- Thanks for everyone for coming out.
So, our topic today is the
December tax legislation,
sometimes called the Tax Cuts
and Jobs Act, sometimes not,
they actually did not
manage to get that title
into the legislation, it got
struck at the last moment.
In any case, this legislation,
whatever its name,
is among the most consequential pieces
of domestic legislation passed
in the last several decades.
It will have significant
effects on the ways in which
business is done in the
country, on government finances,
and on the distribution of resources.
This is not to mention the
effects on tax practice
where this is producing an
unending amount of work,
and that does not seem
likely to end any time soon.
The panel today will discuss
a number of key elements,
and engage in hopefully, some discussion
around a few of the
key parts of this bill.
So, in this case, I'm going with the idea
that we need no introduction,
though maybe just a tiny one.
So, all of us, so, Lily
Batchelder, Mitchell Kane,
Dan Shaviro, though apparently
he needed an introduction
to the person writing the
label on his card, we are all--
- [Dan] When I've been here longer,
I'm hoping they'll get my name right.
- Yeah, you know, just
a few more years, Dan.
So, all of us are tax professors here,
all of us have worked
extensively on this bill
from the outside, none of us were inside,
we all coauthored a
major report on the bill
as it was being drafted,
that report focusing
on the tax games that
would likely be played,
and a number of us wrote in other forms
on the tax bill as it was being written.
So, with that as our topper,
I thought we would now begin
to work through some of
the sort of key topics,
and we've sort of divided
up a little bit among
some of the key topics, and
so starting first with Lily.
- Great.
Well, glad to see so many people out today
to hear about tax, and
what I thought I would do
is provide a quick overview of the revenue
and distributional impacts of the bill,
and also a very, very quick overview
of the individual income
tax provisions in it,
and then I think, Dan's gonna talk more
about partnership and corporate.
David's gonna talk about some
of the games being played,
and Mitchell's gonna talk
about more about international.
So overall, the bill was estimated
by the Joint Committee on Taxation,
which is the official
nonpartisan scorekeeper
of tax legislation, they're like the CBO
for all spending legislation.
They estimated that the bill would cost
$1.5 trillion over 10
years, or 1.8 trillion
if you include interest costs.
We have a few slides, and then generally
weren't not gonna use
slides, but this chart shows
that if you look over the first 10 years,
generally the tax cuts are split among
individuals, a state tax cuts,
the new pass-through deduction,
and corporate rate cuts.
But by the end of the budget
period, starting in 2026,
this really changes because almost all
of the individual tax cuts expire,
whereas the other provisions
are made permanent.
So, by the end of the budget window,
it's really a big permanent cut
to business taxes financed by
a tax increase on individuals.
If these individual tax cuts are extended,
which seems possible,
then the cost of the bill
would go up to over $2 trillion.
It is estimated to
modestly increase growth
in the short term, which JCT
estimates would reduce its cost
by about 400 billion, so
down to maybe 1.1 trillion
assuming that all of these
individual tax cuts do expire.
But those long term growth
effects largely disappear,
and may reverse in the long
term because the extent
to which it increased deficits
means that interest rates
are likely to rise, which
will depress investment.
It also does not take into account
these JCT growth estimates,
do not take into account
the effect on growth of eventually paying
for these tax cuts.
So there's no free lunch, eventually these
will have to be paid for
either through tax increases
or spending cuts, and those
aren't taken into account
in the reported estimates by
JCT of the growth effects.
So overall, the bill is quite regressive.
David Kamin has written
a great paper on the way
that you should measure progressivity
as a percentage change
in after-tax income,
and after he wrote that paper,
I became a true believer in
that, and we'll only generally,
if it is available, talk about numbers
that are about the percent
change and after-tax income.
So, this shows the near
term effect in 2019,
and the tax cuts for millionaires
are about three times as
large as the share of income
as a family earning saying
40 to $50,000 per year.
It's even more regressive by
the end of the budget window.
So at that point, all income groups
earning less than $75,000
actually face a tax increase.
This is after all of those
individual tax cuts expire,
but there are a few permanent provisions
that I'll talk about that resulted in them
paying higher taxes.
And I should note that
these estimates assume
that 25% of the corporate tax cuts redound
to the benefit of labor, so
these don't actually reflect
changes in people's personal tax bills.
They also don't include the estate tax,
they don't include changes in spending
attributable to the repeal
of the individual mandate,
and so, if you accounted
for all those things,
the effects would be even more regressive.
So, I now that have this slide
which violates my general maxim
that I will only show
distributional estimates
as a percentage change of after-tax income
because the way JCT did these estimates,
it wasn't possible to calculate that.
So these are just the dollar terms,
but they look at what is the effect
of the non-business provisions alone,
so that's sort of a way of
thinking about what is the change
gonna be on individual
employees own tax bills,
as opposed to the possibility that maybe
their business that they work for
will give them a wage increase over time.
And so if you look just at
this, the average tax cut
is about $1,000 in 2019, but it becomes
an average tax increase of $300
by the end of the budget window.
And again, partially
because these are presented
in dollar terms, you can
see that the tax cuts
initially really redound
more to higher income people.
These estimates also,
like those macro estimates
that I mentioned, don't take
account for how this bill
will be paid for ultimately,
and we don't know,
a good guess might be that
they might be paid for
by either tax increases or spending cuts
that are proportionate to
income, and that would make
these effects look even
more regressive over time.
So, I wanna now do the revisitive tours
of the individual provisions
that are in the bill.
So, there were only two
provisions that are permanent.
The first one is a slower
measure of inflation
in the tax code, and this
actually has really broad effects.
It sounds super technical,
but it basically means
that over time, more income
falls into higher tax brackets
than it would of under prior
law because those tax brackets,
income thresholds, grow more slowly
because there's the slower
inflation measure used.
And so this tends to just
proportionately effect
low and middle-income households
because the wealthiest
are all, most of their income is already
in the top tax bracket, so they don't care
whether the threshold for it is growing
a little more slowly over time.
It also reduces the value of
a bunch of tax expenditures.
So, some tax expenditures have components
that are inflation-indexed,
and other's don't,
but for example, the
earned income tax credit,
which many of you may have heard about,
it's essentially a waived
subsidy for low-income families,
primarily who have kids, and
the threshold and all of that
are inflation-indexed
because they're gonna grow
more slowly over time,
that means it'll be less, worth less
compared to current law
over time, than it is today,
or would be in the future.
So this provision raises
about $133 billion
in the first 10 years, but its
impacts grow really rapidly,
so according to the JCT, it
raises three times as much
in the second decade as the first.
So this is one kind of
stealth tax increase
embedded in the bill
that primarily effects
low and middle-income families.
The second and permanent provision,
and the only other permanent
provision for individuals,
is repeal of the individual mandate
that's part of healthcare reform.
Technically it doesn't repeal the mandate,
but it lowers the penalty to zero,
so there's no repercussions
if you don't purchase
health insurance other than not having it.
This raises 314 billion and CBO estimates
that by the end of the
decade, it's gonna increase
the number of uninsured
people by 13 million,
and it's also gonna increase premiums
in the individual market by 10%.
