Mark Mazur joined the Urban-Brookings Tax Policy Center as its new director on February 1. Before that, as Treasury assistant secretary for tax policy, Mazur spearheaded the Obama administration's defense of the controversial final debt-equity regulations and proposed valuation discount rules.
Mazur's tax career began in the private sector as a tax accountant at General Motors Co., but over the years he held a range of tax- and economics-focused posts at several government agencies. His resume spans from stints at the Joint Committee on Taxation to the White House Council of Economic Advisers and the National Economic Council during the Clinton administration. Mazur also led the IRS Office of Research Analysis and Statistics and then began his stint at Treasury as deputy assistant secretary for tax analysis in 2009. He was confirmed as assistant secretary for tax policy in August 2012.
Mazur recently spoke with Tax Analysts' Jonathan Curry to discuss the potential complications of a destination-based cash flow tax, his hope that the section 385 regulations will stick around, and his advice for the next Treasury assistant secretary for tax policy.
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Tax Analysts: In your last position as Treasury assistant secretary for tax policy, what role did you play specifically in developing and advancing tax policy? And tied to that, did policy originate with your office, or did that come more from the Office of Management and Budget and then you'd crunch the numbers and make the policy happen?
Mark Mazur: The development of tax policy proposals in the Obama administration was coordinated by the National Economic Council, but the Treasury Department was the main participant in the process, the indispensable participant in the process.
Generally, the Office of Tax Policy would brainstorm budget proposals and help shape budget deliberations, but in an administration, there is just about an infinite number of ideas for tax policy proposals that come throughout the administration. And part of the job of the National Economic Council staff is to ensure that those policy proposals get developed and evaluated. And so the Office of Tax Policy would be the place that you would do the evaluation of the proposals. But we generated a lot of them on our own. So it's kind of hard to separate out what the role is. I think you could get tax policy proposals both in an initiation role, and then in every one of the proposals an evaluation/analytical role.
That's part of what the Office of Tax Policy does. There's a large amount of guidance that comes out of the Office of Tax Policy, and that is collaborative work with the IRS. And generally, that's an area where there is not a whole lot of influence from the rest of the administration. And we put out probably 200 to 300 pieces of guidance a year.
TA: President Trump has campaigned under a banner of bringing radical change to Washington. Do you think that the roles of Treasury and the IRS -- and specifically the Office of Tax Policy and the assistant secretary for tax policy -- are likely to change, or are they pretty well entrenched at this point?
Mazur: Well, every administration has an opportunity to figure out how they want to coordinate and develop policy throughout the administration. I think one thing about tax policy is it does touch upon a bunch of other activities. We run a ton of our social programs through the tax code of the country, and so you need some kind of a coordinating body. I think it's kind of too early to tell whether the incoming administration is going to run that out of the National Economic Council or set up some other structure.
TA: The IRS's funding woes are a pretty well-known issue at this point. Did the Office of Tax Policy have issues with funding, or has it been well supplied compared with other government agencies?
Mazur: If you just look at the history of staffing in the Office of Tax Policy, I think at the end of the [George W.] Bush administration, the office was somewhere around 90 people, and at the end of the Obama administration, somewhere around 103 or 105 people -- actually, probably a little above 105 people. So a pretty significant increase in staffing over time.
I think there were a couple of things. One, as I mentioned earlier, was the large amount of social policy run through the tax code and so just the recognition of that. Two, a recognition of the increased globalization of the economy. And so the Office of Tax Policy needs to participate in a wide range of activities, international activities. And it needs staffing to do that.
I think both [former Treasury] Secretary [Timothy] Geithner and [former] Secretary [Jacob] Lew realized that it was important and valuable to have a well-functioning Office of Tax Policy, and they both helped direct additional resources in that direction.
TA: As assistant secretary for tax policy, did you have a pet project, something that you really wanted to fix or make sure you accomplished before you left the public sector?
Mazur: Not really. My goal going into the position was to improve the efficiency, effectiveness, and fairness of the tax code. And that's the lens I used to look at all the policy proposals. I didn't have any particular pet things that I wanted to get done.
TA: So I'll ask you to self-evaluate a little bit: How do you think you did?
Mazur: I think the tax code is much more progressive than it was at the start of the Obama administration. So I think you have to give a check on the fairness.
On the efficiency and effectiveness, I think that the jury is a bit out on that one. I think that we all thought -- that is, we all in the administration thought -- that we had an opportunity to do some serious reform of the business tax system and thought there was an opportunity to make some progress there. I think you saw [former House Ways and Means Committee] Chairman [Dave] Camp's proposal and others that were floated as good attempts to improve the business tax system. But frankly, there wasn't a will in Congress to engage on doing business tax reform. And so that didn't happen.
