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Speaker 1: House Republicans unfair unveiled their bill to overhaul the American

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Speaker 1: tax system yesterday. The bill contains provisions, among other things,

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Speaker 1: to substantially lower corporate tax rates, consolidate individual tax rates,

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Speaker 1: eliminate the alternative minimum tax, phase out the estate tax, UH,

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Speaker 1: eliminate the deduction for state and local income taxes, and

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Speaker 1: cap the mortgage interest deduction. Congress has joined Committee on

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Speaker 1: Taxation estimates that the bill would cost about one point

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Speaker 1: five one trillion dollars over the next decade, and many

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Speaker 1: think this is unlikely to be the final bill, and

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Speaker 1: the prospects for a plan like this bill in the

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Speaker 1: Senate if it gets that far are unclear. Here to

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Speaker 1: talk with us about the proposed tax bill and what

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Speaker 1: happens from here are Richard Schmallback, a professor at Duke

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Speaker 1: University Law School, and Tim Space, a partner at Eisner Amper. Richard,

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Speaker 1: the estimate on the bill at this point is that

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Speaker 1: it would cost about one point five one trillion dollars

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Speaker 1: over the next decade. What is it that is there

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Speaker 1: a significance to that number in particular? Um, Well, I'm

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Speaker 1: not sure exactly what you mean, but I did notice

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Speaker 1: that the revenue lots of associated with the basic cuts

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Speaker 1: and the corporate tax rates uh plus the expensing are

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Speaker 1: are just about that number. So one way to conceive

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Speaker 1: of this bill is that it's got a big text

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Speaker 1: for cut for for business income offset by all the

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Speaker 1: all the other provisions of the code are kind of

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Speaker 1: collectively revenue neutral. You've got a bunch of loophole closers, uh,

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Speaker 1: and then you've got a bunch of of things that

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Speaker 1: will give away revenue. But the one thing that kind

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Speaker 1: of sticks out is the cut and the corporate rates. So, Tim,

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Speaker 1: where is the money coming from the tax cuts? Where

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Speaker 1: is that money coming from? Well, I think the cuts

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Speaker 1: in first, thank you for for having me this Africa.

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Speaker 1: I think the cuts are coming from basically the off

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Speaker 1: side of of of really the disallowed expenses. I mean,

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Speaker 1: when you look through this, and I know that we

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Speaker 1: want to keep this somewhat brisk, but there's going to

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Speaker 1: be a lot of deduction. The state and local was

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Speaker 1: always talked about. Um, the state and local deduction sales

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Speaker 1: tax would be eliminated, which is important, and they would

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Speaker 1: still be allowed though however, were they're deducted in the contest.

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Speaker 1: Carrying on a trader business. The deductions that we spoke

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Speaker 1: about probably throughout the whole season, medical expense deductions would

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Speaker 1: still be be repealed, carried loss deductions of course, mortgage interests.

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Speaker 1: So so it's really coming the other way. So tax

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Speaker 1: rates are being reduced, but then you're also taking away

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Speaker 1: in the simplest way to look at this key itemized deductions.

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Speaker 1: Although there is some relaxation here, they're not mentioned yet.

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Speaker 1: Was the fact that the mortgage limits on mortgage debt

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Speaker 1: would be reduced to five dred thousand. And that's silly.

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Speaker 1: It's a sitting at one point one and charitable contributions,

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Speaker 1: I mean that was set all along that that would

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Speaker 1: never be touched. Uh And in fact, the limitation, the

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Speaker 1: current shift to present limitation that someone could be ducked

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Speaker 1: a g I would actually be increased. Uh to. So

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Speaker 1: I believe that, as said by the other gentleman, it's

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Speaker 1: been a dance within a window, so to speak, that

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Speaker 1: making sure the revenue offsets and the cuts equal each

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Speaker 1: other so you don't have them out of alignment. Well, Richard,

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Speaker 1: the you know, you can imagine two different places that

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Speaker 1: the bill could run into some issues. One is that

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Speaker 1: you know, the one and a half trillion dollars a

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Speaker 1: lot is a lot of money for the deficit, and

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Speaker 1: you have deficit hawks in both the House and the

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Speaker 1: Senate who might have issues with that. And the other

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Speaker 1: is in the some of the specific revenue offsets that

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Speaker 1: we're talking about here. Where where do you think that

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Speaker 1: the primary resistance to this bill will come from? Which?

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Speaker 1: Um are you directing that to me? Well, certainly, UH,

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Speaker 1: home builders and realtors are going to object to this.

