Tax Reform Act of 2017 Can It Happen Here? Kirk J. Stark Barrall Family Professor of Tax Law and Policy UCLA School of Law January 2017

Structure of Remarks The New Political Landscape Polling Data 2015 (Pew): popular opinion on U.S. tax system and tax reform 2017 (Pew): popular opinion on political influence in Trump era 2017 (Harvard) : popular opinion on tax reform in Trump era Specific Tax Reform Proposals from: Trump campaign proposals (Revised September 2016) House GOP (Ryan/Brady June 2016 “Blueprint”) Senate GOP (Hatch) Projections about tax reform in 2017 or beyond. 1. There appears to be broad popular political support for significant tax reform. 2. Not surprisingly, given that this is an election year, presidential candidates are tapping into that popular sentiment. 3. We will look at the tax proposals of six candidates: four Republicans and two Democrats. As we will see, the details of these proposals or predictably underspecified. And it won't surprise you to learn that there isn't a very high noise to signal ratio in what the candidates are saying about tax policy. That said, we can detect some signals and some general directions to consider. 4. Next, even though it's early in the process, we will have a look at the most likely outcome for the 2016 election. More specifically, what I'd like to do here is to take a look at what the prediction markets are saying about the nominations for each party and the likely outcome of congressional elections. 5. With that information, we should be able to make some very rough and very imperfect projections about the likely direction of tax policy following the 2016 election. 6. Finally, in the last portion of my remarks, at which point you will be petitioning for me to sit down and shut up, i'd like to take a step back from the politics of the moment and the tax proposals on the table to have a broader look at the nature of the US tax system at this point in American history.

February 29, 2016 Possible Executive-Legislative Outcomes, (Very Loosely) Ranked by Likelihood DEM President, DEM Senate, GOP House DEM President, GOP Senate, GOP House GOP President, DEM Senate, GOP House GOP President, GOP Senate, GOP House Notes the most likely outcomes feature divided government filibuster-proof Senate control very unlikely for either party close 2016 margins will likely accelerate the political salience of future elections (2018, 2020, etc…)

Thumbs Up on Tax Reform? President Donald Trump Speaker Paul Ryan Majority Leader Mitch McConnell Treasury Secretary Steve Mnuchin Senate Finance Chair Orrin Hatch House Ways & Means Chair Kevin Brady.

2015

2017

2017

State of Play // Current Proposals Trump campaign Individual –reduce/flatten rates, “simplify” Business – underdeveloped (15%) Estate tax – repeal (tax capital gains @ death) House “Blueprint” Individual – reduce/flatten rates, “simplify” Business – border adj. corp cash flow tax (20%) Estate tax – repeal Senate (Hatch) Business – Corporate tax integration

House GOP Proposed Individual Income Tax Trump tax rates are SAME (possibly different breakpoints) INCREASE STANDARD DEDUCTION: HOUSE = $24,000 (collapse w/ personal exempt), TRUMP: $15K/$30K TRUMP: CAP Itemized Deductions at$100k/$200k HOUSE: No more deductions for SALT, Medical, Casualty Losses NEW Incentives for SAVINGS? – USA “Unlimited Savings Allowance” AMT is GONE

Current v. Trump Proposed Tax Rates

Business Tax Proposals Trump Campaign 15% “all businesses, small and large, that want to retain the profits within the business” (Ryan/Brady) House GOP 20% DBCFT: Destination based (border adjusted) corporate cash flow tax Senate (Hatch) __ % Seems most interested in Corporate tax integration (see Treasury report, 1992)

Business Tax Proposals Trump Campaign 15% “all businesses, small and large, that want to retain the profits within the business” (Ryan/Brady) House GOP 20% DBCFT: Destination based (border adjusted) corporate cash flow tax Senate (Hatch) __ % Seems most interested in Corporate tax integration (see Treasury report, 1992)

Intellectual History of House GOP’s Corporate Cash-Flow Tax Standard credit-invoice VAT Tax each firm on receipts from other firms Credit for VAT paid on inputs Subtraction-Method VAT Tax each firm on total receipts minus inputs No deduction for wages Hall-Rabushka “Flat Tax” // David Bradford’s “X Tax” “Modified” Subtraction-method VAT (allow deduction for wages) Paired with free-standing wage tax w/ household returns 2005 Growth and Investment Tax Plan Variation of “flat”/ X-tax model “destination-based” w/ border tax adjustments Blueprint Destination-Based Corporate Cash Flow Tax

Key Features of House GOP’s Destination-Based Corporate Cash-Flow Tax Replacement for corporate income tax Only applies to corporations, not pass-through entities Single rate – presently advertised at 20% Replace depreciation with immediate expensing Retain deduction for wages (can be understood as a 20% “subsidy” for payroll, relative to VAT) “destination-based” No deduction for imports Export revenue not included Note: major legal questions here regarding WTO rules on permissibility of border adjustments for “direct” taxes

Current law: $10 trillion increase in federal debt over next decade

Will top individual tax rate be reduced in 2017?

Will top corporate tax rate be reduced in 2017?

Will carried interest be taxed as ordinary income in 2017?