Election Implications for Tax Policy: Transcript

Cara Griffith: Welcome. I'm Cara Griffith, the president and CEO of Tax Analysts. Thank you for joining us today to discuss a topic that is top of mind for most of us: the election and its implications for tax policy. Today, we'll explore some potential scenarios for tax law changes depending on who's in control in Washington next year.

That means that the individual income tax rate would return to 39.6 percent, and tax rates from many average taxpayers would also rise. Withholding would revert to pre-2017 levels. Both the standard deduction and the child tax credit would shrink by half. The 20 percent deduction for pass-through income, known as 199A, would die. The estate tax exclusion would fall by more than a half. The $10,000 SALT deduction cap would disappear, and the AMT could return from more middle-income taxpayers.

Trump and many congressional Republicans want to extend the TCJA in its entirety. Harris hasn't said anything quite as clear cut on the 2017 law, but like President Biden, she's promised not to raise taxes on anyone making less than $400,000 a year. But that's not all.

Both Trump and Harris have proposed other tax and tax-related measures in their campaigns that go far beyond the question of whether or not to extend the TCJA. Trump has talked about:

• cutting the corporate tax rate even further, particularly for companies that make their products in the United States;

• ending the double taxation on Americans who live abroad,

• killing the SALT cap altogether;

• letting individuals deduct their interest on car loans;

• eliminating income taxes on Social Security benefits;

• ending taxes on tips and overtime pay; and

• imposing huge tariffs on imported goods.

Harris has talked about expanding the earned income tax credit and the child tax credit, creating tax credits for first-time home buyers, for developers that build affordable housing, and for new small businesses.

She's also talked about:

• raising the corporate tax rate;

• raising the corporate AMT rate for certain large corporations;

• raising the tax on stock buybacks;

• raising capital gains taxes for those at the top, maybe even on unrealized gains; and

• eliminating taxes on tips.

Now of course, the fate of tax policy doesn't just depend on the presidential election. What happens with congressional elections is hugely important as well. If either party sweeps the election, giving it control of both the White House and Congress, no one should be surprised to see that that majority party uses the fast-track process known as budget reconciliation to push through tax changes. Under reconciliation, the majority can pass legislation in the Senate with just 51 votes, rather than the 60 that's required on just about everything these days.

In fact, congressional Republicans are already preparing for a Republican sweep. While extending the TCJA, they're talking about adjusting global intangible low-taxed income and other corporate provisions, and possibly scaling back or ending the clean energy incentives that came with the 2022 Inflation Adjustment Act.

But what will happen in November is anyone's guess. The presidential election could hardly be closer, and while Republicans are favored to take the Senate, the House is up for grabs. So there is a lot on the table, and we honestly don't know who's going to be sitting around that table. The implications are huge.

So today we have an outstanding panel to discuss and debate all of the pending issues of tax policy. Let me introduce them. First, we have Bill Gale, who is the Arjay and Frances Miller Chair in Federal Economic Policy in the economic studies program at the Brookings Institution, and co-director of the Tax Policy Center. Kyle Pomerleau is senior fellow at the American Enterprise Institute, and Joe Thorndike is contributing editor for Tax Notes, and the director of the Tax History Project at Tax Analysts.

Welcome to all of you, and thank you so much for joining us today. I think this is going to be a very fun and interesting discussion.

Bill, let me kick it off with you. What do you think about the Democratic tax policy platforms that we know of so far and that are currently on the table?

William Gale: Well, let me just start by saying thank you for having me, and it's an honor to participate in this great series that Tax Analysts has been doing for a long time now.

I think the best way to think about the Democratic proposals is to compare them to the Republican proposals. I think there are a couple of interesting similarities and a couple of interesting differences. The first thing that jumps out in terms of similarity is that both parties are proposing ambitious tax reform proposals that go way beyond the TCJA. I think that that's actually healthy because I don't think the debate should just focus on which parts of TCJA should be extended and which parts should be allowed to die. Ambitious tax reform on both sides is one commonality.

The two obvious differences are that the Democratic proposals are much more progressive, and I think — I'll word this carefully — they are less fiscally irresponsible than the Republican proposals. Adding to that fiscal responsibility issue, the other thing they have in common, the Democratic and Republican proposals, is that the revenue-raising mechanisms that they propose to reduce the size of the gross tax cuts seem extremely untenable. So there are some interesting similarities and some very big differences between the two parties.

Cara Griffith: Fantastic. Kyle, I want to turn it over to you, and the same question, maybe looking at it from the Republican side, though. What do you think about the Republican tax policy platforms that we know of right now, and maybe as Bill did, in comparison to the Democratic policy platforms?

Kyle Pomerleau: Sure, and thanks for having me. This will be fun.