About half of this is actually due
to people buying less
insurance on the exchanges,
and half due to people not
taking up Medicaid benefits
to which they're entitled.
Very little of it, less than
10% is people not paying
that tax that used to apply if you didn't
purchase health insurance.
So, all the rest of the
individual provisions,
including the pass-through deduction
that Dan's gonna talk about,
expire after eight years,
at the end of 2025, and this sets us up
for a giant fiscal cliff
similar to what we had
a few years ago, big extenders debate.
There are lots of changes in
the individual tax brackets,
so this chart shows the top one is
if you're married filing jointly.
They very top bar shows what
your rate is under current law,
or prior law and the bottom
shows what your rate is
under the new law, and it's always lower
for married couples, it's not
always lower if you're single,
but the cuts are bigger if you
earned over about $450,000.
There are a lot of
changes for non-itemizers.
The standard deductions increased,
personal exemptions are repealed,
there is an increase in
the child tax credit.
The net effect of these is kind of a wash.
It's close to zero
revenue effect if you add
all of these provisions together,
but it gradually becomes
worse for families over time
because of that inflation
indexing provision,
and the personal exemptions
that were repealed,
were inflation-indexed while
the child tax credit is not.
So the last major thing
I wanted to talk about
was there are a lot of changes
to itemized deductions.
So, prior to this bill, about
30% of taxpayers itemized,
and afterwards about 10% of
taxpayers are gonna itemize.
Part of this is because the
state and local tax deduction,
which David's gonna talk about,
is substantially reduced,
the mortgage interest
deduction is capped at $750,000
if you buy a new home,
and there're a bunch
of other changes, but the result of having
much fewer itemizers is probably gonna be
a reduction in charitable giving.
This is also a product of
the fact that the estate tax
is substantially reduced, and
that's a big tax incentive
for charitable giving,
and there should also be
some decrease in home
prices at the high end,
because of that reduction in the
mortgage interest deduction,
and the number of people
that are itemizing in general.
So, there's a lot more we
can talk about on this,
but I think I will wrap
up so we can jet through
the other discussions.
- All right, so a bit before we move on,
I'm gonna use moderator's
discretion to ask a question.
So, are these models
already being proven wrong?
So, you've set up distributional tables,
you've talked about how
some of the models suggested
there would be relatively
little growth effect and so
workers wouldn't benefit, but
corporations have announced
now a raft of bonuses
suggesting that the tax bill
was already raising the
amounts people are taking home,
even before we get to the actual tax cuts
they would be getting starting this month.
So, are these models right,
or are they just proven wrong,
and people are already
seeing pay increases
due to the tax bill?
- Well, I think the thing we
should pay more attention to
is the changes in withholding
and people's tax payments
next year, as opposed
to these announcements.
So, there have been a bunch
of announcements in the press,
there have also been a bunch
of announcements of lay offs.
And the question is really,
what would of happened
if this bill hadn't been enacted.
And the economy's actually doing
pretty well, so chances are
there'd be a fair amount
of announcements of hiring
and of bonuses regardless,
and it's sort of hard for us
to know the counter-effectual.
You may know this better than me, David,
so feel free to respond
to your own question,
but I don't think that these
bonuses actually represent
a substantial share of the
workforce, and you know,
having worked in the White
House, there is certainly
a tendency for White Houses
to like to take credit
for things that would
have happened already.
So, if you are a large
multinational business
that's planning to pay some
bonuses, or increase wages,
and you have a bunch of
regulatory priorities
before the administration,
you might wanna go in
and talk to the president
and say, we're gonna do this,
and you know, feel free to claim credit
for your great tax bill causing this,
even though we were planning
to do this three months ago.
And so, I think we just can't
know how much that is driven
by this bill versus would
have happened anyhow.
- So, and just to add a
little bit of gloss there,
one poll suggested about 2% of workers
said they were getting
something that like,
the firm had said was
due to the tax cut bill,
on top of that, in some
cases actually a tax game,
the corporations are trying
to write off compensation
against a higher tax rate,
before their tax rate
flips lower, and they're
probably accelerating pay.
The final thing I would say is that,
one thing that the models do
suggest that Lily was showing,
is that this is probably
good for shareholders.
So, if the corporations are acting
in the shareholder's own
interest, they should continue
a lobbying campaign for a
tax cut bill that they know
will be debated over
the next several years.
And so, some of the announcements,
one should at least
take with that in mind.
Corporations are continuing an
effort that they already had
to get the bill, and now
to preserve the bill.
- And one other thing
to add, is if we go back
to these distributional
charts, a bunch of the tax cut
that you see for people here,
is actually supposed to be
corporations raising people's wages.
So, and you know, maybe
they are doing so for 2%,
the other problem is,
most of the announcements
have been bonuses, not wage increases.
So if you're a worker,
you'd much rather have
a permanent wage increase
than a one-time bonus.
- All right, so, Dan?
- Okay, great, so, well
proponents of the 2017 act
promised that it would
create lots of good jobs.
They were right in at least one respect,
it created jobs for tax lawyers.
Now, we have the question,
how should business income be taxed?
People disagree about a lot of it,
but one thing I think you'd
get a lot of agreement about
is it should be as
featureless and as transparent
as possible because that means people
just do what makes sense
from a business standpoint,
and violating that as the act really did,
is bad for tax policy,
but it is good for again,
good for careers in tax law,
so all you first-years out
there, keep this in mind
when you're deciding what
to register for in the fall.
So, I'm gonna address two
aspects of the corporate rate cut
and the so-called pass-trough deduction.
So, corporate rate cut, it used to be 35%,
it's now been cut to 21%.
The corporate rate has
almost always been lower
than the individual rate, both in the US
and other countries, it's
mainly for an old reason
that's kind of faded a
bit, and for a new reason
that's been growing.
The old reason for the
corporate rate being lower
was that there's a second level of tax.
Company earns income, it's taxed,
it pays dividends to the
shareholders, they're taxed.
And so it was thought
that, kind of the first tax
should be lower so that the overall thing
isn't discouraged too much.
That's faded a bit for
a couple of reasons,
as a rationale for cutting
the corporate rate.
One is that the dividend
tax rate was reduced to 20%.
The second is that actually,
there are a whole lot
of US companies that are mainly held
by tax-exempt shareholders.
So as a result, the second level tax
doesn't arise that much.
So, that's kinda reason it's faded,
but the other reason for having
a lower corporate tax rate
has increased in recent years,
and that's simply global tax competition.
So, like me, as a NYU Law prof,
I'm not really benefiting
from global tax competition,
I'm gonna kind of teach and work in the US
and get taxed by the
US, but if I'm a company
in a global business environment,
I'm in a kind of different picture,
likewise if I'm an investor
deciding what company
to buy stock in.
I can build a factory in
one country or another,
and also even if my factory is over there,
I can report my profits
in one country or another.
So, companies have a lot
of flexibility to respond
to global tax competition to
different countries offering
lower tax rates, either
through what they actually do,
or simply through their paper shuffling.
