Much has been made about the permanent tax cuts for corporations contained in the legislation signed by President Trump last week, in contrast to the temporary cuts that apply to many of the rules affecting individuals.
It’s actually much ado about very little. There is never anything “permanent” about a tax law; the income tax statutes alone have changed dozens of times since the modern tax was first enacted in 1913. Corporate tax laws change just as often – and this doesn’t even consider the varying pronouncements and positions of the tax authorities and interpretations by the courts, which sometimes change the treatment of certain tax positions even without amendments to the underlying laws.
Most of the temporary items in the new tax law are scheduled to expire in or close to 2025, a target that was chosen to keep the bill’s projected cost within parameters set by Senate budget rules. But in practice, I think the shelf life of many of those changes is no more than three years.
Suppose Democrats captured control of both houses of Congress in next year’s elections. They would almost certainly pass bills undoing significant parts of this year’s law, but to no effect. President Trump (or President Pence, should anything happen to curtail Trump’s presidency) would veto the effort. The entire exercise would be mainly posturing for the 2020 elections.
But should Democrats capture the White House in that election, all bets are effectively off. GOP control of at least one house of Congress would be almost essential to prevent some changes, such as boosting the top marginal income tax rate and rolling back the individual exemption from estate and gift taxes, which the new law doubles to more than $11 million per person. Democrats would surely raise, if not remove, the cap on deductions for state and local taxes, which falls most heavily on residents of the high-tax states that their party tends to dominate. The obvious trade-off would be a significant boost in the top marginal tax rate, and probably a broadening of the individual Alternative Minimum Tax that Republicans lacked the fiscal space to repeal.
The “permanent” corporate tax changes will be more difficult to undo completely, and it is not likely that Democrats will want to try anyway. There is probably little appetite in either party to return to a system in which most corporate profits earned abroad are heavily taxed upon repatriation; that is how more than $2 trillion on U.S. corporate balance sheets was locked away from productive investment here at home. Now, with a relatively low corporate tax rate of 21 percent and a “territorial” system in which the United States taxes only the profits earned within its borders, there is greater incentive to shift profits back to the U.S. and redeploy the funds more rapidly.
We would more likely see tweaks such as raising the corporate tax rate to 25 percent and further restricting the deductibility of interest expense. These changes would not fundamentally alter most business planning, but they would raise significant money for Democratic priorities.
Tax laws are a moving target, best aimed at from short range. Multiyear tax planning has some value, but mainly when it is combined with enough flexibility to adapt to changing tax rules and economic conditions.
When tax conditions are favorable – and in many ways, beginning in 2018, they are very favorable – it is often wise to strike quickly. A prime example is the aforementioned boost in the estate and gift tax exemption. A married couple with substantial wealth can now move at least an additional $11 million to younger generations, free of the statutory 40 percent tax. That’s a savings of $4.4 million over the 2017 regime, plus additional benefit as future growth of that wealth escapes tax at the transferor’s generation.
As written, this increased exemption will stay in force (with increases tied to inflation) through 2025, before reverting to the prior law’s levels. But it is liable to be a prime target for a Democratic president and Congress taking office in 2021, should that come to pass. So I would treat this opportunity as one with just a three-year assured life, and I am going to encourage my clients to take maximum advantage of it during that window. Use it or risk losing it.
Opportunism in tax planning is usually a good thing, and it is best to remember that there is no such thing as a “permanent” tax cut, no matter what label its authors give it.
That’s true of any advantageous tax situation.