Academic journal article Law and Contemporary Problems

The State of America's Tax Institutions

Academic journal article Law and Contemporary Problems

The State of America's Tax Institutions

Article excerpt

I

INTRODUCTION

The rules of the game have changed. More than ever, ideology drives tax policy at the expense of evidence, reason, expert advice, or specialized knowledge. This article examines the performance of American tax institutions in the year leading up to the passage of the Tax Cut and Jobs Act of 2017 (the "TCJA"). (1) I conclude that the state of this country's tax institutions is not strong.

The tax legislative process--including both the formal process and the informal "rules of the game"--historically has allowed a variety of institutional players with specialized knowledge and expertise to influence and shape tax legislation. These institutions include the Congressional tax writing committees, the White House, the President, other elected officials, the Treasury Department, the staff of the Joint Committee on Taxation, think tanks, law firms and accounting firms, lobbyists, academia, and the press. The rules of the game made the tax legislative process somewhat inclusive, pluralistic, and politically independent. In 2017, these traditionally strong tax institutions were largely hamstrung, sidelined, or ignored while a handful of elected officials and staff churned out a bill, behind closed doors, in record time.

The lessons of 2017 are less clear. The surprise of President's Trump election, the narrow Republican majority in the Senate, and the last-minute failure of health care "repeal and replace" turned the tax bill into "must pass" legislation and steered the Republican participants towards speed and secrecy and away from careful deliberation. Still, the process failures may have been more than a blip in an otherwise sound process. Ideology increasingly carries the day over the influence of experts and even lobbyists. It seems unlikely that Democratic control of the White House and Congress would reverse the trend toward weaker tax institutions. We may wish to acknowledge that our tax institutions may not be strong enough to promptly, effectively or coherently address complex and difficult social problems such as climate change, income inequality, inequality of opportunity, or raising sufficient revenue to pay for government obligations.

II

TAX CUTS

Donald Trump had it right all along. It should have been called "The Cut Cut Cut Act." (2)

In the end, the Tax Cut and Jobs Act of 2017 was about tax cuts, not tax reform. If one evaluates the TCJA as a tax reform measure--compared to the Tax Reform Act of 1986, or to tax reform efforts in other countries--the TCJA is a failure. (3) There were no major changes to the tax base, such as the introduction of a consumption tax or carbon tax, no major base-broadening efforts, no major structural changes to the individual, corporate, or partnership sections of the tax code, and no attempt to modernize the Code or harmonize this system with trading partners' systems.

It is true that the international tax rules have changed significantly. The exemption of active foreign source income and the new Foreign-Derived Intangible Income (FDII), Global Intangible Low Tax Income (GILTI), and Base Erosion Anti-Abuse Tax (BEAT) provisions scramble the international tax system into something new. (4) But unlike the GOP's initial foray in late 2016 and early 2017-the Destination-Based Cash Flow Tax (DBCFT)--the TCJA leaves all the building blocks of a byzantine international system in place. (5) The U.S. system remains a nominally worldwide tax system based on residence, with foreign tax credits to ease offshore investment and Subpart F to address passive income. There is a new "participation exemption" for certain foreign source earnings, but transfer pricing principles continue to police the sourcing of income. Instead of reforming the foundations of international tax, three new floors on top of the structure were added: a minimum tax on deemed intangible income--GILTI, an anti-abuse tax on payments to foreign affiliates--BEAT, and an export subsidy for intangible income--FDII. …

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