United States

Balancing tax reform’s competing goals

Mar 31, 2017

Tracking Tax Reform

By John Gimigliano, Principal in Charge, Federal Legislative & Regulatory Services, Washington National Tax, KPMG LLP

Read more Tracking Tax Reform blog posts

Like juggling chainsaws, tax reform is hard.

It’s obvious why juggling chainsaws is hard. But what is it about tax reform that makes it so hard compared to other legislative issues? Let’s set partisan issues aside and dig a little deeper.

Balancing the three tax reform mandates: There are three primary mandates Congress would like to achieve in tax reform:

  • Revenue neutrality
  • Distribution neutrality
  • Legal-entity neutrality

These three mandates compete against one another, and they need to be achieved simultaneously. Accomplishing any one of these them is hard. Doing all three at the same time is incredibly difficult.

Let’s take a closer look:

Revenue neutrality – Lowering income tax rates is the main objective of most tax reform proposals. But to remain revenue neutral—that is, for the government to end up with at least the same amount of income before and after the reform so as not to increase the deficit—you need to collect taxes by other means (e.g., implementing a border-adjustment tax, eliminating interest deductions). This, generally, can only be achieved politically if Congress believes the trade-offs are good ones. So, while difficult, achieving revenue neutrality is essentially a math problem.

Distributional neutrality – Pressure also exists to ensure that tax reform doesn’t substantially benefit one group of companies or individuals over another. Under the current GOP Blueprint, the distributional effect of border adjustability has proven to be controversial, as most revenue raising provisions are. Because of this perceived winners and losers effect distributional neutrality is typically much harder to solve than revenue neutrality.

Legal-entity neutrality – While the concept of reducing corporate rates seems to have gained at least some bipartisan support, that must be squared with the mandate that tax reform be legal-entity neutral. Unless top individual income tax rates are lowered, along with corporates rates, business owners who operate via passthrough entities (e.g., partnerships, S corporations, etc.,) could need to revisit their choice of legal entity.

Finding the balance: Writing a bill that balances all three mandates simultaneously will be incredibly difficult. But may be necessary to meet both the policy and political objectives of tax reform.

As the GOP Blueprint moves through the legislative process this summer, examine the changes being made. Then ask yourself: Do those changes move it closer to reaching the required balance, or further away? The answer will tell you a lot about the prospects for enactment.

___________

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.