Originally published on Forbes.com.
The press release from Paul Ryan’s office on the joint statement on tax reform was so vague and contradictory that I thought about passing on it. In the run up, we get that “tax relief for American families should be at the heart of our plan”. Then it goes on:
We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas.
That seems to be a focus on business tax cuts. You can already write off $500,000 in equipment, so it is hard to see how “unprecedented capital expensing” will be that much of a benefit to small business. That small business rate seems like something that could supercharge the gig economy, but we will see. The devil is in the details.
They Don’t Do Tax Reform Like They Did When I Was A Kid
As noted in the press release fundamental tax reform is a once in a generation thing. We call it the Internal Revenue Code of 1986 for a reason. Before that it was the Internal Revenue Code of 1954. The Tax Reform Act of 1986 was preceded by a deep study by the Treasury released in two volumes in 1984. You can read them here and here. I have this great fondness of TRA 1986 because it was a brief shining moment for bookish nerds who actually looked things up. Regardless, a lot of thought and study went into it. Not everything in the Treasury study made it into the act, but pretty much everything had been thought through pretty thoroughly.
What To Do Now?
But what should you do? Jon Traub, managing principal, tax policy, Deloitte Tax LLP has a suggestion.
Today’s announcement of a unified commitment to tax reform is a strong signal from leaders in Congress and the administration of their shared desire to enact long-awaited tax reform. The hard work will resume in September as the tax-writing committees in Congress attempt to address the myriad complexities presented by tax reform, which were just hinted at in today’s release.
Taxpayers may be left wondering how to react to today’s statement. In this uncertain legislative environment, companies can use the time to do some situational modeling that weighs proposals against one another, scenario plan, and create customized alternatives in order to analyze the effects of the various tax reform proposals on the table.
Darn. You probably don’t have a real clear idea as to how to do all that situational modeling to scenario plan to create customized alternatives. Well, you know what. I bet they’ve got people at Deloitte all geared up to do it for you. And probably at PWC and the rest of the final four. Who knows maybe even at Grant Thornton and the other Big 4 wannabe firms? They all have offices in Washington. Deloitte, PWC and Grant Thornton all have PACs that gave more to the Republicans than the Democrats, so they can get their phone calls answered. When I was in the not quite Big 4 there was a lot of encouragement to give to the PAC, one of the privileges managing directors shared with partners. Regardless, if you talk to the right partner, he or she will assure you that their guy has the real inside dope and they have the best model. That’s how you make money in the upper reaches of the tax business – by being consultative. There is only so much you can make from outsourcing the return preparation to India.
Wait And See
The main problem I have with this is that the information on what might come out of the “tax reform” effort is too vague to formulate any sort of plan that would impact a business decision you might make in the next several months. Going into the end of last year, I made a strong recommendation that real estate operators accelerate major projects that could be characterized as repairs and extra effort be made to defer income, particularly investment income given the probable repeal of the Net Investment Income Tax and the good chance of lower rates. It was pretty low-risk advice because whatever happens, it seems pretty unlikely that the Republicans will raise tax rates. But what to do in the next couple of months?
I really can’t think of anything other than charging people to run models and scenarios to show them how much they might be paying under different scenarios. $Kaching$. That would be good for me. Only it would cut into my blogging time and more importantly, it wouldn’t do them any good, since it would not provide them with any information that would translate into intelligence. Information only becomes intelligence when it gets into the hands of a decision-maker whose decision will be affected. And it is hard to think of any business decision that could be affected by the vague proposals that are floating around. Maybe deferring major capital acquisitions. Maybe. But I can’t think of a better example of the tax tail wagging the business dog than having the vague information available, which may come to nothing, to anyway affect a deal that makes business sense.
But maybe I am wrong. I reached out to a number of people whose opinion I value. Matt Erskine runs a boutique practice a short walk from the Worcester Art Museum. Matt kind of disagrees with me. He wrote me:
Strategically, it is always worthwhile to model different alternatives for a client’s future of the possible risks and opportunities they or their company may face. It provides the mental image needed to adapt quickly to ongoing and unpredictable current events.