Trump's tax proposals, I guess you can put them into three buckets. We can start with what I'd say are the good components of this, and it reflects what Bill said, the more reform-oriented parts. I'd highlight first, the Trump campaign has proposed making the individual provisions of the TCJA permanent, and the individual provisions include some genuine improvements to the tax system. This includes the reforms to family benefits, which is the larger child tax credit, the larger standard deduction, and the repeal of the personal exemption.

It includes a huge scale-back of the alternative minimum tax prior to the TCJA, about 5 million returns for AMT filers. Now it's closer to 200,000. Then another genuine improvement is a reduction in statutory tax rates, and I guess you could pair that too with the reduction in number of itemizers. Those are genuine improvements to the tax system that are included.

I'd also like to flag too that the Trump campaign has proposed scaling back or eliminating the IRA tax credit. I do think it's worth thinking about, at a policy level, what's the best way to address green energy and climate change in the United States. I personally think the subsidized approach is less efficient than something else like a carbon tax. Now, I'm not suggesting that the Trump administration is repealing the IRA credits and replacing it with a carbon tax, but at least putting that on the table starts that discussion.

Now after that, the proposals, I'd say, go downhill in quality pretty precipitously. Group No. 2 of proposals I'd say is Trump's maybe centerpiece, which is his across-the-board tariffs. The 20 percent tariffs on all imports and also some targeted tariffs on certain countries — high ones, for example, on China — this would be a pretty large tax increase, by itself about nearly $4 trillion over a decade. That's around the same size as the individual provisions in the TCJA, just to give a sense of scale.

Then another group of tax policies from the Trump campaign are, let's say, a "grab bag" of tax cuts that he has proposed over the last couple of months while on the campaign trail. This includes the exemption for overtime, exemption for tips, a deduction for the interest on auto loans. While you can make maybe narrow cases for some of these proposals, in a comprehensive package, I mean, these are just simply giveaways or tax cuts for certain groups — something that's pretty standard in campaigns. But what is noticeable however is that some of these tax cuts include clawbacks of his own signature legislation.

You had mentioned earlier that he would restore the SALT deduction. Well, that's a component of the TCJA, which capped that at $10,000. Also, he would effectively reinstate the old section 199, which is the manufacturing deduction. Now, we don't know exactly how he would structure this lower tax burden for manufacturing activity, but one way he could go about it is to reinstate a policy that he had previously repealed.

Cara Griffith: It's interesting at this stage of the campaign, and that you do see a lot of, it's just the grab bag. There's a lot of proposals that get tossed out. I feel like both sides just talk off the cuff. It depends on who they're talking to as to what they say, so it'll be interesting to see what happens.

Joe, let me turn to you on that point. Historically, what can a new administration accomplish in terms of tax legislation? Will this “new” administration, and I say new in quotes because we do kind of have a sense of each of the candidates, but how will this new administration be any different in terms of what they can accomplish in terms of tax policy changes?

Joseph Thorndike: Well, I think you qualified it there and said that they're new, but they're not so new. I think that's actually an important thing. If Trump wins, he's going to be serving the second term of a discontinuous two-term presidency. I don't think that's really the same thing as a first-term president who brings along a lot of uncertainty with them that we wouldn't have this time. We haven't actually had a discontinuous second-term president since Grover Cleveland, and that's less obscure of a reference than you might think because the big issue for Grover Cleveland was tariffs just like it is today.

But Harris too is not a wholly new candidate because it's an interparty transfer. Now, we don't have a lot of those in the past either. The last one was 35 years ago, when Reagan handed off to Bush. There are earlier ones — JFK to Johnson and Roosevelt to Truman — but what we get then tends to be a fair amount of continuity. Not perfect continuity, but a fair amount.

But I think the question here is, to what extent will a president prioritize tax policy? Not all of them do. Some of them choose to, but Barack Obama did not, famously. He put something else higher on his list. And actually, Trump put something else higher on his list, which was undoing Obama's Affordable Care Act.

I do think the whole question of a honeymoon is a little bit overblown. Presidents in that first 100 days or whatever, it's thought that they have more freedom and more political juice. I think that's a little bit of an artifact at this point, in that in our polarized age, we don't really see that as much anymore. So I'm not sure that we should hang our hat on that, but it does seem pretty clear that both of these candidates have fairly ambitious tax plans. I think for a lot of people, they're sort of frightening tax plans, right? For a lot of people, those tariffs are really scary.

For a lot of people, for a lot of Democrats, just renewing the TCJA is scary. But I think that we should also remember that, like they say about Trump, we should take all these ideas seriously, but not literally. In a campaign, you make lots of statements. You are ambitious, and you lay out an aspirational plan, but the laws of political gravity still apply. I think it's likely that many of these things will not come to fruition.

Finally, that being said, I do think the tariffs are worth talking about because they're more likely to happen. They don't require Congress's help. The courts are unlikely to stop them, so I think that's important. Especially if they raise enough revenue to really follow through on some of these other tax reforms that Trump is talking about.