TA: Earlier this year you argued more needs to still be done within the tax code to reduce income inequality. And by most estimates, including those from the Tax Policy Center's analyses, the after-tax income benefits of the tax cuts in House Republicans' "A Better Way" tax reform blueprint, as well as Trump's tax plan during the campaign, skewed largely to upper-income earners. Do you think there's still an opportunity to address income inequality through the tax code in the next administration? And if so, what are a couple of proposals out there that you think have a realistic chance of getting bipartisan support and being implemented?
Mazur: I think on the basic goal, whether the tax code can be made more progressive or less progressive going forward, I think that we're still at the early stages of the process, and so we'll have to see how this plays out. You're right to point out the Republican Better Way proposal and the proposals from candidate Trump as skewing toward the upper end of the income distribution in terms of tax benefits that are provided, but I think we're still pretty early on.
And just one example of a proposal that would help improve income inequality would be the proposal from [House] Speaker [Paul D.] Ryan to improve the earned income tax credit as it relates to workers without children. And so that could be part of a tax reform proposal that would be on the helping progressivity side. But again, really too early to tell how all the pieces are going to come together.
TA: Last year as well, you expressed optimism about the prospects of business tax reform in the near future. And recent tax reform efforts attempting to broaden the base and lower the rates have taken a bit of a back seat to talk of more dramatic changes to the tax system, especially the House blueprint's destination-based cash flow tax. What path do you see tax reform taking, and what are the risks and rewards for that path?
Mazur: I think the legislative side -- if you look at the House proposal, you have the destination-based cash flow tax as a leading contender at this point. Again, kind of too early to tell how it's going to work its way through the legislative process. I think at the end of the day, you're going to need some sort of a tax reform plan that passes on a bipartisan basis. And so it's completely unclear at this point whether you'll get bipartisan support for something like the destination-based cash flow tax in the House, and again if you'll get similar support in the Senate. I'm really looking forward to seeing a lot of the details of the proposals get spec'd out because I think right now there are lots of questions being raised by outside observers, and until you get those questions resolved, it's kind of too early to tell what it's going to look like.
That said, I expect Congress to enact some tax legislation this year. My guess is it will be termed "reform" and we'll need to look at the final review of the package to see if it truly is tax reform.
TA: Do you have any thoughts on how adopting a tax system like the destination-based cash flow tax would affect tax administration? Would there have to be any significant reorganization, with new roles created, or could it be fairly easily adopted with minimal structural changes required?
Mazur: So I have two observations here. One is -- and I'm going to sound like a bit of a broken record -- but you do need to see the details to answer any of those questions. I think what [Ways and Means Committee Chair Kevin] Brady is trying to do is utilize the structure of the corporate income tax so that it would minimize the amount of dramatic changes that would occur.
Second observation I think is that when you do a tax change this large you have to be very, very concerned about unintended consequences and opening up different dimensions of behavior and tax planning that may not be an issue in the current system. And, again, until you see all the details, you don't know how it's going to work; but you should just think about the idea of having an idealized cash flow tax being compared to what is clearly a flawed corporate income tax, and it's easy to say, "Well, let me choose the idealized version." But when something gets enacted into law, it's not going to be the idealized version -- there are going to be a lot of compromises made. And so you'll need to compare [that version with] the one that gets enacted.
TA: In general, the way manufacturers and retailers are lining up is kind of predictable -- they're getting into coalitions and they're lobbying for and against. But the impact on many industries is still unclear. How do you think such a tax proposal would apply to the financial services industry, as well as to financial transactions?
Mazur: Yeah, so that's one of the details, right, that is unspecified at the moment. And I think one of the things that you need to be aware of is, suppose you have a special rule for the financial industry, then do you also have a special rule for the manufacturing companies that are engaged in financial transactions? And seeing how far that you push on that dimension will be a major determinant as to how this thing is going to work in practice.
TA: A lot of practitioners are questioning whether cross-border reinsurance transactions should be treated as an import of a service or an export of risk. Do you have any thoughts on how reinsurance under the proposal would be treated, or are you aware of any discussions on this?
Mazur: No idea how it's going to be treated, but just one observation, and this will be an example of lots of these issues. If you're a taxpayer, you're going to want to say that whatever activity you're engaging in -- that you can -- it's an export, right, because it's not subject to tax.
And under this proposal, you try very hard not to have your activities classified as imports, right, because then you don't get the deduction for those costs.
And so you can just see how this is going to play out. In the case of reinsurance, you would expect the U.S.-based reinsurer to say, "Hey, wait a minute, that's an export." And on the flip side of that, people try to say, "No, it's not really an import," coming the other direction.
But you're going to have that on a ton of other transactions. Think about with global supply chains, how are you going to see those change if people are concerned about whether something is labeled an import or an export -- or provision of services or provision of software? I mean, I don't know how this is going to look, but at the very cynical level you would think that if you put software in a cloud, you'd try very hard to say that was an export.
