Declaring that the “Federal tax system should be simple, fair, efficient, and pro-growth,” President Donald Trump signed a new executive order focused on rolling back a number of tax regulations established by former President Barack Obama. Those regulations, according to Trump, “have effectively increased tax burdens, impeded economic growth, and saddled American businesses with onerous fines, complicated forms, and frustration.”
So how do we fix it?
The executive order doesn’t say. What it does is charge the Treasury with reviewing tax regulations put into place last year. The theory is that rolling back those regulations will make the Tax Code more simple and ease taxpayer burdens. Trump said about the order, which he signed along with two presidential memos targeting bank regulations, “This is really the beginning of a whole new way of life that this country hasn’t seen in really many, many years.”
And that sounds nice. But our Tax Code didn’t end up stuffed and bloated from regulations beginning in 2016: there has been a steady drip of tax provisions since 1913.
The President rightfully notes that individual taxpayers spend far too long on tax compliance: according to the Internal Revenue Service, the average burden for taxpayers filing a form 1040 is about 15 hours and $280 while the average for Form 1040EZ filers is about 5 hours and $40. Realistically, however, the regulations targeted in this executive order aren’t those focused on individual taxpayers but on corporate taxpayers. Specifically, Secretary of the Treasury Steven Mnuchin indicated that a “significant” focus of the order would be regulations limiting corporate inversions.
Talking about corporate inversions was all the rage a few years ago (remember Burger King and Tim Horton’s?). A corporate inversion is a mechanism used by corporations to reduce their overall tax burden, typically by changing their tax home. In the past decade, a number of corporate inversions involving U.S. companies were triggered by having a foreign company – even a smaller one – effectively buy the existing U.S. company. The U.S. company then officially dissolves – even though it’s generally business as usual to the public – and the foreign company owns the assets. The result is that the “new” company is located in a foreign home where it pays fewer taxes and the transaction can be tax-favored (or tax-free) to the U.S. company.
Taxpayers – and Congress – weren’t happy about the numbers of U.S. companies opting into corporate inversions. In 2014, Treasury took steps to reduce the tax benefits of corporate tax inversions. The 2014 changes tweaked eliminates certain techniques, such as “hopscotch” loans, used to access overseas earnings without paying U.S. tax. In 2015, Treasury again took steps to make corporate inversions less favorable, including limiting the ability of U.S. companies to inflate the new foreign parent corporation’s size to avoid the so-called “80-percent rule” as well as expanding the scope of inversion gain which must be paid on the transaction. And finally, in 2016, Treasury made it clear that a foreign company could not artificially inflate its size (often by acquiring multiple American companies over time) so that it can avoid inversion thresholds as well as targeting transactions that increased certain kinds of debt without corresponding new investment in the U.S. The result is that it was supposed to be harder to flip a U.S. based company into a foreign company for the purpose of avoiding tax, thus discouraging corporate relocations.
President Trump ran a large segment of his campaign on the notion that companies should not be incentivized to move outside of the U.S. The move to strip restrictions on corporate inversions appears to be at odds with those goals.
Viewed alone, undoing the rules would appear to be at odds with Mr. Trump’s campaign pledge to reduce incentives for companies to move overseas to minimize taxes.
Under the executive order, Secretary Mnuchin has 150 days to “prepare and submit a report to the President” with his specific recommendations.