proposed???!!! I will get to that, and some predictions in my next post…