TA: You pointed out that different industries might be having different rules made for them. Would the special rules be coming out of legislation, or would that be left to Treasury to work out?
Mazur: Well, you know that the right answer is that it should be done with legislation.
TA: Sure. But you predict that a lot of this is going to fall on Treasury to clean up the mess?
Mazur: Well, we'll see. I think that again, the right answer to do this would be to have a fulsome public debate and have things decided in a bipartisan way, both in the House and in the Senate. And in that case, you could easily see pretty specific rules for different industries as they try to adapt to this new tax system.
And so that would be the right thing to do. If you said you'd leave it to Treasury to come up with rules like that, that just increases uncertainty for provisions going forward. Doesn't sound like that's a great strategy.
TA: Let's take a look back. One of the more controversial regulatory projects that was issued during your tenure at Treasury was the section 385 debt-equity reclassification guidance. And while the final regs substantially scaled back the reach of the proposed regs, there are still some voices on Capitol Hill calling for the regs to be rescinded. Do you think that the regs are achieving their aims, and do you believe that those aims are in line with the current administration's stated philosophy of U.S. protectionism, as your former colleague Robert Stack does? And do you think they're unlikely to be rescinded in the next administration?
Mazur: OK, a couple of things. On the section 385 debt-equity regulations, I think the process worked exactly as it's supposed to in the sense that we put out proposed regulations, asked for comments, got a lot of high-quality comments, incorporated those comments in the final regs, and came out with something that I think the vast majority of the tax policy observers looking at this would say was pretty well done, a pretty good pilot.
The regulations were intended to ensure that debt between related companies truly was debt -- I mean truly was a debt instrument if you're going to claim an interest deduction. And so the rules are set up to do that. And the idea that a taxpayer who's borrowing $100 million should have, you know, three pages of documentation seems like a reasonable one, even if it is a related-party debt. And the fact that there should be a prospect of being repaid seems to be a reasonable one. And so I think this is a step that was taken by Treasury and the IRS to avoid the further erosion of the U.S. corporate tax base. And I think both the administration and Congress, if they're fair-minded about this, would say that the regulations are doing what they're intended to do and that they'd want to keep that in place.
TA: Recently, Trump issued an executive order requiring the elimination of two regulations for every new one issued. Now the order as we know it is a little bit unclear and is very broad but with a stated goal to encourage prudence and be financially responsible, how would you characterize tax regulations fitting into that world view generally? And do you think Treasury can find a workaround to the order, or do you envision regulatory projects coming to a halt altogether?
Mazur: We'll have to see how this executive order gets interpreted and passed down to the agencies on this. I mean, one thing that I would note is that I said earlier we put out 200 or 300 pieces of tax guidance a year. Much of that tax guidance is welcomed by the taxpaying community because it provides clarity about the way law is supposed to work, it provides certainty, it interprets long-standing provisions of the law, and so generally is welcomed by the community. And I would say two-thirds or more is in that bucket. So it puts like a third or less in the not-so-welcome bucket.
And if that's the case, then this mechanical rule of repealing two regulations to replace one, or to have one new one come out, seems like a bad way to run the government. It doesn't take into account the nuances and subtleties that you need in doing guidance. And I think you shouldn't replace professional judgment with a mechanical rule, and that seems to be what this is trying to do. Whether the Treasury could find a workaround for it, I don't know. You know, maybe we should go back to like the 1970s and repeal the inflation adjustments that were done then and say, "Oh, we did that." I don't know. That doesn't seem to be within the spirit of what they're trying to do.
TA: Another thing Trump proposed during the campaign is a uniform 15 percent business tax rate on both corporations and passthroughs, with large passthroughs being still able to claim that rate if they reinvested profits back into the company. Now, a number of observers have warned that having a top individual income tax rate of 33 percent, with that 18 percentage point differential, would create a lot of pressure for gaming the system since high-income earners would have an incentive to reclassify income and claim the 15 percent rate instead. The Trump team has said several times that they would enact rules to prevent gaming, but based on your experience, do you think that effective rules could be implemented to prevent these kinds of tax shenanigans?
Mazur: It would be difficult to do. I think the problem that you have here is trying to anticipate all the ways that human ingenuity can develop new organizational structures or new forms of business. I think that [economist and professor] Joel Slemrod has gone through this idea of a hierarchy in that timing shifts are very easy to do in response to a tax change. And so you see this happen when there's a tax change. I guess with top rates moving up or down you see taxpayers either accelerate or defer income or a loss. And that's totally straightforward and fairly expected. But kind of right behind timing are paper transactions in terms of ease of doing this. And so if you say that an LLC gets treated differently than a corporation and there's a tax reason to be one or the other, taxpayers will find a way to set up the organizational structure that's more tax favored.
