December 26, 2016
by Dean Zerbe, former Senior Counsel to the U.S. Senate Finance Committee and alliantgroup National Managing Director
President-elect Trump was elected, in part, thanks to the support he received from families who work the hard jobs in this country. As he works on the details of major tax reform, his administration needs to look to tax proposals that will help “the forgotten man” who works the line, goes down the mine and wakes before the sun.
The general outline of Trump’s tax proposals is in concert with the good ideas put forward by Congress, especially the House Ways and Means Committee: Lowering rates for individuals (especially the middle class), small and medium businesses organized as pass-throughs, and corporations (coupled with international tax reform). All these are important and useful, but give little sizzle to the steak. Little of this will sing for those working families who were critical to Trump’s victory.
Having served as a Republican tax counsel on the Senate Finance Committee during the big Bush tax cuts of 2001 and 2003, I can assure you that senators and members of Congress will have signature proposals they want included in next year’s big tax bill. Trump should also champion his own ideas that will be reflective of his priorities and help those who helped him win the White House. Here are three.
Encourage greater employee ownership and profit sharing. The platform at the Republican National Convention called for supporting “employee stock ownership plans that enable workers to become capitalists.” Study after study has shown that encouraging employee ownership and profit sharing is near to a cure-all, leading to good results for both employees (higher wages and savings) and employers (greater productivity, higher profits).
However, too often proposals in this area are half-measures or damp squibs. Be bold. Swing for the fences. Tell business owners that if they meet certain thresholds and benchmarks for employee ownership and profit sharing that they will see a 10 percent reduction in their taxes. Such a proposal will move the needle off the charts and dramatically change for the better the economic outlook for workers in this country and strengthen support for our free-market system. Corporations and pass-through business owners will see the lower rates that Trump has proposed during the campaign, they just need to share the wealth.
Expand the R&D tax credit for domestic manufacturers. The research and development tax credit is much misunderstood. I see first-hand in my work that the R&D tax credit is not only about lab coats, but is vital to supporting manufacturers (tool and die, mining, etc.) in terms of practical applied science. The R&D tax credit is key in improving productivity and competitiveness for American business and workers.
While the credit was recently made permanent and more accessible for small and medium businesses, it is still in the middle of the pack compared to our international competitors. Tax-cut dollars will most likely be scarce for an overall expansion of the R&D tax credit.
Perhaps a better and more doable option would be to target an increase on the credit for American businesses that do both R&D in this country and manufacturing in this country. Let’s reward those businesses that not only hire the software engineer in this country to design the new phone, but also hire the line worker to build the new phone here as well. A tax credit that supports good-paying jobs, helps manufacturing, improves productivity and competitiveness, and encourages domestic manufacturing and research — what’s not to like?
College affordability. During the campaign, Trump rightly stated that if universities want to continue to receive tax breaks, they need to reduce the costs of college and student debt and use their endowments to help students.
Colleges and universities receive well north of $20 billion per year in tax breaks subsidized by everyone, with the vast percentage of those billions in tax breaks going to a handful of universities (Harvard, Yale, Princeton, etc.). If there were ever a case of the 0.1 percent getting 90 percent of the tax benefits, it is our nation’s elite colleges and universities that overwhelmingly serve the wealthy. The administration should demand a complete overhaul of the current tax expenditures for universities, with a goal of those $20-plus billion in tax benefits going to universities that do the most to educate our nation’s poorest working families and who serve in the military. It’s a chance for the new administration and Congress to put the 99.9 percent before the 0.1 percent.
Rep. Tom Reed, R-N.Y., has already put forward legislation that is a good start. It would require billion-dollar college endowments to start paying out more of the money they are currently keeping under the mattress, and it would target those additional dollars to help families meet college costs. The federal government currently does more to control costs for toenail fungus than to control college costs. It’s students and families crushed by skyrocketing tuition who suffer, while at the same time a record number of college presidents enjoy multi-million dollar salaries. Much good can be accomplished with the right priorities and incentives.
These three ideas will provide a real benefit to those who have been left behind by this economy — three ideas that can help define the Trump administration’s priorities in tax reform as being for working men and women.
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.
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