Cara Griffith: Let's keep the conversation going with tariffs then. Bill, I'll come to you first. What impact do tariffs have on tax policy? Let's assume that Trump goes forward, and he imposes a massive tariff on goods coming from China. What impact does that have on tax policy, and does it raise enough revenue to be worth it?

William Gale: It certainly doesn't raise enough revenue to replace big parts of the income tax. The imports are just not big enough that any realistic tax on them would raise significant revenue. They'd raise some revenue, but we're talking about a $5 trillion hole for extending TCJA over the next 10 years, and tariffs are not going to do that or come close to it.

The myth about tariffs is that other countries bear the burden of them. I mean, that's wrong on the face of it, on the evidence. In fact, it seems like they're regressive when looking at individuals, but also, they raise costs across the board for businesses, American businesses.

Joe could talk about this more. We had a long experiment with tariffs in the 19th century that was partly due to the restrictions related to slavery and those sort of issues. But no advanced country today depends extensively on tariffs, and there's a reason: their economic effects and the potential for retaliation. And the last thing we need is a trade war. Most economists think of them as a nonstarter.

I'm reminded of Alan Blinder's Murphy's Law of Economics, which is that economists are most ignored when they most agree on a subject, and they're most paid attention to when they most disagree. This is a case where the evidence is clear. The theory is clear. Economists are, I don't know if unanimous, but strongly supportive of the idea that tariffs are a bad idea, and yet they keep popping up as a discussion on it.

Cara Griffith: Kyle and Joe, I want to come back to you on that. Do you agree? I mean, are we unanimous here that tariffs are not a great idea and don't make sense in this instance?

Kyle Pomerleau: Yeah, I think they're a particularly poor way to raise revenue for the federal government. I see maybe three potential implications that should be in the top of people's minds here. The first is — Bill alluded to this — the distributional implications. So if you're moving from an income tax with highly progressive rate structures to basically an excise tax or a consumption-based tax, roughly speaking, you're going to be changing the distribution of the tax burden.

We've seen modeling recently that shows that if you look at Trump's total tax changes, there's a good chance that, depending on what he does on the tariff side, even if he extends all of the individual provisions of the TCJA and enacts a lot of these additional tax cuts, the bottom 20 percent of taxpayers are going to see lower after-tax income, and that that's a consequence of the tariffs.

The second implication here is economic. I think there's broad agreement that import taxes are going to have a negative impact on the U.S. economy, not a positive one. Whatever you think the magnitude is, you also have to think about the fact that tariffs, unlike purely domestic excise taxes, apply to a sector that's integrated with other countries.

As a result, if the United States were to launch into applying import taxes onto goods coming from other countries, this could push other countries to launch trade wars and retaliate. That retaliation is also going to be an economic cost for the United States. So whatever you think the economic effect is, you could be close to doubling that depending on how significant the retaliation is.

Then the third implication here is maybe institutional in nature — that because Trump is going to be responsible for enacting these tariffs, and Congress is not, it's shifting a lot of the responsibility for revenue raising to the executive branch and away from Congress. That can relate back to the previous implication that if you have something that the executive can turn on or turn off whenever they want, that can introduce some economic uncertainty that could magnify some of the economic effects we could expect.

Cara Griffith: That's an interesting point. I hadn't thought of that.

Joe, we got a question from the audience which relates to tariffs, so I'm going to pose it to you. Would Trump have the authority to raise tariffs across the board without any findings? So I guess this comes to authority. What would you think on that?

Joseph Thorndike: Congress has delegated an awful lot of tariff authority to the presidency. But in many situations, they require a finding of some sort, but not all.

The really important point, I think, is that when this delegation has been challenged by people in court, often citing the nondelegation doctrine that is newly back in fashion these days, the courts have pretty much said, "Hands off. When it comes to tariffs, we view them as a national security or foreign policy issue, and these are realms in which the president has traditionally got a lot more independence to act. We're not experts in that and are not inclined to trespass on that."

So the implication is strong that the courts will not actually do much to rein in presidential authority. I do think it creates that uncertainty that Kyle was talking about.

The other thing that was interesting about your comments, Kyle, is that you basically rehashed the history of tariffs in America, right? We have an income tax in the first place because tariffs were a problem, and they've repeatedly been a problem. What we would be doing is just walking that back and ignoring it.

I think the part that is being ignored right now is, what has been said a couple of times, the distributional impact of these tariffs. They're going to be unpopular. That distributional impact is why we created an income tax, was to rebalance things.

It's one of those rare moments. Trump talks a remarkable amount about the late 19th century and about William McKinley, but maybe he should be thinking more about, my favorite guy again, Grover Cleveland. Because Grover Cleveland won the presidency on the backs of tariff unhappiness. I suspect that what we would see is an awful lot of quick unhappiness about the kinds of blanket tariffs that Trump is talking about.

