Politics is about leverage, and the pending tax reform effort is a prime example. Republicans hold a narrow majority over the Democrats in the Senate, 52 to 48, meaning they can’t afford to lose more than two senators. Otherwise the Tax Cuts and Jobs Act (H.R. 1) is kaput and it’s back to the drawing board.
So, it’s no surprise to see some GOP senators publicly hint that their minds aren’t yet made up on whether to support the bill. They have every reason to hold out. By playing hard to get, they’re signaling to Senate leadership that some benefit must fall to their constituents before they can be counted as a safe vote.
Consider Alaska Republican Sen. Lisa Murkowski. Recently she was on the fence about tax reform, until a measure allowing oil and gas drilling in the Arctic National Wildlife Refuge was put into play. As it turns out, Murkowski is again on the fence, this time for an entirely different reason -- one that relates to the proposed repeal of the tax penalty on violations of the Affordable Care Act individual mandate. So great is her leverage that she’s applied it twice, or at least tried to. And why not—Senate Majority Leader Mitch McConnell needs her vote.
It strikes me as curious, then, that another GOP senator has been rather quiet of late on a prominent issue. That would be Rand Paul of Kentucky, and the issue would be the Foreign Account Tax Compliance Act, better known as FATCA.
Paul has a history of going his own way. He was the only Senate Republican to vote against the concurrent budget resolution that paved the way for H.R.1. There’s also Paul’s peculiar stance on the U.S. tax treaty network. Most conservative lawmakers are fine with tax treaties because the instruments are stuffed with pro-business elements. For instance, tax treaties facilitate cross-border investment because they offer critical relief from statutory withholding on income streams like dividends, interest, and royalties. Treaties also restrict the ability of source jurisdictions to wantonly tax U.S.-based multinationals, provided their local activities don’t cross a prescribed threshold. In short, tax treaties are extremely useful to U.S. corporate interests.
Paul doesn’t care. He hates tax treaties because of their article regarding the exchange of information between national revenue bodies. Normally, taxpayer information is strictly confidential. Tax treaties are a major exception to that doctrine. For example, the U.S.-U.K. treaty authorizes the IRS to share taxpayer information – under certain circumstances – with its British counterpart, HM Revenue & Customs. That information sharing helps the IRS make sure American taxpayers aren’t concealing income-producing assets in the U.K.; ditto for HMRC and British taxpayers. Paul considers it an objectionable breach of personal financial privacy.
If the United States had a tax treaty with every other country in the world, the IRS would be able to share taxpayer information with every other government. That’s what Paul wants to prevent. As a member of the Senate Foreign Relations Committee, he has single-handedly frozen progress on tax treaties. That’s been going on for several years. There’s a queue of pending tax treaties that have been negotiated in good faith by the U.S. Treasury Department (including one with Switzerland) that will never be ratified so long as Paul has his way. I’m sure he’d stop progress on bilateral tax information exchange agreements as well, but they’re procedurally treated as executive orders that don’t require Senate approval.
There’s one thing Paul hates even worse than tax treaties and TIEAs, and that’s FATCA. His opposition to it runs so deep that he personally sued the government in federal court to nullify it. The basis of his legal argument was that the network of intergovernmental agreements on which the regime is based is an unconstitutional infringement on his ability to block measures in the Senate. The only reason FATCA is a viable system today is that IGAs don’t require Senate approval.
Earlier this year the Sixth Circuit ruled against Paul, ending his attempts to thwart FATCA through the judicial process. Which brings us back to the legislative process, and tax reform.
It’s a good thing I’m not a gambler, because I would have bet the ranch that Paul would have spent the last few days doing what Murkowski and a handful of other GOP senators have been doing. I keep waiting for the announcement that Paul will yank his support for H.R. 1 unless the Senate adopts an amendment repealing FATCA.
Sure, FATCA brings in a bit of revenue. The precise amount isn’t entirely clear because the government also does other things to crack down on the offshore sector. When a U.S. taxpayer finally comes clean and discloses her Cayman Islands bank account, who’s to say whether she did it because of FATCA or some other compliance initiative. Nevertheless, repealing FATCA would drive up the overall cost of the tax reform package. That requires pay-fors from elsewhere to make up the loss. Not an easy task, but senators could find the money if they absolutely had to. There are plenty of revenue raisers right there in the House bill. For instance, they could replace the repatriation rates in the Senate bill with the slightly higher rates from the House bill. That would more than pay for FATCA repeal.
Make no mistake—McConnell needs 50 votes. He can’t necessarily count on GOP senators who aren’t running for reelection – such as Bob Corker of Tennessee or Jeff Flake of Arizona – or moderates like Susan Collins of Maine, who seems uneasy with measures like the estate tax repeal. And who knows how John McCain of Arizona will vote?
Just do the math. The GOP desperately needs Rand Paul as a solid yes vote on tax reform. If he’s still serious about repealing FATCA, he knows what he has to do. The leverage is his to use, but the window in which he can use it is closing.