Rachel McCleery (202) 224-4515
Wyden: "President's Plan Will Make Tax Shelters Great Again"
As Prepared for Delivery
WASHINGTON – Senate Finance Committee Ranking Member Ron Wyden, D-Ore., today delivered remarks as the keynote speaker at the Urban Institute-Tax Policy Center’s forum on tax reform:
“In the first weeks of this new administration, the spotlight on tax reform is brighter than it’s been in a long time. And there’s already been a lot of happy talk when it comes to taxes, so now more than ever it is critical that we get the facts. When it comes to taxes, the Trump administration isn’t going to make America great again. They’re going to make tax shelters great again.
“Let me be clear: you cannot pass a lasting, bipartisan, comprehensive tax reform bill by August that sets our economy on a new course. If you take the partisan route, you cannot pass a tax reform bill that takes on the big economic challenge of this era, which is guaranteeing that everybody has a chance to get ahead. That’ll only come through bipartisanship.”
Wyden’s full remarks can be found below:
In the first weeks of this new administration, the spotlight on tax reform is brighter than it’s been in a long time. And there’s already been a lot of happy talk when it comes to taxes, so now more than ever it is critical that we get the facts. And that, in my view, is what this organization does better than anybody else out there.
This morning I want to talk a bit about how I see this debate playing out in Congress, but before I do that, I’d like to take a few minutes to discuss what the Trump team is cooking up.
Nobody will soon forget the Trump campaign slogan, Make America Great Again. There are reports that it’s emblazoned on coffee mugs and knick-knacks around the West Wing at this very moment.
And it seems like on a lot of policy matters, when you ask the administration for specifics on the Trump agenda, what you hear in response is, “well, we’re going to Make America Great Again.”
But when it comes to taxes, the Trump administration isn’t going to make America great again. They’re going to make tax shelters great again. Let me give you some examples.
No example could be clearer than carried interest. This loophole is a favorite on Wall Street, used by investment fund managers to redefine their income as capital gains and shrink their tax bills.
On the campaign trail, Candidate Trump singled out carried interest as a loophole he’d attack. In fact, it seemed like a race between him and Jeb Bush to see who could be the first to plant their flag in that populist turf.
Candidate Trump told CBS News in 2015 that, “The hedge-fund guys are getting away with murder … They’re paying nothing, and it’s ridiculous.”
That pledge – and the tough, blunt language that went along with it – earned plaudits from across the spectrum. It added to the populist groundswell that helped get the president elected.
Here’s the problem – the Trump pledge on carried interest turned out to be just another head fake. Since the election, there hasn’t been so much as a tweet about it. Apparently hedge fund guys “getting away with murder” wasn’t quite enough, because instead of asking them to pay their fair share, the Trump plan gives them a 37 percent tax cut.
Of course, when you talk about the carried interest loophole, you’re talking about capital gains. And when you talk about capital gains, you’re talking about the biggest tax shelter of all – the one hiding in plain sight.
Today the capital gains tax rate is 23.8 percent. Republicans want to make it 16 percent. So if you can take advantage of a gimmick that characterizes your income as a capital gain, your tax rate plummets. The White House and the majority party in Congress are working to make it even easier to get away with that gamesmanship.
The argument you hear is that it’s all about incentivizing investment and creating jobs. But back in 1986, President Ronald Reagan – nobody’s idea of a tax and spend liberal – raised the capital gains rate from 20 to 28 percent. The law he signed treated income from wages and wealth the same way. In my view, that’s a formula that ought to be repeated.
A second example is the Trump infrastructure proposal – an 82 percent tax credit on the equity private investors put up for a project.
Now let me make one thing very clear – I take a back seat to nobody when it comes to pushing for infrastructure investments in America. I worked with a group of Democratic colleagues on a trillion dollar infrastructure package that’s ready to go. I’m also a strong believer in getting private dollars off the sidelines and into the game on roads, bridges, highways, ports and airports. I’ve spent the last few years shouting from every hilltop I could find about the success of Build America Bonds, a program I contributed to the economic recovery law, and the enormous potential of my Move America Bonds proposal. Done right, private infrastructure financing can be a powerful tool.
However, when you look at the Trump infrastructure plan, it is manna from heaven for uber-wealthy investors. An 82 percent tax credit on the equity they put into projects. Without any guidelines or restrictions on the kinds of projects you’re financing, American taxpayers would be throwing huge amounts of cash straight into the pockets of wealthy investors. Billions of dollars going either toward duplicitous projects or projects that would have gone ahead even without that much taxpayer backing -- all that manna from heaven raining down.
Furthermore, it’d be useless for some of this country’s biggest infrastructure needs. Mass transit projects in growing cities, for example, and a lot of crumbling, rural roads, highways and bridges. Few investors would have a reason to touch those since they wouldn’t generate enough revenue.
So rather than a serious infrastructure plan for America, this looks to me like a developer’s dream plan that would come at enormous cost to the taxpayer.
Here’s a third example of making tax shelters great again – the dynasty trust. Let’s look past the Marie Antoinette-esque name and let’s look at how this kind of shelter works. It's a gimmick that allows the most fortunate to avoid paying estate taxes not just for a generation or two, but forever.
The Obama administration proposed limiting this loophole to 90 years. Not long enough, say the Republicans. And if you’re hoping the Trump administration will lead the campaign to close this loophole, don’t bet on it. Their point man on tax reform, Treasury Secretary Steven Mnuchin, has a personal interest in this type of tax shelter, since he had one of them among his nine trusts.
