With great fanfare, the Trump administration released its much-hyped tax reform plan. Less than 200 words long, the plan consists of 12 bullet points outlining broad goals for reforming the nation’s individual and business tax system. The business reform proposals include reducing the corporate tax rate to 15 percent, taxing passthrough entities at the same reduced rate as corporations, moving the U.S. to a territorial system, granting a “holiday” to encourage U.S. multinationals to repatriate and pay taxes on trillions of dollars held offshore, and eliminating tax breaks for special interests (p. 371). If enacted, the changes could revolutionize the international tax landscape.
Short on specifics, the plan raises far more questions than it answers, most importantly:
- How will the plan generate enough revenue to pay for the tax rate cuts?
- How will the plan prevent passthroughs from shifting personal services income taxed at 35 percent to business income taxed at 15 percent?
- What tax rate will be offered to induce multinationals to repatriate more than $2 trillion in offshore earnings, and how will the plan ensure that repatriated funds are invested in job creation instead of share buybacks (which is what happened with the last repatriation holiday)?
- What special interest tax breaks will be eliminated?
- Is the House GOP plan for a border-adjustable tax dead, on life support, or just hibernating?
As to the first — and perhaps most important — question, administration officials expressed confidence that putting more money into the hands of American taxpayers would generate sufficient additional economic activity so that the tax cuts would pay for themselves. If this explanation sounds familiar, that’s because it has been used to rationalize tax cuts for the past 36 years, all the way back to the Economic Recovery Tax Act of 1981. But history has never validated this theory. In fact, the 1981 Reagan tax cut — then billed as the largest tax cut in U.S. history — drained so much revenue from the treasury that, to compensate, in 1982 Congress was forced to enact the largest tax increase in U.S. history.
While the Trump tax plan proposes one way to equalize the tax treatment of corporate and passthrough business income, it is not the only way to achieve that result. For decades, politicians have flirted with the idea of creating parity through corporate integration. Mindy Herzfeld looks at the history of those efforts, from the 1970s through the recent work by the Senate Finance Committee. She explains why the timing could be right for enacting an integration plan that achieves parity (p. 378).
Europe, meanwhile, is focused on detecting and preventing fraud. The European Parliament’s PANA committee, investigating tax avoidance following the release of the Panama Papers one year ago, has concluded that tax havens and offshore financial centers cost EU member states as much as €237 billion (p. 394). On April 25 the European Council adopted a comprehensive directive on VAT fraud. Among other things, the directive calls upon member states to impose a four-year prison term for VAT fraud exceeding €10 million (p. 395).
Hundreds of agents from HM Revenue & Customs and the French national financial prosecutor’s office recently carried out raids at locations in France and the U.K. in connection with an investigation into tax fraud in professional soccer. Those raids included several arrests (p. 412).