Cara Griffith: Let's keep going with the idea of raising revenue, and let's talk about the corporate tax rate a little bit. That does seem like that is a place, if you're going to raise revenue, and I will go on the record and say it seems to me that both candidates at this moment are being a bit fiscally irresponsible, but that is the place we are in the campaign. We throw out a lot of ideas, and we see what ultimately sticks. But raising that corporate rate is certainly one place where you can raise revenue.

Bill, I want to come back to you. Let's assume Harris gets into the White House. Maybe let's say we have mixed government. Do you think a corporate tax increase would be on the table? How high do you think it would go, and is it a good idea?

William Gale: I think in that scenario, it would have to be on the table. One of the main Harris proposals is the millionaire’s tax on unrealized gains. I just feel that that's not going to get enacted. I mentioned earlier that the revenue raisers were difficult on both sides. If you look at revenue raisers that are feasible and doable and within the historical range of experience, raising the corporate tax from 21 percent is certainly within that category.

I could see it going to 25 percent. I have a hard time seeing it going to 28 percent, but I'm not going to fall on my sword on that. But I think there's a solid chunk of revenue that could be raised there that would not make the U.S. a pariah for investment or an outlier relative to other countries.

I think a package that kept the investment incentives and raised the rate would be attractive not just for revenue purposes, but for incentive purposes too. When you think about it, a company's income in a current year is mainly the result of investments it made in the past. If you cut the rate, in the short run at least, you're basically giving a lot of windfall gains to the investments that's made in the past.

It's much better to keep the rate at a decent level and give incentives for new investments. I think there actually is some coalescing around that idea. I would think that a corporate tax rate increase, coupled with continuation of the expensing and interest in net operating loss provisions that were originally enacted in TCJA, would be an attractive way to raise some revenues, but retain investment incentives.

Joseph Thorndike: Could I ask Bill a follow-up question on that? I mean, you paint a picture of what might be a reasonable package. Is it your sense, or Kyle's, that there's actual Republican buy-in for that, plausibly?

William Gale: I'm not good at predicting what Republicans will think or do, but this would be part of an overall big package. I mean, compared to other revenue raisers, I think this would be relatively more attractive.

Cara Griffith: Kyle, I'm interested to hear your thoughts on the topic, too. So to Joe's question, could there be a scenario where it would be attractive to the Republicans to raise the corporate rate? I guess alternatively on that is that if we have a Trump presidency, can Trump avoid raising the corporate rate and pay for many of the other things that he's proposed?

Kyle Pomerleau: I think that it's unlikely that the Republicans are going to want to raise the statutory corporate income tax rate. Now it's not impossible that it happens, but I think it is less likely in that scenario. I think the scenario is more likely if there is a Democratic trifecta, which of course is I think an unlikely outcome of the election given current polling.

Bill hit on an important point: Whether raising the corporate tax rate for additional revenue is a good idea will be context specific. What are the other details of the proposal? One of them that Bill already brought up is whether they are able to maintain or expand expensing, and also whether they're able to maintain or expand limitations on interest deductibility.

Then I'll add another one, which is what they do on the international side. So the statutory tax rate is important in determining where companies locate their profits. If there is an increase in the statutory corporate income tax rate, but no real change to the international regime, that can place additional pressures on the corporate tax base that should be dealt with international provisions.

But from my perspective, I think there are some lower-hanging fruit for revenue raisers on the corporate side. This includes limitations to interest deductibility. This includes tinkering with international provisions, maybe making GILTI a little bit more rational, and also looking at general business credits before then moving to statutory tax rate.

Then if Republicans want something that is in effect very similar to a statutory rate increase, but also accomplishes some of their other goals, which they were trying to accomplish with, say, the state and local tax deduction limitation on the individual side, they can take a look at how to structure a limitation for the corporate deduction for corporate state income taxes paid. This, again, is effectively very similar to a rate, but I think it's a rate increase that aligns incentives a little better across the 50 states.

Cara Griffith: I wanted to get to the international provisions, but I'm going to touch on the SALT cap first since that was the last bit you mentioned. We know Trump has said he wants to get rid of the SALT cap. Harris hasn't been so bold yet, but there's plenty of Democrats that are not in support of the cap.

Is it likely to go away? A lot of the states have done workarounds — is there a way to get rid of the workarounds? What becomes of the SALT cap at the end of 2025? Does anyone want to kick us off on that conversation? The answer is no — no one wants to kick us off.

Joseph Thorndike: Well, flat-out prediction is hard, because you're accountable to it. So I'll fall on my sword on this one and say that I do think that depends on the makeup of Congress a lot and how close the votes are.