And by the way, just
to give you an example
of the paper shuffling, Bermuda in 2010,
US companies were reported,
multinationals reported
$94 billion in profits arising there.
Bermuda's GDP for the year was $6 billion.
So it's a bit of a difference.
Anyway, there's been, the US
tax, the corporate tax rate
has been higher than
other countries' tax rate,
and it's actually been a
fairly widespread belief
that the US corporate
tax rate ought to be cut
because of what's happened
in other countries.
And I'm talking to the statutory rate.
The effective rate is different.
The effective rate is how
much you actually pay,
and there it's not necessarily
true that US companies
were hit harder than other companies.
Nonetheless, the statutory
rate does matter.
Now, if you look at public opinion polls,
the public seems to want
higher corporate taxes,
but there's actually
been a widespread view
in the court expert sector,
that the corporate tax rate should be cut.
For example, if you look
in politics, really,
not only the Republicans, but Democrats
through what I would call
the Obama wing of the party,
also favored cutting corporate taxes.
The Bernie wing of the party perhaps not,
but there was sort of a lot of people
who thought the corporate
tax rate should be cut.
Academics also, I think it's fair to say,
have generally supported different beliefs
that the corporate tax rate should be cut,
but with three caveats.
The first is that you pay for it,
you don't like just have unfunded deficits
to increases to have it, so
you have to be responsible,
you have to pay for it.
The second is you have to address
the overall distributional
effects of doing it.
What those are is complicated,
but if you care about
distributional policy,
you've gotta address that.
And the third is there
have to be safeguards.
What I mean by that, again if
we cut the corporate tax rate
because we're competing
with other countries,
either for real factories
or for fake bookkeeping
to say that a profit arose there,
that doesn't really apply to me.
It doesn't make a whole lot of sense,
well, I think it makes sense,
but no one else will agree,
if I can go to Dean Marsh and say
could you pay the Shaviro
Corp instead of paying
Daniel Shaviro, that way my
tax rate will only be 21%.
So you really need safeguards
to make a much lower
corporate rate than the
individual rate makes sense,
and that simply was not done at all.
So, actually when they passed
the rate, the 21% rate,
they didn't do any of this.
They not only didn't pay for it,
but had matching further tax cuts,
they not only didn't address
the distributional aspects,
but in other ways made the
regressivity even greater,
as Lily was just saying.
And there's really a complete
absence of safeguards
to make sure that it's really used
for global tax competition, not for people
who might enjoy getting a lower
tax rate on their salaries.
So that's really the main
reason I would criticize
what happened, just to sort
of show how these things work.
Not only I, but a lot of people
who might be more likely to be honest,
to vote for the Democratic
than the Republican candidate,
would be willing under
the right circumstances,
to go to say a 15% corporate rate.
It really depends upon what
surrounds it and again,
and how you pay for it, how you address
any distributional issues,
and how you have safeguards,
so that's really only used
for the sector where the US
is subject to global tax
competition, not just as a way
for high-income people
to cut their tax rate.
So, one upshot of this, and
one reason why the tax lawyers
are going to have some
fun, or at least be paid,
I don't know how much fun
it'll be, is that basically
any high-income person who is
not forced to be an employee
for tax purposes is
gonna be thinking about
should I do this?
And the upside is wow, the tax rate's 21%,
that's better than 37.
The downside though, is that
then you can't kinda get
the money out of the
company without questions
about facing the dividend rates,
so it's simply a trade-off
that they're gonna be
figuring out what to do about.
Another thing that they're worried about
is what if the law changes?
I become a corporation,
and then the law becomes
less favorable to this.
Okay, on to the pass-through deductions.
So, a lot of, so I think
because I just got a note
about three minutes, I'm gonna
start talking even faster.
(laughs)
Yes, yes there is still
room to come up the, anyway.
So, a lot of you US businesses
run through outside corporate forum.
People have partnerships,
they have what are called
desk corporations, they
have sole proprietorships.
These are often called
pass-through businesses
because even if there's a legal
entity like a partnership,
the income is actually
passed through and taxed
at the individual level.
And real estate is in
there, tends to be in this,
oil and gas, finance, lots
of other big businesses,
and also of course, a law
firm would be an example
of someone who operates that way.
Now, some folks in the
center in this sector,
including US senators said, the
corporate people got theirs,
we should get ours.
It was really nothing
more fancy than that.
"It's unfair to us", I'm
quoting Senator Ron Johnson
of Wisconsin who stood
to benefit by millions.
It's unfair to us if we
don't get our tax cut too.
So, as a result what
Congress decided to do
was not to sort of offset
the corporate tax cut,
but to expand it, so people would get it
without having to incorporate.
Well, why can't these
people just incorporate?
As I just said, many of them,
I think the answer is many of them will.
Many of them will just incorporate.
But they also, some of them
wanted a straight-out tax cut
without this kind of
niggling nuisance of oh,
now I'm the corporation,
I can't get the money out
without worrying about
paying additional tax.
They wanted to get it straight-up.
So what Congress did for them,
was it gave a 20% deduction
for certain types of business
income that are earned
by people who are not employees.
What that basically means is
it lowers the marginal rate
you face by 20%, so if your rate is 37%,
but you can deduct 20% of it,
your rate is actually only
29.6%, which is 80% of that.
So, they just did this,
really because these people,
it was not fair to us if
they get theirs and we
don't get ours, and we don't
wanna have to incorporate,
even though we might do anyway.
They put in some so-called guardrails,
but they're not very effective,
partly because there's really
no underlying principle
for who gets it and who
doesn't, and the revenue costs,
there's about $400 billion.
Now, a key thing that happened here
that'll matter to people in the room,
is they didn't wanna
give it to professionals.
It's for quote, business people.
It's not for doctors,
it's not for lawyers,
it's not for accountants,
it's not for artists,
it's not for athletes.
Why?
Well, first of all, these
people can incorporate
if they like, if it
works for them, but why?
I think the reason is
basically sociological.
If you've either watched say
the 2016 and 2012 presidential
coverage, and you've read
a lot of American
literature, you kind of know
that there's a long-standing
sociological divide
in our country between people
among relatively affluent people,
this is the so called business
class, and the professional,
educated, intellectual,
even academic class,
these are just sort of different groups.
And those guys wanted this for themselves.
They were kind of willing to
let us get the corporate rate,
but this is for them, it's not for us.
So, they put in rules
that basically denied
if they're doctors and
lawyers, and the like,
and athletes and artists and so forth.
But engineers and architects
got out at the last second.
They got to someone in the conference
and they can now do it.
Anyway, so the result is this tax cut,
this 20% rate is available
for non-employees,
but not for lawyers, so what
does this mean for you guys?
Well, a couple of things.
One is, if you go work for a law firm,
you can't get the tax cut,
the partners can't get
the 20% tax cut 'cause
they're in the law business,
more on that in a second, you can't
'cause you're an employee.
So what law firms may do,
is form a partnership of
associates, believe it or not,
so that you're quote, a
partner in the associateship
that gives services to the partners,
and perhaps you get your 20% deduction.
Is that good for you?
Well, not necessarily.
They might just cut your
wages by 20%, sorry.