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Speaker 1: Even though the mortgage interest deduction has been mostly retained.

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Speaker 1: One of the effects of the bill by by nearly

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Speaker 1: doubling the standard deduction and then shipping away at the

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Speaker 1: various things that constituted itemized deductions, you're going to radically

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Speaker 1: reduce the number of people who are in a position

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Speaker 1: to take advantage of itemizing. It's currently about thirty percent

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Speaker 1: of taxpayers who itemize, but I've been looking at some

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Speaker 1: numbers and I can't see how it could possibly be

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Speaker 1: more than ten percent under this bill, and might be

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Speaker 1: as little as five And that means that even though

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Speaker 1: we've preserved the charitable contribution deduction, UH, it only applies

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Speaker 1: to itemizers, and I only five percent of taxpayers are itemizing,

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Speaker 1: then the other have no particular tax incentive to make contributions.

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Speaker 1: And the same is true effectively with respect to mortgage

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Speaker 1: interest deductions. There theoretically deductible, but again only if you

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Speaker 1: had and if only five percent of people itemized, then

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Speaker 1: that deduction, which has substantially reduced the cost of homeownership

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Speaker 1: for um, basically as long as we've had our tax system,

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Speaker 1: will disappear for the taxpayers who don't itemize. And tim

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Speaker 1: in about thirty seconds, do you how do you do

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Speaker 1: you agree with that? Well? First, yes, I yes, in

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Speaker 1: the sense that we always have to be looking at

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Speaker 1: the percentage of US taxpayers. Treasury has these records, of

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Speaker 1: course that itemize in the first place. And if you've

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Speaker 1: meant now diminished the benefit of itemizing, it's it's certainly

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Speaker 1: logical to say that you have fewer itemizers. But amongst

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Speaker 1: those ones that do itemize, I mean there's still there's

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Speaker 1: still windows here and the opportunity. I mean, remember when

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Speaker 1: we we began this whole process, it was said that

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Speaker 1: the only thing that was going to be allowed when

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Speaker 1: was going to be charity in mortgage interest. We are

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Speaker 1: talking with Richard Schmallback, a professor at Duke University Law School,

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Speaker 1: and Tim Space, a partner at Eisner Amper, about the

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Speaker 1: House Tax bill, which will lower corporate tax rates, have passed,

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Speaker 1: consolidate individual tax rates, eliminated number or phase out some taxes,

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Speaker 1: and eliminated phase out some deductions, the whole host of

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Speaker 1: different things which we've been talking about, and we're gonna

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Speaker 1: let's let's turn to some of the specific things that

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Speaker 1: are in the bill. Tim, One of the more interesting

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Speaker 1: issues that I think the bill raises is how it's

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Speaker 1: dealing with passed through corporations. This is a this is

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Speaker 1: a place where the U It appears that the House

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Speaker 1: bill is trying to give a break to people who

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Speaker 1: have passed through corporations, but UM prevent sort of predictable

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Speaker 1: abuse of the of the of a lower pass through rate.

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Speaker 1: Explain what's going on here and what the bill does

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Speaker 1: about it, right, And that's a great question. Has been

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Speaker 1: a lot of talking about this the whole legislative cycle.

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Speaker 1: So basically, what it what the provision provides that UM

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Speaker 1: a portion of net income distributions from pass through when ities.

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Speaker 1: We should talk about what that is. But that's going

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Speaker 1: to be tax of the maximum rate of instead of

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Speaker 1: the normal normal graduated systems presently in place, which goes

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Speaker 1: off all the way up to third nine point six UM.

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Speaker 1: And that would be for effective starting in. The bill

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Speaker 1: has provisions to prevent individuals from converting wage income and

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Speaker 1: to pass through distributions, and so that's the rate UM.

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Speaker 1: It's the concern is that you're going to have nonintended

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Speaker 1: income be taxed at this favorable rate UM. And that's

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Speaker 1: really that's really going to remain remain an element of

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Speaker 1: concern probably until we have regulations that better define it um.

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Speaker 1: Income from non passive business activities, which we had those

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Speaker 1: already owners and shareholders would be able to elect to

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Speaker 1: treat say thirty percent of the income for the rate.

