Tax Analysts Blog

2017 Could Be a Big Year for Tax Policy

Posted on Jan 3, 2017

The new year is here, and 2017 has the potential to dramatically alter the tax policy climate in both the United States and Europe.  Most obviously, the incoming Trump administration and its Republican allies in Congress would love to remake the U.S. tax code by repealing Obamacare (which has many important tax components) and passing a tax reform package that lowers rates and alters how business income is treated.  In Europe, the populist wave personified by Brexit and Donald Trump could sweep away governments in France (most likely), Italy, and Germany (least likely). 

The United States

Tax reform is coming.  While it isn't entirely certain what Republicans can and will accomplish this year, they will spend a great deal of time trying to develop and pass something.  The boldest plans will probably not be passed in the first 100 or even 300 days of the new administration, but that doesn't mean a lot won't happen pretty quickly.

The most obvious candidate for 100-day treatment is Obamacare.  Despite President Obama and his party's noises about slowing down the repeal of the Affordable Care Act, there isn't much they can do.  The GOP controls both chambers of Congress and can use reconciliation to gut most of Obama's signature achievement.  This means no more individual mandate penalty.  It also would mean the repeal of the medical device excise tax and the net investment income tax (effectively a higher tax on capital gains for the wealthy), and the permanent postponement of the tax on Cadillac insurance plans.  Things will get more complicated if Congress tries to repeal and replace at the same time, but that probably isn't what will happen.

If House Speaker Paul Ryan drops the Ways and Means plan for a destination-based cash flow tax, then a broader tax reform bill could also be done this year.  Now whether lower corporate rates, a repatriation tax, new infrastructure spending, and some tweaking of the individual side qualify as true reform is up to each individual observer.  There is some chance (perhaps a very good chance) that if the destination-based cash flow tax fails to attract Trump's support, 2017 could be a lot more like 1981 (with corporate reform thrown in) than 1986.

If, however, Ryan is able to convince Senate Majority Leader Mitch McConnell, Trump, and future Treasury Secretary Steven Mnuchin to radically overhaul business taxation and put in place the House GOP blueprint, there's no way to see that as anything other than major tax reform.  In fact, moving to a destination-based cash flow tax would be an even bigger change than anything done (or even seriously contemplated) in 1986.  The House plan, though, would be extremely complicated, and it would take considerable time to draft legislative language and assuage concerns about both WTO compliance and winners and losers in the business community.  What kind of individual reform would be paired with the House plan is also up in the air because the revenue loss (or gain) hasn't really been pinned down.

Europe

This year could also bring dramatic changes in the direction of European tax policy.  We already know that Italy's government will be replaced, although its president is holding up new elections until electoral reforms reduce the chance of the populist Five Star Movement gaining power.  And while Angela Merkel seems safe in Germany, a strong vote for right-wing or nationalist parties might undermine some of her commitment to the EU or collectivist fiscal policy.

The biggest chance for a major shake-up on the continent is in France.  The right-of-center French Republican Party chose a very conservative candidate as its nominee in Francois Fillon.  Fillon has adopted some of the anti-European and anti-migrant rhetoric of the National Front.  If he or Marine Le Pen were to win the presidency, it would undermine European unity considerably.  Traditionally, France and Germany have been the main drivers of European centralization and are responsible for much of the bureaucracy and rules that drove the United Kingdom to vote to leave last year. 

With the Socialists in total disarray after President Hollande declined to run again, it seems very likely that Fillon or Le Pen will end up winning.  While Fillon could moderate some of his populist positions once in power, Le Pen will not.  That could create a scenario in which Europe might lose two of its three largest economies (France and the United Kingdom) in a very short amount of time.  Probable?  Maybe not.  But it's definitely not as impossible as it might have seemed two years ago.

Read Comments (2)

Edmund DantesJan 6, 2017

I think you are right, we are in a 1981 situation, not a 1986 situation. We will overshoot on tax cuts, then pare back later, as we did in 1982 and 1984.

I think you are wrong about Merkel. She awoke too late to the severity of the muslim assimilation catastrophe, and legislating against muslim dress fools no one. Her only chance is to round up and deport 1,000 or so terrorists before the election. Most unlikely--just look at today's report of how the police botched capturing the Paris terrorists when they had the chance. It's far more likely that there will be another muslim terrorist attack on German soil, or more sex attacks by muslims there.

No doubt, the EU does not have a long life ahead of it.

Mike55Jan 10, 2017

Great summary of the current landscape. Personally I find the ACA "repeal-and-??" matter the most intriguing. It seems obvious the individual mandate and Cadillac Tax are gone... Republicans despise both, and even Democrats are only lukewarm on those two provisions. From there who knows, feels like anything could happen.

I think tax reform is happening too, but would guess (or maybe just hope?) the answer is something less than the full-blown border adjusted cash flow tax plan being floated. That seems like too much too fast for my tastes... why not go with a few meaningful reforms that are (1) widely agreed to create dynamic growth and (2) not inconsistent with a cash flow tax to get started (e.g., full expensing)? You could then see how things go and re-evaluate in 2021.

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