I mean, we saw this happen already when a group of northeastern Republicans essentially ended up wielding disproportionate influence in a lot of congressional debates specifically because of the SALT cap. I think that it's really going to come down to that sort of legislative nitty-gritty. Do the states that are affected by this the most, do the representatives from those states really have the juice to make it happen? Because it's a lot of money to give up.

At some level, although I'm not convinced that things are going to really need to be paid for, because no one feels like they need to pay for anything anymore, but I do think, again, rules of gravity apply. There will be a number that people are trying to hit, so I think it's unlikely.

It's going to be a heavy lift, but it's not implausible, I don't think, because that small group of activist lawmakers, which is bipartisan, actually really care about this issue more than any other.

Kyle Pomerleau: I think it also depends on the margins in Congress. If Republicans go in there with very slim margins, then it's more likely that the SALT Caucus of the Republican Party is your marginal vote, so they're going to be much more important. Whereas if Republicans get a broader majority, they're going to be less important.

But does the cap go away altogether yet? Unclear. You could see a lot of in-between policies where lawmakers may double the cap for married couples filing jointly as a way to reduce the burden but without getting rid of the cap altogether.

The math is just so challenging already when you assume the cap stays in the context of extending the TCJA. It's hard for me to imagine that they want from the outset to make the math even harder for them.

Cara Griffith: Yeah. I mean, if I had to fall on my sword, it would be that the SALT cap doubles in some way, and we try to get rid of some of the workarounds. That's where I'll go on record, and that's where I would fall, and we'll see what happens.

William Gale: Cara, can I just add two things? One is I think the most likely scenario, of course, is dependent on who's elected, but I think the most likely scenario is that related to what Kyle said – the cap gets expanded a little bit, and the marriage penalty gets removed.

I can't see a scenario where the cap is totally removed. That just seems way too expensive and regressive on top of everything else that's being proposed.

But the other thing to think about is as you relax the limit on the SALT deduction, the AMT can come back into play. The AMT and the SALT changes in 2017 were done as a combination. So as we think about SALT, we need to think about the individual AMT as well.

Cara Griffith: That's right. You’re absolutely correct there. Bill, can I stick with you? And let's change the topic to think about international tax provisions. Trump and Harris have very divergent thoughts on pillar 2 with Harris being somewhat in support of it, and Trump not.

What do you think is going to happen in terms of any international tax changes that might happen with either administration?

William Gale: It's important to put this in a little bit of historical context. In 2017 we totally changed the way we tax foreign source income. There were just hundreds and hundreds of changes. I think everyone understands that it's very unlikely that they got everything right the first time.

I think some of the things that are on the table are moving GILTI to a country-by-country basis, maybe raising the GILTI rate to be more in compliance with pillar 2 so we're not giving up revenues to other countries. I think those are plausible reforms within the structure that was created in 2017.

I don't think anyone wants to move to a different structure or certainly not back to the old structure. Foreign-derived intangible income also seems like it's on the table for either repeal or adjustment.

Cara Griffith: Kyle, same question coming over to you.

Kyle Pomerleau: Yeah, it definitely depends on the outcome of the election. If Republicans are in control, you could see maybe a number of outcomes. They have not been shy about disliking major components of pillar 2.

Undertaxed payments or profits rule, of course, is the prime example of that. They view that as extraterritorial taxation, however one may define that. So there may be even trade action on that policy in terms of GILTI under Republicans. The question is, do they do anything? Do they go to the OECD and say, "Look, just grandfather GILTI, and then we'll move on from this"? Or is there going to be pressure within the broader 2025 debate to find revenue raisers?

Part of that could be looking at GILTI, looking at the structure of FDII and ways to reform that could raise a little bit of revenue. Because there are ways that you can change GILTI that both conform to pillar 2 in ways that raise revenue, but also ways that conform to pillar 2 that would lose revenue relative to GILTI. I think it's taken for granted that GILTI is this extremely generous provision, and that pillar 2 would take away that generosity. It's more of a give-and-take. There are parts of GILTI that are much less taxpayer friendly than parts of pillar 2 are.

Then on the domestic side, we have the corporate alternative minimum tax. CAMT is not a pillar 2 minimum tax. You could imagine a world where that's converted into a qualified domestic minimum top-up tax potentially. I haven't seen specific proposals for that, but that would deal with that. But I would see that as a potential under Democratic control rather than Republican control.

Cara Griffith: Yeah, it seems CAMT is one of those that every corporate taxpayer loves to hate. It's complicated, it's convoluted, and no one likes having to keep a third set of books in order to comply with it. That's an interesting one.

Joe, I want to get your thoughts, too, on the international piece before we can then go to CAMT if we want a little bit more. There's plenty of other topics, but I wanted to get your thoughts on the international piece because I think it's very important.

