U.S. Tax Reform: What's New, What Would It Mean?

Panel Composition and Context

• The session featured Phil Swaggle (Milken Institute), Maryland Treasurer Nancy Kopp, former IRS Commissioner Mark Everson, and Jared Bernstein (Milken Institute/White House).
• The discussion centered on U.S. tax reform priorities following the financial crisis, specifically regarding job creation, R&D incentives, and deficit reduction.
• Phil Swaggle noted his testimony before the House Ways and Means Committee just prior to the panel, focusing on housing policy and mortgage deductions.

Tax Policy Efficacy and Job Creation

• Jared Bernstein challenged the premise that current tax policy effectively drives job creation, citing the tenuous historical link between tax cuts and employment (comparing Reagan's supply-side cuts to Clinton's progressive tax increases and subsequent surpluses).
• Bernstein highlighted that the current tax system incentivizes offshore investment in R&D (e.g., Shanghai vs. Indianapolis), which risks further eroding domestic innovation.
• Mark Everson emphasized that the "corporate" label is too narrow, noting that two-thirds of the U.S. private sector workforce is employed by pass-through entities (SMEs) with fewer than 1,000 employees.
• Everson identified the Alternative Minimum Tax (AMT) as a barrier preventing small businesses from accessing existing R&D incentives.

Tax Expenditures and Revenue Foregone

• The panel agreed that approximately $1.1 trillion in revenue is foregone annually through tax expenditures.
• Phil Swaggle and Mark Everson proposed a typology for evaluating tax expenditures based on revenue foregone, efficiency, fairness, and political feasibility.
• The mortgage interest deduction was identified as having high revenue foregone (~$100 billion) but low efficiency and fairness; Swaggle argues it should be eliminated or capped despite high political resistance.
• Swaggle suggested a "global cap" on deductions as an intermediate step to simplify the code and reduce revenue foregone without eliminating specific preferences individually.

Specific Tax Provisions and Controversies

• Carried Interest: Bernstein and Swaggle agreed this provision is highly unfair and inefficient, taxing private equity gains at lower rates than labor income, despite the revenue impact being a "rounding error" in isolation.
• Municipal Bonds: The tax-exempt status of municipal bonds was defended as critical for infrastructure funding; eliminating it would likely force states to raise regressive sales or property taxes.
• Net Operating Loss (NOL) Carry-forwards: Mark Everson deferred to Nancy Kopp on NOLs, while the panel acknowledged that state and local tax deductions effectively subsidize high-tax states like New York and California.
• Estate Tax: The 2012 "fiscal cliff" compromise raised the estate tax exemption to $5.25 million per person ($10.5 million for couples), a rate criticized as too regressive as it exempts 99.8% of estates.

Enforcement and the "Tax Gap"

• Mark Everson cited a $300 billion annual "tax gap" (unpaid revenue) that requires robust IRS funding to address.
• Everson warned that sequestration cuts to the IRS reduced audit capabilities and customer service, exacerbating collection issues.
• Identity theft was flagged as a growing threat to the tax system's integrity and refund timelines.
• Everson argued that every additional dollar invested in IRS enforcement yields significantly more than one dollar in recovered revenue.

Legislative and Political Obstacles

• The panel identified a lack of presidential leadership and "no new revenues" rhetoric from conservative Republicans (specifically mentioning Grover Norquist's silence on internet sales tax) as primary blockers to comprehensive reform.
• The "10-to-1" rule (where Republicans demanded $10 in spending cuts for every $1 in revenue) was criticized as an insurmountable barrier during the recent election cycle.
• Phil Swaggle noted that while Senator Bob Corker showed openness to revenue discussions, the broader Congressional environment remains hostile to tax reform without a balanced budget deal.

Future Outlook and Reform Proposals

• Permanency: Nancy Kopp and Mark Everson prioritized making permanent specific tax provisions (like R&D incentives) to provide business certainty, arguing that the current cycle of temporary extensions creates inefficiency.
• Corporate Deferral: Jared Bernstein proposed ending the deferral of foreign earnings taxation as a major source of revenue and fairness, estimating hundreds of billions in revenue over 10 years.
• Repatriation: The panel unanimously rejected previous repatriation attempts (citing the 2004 Jobs Act) as a failure that led to layoffs and stock buybacks rather than investment; future proposals must include strict usage mandates to be effective.
• Simplification: The consensus is that capping deductions (e.g., the President's 28% cap proposal) is more effective for simplification than fighting individual tax preference battles, though it introduces its own market distortions (e.g., municipal bond risk premiums).
• Internet Sales Tax: The panel noted the internet sales tax debate has gained momentum due to state revenue needs, with potential to affect middle and lower-income consumers.

Audience Q&A Highlights

• Charitable Deductions: Concerns were raised that capping deductions could disproportionately impact non-profits; Everson noted the difficulty in distinguishing tax-exempt activities from taxable ones in sectors like healthcare.
• Balanced Budget Amendment: Phil Swaggle rejected a constitutional amendment, preferring legislative discipline; he suggested a 10-year sunset provision for tax laws to align with budget windows.
• State vs. Federal: The panel acknowledged the complexity of federalism, noting that eliminating state and local tax deductions would effectively force a transfer of fiscal burden to federal taxpayers or state-level sales taxes.