Tax Analysts Blog

Hillary Clinton: The First Minus 50 Days

Posted on Jul 28, 2016

Hillary Clinton, having finished in first place in a Democratic primary race with only one Democrat in it, was duly anointed by the party as its standard-bearer at its convention in Philadelphia on July 26. Her nominally independent and avowedly democratic socialist primary opponent, Bernie Sanders, who had previously declared that the country was “sick and tired” of news coverage of her use of a personal email server for receiving and sending classified documents, is apparently now resolved to also deflect attention from hacked emails showing that the top brass of the party to which he doesn’t belong actively encouraged efforts to deny him its nomination. With both email scandals thus firmly behind her, Clinton’s return to the White House seems inevitable—this time as the power on rather than behind the throne.

Unlike other first-term presidencies, however, a Hillary Clinton administration will probably not be defined by the first 100 days following her inauguration on January 20, 2017. Instead, the tone is likely to be set by an approximately 50-day period preceding that date: the duration that the current—114th—Congress will be in session after her election on November 8, 2016, and before its term expires on January 3, 2017.

Faced with being shut out of the White House for another four years, and perhaps a loss of their Senate majority in the 115th Congress, establishment GOP members dominating both houses of the 114th are likely to try to grab any half-loaf that President Obama has on offer rather than risk an empty larder under a President Hillary Clinton. In the process, they may end up extricating Clinton from a situation of her own making that could inhibit her ability to govern as the pragmatist incrementalist that she essentially is. Seeking to outflank Sanders on the left in her primary battle, Clinton has staked positions belying her more own centrist tendencies, often in direct contradiction of her husband’s record. These include rebuffing as insufficiently diverse Obama’s Supreme Court nominee, Judge Merrick B. Garland, who was appointed to the D.C. Circuit by Bill Clinton; and repudiating her own prior endorsement of the Trans-Pacific Partnership, which represents a logical progression of the trade liberalization policies initiated by the North American Free Trade Agreement signed into law by Bill Clinton.

Perhaps even more stark, Hillary Clinton unveiled a tax plan that unabashedly seeks to punish the successful by, among other things, almost doubling the top capital gains rate on assets held for between one and two years to 43.4 percent from the current 23.8 percent. In contrast, Bill Clinton had dropped the long-term capital gains rate down to 20 percent from 28 percent in 1997, and in 1995 expressed contrition for the marginal tax increases enacted two years earlier in his first budget, labelling them as “too much.” On the corporate side, instead of seeking to attract some of the more than $2 trillion in earnings trapped abroad by offering the carrot of lower rates or a move toward territoriality, Hillary Clinton’s plan simply brandishes a bigger stick, proposing a punitive exit tax on all deferred earnings at the full 35 percent rate for companies that expatriate.

Within days of the presidential race being called for Clinton, expect Garland to secure easy confirmation to the Supreme Court. Most GOP Senators will positively shudder at the specter of an Elizabeth Warren-approved nomination emanating from the Clinton White House. Similarly, current House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, both free trade advocates, should be able to shepherd congressional approval of the Trans-Pacific Partnership. Ironically, their task will be made easier if Democrats are poised to regain Senate control in the next Congress, with the decidedly pro-labor-union Chuck Schumer slated to take over as the new majority leader.

Tax reform will present a much bigger challenge. House Republicans under Ryan’s leadership released an ambitious blueprint last month for “fixing our broken tax code.” On the individual side, the blueprint simplifies, flattens, and reduces. It would consolidate tax brackets, lower rates, substantially increase the standard deduction, and eliminate most itemized deductions, retaining only the mortgage interest deduction and some form of allowance for charitable contributions. In addition, it would increase the child tax credit and keep the earned income tax credit, educational credits, and the exclusion for employer-provided health insurance.

The blueprint’s real innovation, however, is on the corporate side. It would transform the current structure into a destination-based cash flow tax by moving to territoriality, exempting exports, and allowing expensing. Along with lowering the rate to 20 percent, the blueprint’s changes could help transform the United States from a jurisdiction that multinationals seek to flee to one where they flock to set up headquarters and operations.

Revamping the code on the scale envisaged in the House Republicans' blueprint would almost certainly lie beyond any zone of converging interests between an Obama administration looking to end its second term on an up note and the Republican congressional leadership licking its wounds after the party’s third straight presidential defeat. But targeted international corporate tax reform remains a distinct possibility. The administration’s last several budgets have proposed a limited move to territoriality by ending deferral and imposing a minimum tax on the foreign earnings of U.S. multinationals. Last year, a bipartisan working group of the Senate Finance Committee floated an alternative approach—a participation exemption for dividends from controlled foreign corporations to their U.S. parents. A quasi-territorial regime with interim rules to encourage repatriation of trapped foreign earnings may well be on the books before Hillary Clinton’s team takes over at Treasury, perhaps even with input from that team during the transition.

When he coined the term “hundred days,” in a radio address to the nation several weeks before assuming office on March 4, 1933, President Franklin D. Roosevelt was in fact referring to a legislative session—that of the 73rd Congress between March 9 and June 17, 1933—rather than the first 100 days of his administration. Moreover, the original historical use of that phrase had connotations that were far from propitious—it described the surprisingly short time it took for Napoleon’s triumphant return to power after his escape from Elba to come to an ignominious end with his humiliating defeat at Waterloo on June 18, 1815.

Whether good auguries attend Clinton’s assumption of power would depend in large measure on the extent to which in the days leading up to it, two lame ducks agree to play ball with each other: Obama looking to cement his legacy on the way out, and a thrice-denied Republican Party in control of both congressional chambers.


Read Comments (1)

Mike55Jul 29, 2016

Great article, as always. I do wonder though: why couldn't Obama and the House achieve a grand compromise on corporate tax reform? Is it just the idea that comprehensive corporate reform cannot occur in isolation (with the parties being way too far apart on the individual side)?

The recent GOP proposal is interesting in that nothing about it should be inherently distasteful to Democrats. Sure, there'd be a battle over what it means for a proposal to be "revenue neutral," but that issue needs to be addressed regardless of the proposal.

I appreciate that the most likely result here is nothing happening, and you'd be crazy to bet on tax reform happening anytime soon. It's just hard to understand why corporate reform can't happen, as the parties really don't seem all that far apart in substance (despite the dramatic differences in rhetoric).

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