Also, let's say we have mixed government, is there room for some bipartisanship here that comes to something that maybe is pillar 2 compliant that the Republicans can get behind?

Joseph Thorndike: I've been a skeptic for a long time that the Republicans are ever really going to get on board for the parts for most of pillar 2. I feel like Republicans have been, for the most part, fairly clear about that over time.

Originally, this was the kind of issue that was not all that partisanly politicized in American politics, but it really has become that way in the last several years. I don't even know that it started that way a few years ago, but the lines have been drawn pretty clearly, and I would be surprised if Republicans are willing to go down this road very far.

Cara Griffith: It's an interesting one, and I think it'll be challenging. That's going to be a very challenging one to consider. Let's move on to another TCJA provision that may or may not be extended and talk about section 199A. What might become of that?

Bill, I can come to you first for this. Do you think it's going to be extended, and if not, what else happens?

William Gale: It's a really interesting issue. The Peterson Foundation did a "Solutions 2024" thing earlier this year, where they had seven think tanks put forth their budget proposal ideas. All seven of them proposed repeal of section 199A.

I mean, it's well known to be expensive, to be extremely regressive, and not to have had anywhere near the desired impact on either investment or hiring etc. It was created for equity for passthrough owners given that the corporate tax was being cut. So, harking back to the earlier discussion, one of the benefits of raising the corporate rate would be elimination of the need of 199A to maintain parity between the corporate and noncorporate sectors.

Having said all that, there's a car dealer in every congressional district benefiting from this, and it's going to be really hard to just repeal it, I think, or just let it expire. Actually, I think Kyle has the most constructive proposal of how to deal with 199A.

Kyle Pomerleau: I agree with Bill that it will be very politically difficult to get rid of section 199A, even if Democrats are in control. I think from there, policy people need to think about, what are ways that section 199A can be reformed? I think a starting point is to think about the issues that it creates in the tax system. So, contrary to what supporters say about 199A, it doesn't really create parity between C corporations and passthrough businesses. It really locks in a tax advantage that passthrough businesses had prior to the TCJA.

In fact, I think that the system would be more equitable between the two businesses if we just had the system we had today without 199A. A big problem with 199A is you're creating a rate differential between two forms of income that passthrough business owners receive, and those are the profits from the business and labor compensation. When you create that rate differential, you create pressure on the tax system where business owners are going to have an incentive to recharacterize wages as profits to bring their total effective tax rate down.

Now, the current section 199A has a couple of rules to try to deal with this. I think they're, one, complicated, and two, arbitrary. For example, just arbitrarily removing certain service businesses from the base of section 199A.

If you're going to have a provision that's meant to encourage investment, it should be across the board for all industries regardless of business. The proposal that I put forth and before me, a friend of mine, Scott Greenberg, put forth, is to replace those limitations that exist under current law. So keep the deduction as is, a 20 percent deduction against taxable income. Replace the limitations that can create complexity and distort decision-making — just replace that with a simple calculation that taxpayers need to do where they take the assets of the business, multiply that by a deemed rate of return. That is your qualified business income, and then that is the limit to which you can deduct against your taxable income.

I believe that that aligns incentives of the policy pretty nicely. It keeps the incentives for additional investment but removes the incentives for shifting income to lower forms. So as a result, it, I think, has the same incentive effects as current 199A at a much lower cost.

Cara Griffith: Kyle, do you think that a proposal like that, which on its face seems very reasonable and seems to accomplish a lot of this data goals — is something like that able to get bipartisan support?

Kyle Pomerleau: That remains to be seen. What's pushing against reforming of 199A is a concern from the supporters that any reduction in the value is going to then snowball to taking away the deduction eventually. Now from a policy perspective, great. But that's the fear. There's going to be a lot of pushback against, I think, anything that reduces the value of the deduction.

Cara Griffith: Yeah, that's very interesting. We had a question come in from the audience on the estate tax. The question is that the estate tax exemption looms large in the TCJA, and it's historically been used as a horse trader. With a historically high amount, how much political will will there be to alter the expiration of the estate tax? Of the three of you, any thoughts on what might become of the estate tax?

Joseph Thorndike: I think that the estate tax is always puzzling because we can never really explain why actual voters care about it as much as they do when it is only at stake for a few handful of extremely rich people. But that being said, I mean, I can imagine some tinkering with the exemption because the exemption is so high right now that you could lower it and still have it be so high right now.

But it is an unpopular tax. Progressives and policymakers can wish that that were not so, but it demonstrably is so. I don't think it's the heaviest lift. I think getting rid of 199A is a lot heavier lift than putting back on the estate tax exemption. It's just a bigger constituency.

But I do think that the general trend of the estate taxes in the same direction, and even if we lower the exemption, it's not going to raise huge amounts of new money. I'm not convinced it's going to be that high on the agenda one way or the other. Maybe it is used as a horse-trading item, but I don't think it's especially likely to expire.

