We have a few proposed changes under consideration that very much need a deep policy discussion rather than only a cost estimate and a general like or dislike. Here are three such items:
1. What is an appropriate phase-out rule for the next economic impact payments? The current ones cause a credit to still be allowed for high income taxpayers who have a few children. The CASH Act (H.R. 9051; 116th Congress) that the House passed late 2020, called for EIP of $2,000 including for dependents. If a married couple has 4 dependents, they credit would be $12,000. The phaseout rule would not cause this entire credit to reach $0 until AGI reached $390,000! That is not an income level in need of assistance typically.
2. Should the TCJA be made permanent? On 12/22/20, Senator Grassley sent a letter to President-elect Biden suggesting this. While this could be done with a single piece of legislation, it really needs major tax policy discussions. This should include what the goals were of the TCJA beyond the need to reduce the corporate tax rate and move the international tax system for businesses to be more territorial rather than worldwide. Examples of things to discuss:
- What is the proper rate structure for all buisnesses and individuals. For individuals, a discussion of progressivity and relevance for capital gains and ordinary income as well as looking at the impact at each quintile as well as top 1% and further breakdown that top 1% given the income range from 6 figures to 9 figures.
- Besides the rate, the base is crucial. What are appropriate deductions and exclusions and phaseouts for any of them?
- The TCJA denied deductions to employers for certain employee fringe benefits. Seems the more appropriate policy is to allow the business to deduct its normal business expenses and any desire to have wage income equal wage deductions should be done via repeal of certain fringe benefits. Also, transparency and accountability are missing from one of these changes – the denial of a deduction by an employer providing qualified transportation fringe benefits. Why wasn’t that prohibition put in section 162 or at a new section 280I? Placing it in section 274(a)(4) makes the exceptions at section 274(e) applicable so some of these QTF expenses are actually deductible.
- And there is more. And just a reminder that for the Tax Reform Act of 1986, there were extensive reports written in advance and lots of hearings (for about a year).
3. Should the TCJA $10,000 SALT cap be changed and how? The policy discussion need to include is the point of limiting all taxes of individuals? This is not a new topic as denial of the deduction was proposed back with the Tax Reform Act of 1986. The current SALT cap includes state and local income taxes that sole proprietors and partners pay on their business income even though corporations have no such limitation. Such taxes should be a deduction for AGI. A common argument about tax deductions is that they are mandatory payments. That is true, but some have some optional aspects to them. For example, if someone buys a very large home or a second home, that is their choice. Why should they deduct all of their property taxes? That deduction can be limited to the property taxes on a median priced/sized home for that county and just one home. These are just examples of some of the discussions needed here. This makes more sense than writing regs and encouraging states to enact optional or mandatory income taxes on partnerships and S corporations which the IRS has said it will treat as above the line even though the owners still report the income on their federal income tax return. [See Notice 2020-75]
What do you think?