The President is a whirlwind of tax ideas these days. Last week, he proposed to punish individuals who were trying to save money for college by taxing the profits in Section 529 plans that were designed to encourage individuals to save for college. Last week, he also proposed to tax capital gains on death to go along with the current 40 percent tax rate on taxable estates. This change would subject hundreds of thousands of small business owners and savers currently exempt from estate taxes to a 28 percent tax on the increase in value of their assets over their lifetimes. This idea was proposed as a hike on the wealthy yet would literally hit virtually every small business owner in the country.
This week the President is proposing to implement a 14 percent tax on all corporate earnings resting overseas which to date has not yet been subject to U.S. taxes. This would be 14 percent of almost $2 trillion and then he would hit future foreign earnings with a new 19 percent tax. He wants to use these funds to fix roadways, bridges etc.
There are only two minor barriers to the President’s recent proposal. The first is that if the corporations have to reduce their corporate assets by hundreds of billions of dollars the President wants to take from them, they are going to need to make more than modest reductions in their businesses. This means reductions in corporate investments and jobs. The second is that proposing to tax that which has already been earned and which under the law was specifically not taxed is likely not constitutional. It would be equivalent on the individual tax side of informing taxpayers that the government had decided that those charitable contributions made in prior years were retroactively no longer tax deductible and by April 15th, the government expected to receive a check equal to 14% of the total of all contributions made since one began filing federal income tax returns.
The President’s plan is not an income tax, it is a confiscation. Whether one believes the current tax system has resulted in those earnings inappropriately not being taxed or one believes that corporations have moved their operations offshore because of high U.S. tax rates, those thoughts are irrelevant. We cannot have laws that are ex post facto ----- changing the law after the activity has taken place. This is why we have a constitution rather than a king.
On the practical side of the equation, the President’s proposal is breathtakingly naïve. We have been down the “shovel ready” route before. There was not then and probably is not now the capacity to spend the money that the President proposes to take out of the economy. However, as these funds would come from the coffers of business, it is axiomatic that there would be considerable impact to job creation and to business investment. There would also be potential impacts to the stock market from a surprise tax of hundreds of billions of dollars and that same stock market holds the dreams of millions of current and future retirees in its hands. Further, I suspect the advisors to the President have focused on a few cash heavy corporations without thinking about companies that have reinvested all of their cash savings and actually do not have the cash to pay the proposed tax. Google and Apple do not represent the average corporation doing business overseas. There is certainly no reason to believe that every corporation with activities overseas has the cash available to pay the proposed tax or the borrowing capacity to get the funds.
Tax reform should not be about sound bites and class warfare. Do we need tax reform? That is rhetorical. Do we deserve well thought out proposals that are allowed under the Constitution of the United States and that will not potentially cost the country millions of jobs? Absolutely. Perhaps Congress can actually produce a reasonable plan.
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