Kyle Pomerleau: I think the major difference here is that you don't see the same bipartisan support for the estate tax as you do for section 199A in some form. I think Republicans are pretty clear that they would like to get rid of it eventually, whereas Democrats would like to strengthen and broaden it.

William Gale: I think the discussion of the estate tax needs to be expanded to think about the treatment of capital gains at death, either moving from the step-up in basis to basis carryover or to taxation of unrealized gains at death. I think that might be a little more popular than the estate tax, because the idea that you should pay taxes on your income at some point in your life doesn't seem unreasonable.

Likewise, on estate tax, I agree with what Joe said. Progressives have been beating their head against the wall for decades trying to convince people that it's a good tax.

I think converting the estate tax to inheritance tax, might feel more justified in the sense that inheritance is the one major form of income that people get that is not included at all in the income tax. I don't know if you'd want to tax it as part of the income tax or tax inheritances separately under their own schedule, but I think that's an idea that policymakers should consider, given both the unpopularity of estate tax and given the enormous transfers of wealth that are coming in the next few decades. The over-65 population owns a far greater share of wealth now than it has most times in the past.

There are going to be trillions of dollars of transfers coming up in the next 20 years. If we have this eviscerated wealth transfer tax system that we have now, we're going to lose out on revenues. We're going to cement dynasties in place. I think wealth transfer taxation should be on the table, but I don't think the estate tax is the right way to go.

Cara Griffith: That's interesting. You mentioned taxing unrealized gains, which was definitely something that I wanted to get to. It's not hard to get behind the idea of taxing unrealized gains at death, assuming that death is that realization event. I can make that work in my own head, but what do you think about Harris's proposal, that billionaire idea — that we're going to tax the unrealized gains of the ultrarich?

Bill, I'll start with you, and then we'll go to Kyle and Joe. Is that feasible, and do you think it's likely to be proposed if we have a Harris White House?

William Gale: It'll be proposed in the sense that it's in the budget. It's in the Biden budget. It's in the list of things she's endorsed. It's just not going to happen.

It didn't happen in 2021 when the Democrats had control of both houses and the White House. You might say, "Well, that's because there was Sen. Joe Manchin III, I-W.Va. and Sen. Kyrsten Sinema, I-Ariz.,” but there's always going to be a Manchin-Sinema. There's always going to be a marginal vote. I just think if we try to tax unrealized gains at death, that's taxing them once during a lifetime.

I feel like we should try to walk before we try to run, and taxing all gains on an annual basis is just administratively an order of magnitude more difficult than taxing capital gains at death. So it's fun to think about the longer-term goals, but the imperative right now, the next step to me, if we wanted to go this way, would be thinking about taxing unrealized gains at death.

Kyle Pomerleau: Yeah, this is one of those things that in principle, you can make a case for. So under a pure income tax, you'd want to tax gains as they appreciate on an annual basis. The minimum tax that is being proposed is moving in that direction.

But in practice, or how this is structured, I don't think you can make a strong case that this is improving efficiency or improving incentives significantly. I don't think the tax code needs yet another minimum tax, and I think that supporters need to think through the implications of this being a minimum tax, not just a system that taxes unrealized gains on an annual basis.

I mean, I think those are going to be fundamentally different. I sit down from time to time and reintroduce myself to the minimum tax, and remind myself that there are details in the budget, but I don't think all the details are there. It's in some cases not clear how losses are going to be addressed in certain cases. I think the potential for complexity I don't think has been fully grappled with.

Joseph Thorndike: I think you're right, Kyle, that the treatment of losses is always going to be a sticking point for this. Personally, I would be shocked if anything close to these proposals actually get outside the pages of the budget. It's hard to change capital gains, that capital gains preference itself. This is orders of magnitude more difficult than that.

I think that this is also one of those things where — I hear this a lot from people asking about this election — this proposal, despite the fact that such as it is, it's restricted to a small group of very wealthy taxpayers, it scares people. Because, I mean, realization seems like something that's necessary to a lot of people for a tax, and it probably is necessary for the Supreme Court it turns out, although they haven't actually decided that yet, but they've signaled that they will.

I just think that it's completely politically implausible that anything like this is actually going to happen. Perhaps at death, as Bill says. It might be saleable in those terms, but trying to tax on an ongoing basis seems to be impossible. I think this is one of those things, again, where we should take not Trump but Harris seriously, but not literally.

That's why it appears in the budget. It's to be taken seriously. It's to send a signal, but I don't think anyone has a genuine belief that this is going to happen. I don't know why people actually are so quick to discount Trump's rather crazy ideas like some of his tariff stuff, but are quick to be very credulous about Harris's ideas and think, "Oh, that might actually happen, and it seems scary." I mean, that to me is something we should all work against and realize that an awful lot of this stuff is just symbolic — just positioning.