(laughs)
Meanwhile, what do the partners do?
Well, they'll do two things.
They'll consider incorporating,
they'll also do things
to get some of it, like for example,
how valuable is the
name Sullivan Cromwell?
Just the to name one, or Davis Polk,
how valuable are these names?
What would you pay for the ability
to do business as Davis Polk?
Probably a lot.
So, the Davis Polk partners
could form two partnerships,
and one will charge the other
for the use of the name Davis Polk.
The law services partnership
can't get the 20% tax cut,
but the Davis Polk partnership of IP,
that owns this valuable
trade name, they will get it,
and believe me, they'll charge
themselves through the nose
for it so they get as much
of the 20% cut as possible.
Anyway, this whole thing is
very unstable, and I think it,
again, getting back to the tax lawyers,
there's basically no
one who's high-income,
and who is not perforce
an unavoidably an employee
of a taxpayer who's not gonna be thinking
about both of these routes.
And of course, think about it, it means
they're gonna be hiring lawyers
to help them think about it.
So that's why it might be good news
for the people to take Tax 1 in the fall.
- So, question about the 20% deduction.
So, especially given the
fact that corporations
were seeing such rate cuts,
didn't there need to be
some sort of tax relief
for small businesses?
And, like we know small businesses,
the way small business gets structured,
so if you go to your bodega,
like they're not a corporation,
they often they might have a Schedule C,
where they report their income,
or maybe their partnership,
and so isn't this actually
sort of just a way
of providing tax relief to
small business job creators?
- Well, as you well know, that
the enormous preponderance
of the benefit goes to big businesses,
it goes to people like the Coke brothers,
or Senator Ron Johnson, or on gas,
so it's really not primarily
for them, and also again,
it narrows the disparity
between the corporate rate
and the sort of non-corporate rate,
but one, those guys
could just incorporate,
and two, it expands the disparity
between being a quote business
owner, and an employee,
and that I think makes no sense at all.
It really means a dollar
isn't a dollar anymore,
it depends on how you earn it.
An article in the "New York
Times" by Patricia Cohen
saying two guys working
side-by-side as chefs,
one is getting the pass-through
rule, the other isn't,
they have the same salary,
they have different taxes.
- So, and just to, well, I
do think one aspect of this
could make it a more durable
aspect of the tax code,
I think unfortunately, they were choosing
between two ways to do this.
One way would have been
like a top rate of like 25%,
which truly would have been only focused
at the very, very top.
They instead provided a 20% deduction,
which can potentially reach
a greater swath of people,
even though it's
disproportionately for the top.
So, I remember I did
an interview with like,
a medical like, magazine
for like some doctor's read,
and the guy was just saying
how horrible this deduction is,
but the headline there was
like medical doctor's offices,
great new thing for all of you.
Assuming they make about some
$315,000 in taxable income.
If they're above it, they
don't get it 'cause they're in
their own--
- Yeah, I think I forgot
to mention that, that lawyers get it--
- Right, so like the reason why the like,
it's possible that the associate
who then becomes a partner
gets it as they created
these income thresholds
where they say, if you
make less than $315,000
in taxable income for a married
couple, half for singles,
you can get the 20% deductions
so long as you're not an employee.
So long as you're not an employee.
That means that you know, so let's say
you're like a medical practitioner,
you make $200,000 a year,
and you could be getting
20% basically off your top tax rate.
Sounds good.
So imagine a politician running in 2020.
Are you going to run and say
that you're gonna raise taxes
on the doctor making $200,000?
You should.
It's a terrible tax policy,
which also disproportionately
benefits the very top,
but they structure it in such a way
that it has broader effects
than just at the very top.
- Well, two things, a serious point,
and then just a joke point,
but that's true that I
just though I'd throw in,
and the first one is that,
the so-called pass-throughs
are very, very politically powerful.
I was talking to a friend
that I used to work with
who actually is now like,
a DC honcho who works
on behalf of the multinational
companies, and I said to him,
how are you feeling?
Not as great as you expected, huh?
And he said, yeah, that's
right because one way to put it
is that the multinationals
may be liked by Congress,
but the pass-throughs are well-liked
in Willy lawman's terms.
They're much more powerful,
and much more popular,
it's gonna be very hard to take it away.
The second, I just wanted to mention
one of the beneficiaries of this,
what do tax professors
do in their spare time?
Well, one thing they do
is there's this sort of,
believe it or not, tax
prof discussion group,
and the question was, can drug dealers
take the 20% deduction?
There's a rule that says that drug dealers
aren't allowed any business deductions,
so if you hire your mule to,
well, let's not get into that,
but they can't deduct any
of their business expenses,
but they, due to the exact terminology,
they can deduct this.
So the drug dealers, I guess,
will be lobbying Congress as
well as the $200,000 doctor.
- One other just perverse
aspect of this deduction,
and I think we may all pile on a bit
about the pass-through
deduction, David mentioned that,
there are more guardrails above $315,000,
they will be easy to
avoid for many businesses,
but there are generally
no guardrails below that
with the exception that
you can't be an employee.
And so, another concern that David and I
had written a bit about,
is that this creates
a big incentive to become
an independent contractor.
So it's good for people who
are already Uber drivers,
but it creates an incentive
for more and more people
to become independent contractors
in order to get this 20% deduction.
And you know, that maybe
be positive for them
in the short term, and just
looking at the deduction,
but in the process, people are generally
going to have to give up
their employee benefits.
So things like health
insurance, retirement savings,
life insurance, worker's compensation.
So one of the concerns is people
will sort of look at
the immediate interest,
talk to their accountant,
their account will say
this will be great for you
to become an independent
contractor, and not realize
that they're really giving up a lot
of their safety net in doing so.
- Mitchell.
- It pains me to say anything positive
about this specific
legislation, but here it goes.
The international provisions
of the legislation
in some ways are not as
horrible as the corporate and
pass-through provisions.
- I completely agree
with this.
- That Dan just described.
Fault lines are the
Achilles heel of tax law,
and also the lifeblood of the tax lawyer,
so fault lines we're familiar with,
those distinguished
categories of tax relevance
like debt versus equity.
So, a poor tax system
draws formalistic lines
between categories that's easy to cross
from one to the other, that
has massive consequences,
and doesn't track anything
of substance, of merit.
That's pretty much a good description
of what Dan just talked about
with respect to pass-through,
and also the games that one can play
with the corporate rate.
Now, that doesn't describe what's going on
in the international space.
So, the international
provisions are wrestling
with a fault line, about how we tax
US activity versus foreign activity.
That's a perennial fault
line, it must be dealt with.
And the provisions do grapple
with that to some extent.
The tragedy in my mind, is
that this part of the act,
I think maybe even uniquely so,
could have an unsound
legislative environment
generated through bipartisan reform
that would have generated
a lot of revenue,
and made for sound policy going forward.
And we did completely
fail to achieve that.
So, this is a very
complex area of the law,
so I'm just gonna let it
scratched at the surface
in a few minutes, and then
a lot of people in the room
don't have experience
with the technical aspects
or have even taken a
first class in tax law,
but I think you're familiar
with some of the basic issues
'cause they have a lot
of popular resonance.