Here’s where the tax shelter gets even bigger. My colleagues on the other side – who are working on a reform plan with the White House – would double down on protecting dynastic wealth by repealing the estate tax altogether. A tax that affects only the thinnest margin of taxpayers at the very peak of the income scale – not family farmers, not small business owners, not middle-income families bringing home paychecks a few times a month.
Under the Republican plan, if you inherit a massive fortune, sit back and watch it appreciate in value, you can pass it along to the next generation without ever paying income tax or estate tax.
A fourth example shows how even the most obscure corners of debates that aren’t even focused on tax can be commandeered to make tax shelters great again. This one is known as the codification of the economic substance doctrine. It isn’t exactly dinner-table conversation; this is a little-known issue in just about every room but this one. Judges developed the doctrine of economic substance over the years as a way of shutting down sham tax shelters. The Affordable Care Act included a provision strengthening its application, aiming to shut down more tax shelters. It’s been effective. Now Republicans want to repeal it.
That brings me to the final topics on which I’ll wrap up – the issues I believe need to be addressed, and the way I see this debate playing out in the months ahead.
Some of you may have heard me say that I view the tax code today as a tale of two systems. If you’re a wage earner – a welder in Portland or a nurse in Wichita – your taxes come straight out of your paycheck. You can even see the numbers right on your paystub. The system is compulsory and strict. There are no special tax-dodging strategies or loopholes to winnow down your tax bill. You can’t set up John Doe, Inc. in a Cayman Island P.O. box to shield your income from taxes.
The rules are different for the powerful and well-connected. At their disposal are huge armies of lawyers and accountants from white-shoe firms who specialize in tax games. With the right advice, the most fortunate individuals and corporations in this country can decide how much tax to pay and when to pay it.
When I look at the proposals under development by the Trump administration and Republicans in Congress, I don’t see that galling, root unfairness in our system being fixed. In fact, it would only get worse. But there’s a lot of tax reform happy talk hiding exactly how Republicans would go about reforming the system on the books.
The president has said his team is working on a “phenomenal” tax plan that would soon be released. On Tuesday night he promised “massive tax relief for the middle class.”
And I’ll go back to what I call the Mnuchin Rule: “…no absolute tax cut for the upper class.”
I first talked about the Mnuchin Rule in the Finance Committee hearing on Secretary Mnuchin’s nomination. Here’s how he responded: “Senator Wyden, by the way, I wanted to thank you for a now and great esteem of having the Mnuchin Rule with both the Buffet Rule and the Volcker Rule. I take that as a great compliment.”
He sounded pretty thrilled by it. He’s even reiterated the rule multiple times since the hearing. But here’s the problem: the math does not add up. Priority number one for Republicans and the White House – repealing the Affordable Care Act – would break the Mnuchin Rule by cutting taxes for the wealthy by hundreds of billions of dollars, and it’s paid for by taking insurance coverage and tax cuts for health care away from working families.
Then it’s back for another blow to the Mnuchin Rule in tax reform. The plan slashes tax rates for corporations and the wealthy across the board at a cost of trillions of dollars. By eliminating key exemptions and head of household filing status, the Trump campaign plan actually raised taxes on millions of middle-income families.
And then there’s the border adjustment proposal being pushed by Republicans in the House – the Destination-Based Cash Flow Tax. Reports suggest the White House may be coming around to it.
Everybody recognizes that our international and corporate tax systems are a mess. But the border adjustment proposal – which is a new form of a consumption tax – would replace our current system with a risky and untested scheme. It could have loopholes so big that hundreds of our largest corporations would never pay taxes again.
It’s true that nobody knows exactly how this system would pan out. And frankly, my colleagues on the other side have yet to show interest in hearing the Democratic perspective.
So I’ll be clear about how I view this proposal based on what’s being reported day in and day out in the press. It sounds to me like the plan Republicans are pushing is effectively a grocery tax. In order to pay for a trillion-dollar corporate tax cut, Republicans want to raise prices on food, clothing and other simple products Americans buy every day. It’d be a gut punch to working families who are already struggling to get by. That’s not a plan to fix what’s broken in our economy today.
Now, as for timing, let’s forget for a moment that the House and Senate majorities aren’t exactly singing from the same songbook on taxes. And unfortunately, Leader McConnell has said Republicans intend to go it alone on tax reform.
Secretary Mnuchin said recently that the administration would have a tax reform plan passed and signed into law by August. If this administration and the bulk of Senate and House Republicans get on the same page, they may be able to bulldoze their way to a tax cut for the wealthy that lasts some amount of time.
But let me be clear: you cannot pass a lasting, bipartisan, comprehensive tax reform bill by August that sets our economy on a new course.
If you take the partisan route, you cannot pass a tax reform bill that takes on the big economic challenge of this era, which is guaranteeing that everybody has a chance to get ahead. That’ll only come through bipartisanship.
I’ve written two bipartisan comprehensive tax reform bills. First it was with Mitch McConnell’s economics lieutenant, Judd Gregg, and then it was updated with my friend Dan Coats, a former member of the Finance Committee. The TPC scored the plan as more progressive than what was current law at the time, and still it got Republican buy-in. I would jump at the opportunity to write a third – if it increased progressivity and truly brought together the best ideas from both sides. That, in my judgement, is what bipartisanship is all about. And that’s the only way to do tax reform right.
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