House Republicans unfair unveiled their bill to overhaul the American tax system yesterday. The bill contains provisions, among other things, to substantially lower corporate tax rates, consolidate individual tax rates, eliminate the alternative minimum tax, phase out the estate tax, UH, eliminate the deduction for state and local income taxes, and
cap the mortgage interest deduction. Congress has joined Committee on Taxation estimates that the bill would cost about one point five one trillion dollars over the next decade, and many think this is unlikely to be the final bill, and the prospects for a plan like this bill in the Senate if it gets that far are unclear. Here to talk with us about the proposed tax bill and what happens from here are Richard Schmallback, a professor at Duke
University Law School, and Tim Space, a partner at Eisner Amper. Richard, the estimate on the bill at this point is that it would cost about one point five one trillion dollars over the next decade. What is it that is there a significance to that number in particular? Um, Well, I'm not sure exactly what you mean, but I did notice that the revenue lots of associated with the basic cuts and the corporate tax rates uh plus the expensing are
are just about that number. So one way to conceive of this bill is that it's got a big text for cut for for business income offset by all the all the other provisions of the code are kind of collectively revenue neutral. You've got a bunch of loophole closers, uh, and then you've got a bunch of of things that will give away revenue. But the one thing that kind of sticks out is the cut and the corporate rates. So, Tim, where is the money coming from the tax cuts? Where
is that money coming from? Well, I think the cuts in first, thank you for for having me this Africa. I think the cuts are coming from basically the off side of of of really the disallowed expenses. I mean, when you look through this, and I know that we want to keep this somewhat brisk, but there's going to be a lot of deduction. The state and local was
always talked about. Um, the state and local deduction sales tax would be eliminated, which is important, and they would still be allowed though however, were they're deducted in the contest. Carrying on a trader business. The deductions that we spoke about probably throughout the whole season, medical expense deductions would still be be repealed, carried loss deductions of course, mortgage interests.
So so it's really coming the other way. So tax rates are being reduced, but then you're also taking away in the simplest way to look at this key itemized deductions. Although there is some relaxation here, they're not mentioned yet. Was the fact that the mortgage limits on mortgage debt would be reduced to five dred thousand. And that's silly. It's a sitting at one point one and charitable contributions, I mean that was set all along that that would
never be touched. Uh And in fact, the limitation, the current shift to present limitation that someone could be ducked a g I would actually be increased. Uh to. So I believe that, as said by the other gentleman, it's been a dance within a window, so to speak, that making sure the revenue offsets and the cuts equal each other so you don't have them out of alignment. Well, Richard, the you know, you can imagine two different places that
the bill could run into some issues. One is that you know, the one and a half trillion dollars a lot is a lot of money for the deficit, and you have deficit hawks in both the House and the Senate who might have issues with that. And the other is in the some of the specific revenue offsets that we're talking about here. Where where do you think that the primary resistance to this bill will come from? Which?
Um are you directing that to me? Well, certainly, UH, home builders and realtors are going to object to this. Even though the mortgage interest deduction has been mostly retained. One of the effects of the bill by by nearly doubling the standard deduction and then shipping away at the various things that constituted itemized deductions, you're going to radically reduce the number of people who are in a position
to take advantage of itemizing. It's currently about thirty percent of taxpayers who itemize, but I've been looking at some numbers and I can't see how it could possibly be more than ten percent under this bill, and might be as little as five And that means that even though we've preserved the charitable contribution deduction, UH, it only applies to itemizers, and I only five percent of taxpayers are itemizing, then the other have no particular tax incentive to make contributions.