And just a small example where you see this is in the S corporation world, where taxpayers try to avoid some of the Medicare tax by reclassifying things as earnings rather than salary to their principals. And so there are some ways that people could do that. And that's for a much smaller percentage point differential than we're talking about here. I think it's really, really hard to precisely rein in really clever tax attorneys and accountants. And so that's one area where I think Congress can try, but you often find that even if you're successful, you're only successful for a limited amount of time. And so technology changes, and people come up with different approaches.
TA: Can you describe some of your priorities for your new role as head of the Tax Policy Center, and are there any new organizational focuses or initiatives on the horizon that you'd like to see take place?
Mazur: So one thing that is incredibly attractive about the Tax Policy Center is that there's a really good set of staff here, a very talented group of people. And the organization has gotten a well-deserved reputation for being a nonpartisan provider of facts and analyses to help the public focus on tax issues and help frame the tax policy debate. I think ensuring that all of the facts and analyses are provided in a timely way so that they can contribute to a fulsome debate is something that we're all about. So the Urban Institute has a slogan that they try to "elevate the debate," and it's fully what we try to do here at the Tax Policy Center.
I'm really just learning all that goes on here at the Tax Policy Center, so I don't have any grand plans to change things. I think what I'd like to do is look at the trajectory that the Tax Policy Center has been on and just continue that in a positive direction.
TA: The Tax Policy Center recently rolled out dynamic scoring estimates a couple of months ago, and a number of Republican lawmakers, including Rep. Mick Mulvaney, who is Trump's nominee for director of the OMB, they strongly support using dynamic scoring to estimate the revenue effects of legislation. How much weight do you think that lawmakers or the public even should give to dynamic scoring estimates?
Mazur: The first point I want to make is that something like this is characterized as dynamic versus static scoring where static scoring is characterized as not really taking into account what goes on in the tax system. And I think the traditional scoring methods used by the Joint Tax Committee and the Treasury Department and [others] do take into account microbehaviors -- so that individuals' behaviors can change, firms' behavior can change, and so on.
What they don't do in the traditional approach to scoring is take into account changes in the overall economy, the size of the economy. And that's what dynamic scoring does. And that's an additional piece of information that's useful. To the extent you say that a change in policy -- and not just tax policy, but a change in policy generally -- will have a predictable effect on the size of the economy, you'd want to incorporate that. So, for example, if you were to look at the immigration reform proposal from the Obama administration, which pretty much would have increased the size of the U.S. labor force by having additional legal immigrants, you would be able to predict that with a larger labor force and push forward, you'd have a greater, larger economy in the future. And you should incorporate that into the analysis of the proposal.
In the case of tax policy proposals, it's harder because they're -- first, many of the proposals that we look at tend to be small in the grand scale of the economy and so really won't have a big effect. Second, those that have a stimulative effect in the short term may have a less stimular effect, or even reverse that effect, in the longer term. So, for instance, if you have a proposal that loses a lot of revenue in the early years, it may generate additional economic activity and offset some of that revenue loss through increased wages, profits, and so on. But in the longer run, those deficits turn into federal debts that need to be serviced in the future. And so you have additional interest payments, which can slow down the level of economic growth in the future.
And so I think the lesson I take away from this is that the use of dynamic scoring is important in trying to understand what possible implications on the future size of the economy might be, but it's really important to understand the limitations and the imprecision that's associated with it. And I think -- one of the worries I have about using dynamic scoring is that it sometimes allows policymakers or outside observers to cherry-pick things, choose whatever model is most favorable to the case they're trying to make and say that is the effect, when the truth is in an economy as large as the U.S. economy and one that is as complicated as the U.S. economy, we generally don't know with a lot of precision what those effects are going to be a decade or more out.
TA: Do you want to share any free advice for your as-yet-unnamed successor at Treasury as the assistant secretary for tax policy?
Mazur: Yes, I guess a couple of things. One, that you should try to have as good a working relationship as you possibly can with a number of entities, with the Treasury secretary and the office of the secretary, with other parts of the Treasury Department, with the White House -- say, the National Economic Council and whoever else is involved in developing tax policies -- and importantly, with the IRS because the administrative work that gets done is collaborative work between the IRS and Treasury Department. Having those relationships in place and ensuring that they work as smoothly as possible is important to be successful.
And then the second thing I think I would say is my successor should surely value and treasure the staff that comes with the Office of Tax Policy. I think that if you look at the economic staff there you'd probably say that it's probably like the best public finance department in the country, that they have a great concentration of really high-caliber economists to cover the entire space of tax issues, and it's something that doesn't exist anywhere else in the country. And then the legal staff, it probably is the best tax-focused boutique law firm in the world. And both of these are huge assets of the federal government, something that should be nurtured and treasured and enhanced as possible.
Andrew Velarde contributed to this article.