They deal with some of
the biggest US companies,
and they're issues you read
about in the front page
of the "New York Times".
So, I thought I would think about,
or talk about three particular issues,
and you can have in
mind, if you wanna think
about tech companies,
think about an Apple,
if you wanna think about
a more standard company,
think about a company like GE.
And so really three issues
that get modeled together
in these discussions, they're all there,
the international rules all affect them,
well let's see if we can tease them out.
So, the first issue is jobs.
And the question there is
does a differential or
preferential tax treatment
of foreign activity
encourage the shift of jobs
from the United States to abroad.
The second issue is what I'm gonna call
absurdly low tax rates with
respect to foreign activity.
So, Dan referenced the
experience of Bermuda,
if you wanna do it at the company level,
it was reported a year or two
ago, that on foreign income,
Apple was paying .50 cents
per $1 million of profit
on foreign activity.
Okay, that suggests something is wrong.
The third issue is that
of trapped earnings.
So again, to pick on Apple,
estimates are that Apple
at the time of the enactment
of the enactments of the
legislation had maybe
$250 billion in cash held
outside the United States.
If you add up the earnings
of all US companies offshore
currently, it's well
over a trillion dollars.
So again, a big issue of import.
So what I thought what I'd do is just talk
about each of these very quickly,
tell you what the law did,
and was gonna pause after
each and see if my panelists
wanted to chime in on anything.
So first off on trapped earnings,
let me just explain how this issue arises.
So under old law, the way it would work
with respect to foreign
companies owned by US companies,
is we would tax the bulk of the profits,
only when the profits were
returned to the United States.
So if Apple for example, was
achieving a very low tax rate
on foreign earnings, what
that meant was they faced
a massive tax liability
upon paying their profits
back to the US.
They didn't wanna do that.
It's even worse than it might
sounds because back in 2005,
we had a tax holiday that
drastically lowered the rate
on sending profits back,
and although at the time
it was advertised as a one-time holiday,
that rhetoric lasted
for about a year or two
and then people started
lobbying for the next one,
and at that point, no one
wanted to pay any profits back
'cause who wanted to be the company
that paid the profits back the
year before the tax holiday?
So these accumulated earnings
just kept getting larger
and larger and larger.
So what the legislation
does here is to impose
what's called a one-time repatriation tax.
So everyone basically has to pay a tax
currently on the offshore earnings
that are currently not
in the United States,
but at a lower rate
than would have applied
if they had paid them back under old law,
so roughly a shade over 15% tax rate
with respect to cash held
overseas, and then going forward,
we moved to what's called
a territorial system.
So in future, there will
be no additional tax
when the profits are paid
back to the United States.
So let me just make a
few observations here.
So one, I think the removal
of what people have called
lock in or lock out, the
disincentive to return cash,
I think is sound policy,
and I think a lot of people
would agree with that.
Second point is that
this is one of the few
revenue raisers in the
bill, so we have to pay
for all these nice benefits in some way,
so this is estimated, scored
to raise about $224 billion,
big numbers, so maybe we
should be happy about that.
But there's a question out there which is,
was that the right number?
It's conceivable we could
of raised much more.
This was a unique moment
in tax legislation,
so as in the 2005 holiday we said oh,
it's a one-time event
and no one believed it,
this is literally a one-time event.
We're not gonna have a
shift from a worldwide
to territorial system,
again, in like decades,
foreseeable future, so
this was a one-time shot
to reach these earnings.
Yeah, companies are
gonna pay a lot of money
with respect to this, but
they're also benefiting a lot
under this legislation as well.
You didn't hear a lot of complaining
about the repatriation
tax, certainly not enough
to slow it down, which tells
me there was more cushion
to probably tax more of
it, so we might have left
a lot of money on the table.
One other thing I'll mention here is,
I have a view that this
will do little or nothing
for the economy broadly.
So, I think there's a naive view that,
that's like shared by politicians perhaps,
that there's a trillion-and-a-half
dollars of cash
sitting in safe deposit boxes in banks
in the Cayman Islands, and now
this is all gonna flood back
into the United States
and do great things.
That's just not how international
capital markets work,
and so when CEOs were
asking about this provision,
oh, what are you gonna do?
They kinda scratched their head, well,
we don't know what we're gonna do,
and that's because they
are not in general,
sitting on unfunded projects
they wanted to undertake.
If they wanted to do projects,
we been in a low interest rate
environment for a long time,
there's foreign-owned
capital, people were funding
the stuff they wanted to do,
so I don't really predict
a big economic effect from it.
So, I'll pause there,
and Dan, at least I know
has firm views on these issues.
- Yeah, I'll just say,
well, a couple of things.
One is the international tax
policy field is a funny field
'cause it's, even among the academics,
it's surprisingly partisan,
by which I don't mean
Democratic versus Republican or something,
but I mean like kind of this
sort of pro-taxing the companies more,
and pro-taxing the companies less.
And the reason for this debate is partly
that there are arguments on each side.
That said, really no one on either side
thought that deferral as such
made sense because it just,
really what it did was not
quote, prevent the companies
from investing in the US, but it made
the chief financial officer
play games of Twister
with how I get the money
here to the project there,
which is wasteful and stupid,
and costs them something,
it's clearly worth eliminating, but again,
I agree with Mitchell.
It's not a flood of
capital racing into the US.
By the way, some of the
money that's gonna quote,
come home now, was already
held in dollars in US banks.
- One other thing just to note on this,
in talking to people
who aren't tax people,
I've heard it a lot say,
well, oh these $2 trillion,
they're gonna have to bring 'em back,
and there's gonna be huge
investment in the US,
and that's really a
misunderstanding of this provision,
so it is a one-time
tax on that $2 trillion
at a much lower rate
than would have applied.
But it isn't contingent on
bringing that money back,
or investing it in any way in the US.
That was a proposal that had occurred,
there had been proposals for
another one-time holiday,
and maybe making it contingent
on certain investments,
but that's not what this does.
I think it is a component
of oh, and actually a lot
of the components of the
international reforms are things
that both Democrats and
Republicans had proposed
with different rates and
elements, but overall,
the structure is similar
and I think this piece of it
is a sensible structure, but it's not,
there's nothing in it that
creates a big incentive
to suddenly invest that
$2 trillion in the US.
- All right, I'm just gonna,
'cause I'm short on time,
just gonna say a very
quick word about jobs,
and then say more about the
low tax on shifted profits.
So with respect to jobs, I'll
make a political point here,
which has interested me.
So I think, the idea that
preferential treatment
of foreign activity is a primary,
or even at all meaningful
cause, for the shift of
jobs is generally rejected
by people who study this area.
And the problem, or issue
there, is that the tax effect
just gets dwarfed by non-tax factors.
So for costs of labor inputs for example,
the difference between making
stuff in a developed country
that has highly regulated labor markets,
the cost difference is
just so, so much greater
than in other countries,
that the tax difference
isn't really effecting it.
And what's interesting
is that the tax burden
on foreign activity did go
down in this legislation.
