U.S. tax policy over the last few decades reminds me of recent dietary trends: Keto, Plant-Based, Paleo, and the Carnivore diet to name a few. Although I know the basics of most of these diet plans, reducing carbohydrates while increasing the diversity of foods I consume, I still end up ordering penne alla vodka from my favorite Italian restaurant more times than I’d like to admit.
Likewise, the framework of any good tax policy has been to cut out tax loopholes while broadening the income base on which tax is collected. However, like any fad diet, Congress has had a problem balancing tax simplification with the enactment of new tax preferences, credits, and deductions.
But what if you could eat whatever you want without gaining weight? What if the secret to heart health was lobster ravioli and spicy Pad See Ew? What if complicating the tax code and driving CPAs crazy was the secret to combating climate change, reducing income inequality, ending childhood poverty, and driving economic growth post-pandemic?
While some debate the corporate tax rate or individual marginal tax rate increases, I think it would be remiss of us to bypass the philosophical debate here—will Covid-19 style legislation become the norm or will we revert back to the status quo. Put another way, are we witnessing a fundamental shift in how (and for whom) taxes are used to generate prosperity? Or is this just a really big cheat day?
Brief History of Tax Reform
Since the Tax Reform act of 1986 tax policy in the U.S. has centered around two major principles: broadening the tax base and lowering tax rates. On both sides of the political spectrum lawmakers have pushed for tax simplicity as well as proposing legislation that would remove several tax loopholes and preferences. But as most tax accountants can attest, the tax code is anything but simple. However, with Republicans regaining control of the White House and both chamber of Congress in November of 2016, the push for tax simplification became a focal point of the new administration.
What once was a campaign talking point became a reality with the passage of the Tax Cuts and Jobs Acts of 2017 (TCJA). Corporate and individual rates were reduced while several tax deductions and exclusions were capped or eliminated altogether. Several significant changes excluded many taxpayers from the grips of the alternative minimum tax (AMT) and millions of taxpayers went from itemizing to claiming the standard deduction.
But the TCJA wasn’t designed for economic turmoil or business losses. When it comes to a drop in gross domestic product that rivals what was seen in the heights of the Great Depression a 21% corporate tax rate doesn’t put money in the hands of those who are threatened with eviction or unemployment.
The New Deal Part II
If the TCJA was a crash diet for tax complexity, then the CARES Acts was a veritable buffet of tax complication. From the creation of the Paycheck Protection Program (PPP) to the employee retention credit (ERC), the CARES Act and subsequent Covid-19 legislation created complex government programs that pumped trillions of dollars into specific industries with the aim of propping up the U.S economy.
Specifically, the most recent round of Covid-19 legislation, the American Rescue Plan Act of 2021 (ARPA), was the reverse of the TCJA in the way it injected billions of dollars into the lowest quartile of the income distribution. The temporary increase of the child tax credit and the temporary increase of the child and dependent care credit, the extension of unemployment benefits, and the infusion of additional stimulus payments injected billions of dollars into low-income communities. Will this be the foundation of future tax reform or is this a temporary fix for a temporary crisis?
The TCJA increased and expanded the child tax credit but the ARPA expanded the credit beyond belief. A family of four could receive tax credits in excess of $20,000 in 2021 with the child tax credit, child and dependent care credit, and the Recovery Rebate Credit—$1,400 per qualifying individual for the recovery rebate credit (aka stimulus checks), $3,600 per qualifying child under the age of six for the child tax credit, and $8,000 per qualifying child for the child and dependent care credit.
Small Business Revitalization
The CARES Act, Consolidated Appropriations Act, and the American Rescue Plan Act extended several tax benefits to small businesses. The PPP, the Restaurant Revitalization Fund (RRF), the Shuttered Venue Grant (SVG), and the Employee Retention Credit injected billions of dollars into small businesses to keep them afloat. The PPP paid for eight weeks of payroll, the ERC paid for 70% of wages per quarter up to $10,000 in 2021, and the remaining operational cost would be covered under the RRF and SVG. Add an additional $10,000 in Economic Injury Disaster Loan (EIDL) grants, and some businesses could be made whole from their losses in 2020.
Low Income Development
The TCJA and the Consolidated Appropriations Act (CAA) created billions of dollars in tax benefits for investing in low-income communities. The TCJA created the qualified opportunity zone tax incentives that would allow high net worth investors to defer and possibly eliminate capital gains by investing in real estate or small businesses within low-income communities. Additionally, the Consolidated Appropriations Act extended the new markets tax credit (NMTC) to 2025 with an annual appropriation of $5 billion per year. The combination of these two programs would infuse billions in new investments in these communities.
Biden’s infrastructure plan addresses climate change with several key provisions. Specifically, his plan includes $213 billion to build greener housing, $174 billion in spending to boost the electric vehicle market, $100 billion in funding to update the country’s electric grid, and $85 billion for public transit. If we’ve learned anything from the CARES Act, real estate developers could benefit from billions of dollars in tax credits from retrofitting development projects to meet these new green standards.
Carrot and the Stick
When the economy recovers from the side-effects of the Covid-19 pandemic will we return to the status quo of traditional tax policy, or will the creation of government programs through tax policy become the norm? If this pandemic has taught us anything it’s that tax policy can either be used as a carrot or a stick when it comes to accomplishing policy outcomes. Whatever the outcome may be, CPAs will be here to guide their clients to eat the carrot or avoid the wrath of the stick.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jeremias is a tax manager of Withum’s National Tax Services Team, based in the New York office. He is also the editor-in-chief of The Daily CPA, an online publication for tax and accounting news geared toward millennial accounting professionals.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.