And the same is true effectively with respect to mortgage interest deductions. There theoretically deductible, but again only if you had and if only five percent of people itemized, then that deduction, which has substantially reduced the cost of homeownership for um, basically as long as we've had our tax system, will disappear for the taxpayers who don't itemize. And tim in about thirty seconds, do you how do you do
you agree with that? Well? First, yes, I yes, in the sense that we always have to be looking at the percentage of US taxpayers. Treasury has these records, of course that itemize in the first place. And if you've meant now diminished the benefit of itemizing, it's it's certainly logical to say that you have fewer itemizers. But amongst those ones that do itemize, I mean there's still there's
still windows here and the opportunity. I mean, remember when we we began this whole process, it was said that the only thing that was going to be allowed when
was going to be charity in mortgage interest. We are talking with Richard Schmallback, a professor at Duke University Law School, and Tim Space, a partner at Eisner Amper, about the House Tax bill, which will lower corporate tax rates, have passed, consolidate individual tax rates, eliminated number or phase out some taxes, and eliminated phase out some deductions, the whole host of different things which we've been talking about, and we're gonna
let's let's turn to some of the specific things that are in the bill. Tim, One of the more interesting issues that I think the bill raises is how it's dealing with passed through corporations. This is a this is a place where the U It appears that the House bill is trying to give a break to people who have passed through corporations, but UM prevent sort of predictable abuse of the of the of a lower pass through rate. Explain what's going on here and what the bill does
about it, right, And that's a great question. Has been a lot of talking about this the whole legislative cycle. So basically, what it what the provision provides that UM a portion of net income distributions from pass through when ities. We should talk about what that is. But that's going to be tax of the maximum rate of instead of the normal normal graduated systems presently in place, which goes off all the way up to third nine point six UM.
And that would be for effective starting in. The bill has provisions to prevent individuals from converting wage income and to pass through distributions, and so that's the rate UM. It's the concern is that you're going to have nonintended income be taxed at this favorable rate UM. And that's really that's really going to remain remain an element of concern probably until we have regulations that better define it um.
Income from non passive business activities, which we had those already owners and shareholders would be able to elect to treat say thirty percent of the income for the rate.
So this this, I think we think at Irina was going to deserves for further scrutiny, but right now, that's what the legislative says, a favoral tax rate at pass through en rich The provision to scrap most abductions for state and local taxes has been the most fiercely contested, uh so far, given that Republicans can only lose two votes and still pass the bill, what's the likelihood that this might be a whole stand out as one of the things holding up the bill. Well, I'm sure it
is a concern. Um, there are Republican congressmen in California, New Jersey, New York, Connecticut, some other high tax states, and they'll they'll have a tough choice to make. There aren't a large number of congressmen from those states though those are basically blue states, and most of their congressmen and I think virtually all of their senators are Democrats, and the administration and the House leadership is not counting
on much support from Democrats anyway, but there will be some. Uh, that's one of several sources that could be chipped off. You've got the deficit talks, You've got the people from the blue states, even if they're Republicans. Uh. You've got people who will be listening to the National Association of home Builders because that's important to their particular constituency. So there are lots of ways that the bill could lose support. But um, exactly how the math will break out remains
to be seen. Tim. You know, in any tax bill, you're gonna have a lot of policy, right, It's not it's not the numbers game. It's making decisions about what kind of activities you want to provide credits for, what you want to tax how much? Um. One of the things that's kind of interesting here is what the bill does about energy tax credits. You know, there's been a lot of alternative energy tax credits in the code for a while. Now what does what does it do in
terms of oil and gas and uh, alternative energy? Right, Well, we're going to be looking at that most more closely. I should say, there's there's really nothing if you look in the in the top end provisions of the legislation. And let's keep in mind this is going to be it's going to be a short course, but as somewhat in depth course to get anything signed in the law in context of the oil and gas industries and so forth.
But the real the real credit focus. UM. And I'm sure I'm sure everyone's ready to release the persons on this call is really I don't I can't speak to that. As far as the energy industry and provisions and so forth, I'm sure, I'm sure that's going to be a consideration. The items that are going to be affecting most, if not all, but most percentage of the population US persons is going to be the various credits that have been
repealed and those that are to be increased. I mean, the good news here is the child tax credit is going to be increased from A thousand and six, the American Hope, American oputuate tax credit. May we remember this. We looked at this really that's that's really designed to provide education benefits. A lot of these are going to be still in place, by the way, so that's rather important.
But as far as the oil and gas industry and some of the other industries, um, we haven't looked at that yet, but that was becoming in the later analysis. Rich just in about thirty seconds. Is this bill even likely to have a future with the Senate? You know, I'm not a political scientist, so I don't know. They don't have much of a margin in the Senate at all. So I mentioned the several different groups that could be sources of votes being stripped off, and they just don't
have much margin to work with. So um, it seems like a long shot to me. I think, uh, possibilities exist for for maybe some compromises on some of these things that might make the bill acceptable to enough people to pass it. It's going to be very difficult though. Thank you very much to Rich Smallbacker, professor at Duke Law School, and Tim Spice of Eisner Amper for being
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