That's in part because of
the territorial aspect,
and in part because the
general corporate rate cut,
so one might have thought
given the rhetoric
of the 2016 presidential
campaign about jobs,
this would have at least
become a discussion point,
that wait, what are we doing?
We're effecting the tax
system in a certain way
to tax foreign income less onerously,
and that was just completely absent,
and was just a wrong
prognosticator on that
because back in September, well, of course
they can't just favor a territorial shift
without having to wrestle with
this issue, that it seems,
at least to the popular consciousness
and conflict with the jobs
argument, but that argument
was and debate was completely absent.
All right, if I have a minute or two left
on low tax profits,
international tax planning
of the last two decades in 15 seconds.
(laughs)
Develop your IP in Silicon Valley,
shift ownership of the
IP to the Caribbean,
sell glossy, beautiful products
into high income destination
market jurisdictions
without paying much tax there,
book your profits in the Caribbean,
don't pay the income back to the US,
and pay a very low tax
sort of in perpetuity
on the foreign activities.
So, that's the state of the world.
So, this is a phenomenon,
it's been labeled stateless income,
it's the low-taxed income
I was talking about
at the beginning, and
what's fascinating here is
we hit a sort of rupture
point where no one was happy
about that either in the jurisdictions
where the IP was produced and developed,
or in the jurisdictions
where the glossy products
are being sold.
So the market countries have responded
in the euros market countries,
so that's the story of EU
member states telling Ireland
hey, you've gotta collect
more money from Apple.
So, those countries are going
after the profit and the US,
maybe somewhat sensibly
said well, wait a second,
we have a claim on that
profit, we wanna go after it.
And so, the legislation
enacts some provisions
that attempt to do
that, so in one instance
the legislation attempts
to tax what's called
global and tangible low-taxed income.
You might think okay, that sounds great,
sounds like we solved the problem,
we're going exactly
after that low-tax stuff.
The problem coming back to fault lines,
is it's really hard to separate
the basket we wanna reach,
from the basket of what I'll call
legitimate, good real foreign activity,
the stuff that we don't wanna tax,
and we want to exempt when
the profits are returned.
Hard drafting problem.
So, what did the legislation do?
Well, it said we're not
even gonna try to figure out
what's intangible versus tangible,
we're just gonna add up
your tangible assets,
and deem a return on
it, deem a 10% return,
and then everything above that gets taxed.
Okay, a few observations.
The problem is 10%'s a
pretty high deemed return
on tangible assets, and so to the extent
that exceeds the actual
return on tangible assets,
you're generating a cushion or shelter
for all of your intangible income.
Further, perversely, if tangible assets
shelter your intangible income,
we've generated a new
incentive to do what?
Shift tangible assets
outside of the United States
in order to achieve
further low-taxed results
on this income.
So, this is all playing
out, it's hard to know
exactly how taxpayers will plan here,
I think we know the direction of it,
but if you ask me right
now oh, am I feeling bold
on the US collecting new large amounts
with respect to global intangible
income, my answer is no.
- Yeah, no, that's--
- Great.
- So, I wanted to sort
of wrap up with a few,
before we go to a question for the panel
and then questions for you
guys, just a few thoughts
on the overall faults in
the structure of this bill,
and the faults in the process
through which it was enacted.
And, which will lead to
sort of a broad topic
that we've been discussing
here, which is game,
which you might call tax games.
And we wrote the paper that was in fact,
titled "The Games That We'll Play".
So, in terms of the
basic fault in structure,
so Dan discussed how we have cut now,
the corporate rate to 21%, and also now,
have a special 20% deduction,
all of these things,
meaning certain flavors of income avoid
the top individual income tax
rate, which is set at 37%.
So, as Mitchell was saying,
when you have fault lines
in the tax system, that is the
territory of the tax lawyer,
especially if territory of
those lines are formalistic,
and if there are ways to cross them.
And here, there are.
Now as a result, the 37% top
individual income tax rate
becomes theoretical.
Sure, some people will pay
it, but you can just bet
that a lot of the work of
tax lawyers and accountants
in the coming years, will
be to advise their clients
how they do not have to
pay the 37% top rate.
There was already a category
of income that easily avoided
the 37 top rate, which was capital gains.
There were a set of
games that people played
to convert from ordinary
income to capital gains.
You can be sure there will now
be a while set of new games
that people are going to be
playing to try to convert income
either to C corps, and
then trying to avoid
the second layer of
tax, or to pass-throughs
and getting the 20% deduction.
Just to give a sense for like,
one kind of game, and how,
I mean it's a pretty easy
one, so let's say you choose
to go into business with some other people
and you choose to incorporate, and you pay
a top rate of 21%.
Now, the whole issue is how
you avoid the 20% tax rate
that applies when you either
dividend out the income,
or you sell your shares
in the corporation.
So you might say, okay,
so that's gonna be hard,
hard to avoid the second level of tax.
Well, here's one game.
You die.
Now, admittedly, that requires
a relatively significant
event, but there are a set
of people out there who are
planning to pass on assets
to their heirs, including
potentially businesses,
and when you die, you get
stepped-up on the basis of death.
The second level of tax gets eliminated.
You might then worry, wait a
moment, I'm like, doing well,
money's being made in my
corporation, yeah sure,
I'd like to give money to my heirs,
but I'd also like to buy a boat.
How can I do that?
It doesn't seem like I can
avoid the second level of tax.
Wait a moment.
Borrow.
Borrow against the stock.
You don't have to realize the gain,
you can borrow against the stock,
and then pass the stock down to your heirs
to get step-up in basis,
and you get a 21% top rate.
That obviously is one structure,
there are other structures,
and as Dan said, unfortunately this law
did not take that
problem seriously at all,
and did not build in
any kind of safeguards
to try to avoid that.
So, you can even see the kind of games
when it comes to other elements,
so the rate structure was a key problem.
Another key problem came when it comes
to some of the offsets they
were using in the bill,
and how they didn't seriously
think through the ways
people respond behaviorally,
including state governments.
So that brings me to another topic,
which is the state and
local tax deduction.
So, one of the largest
offsets in the bill,
raising approximately a trillion dollars,
if it was continued passed
2025 when it expires,
so about a trillion dollars
over a 10 year window,
is getting rid of, or
significantly limiting
the deduction for state and local taxes.
Whereas before you could
deduct if you were itemizing
from your income statement
state and local taxes
with some limits 'cause of
the alternative minimum tax,
you now are limited to a total deduction
for income and property tax of $10,000.
Okay, so we wrote in our
paper a long with others
who are working with us, that
state and local governments
would potentially have ways to avoid that.
They could potentially
setup charitable trusts
which you could give charitable gifts to,
and they would then give you a credit
against individual income taxes,
and suddenly an area
which is not restricted,
charitable deductions,
becomes the way the state
tries to finance itself in
order to preserve deductibility.
They might also flip income taxes on wages
to payroll taxes paid by
employers, which remain deductible.
And miracle of miracles,
state and local governments
are discussing this.
The New York state government
put out a 30-page report
on options about varied ways
they could do charitable
giving and payroll taxes.