As I think Eisenhower said, planning is always valuable, even if the plans are not. This is especially true when combined with good processes and leadership. Combined you can learn from the past, adapt to the present and anticipate the futures for individual or organization.
One challenge is the unintended consequences of your action today
During the planning process you need to examine the assumptions you are making and consider whether the planned or current actions are actually necessary, sufficient and possible to achieve the objectives of the long term goal. If not, then you will find that delays caused by events outside of your control end up with your actions today having unintended consequences tomorrow.This is how I do estate planning, even in “simple” situations.
This is, in part, what I see happening in the Trump White House. The leadership style has taken over and little strategic planning is evident. Reminds me of planning for most successful entrepreneurs.
Jeff Kristoff, Director of Tax at Rosen & Associates in Westborough, Mass (Full disclosure Rosen & Associates spun out of a firm in which I was a partner and I have done a small amount of consulting for them) wrote me.
I think there is limited value until there is enacted reform. Clients rely on us for accurate advice. When tax reform suggestions are announced, the first question asked by many of our clients was “how does this impact me”, “should I become a C Corporation” or even “do I need to pay my next estimate.” Proposed tax reform creates confusion and providing precise models could influence current decisions with adverse results. I feel we try hard to inform clients of potential changes but remind them that they shouldn’t make significant changes until there is enacted tax reform.
What we have done is always consider timing with significant transactions. Following installment sale treatment or consider deferring sales and gain as it is reasonable to assume rates won’t go up. However even with this we tell clients not to push off a good deal or take on unnecessary risk to save maybe 3.8% or even 8.8%. Better to make the best business decision and not have proposals drive those decisions.
I have also received sentiment similar to Jeff’s off the record.
So that’s it on what you should do. I say “Wait and see” and other say put energy into running scenarios. I wouldn’t argue with the others too much. After all, it gives people work.
On Tax Reform
I doubt that we will actually see real tax reform, which would involve scaling back many special provisions that add to the complexity. Whenever actual tax reform is proposed, it ends up being like when a regional or large local accounting firm decides to prune its client base of “C” clients. All the partners agree it is a good idea except when it comes to their own “C” clients. Here is a fill in the blanks response from any interest group in response to tax reform.
Comprehensive tax reform and simplification is a fantastic idea. We here at the ABC Coalition for DEF just love the idea that you are working on it and totally support you. Of course we are sure that you know the DEF is critical to the American way of life and the health, safety and well-being of the world. We would just like to remind you that the GHI deduction and the JKL credit play a critical role in supporting DEF. So when you are doing your simplifying don’t even think about messing with the GHI deduction and the JKL credit. As a matter of fact, you probably should beef them up a bit and get busy on the MNO exemption that we have been asking for. Other than that, chop away at those special tax breaks and give us a simpler Code
And Maybe That Is Just As Well
For a variety of political purposes, we have agreed to support some worthy causes such as affordable housing and conservation with favorable tax treatment rather than by actually spending money. If the tax subsidies are not replaced with spending, the people living in cardboard boxes in a ravaged landscape might not see the benefit of the simpler tax code. Reilly’s Second Law Of Tax Policy – Anything worth giving a tax incentive for should be worth spending money on.
And at the risk of seeming heretical, I think that the ill effect of tax complexity are somewhat exaggerated Those approximately 2,500 pages in the Internal Revenue (not 70,000) and the voluminous regulations and rulings and case law may seem overwhelming, but the reality is that there is nobody who is affected by all of it or even a very large percentage. You are probably not running a bank, or a mutual fund or an insurance company, mining or maintaining inventories.
If you are not an idiot or a scoundrel you don’t have to worry about the criminal provisions and if your net worth is not in at least the mid millions you don’t have to worry about the estate and gift tax. Probably don’t have to worry about the excise taxes either. So your custom personal Internal Revenue Code is probably well under one hundred pages and if you miss something it will probably mean you have paid a bit more than you needed to. If you pay a bit less you will probably get away with it, but if you are caught by the computers the bit of interest and the 20% penalty won’t kill you.
A cleaner simpler Code might be a good thing, but the last time we cleaned and simplified it, the complexity started being added back pretty quickly so we probably came out behind when you consider all the complexity that is created by transitions. On the other hand, it give people work. $Kaching$.