Cara Griffith: I think that's a very good point. One of the things I thought of — and Joe, I'm going to come back to you on this question — is if we were to try to do something like taxing unrealized gains, it is enormously complex. It would mean we have one more thing that we would ask the IRS to do is to figure out how to calculate this on an annual basis.

We talked about this earlier in the week, and something that's not necessarily on the ballot but kind of is, we come back to IRS funding. So we have all of these proposals, and we are going to ask the IRS to administer them, to interpret them, and to provide taxpayer guidance.

Do you have any sense of what the candidates and parties are thinking about IRS funding? Is this going to be something that is well received, or is it going to be again on the chopping block?

Joseph Thorndike: Well, like you say, it's not actually been talked about very much in the campaigns, but I think it's pretty safe to say that the Democrats like to fund the IRS adequately. They're responsible for the Inflation Reduction Act, and it's a big boost for IRS funding.

I suspect that that will continue under a President Harris. But under a President Trump, I think we would expect that the IRS's budget is going to be under continuing attack. It has been since that funding boost originally passed. I thought honestly, it was delusional to think that that money was going to survive for the 10 years it's expected to survive, because it was going to be under attack constantly.

As you say, I think the IRS budget is silently but very much in play during this election. It will be hard for the IRS to administer a tax on unrealized capital gains, but it's going to be hard for the IRS to do everything else —including answering the phones — if that original funding boost is made to disappear in some way.

Cara Griffith: Right. I mean, it comes back to partnership tax issues. There's a lot that just strains the abilities of the IRS.

Kyle Pomerleau: The taxation of unrealized gains is also not the only potential sense of additional administrative burden for the IRS that's being proposed out there on the campaign trail. Proposals such that are much smaller than that or maybe roughly the same size depending on how you count it, such as an exemption for overtime or an exemption for tips, would also put pressure on the IRS and be a strain on their resources.

Cara Griffith: Yeah, that's a good point. One last question I was going to ask — Bill, I'm going to come to you first — but it was on whether there are commonalities between the two proposals at this moment. I was going through my list in advance of this, and the exempting tips was one of the only places I could find.

Bill, let me come to you. Are there places of commonality, whether that's in the TCJA provisions that we think may be extended or other tax policies? Is there anything that really strikes you as being, "Yes, this is likely to happen. This is common between the two platforms, and we might actually see this come to fruition"?

William Gale: If you think about the core TCJA, it's kind of what was in the Smith-Wyden bill that stalled in the Senate last year, the expensing and the capital income provisions for businesses and the child credit for families. I feel like those two things are going to go through.

I've come back to this Alan Blinder quote again. The things they agree on are tips, and to some extent tariffs. Biden did not undo Trump's tariffs. Harris is not really talking about undoing them. So there's this implicit ratcheting up of acceptance of tariffs, which for reasons I mentioned earlier is not really encouraging. But both sides are favoring tax subsidies for children, although in different ways. But generally, the differences to me stand out more than the similarities.

Kyle Pomerleau: One other potential similarity, but I actually will make the case that it's pretty different, is just the TCJA altogether. Trump wants to push forward an extension of the entire thing, while Harris wants to extend it for taxpayers earning under $400,000. Now, if you look at just the distributional burden of the TCJA, that's basically 75 percent of the TCJA. So it's that much overlap, but then you start thinking, "How do you extend the TCJA for taxpayers under $400,000?"

It's not like the Bush tax cuts, where it was just all tax cuts and you could just cut it off at a certain point. It's a mix of tax cuts and tax increases. So it's going to need a lot of creativity in order to figure out how to really manage that pledge, that discontinuity. I think in a lot of ways, the tax system will end up looking quite a bit different, especially around that $400,000 mark.

Cara Griffith: Joe, I'm going to come to you for our final few seconds here. Any similarities you're finding, or do you agree with Kyle and Bill that we're looking at more differences right now than we are similarities?

Joseph Thorndike: I think in most of the important senses, yes. I think you have to strain to find the similarities in the sort of little niche proposals like the tips proposal. I think that there's going to be an awful lot of support for just extending TCJA when it comes along, eventually.

The Democrats are talking a tough game about how they'll let the whole thing go, but I don't believe it. They're going to cave on that if they have to, because Democrats know they'll end up holding the bag. Democrats get blamed for economic problems, so they're not going to invite one.

Cara Griffith: That's a good point. In some ways, inertia gets the best of us. It's there, and no action results — well, I guess no action results in extension, but they're probably not going to want that.

Well, I want to thank all three of you for joining today. This was a lot of fun. I learned a lot, and I appreciate your thoughts and opinions. Thanks to everyone who is watching and who sent in questions. We greatly appreciate it, and we'll you see next time.

This transcript has been edited for clarity.