The state of California has also moving
on a number of these,
not shocking that those
might be two states
that would tend to be under pressure
and might be moving on
this, and none of this was,
at least as we could tell,
considered in the way they
structured that offset.
We can have different
opinions about what we think
of the state and local tax deduction,
and whether it should be limited,
but at the very least if
you were going to limit it,
in order to try to pay for your bill,
you may wanna read the
paper that was telling you
how states were going to respond to it,
and try to take that into account.
- [Dan] Personally, I'm hoping
they won't read the paper though.
- Right, well, or that they ignore it.
I think someone read it.
Now, it was not just a
problem of structure,
where there were some
I think some key issues
that got ignored, it was
also a problem of process.
These bills were introduced
in the beginning of November.
They were made law by the end of December.
And it's true, tax bills have over time
sometimes been enacted very quickly.
You can sometimes see
bills, the cutting rates,
that get pushed through really quickly.
This is a different tax bill.
This is a tax bill that's making
fundamental changes to the
base of the tax system,
creating whole new structures
around international,
around pass-throughs, and
if you're gonna do that,
you might wanna take some time
to figure out what it's doing.
And they didn't, and it
can be compared to say,
the process in 1986,
which is the last time
we've seen major change to
the tax space, we had years
of the Treasury Department
producing long reports,
a long process of
consideration in Congress
which did not happen here.
And so, it's not just that
there are then loopholes
that don't get taken into
account, you see like,
just to give one example of sloppiness,
and there's gonna be much,
much else that's out there,
through the 20% deduction
they accidentally
blew up the farm sector.
Whoops.
They accidentally gave a major tax break
to farm cooperatives, and
didn't give it to others,
and if they don't fix it,
which they probably will
since it's just so
egregious, the farm sector
would entirely transform,
and major corporations
might go out of business, and others
would suddenly be preferenced.
That's just one example.
Now, they'll probably fix it
since there's some major corporations
that might go out of business,
or have to change significantly,
but it's an example
of what happens when you legislate
these kinds of complex
issues so, so quickly.
So, I guess, I had one question
before we go to questions,
which we should do, I just wanted to poll
the panel for a quick poll.
We've heard a lot of complaints,
you can tell we're not
huge fans, but I might ask,
what is your favorite part,
and what's maybe your least favorite part,
but maybe even spend
a little bit more time
on your favorite part
since we've heard a lot
about least favorites.
So, I'm just curious, before we go on,
a favorite part of this bill,
something good you can say.
So, I might start off,
we'll go down the line.
Lily.
- So, I have two favorite parts.
The first would be there's a limit
on interest deductibility
for corporations,
and one of the big problems
with the business sector
for a long time, has been
there's a big tax preference
for debt financing over equity financing
because interest payments are deductible,
whereas dividends are not.
And people had written
papers and done analysis
looking at how this may
increase systemic risk
in the economy which you have
highly leveraged companies,
and then you have a
financial crisis like we had,
and so I think there's a real argument
for limiting the interest deduction,
and the bill did that to some extent.
I'm not sure, it may not
have gone far enough,
or had been as tight as I would like,
but I think it's a move
in the right direction.
And then I'd say my
other favorite provision,
subject to being taught
that it should not be,
by some of our international tax experts,
is there's a international
provision called the BEAT,
which is a kinda novel proposal
to address earning stripping
by what are called inbound companies.
So it's a foreign multinational
that does business in the US.
And it has historically been
the case that those companies
are able to strip earnings out of the US,
so they might load up the US
city area with lots of debt
and that subsidiary will
take lots of deductions,
and reduce their US
income, and we haven't had
a lot of tools to address that.
We've had some, and we've
been, a lot of the proposals
focused very much on profit
shifting by US multinationals,
and not by foreign ones, and
really both are a problem,
and so I thought that was
sort of a clever feature
of the bill, and in a surprise in that,
among the international
provisions, that one hadn't,
which can be very risky,
had not been out there
in some form before.
- I think the best thing about the bill,
is that it could have been even worse.
(laughs)
So, I'll just flag one
provision in particular.
So, the House version of the
bill as you probably saw,
would have taxed tuition
waivers of graduate students,
and I think it would have been disastrous
for higher education.
It represented, it's
kind of the culture war
that Dan was talking about,
still in the pass-through,
sort of dismissal and hatred
of education and universities,
so I was very happy that that dropped out.
But I should really point
to something in particular,
and I had to really pour
through, with a lot of effort,
and then I found it's amendments
to code section 50:51,
which snuck in at the 11th hour,
this goes to David's process
point, these people are busy,
how did this sneak in at the last hour?
So what is it?
It's a 3.50 per barrel
reduction in the excise tax
for craft brewers.
(laughs)
And I'm a big fan of beer,
so I personally love this provision.
So, I did a little calculation,
and I figured that that
roughly accounts to,
if it's fully passed
through to the consumer,
.10 cents per growler fill reduction.
(laughs)
And you're laughing, right?
But that's real money,
if you can put down 15 growlers a week,
that's $1.50 over the year
that will pay for your Costco membership.
(laughs)
(clapping)
- Well, I'm tempted, of course
I won't succumb to
temptation, but I'm tempted
to be spiteful and to say
that my favorite thing,
or it really is the thing that
gives me the most pleasure
about it is, the fact that
they were unable to name it.
That it's a nameless act.
I just like that, that makes
me happy in some small way.
(laughs)
I'm also glad, I was
really worried that they
were gonna rename it the
Internal Revenue Code of 2017.
Really, it's not worthy of that,
and I think the Senate
Parliamentarian who struck the name,
also struck that.
On a little bit more serious
note, I think really,
echoing what's been said before,
I think both the couple of the
international tax provisions
to the so-called BEAT and the guilty,
and the interest deduction limit
for companies that Lily mentioned,
I would call them all good first drafts.
Unfortunately, I don't know
what the later drafts will be,
but they're actually all movements
towards having a rule that makes sense.
They didn't quite get
it right in two months,
but they're good first drafts.
- So, I would echo all of
that in terms of the things
that were best, and I think
if I were to add one more,
and it's merely because, for those of you
who are in my income tax,
know that I'm vaguely obsessed with food,
and especially Silicon Valley food,
and the fact they were
able to fully write off,
and no one has to include
it in their income,
and I find myself desperately jealous.
And so, I had to take a
certain amount of pleasure,
despite the fact I can
no longer teach this,
the fact that the Silicon Valley
firms are at least limited
to a 50% deduction on the amazing food
that they serve under the bill.
(laughs)
So, with that, I thought we might go out
and see if there are
any questions out there.
Sure, the student right there.
- [Student] So, it seems
like one of the summaries
is that there are a lot
of loopholes in this law,
and if they work really well for drafting,
is not really well-considered but,
you guys also talked
about a lot of loopholes
under the previous venues.
I'm wondering what was kind of distinctive
about these new loopholes
that makes them worse?
You know, if there are tax lawyers
who can get around them before,
why is it any different now?
- Well, my feeling is
that it's much bigger
than it was before, with the
exception of international,
and international there
was so many to begin with
that it's not clear they made it worse.