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Speaker 1: So this this, I think we think at Irina was

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Speaker 1: going to deserves for further scrutiny, but right now, that's

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Speaker 1: what the legislative says, a favoral tax rate at pass

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Speaker 1: through en rich The provision to scrap most abductions for

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Speaker 1: state and local taxes has been the most fiercely contested,

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Speaker 1: uh so far, given that Republicans can only lose two

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Speaker 1: votes and still pass the bill, what's the likelihood that

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Speaker 1: this might be a whole stand out as one of

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Speaker 1: the things holding up the bill. Well, I'm sure it

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Speaker 1: is a concern. Um, there are Republican congressmen in California,

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Speaker 1: New Jersey, New York, Connecticut, some other high tax states,

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Speaker 1: and they'll they'll have a tough choice to make. There

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Speaker 1: aren't a large number of congressmen from those states though

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Speaker 1: those are basically blue states, and most of their congressmen

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Speaker 1: and I think virtually all of their senators are Democrats,

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Speaker 1: and the administration and the House leadership is not counting

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Speaker 1: on much support from Democrats anyway, but there will be some. Uh,

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Speaker 1: that's one of several sources that could be chipped off.

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Speaker 1: You've got the deficit talks, You've got the people from

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Speaker 1: the blue states, even if they're Republicans. Uh. You've got

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Speaker 1: people who will be listening to the National Association of

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Speaker 1: home Builders because that's important to their particular constituency. So

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Speaker 1: there are lots of ways that the bill could lose support.

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Speaker 1: But um, exactly how the math will break out remains

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Speaker 1: to be seen. Tim. You know, in any tax bill,

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Speaker 1: you're gonna have a lot of policy, right, It's not

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Speaker 1: it's not the numbers game. It's making decisions about what

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Speaker 1: kind of activities you want to provide credits for, what

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Speaker 1: you want to tax how much? Um. One of the

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Speaker 1: things that's kind of interesting here is what the bill

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Speaker 1: does about energy tax credits. You know, there's been a

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Speaker 1: lot of alternative energy tax credits in the code for

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Speaker 1: a while. Now what does what does it do in

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Speaker 1: terms of oil and gas and uh, alternative energy? Right, Well,

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Speaker 1: we're going to be looking at that most more closely.

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Speaker 1: I should say, there's there's really nothing if you look

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Speaker 1: in the in the top end provisions of the legislation.

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Speaker 1: And let's keep in mind this is going to be

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Speaker 1: it's going to be a short course, but as somewhat

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Speaker 1: in depth course to get anything signed in the law

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Speaker 1: in context of the oil and gas industries and so forth.

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Speaker 1: But the real the real credit focus. UM. And I'm

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Speaker 1: sure I'm sure everyone's ready to release the persons on

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Speaker 1: this call is really I don't I can't speak to that.

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Speaker 1: As far as the energy industry and provisions and so forth,

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Speaker 1: I'm sure, I'm sure that's going to be a consideration.

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Speaker 1: The items that are going to be affecting most, if

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Speaker 1: not all, but most percentage of the population US persons

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Speaker 1: is going to be the various credits that have been

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Speaker 1: repealed and those that are to be increased. I mean,

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Speaker 1: the good news here is the child tax credit is

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Speaker 1: going to be increased from A thousand and six, the

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Speaker 1: American Hope, American oputuate tax credit. May we remember this.

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Speaker 1: We looked at this really that's that's really designed to

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Speaker 1: provide education benefits. A lot of these are going to

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Speaker 1: be still in place, by the way, so that's rather important.

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Speaker 1: But as far as the oil and gas industry and

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Speaker 1: some of the other industries, um, we haven't looked at

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Speaker 1: that yet, but that was becoming in the later analysis.

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Speaker 1: Rich just in about thirty seconds. Is this bill even

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Speaker 1: likely to have a future with the Senate? You know,

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Speaker 1: I'm not a political scientist, so I don't know. They

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Speaker 1: don't have much of a margin in the Senate at all.

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Speaker 1: So I mentioned the several different groups that could be

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Speaker 1: sources of votes being stripped off, and they just don't

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Speaker 1: have much margin to work with. So um, it seems

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Speaker 1: like a long shot to me. I think, uh, possibilities

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Speaker 1: exist for for maybe some compromises on some of these

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Speaker 1: things that might make the bill acceptable to enough people

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Speaker 1: to pass it. It's going to be very difficult though.

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Speaker 1: Thank you very much to Rich Smallbacker, professor at Duke

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Speaker 1: Law School, and Tim Spice of Eisner Amper for being

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Speaker 1: here on Bloomberg Law. Coming up, is the Department of

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Speaker 1: Justice going to suit a block of the time Warner

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Speaker 1: a T and T merger or are they just trying

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Speaker 1: to be tougher negotiations. That's coming up on Bloomberg Law.

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Speaker 1: This is Bloomberg