But for example, the
pass-through deductions,
there's the brand new one.
All the things that people
will be trying to do now,
there are ways of doing it
before, but the kind of,
the ways of doing it are much bigger.
There's an old saying
that a tax lawyer's job
is to drive a truck through a pinprick
in order to get a favorable result.
Well, now you're driving a truck
through a kind of a hole
that's at least like that.
So that's just gonna be easier,
and there's gonna be more of it.
- And I would just sort
of emphasize off that,
it's the ability within the US individual,
individual income tax system
to avoid the top rate,
either by flipping over to the corporate,
or using the pass-through,
and a lot of money
is at stake there.
And so while the international stuff
may be a net improvement,
that in particular,
the games around that
seem like they were likely
to be very, very significant,
if you just compare
prior system as to this
one, I would tend to think
this one's gonna involve even
more effective tax planning.
- [Student] Wondering if you
could talk a little bit more
about the effects that you guys see
from the mortgage interest
rate deduction tax?
- That's actually, well,
yeah, that's actually a change
that we probably like.
I think we probably all agree
that if you were starting
the world over again,
the homeowner's mortgage
interest deduction
really doesn't make sense.
On the other hand, suppose
it were repealed today cold,
that would be pretty tough
on a whole lot of people
out there with homes and mortgages
that would suddenly be underwater.
So they're cutting the
$750,000 principle amount,
that's actually a progressive
change considering isolation,
also lowering the tax rate
and having fewer itemizers,
it moves towards a market for real estate
that's more sane and rational.
Now of course, there could
be some holdouts so to speak,
on the way to that regime, but it is,
it's kind of leaning
towards a better world
in a certain way, that'll be
better for low-income people
with limited credit, for example
they're trying to buy homes.
- That was actually also
on my list after the beer,
of things I liked, so,
the other part of that
is the removal of the
deduction for interest
on home equity lines, which really wasn't
an equitable feature of prior
law that allowed homeowners
to borrow against home equity
and finance everyday consumer expenditure.
So, people who don't own homes
are paying astronomical
nondeductible interest
on credit cards, people who own homes
are financing the exact same expenditures
at a much lower rate and deductible,
and the removal of that
I think is sound policy.
- Just to chime in, I agree that generally
this is a move in the right direction,
or it might have been
good if in the first place
we didn't have a mortgage
interest deduction
in the tax code, there
are some transition costs,
and you know, both the reduction
and the top amount of mortgage interest
that is eligible for
a million to $750,000,
will potentially effect home prices,
but also the big reduction in itemizers
means that even though
the provision only applies
to new home purchases, if
you currently own a home,
and all of your possibilities or purchases
are now not going to
itemize or you're selling,
lucky enough to be selling
a home worth over $750,000,
you're probably gonna get
a lower purchase price
than you would have before.
So, there are some
transition costs to this.
The benefits are that, we already,
even absent the mortgage
interest deduction,
have big tax preferences for
homeownership over renting
because we don't tax the imputed
rental value of your home.
And so, this can create a
bias in favor of homeownership
over renting, when maybe
people would prefer to rent.
They might think they might
be moving in a few years,
and don't necessarily wanna buy a home,
and so from a broader
economic perspective,
there's some real positives
to not necessarily
placing as large of sum on the scale
in favor of homeownership.
- Right.
One aspect that I think, of
sort of the overall policy
around housing that did
not get enough attention,
and I actually, I've not
thought enough about it,
but to give also sort of
an example of what happens
if you enact something in two months.
So, in combination with reduction
in the mortgage interest
deduction, plus the fact
that state and local taxes
remain fully deductible
for trader businesses,
but not for individuals.
It's possible that you
might, and you'd have to like
calculate it out, you might
begin getting a preference
towards renting over
owning in some markets,
especially if they're high-tax markets.
And so, you could begin
potentially seeing a flip over
in like the housing stock from
being owned by individuals,
to potentially being owned
by whether it's a private
equity fund, hedge fund,
whatever it is, and renting.
And that's just sort of like a dynamic,
I actually haven't like
thought through, but I have,
I was in a room of sort of some investors,
and they were actively discussing
the possible large shifts
in the housing market
in some high-tax areas
given the fact that the
businesses, if they own property
can continue to fully deduct taxes,
but the individuals may be limited.
- One other thing to note, your question
was on the mortgage interest reduction,
but there's also big effects
on real estate in the bill,
or rather non-effects in some cases,
so real estate
interestingly, was carved out
of the repeal of like-kind exchanges,
so they still can do like-kind exchanges.
They're eligible for the
pass-through deduction
in ways that a lot of
other businesses are not.
REITs, which are kind of big
investment tool in real estate,
are just automatically legible
for the pass-through deduction,
so real estate as a whole
may be a big winner,
but there's heterogeneity in that.
- [Dan] Developers.
- [Student] Deductible
interest of the debt.
- Yeah.
- Yup.
- Yeah.
- [Student] I have a general
question that goes back
to what said on state
and local tax deduction.
There was a federal
international tax scheme,
so I know this inquest at--
(laughing drowns out speaker)
Will it be doubly true
that we'll be audited,
and ultimately will we get
the deduction, do you see say,
more ultimately more repatriation
will act on the deduction?
- I didn't quite hear the question.
- [Student] I'm sorry,
I didn't, let me repeat.
So, there's repeated age of the forms--
- Oh.
- [Student] And the income,
and get a deduction for it
(speaker fades out)
- Is this about whether or not
the state and local governments
may pick up some revenue
due to the repatriation
on the foreign profits?
- [Student] Yeah, so the state
and local reform policy--
- Yeah, so, a few quick thoughts,
and others may actually know more,
there's actually really big issues here
beyond just to signal the deductibility
of state and local taxes
for state governments.
It depends how their
system's are structured,
but there are a lot of interconnections,
so just to give an example,
a number of systems
connect to the standard deduction,
for the federal standard deduction.
Federal standard deduction doubled.
Do they increase?
A number of them connect in
terms of itemized deductions.
If itemized deductions go
down, do they stay connected?
Expensing, you have immediate
write-offs of investments,
does the same thing happen
for the state tax systems?
When it comes to the
repatriation of funds,
will the state government see
an increase in revenue or not,
how do they treat that?
There are like big questions out there,
actually there's like active lobbying,
like I like I believe
the Conservative network
is right now very
actively lobbying on this,
when it comes to specifically
the unrepatriated funds,
I, myself am not deep on this.
I know when it comes to the
New York state government,
there have been at least some discussions
about how you might be able
to grab some of that revenue
for the state government,
and again, that actually,
the New York state report
is actually a good one,
it's like 30 plus pages,
and it actually tries
to walkthrough all of
the connections they see
between state revenue
base, and what's happening
at the federal level.
So it gives sort of a nice walkthrough
of how at least the New
York state government
is thinking about the
ways in which the changes
will affect their tax base.
- There's one, maybe a
question at the back.
- Okay, I think we're, yeah,
we're unfortunately at time,
but thanks so much for coming
out, and thanks to the family.
(clapping)
