Republican Tax Plan Hits Finance as Wall Street Ire GrowsRichard Rubin
Dave Camp, the Republican House Ways and Means Committee chairman, is filling in the blanks in his plan to revamp the U.S. tax code and leaning on the financial industry to help pay for lower tax rates.
Proposals that became public before the plan’s release today would require big banks to pay a new levy on assets and remove preferential treatment for private-equity managers’ carried interest. Both ideas are drawing resistance from their targets.
Camp also proposes to push top earners into Roth-style retirement accounts and require corporate jets to be depreciated more slowly. Other winners and losers will be revealed as he unveils proposed changes that may include curbing tax breaks for mortgage interest, state and local taxes and municipal bonds.
The Michigan lawmaker is seeking to simplify the tax system while generating the same amount of revenue for the government - - and without giving high-income individuals a tax cut. He’s scheduled to release the plan at 1:30 p.m. today in Washington.
“Our code is overly complex, as I like to say, 10 times the size of the Bible with none of the good news,” Camp said today on CBS’s “This Morning” program. “It’s really a wet blanket over our economy.”
Camp’s proposal, the most complete reconstruction of the U.S. tax system since 1986, is unlikely to become law this year as Republican leaders are wary of the tradeoffs and Democrats are insisting on more revenue. Top Senate leaders from both parties said yesterday that it would be tough if not impossible to resolve tax-policy differences this year.
“We will not be able to finish the job, regretfully, in 2014,” said Senate Minority Leader Mitch McConnell, a Kentucky Republican. “I have no hope for that happening this year.”
Even so, Camp’s plan will become the benchmark for future efforts to revise U.S. tax policy, giving companies that disagree with specific provisions an incentive to build opposition as quickly and permanently as possible.
That may be part of the response from the private-equity industry to Camp’s plan to “clean up” the tax treatment of carried interest and the banking industry’s approach to Camp’s proposal to impose a quarterly 3.5 basis-point tax on assets exceeding $500 billion.
The bank tax plan would affect about 10 companies -- the largest banks along with non-bank institutions such as General Electric Co.’s financing arm -- deemed systemically important. A House Republican aide with knowledge of the plan asked for anonymity to describe it.
The bank tax, which would raise $86.4 billion for the U.S. government over the next decade, would likely affect JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, all of which had more than $500 billion in assets as of Dec. 31, according to the Federal Reserve.
Camp’s goal is to cut the top individual income tax rate to 25 percent from 39.6 percent and the top corporate rate to 25 percent from 35 percent. The bank tax revenue is less than what would be needed to cut the corporate tax rate by 1 percentage point, an indication of the kinds of tradeoffs that will be needed.
Representative Dave Reichert, a Washington state Republican on Ways and Means, said he’s already hearing from businesses at home that want him to “bend the chairman’s ear” about particular breaks.
“Take a deep breath, and step back and go through the entire bill,” he said. “Take a look at your entire bottom line liability and then make your judgment based on that.”
Including a bank tax in the plan is a notable step by the Republican tax-committee chairman, because it echoes a proposal by President Barack Obama’s administration that Republicans and some Democrats have blocked since 2010.
“It’s very meaningful that it’s Camp, a senior Republican, doing this,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC in Washington. “To me, it underscores Camp’s motivations at this point, to leave his mark on tax reform no matter the viability of actually advancing a proposal.”
Banks, which had been preparing for the possibility that the tax would be included in Camp’s plan, have opposed what Obama has called the “financial crisis responsibility fee.” Banks maintain that it would counter Camp’s goal of setting up a tax code that’s neutral across industries.
“We’re still adamantly opposed to any bank tax, because like any taxes in the past, with the large budget deficit and federal debt, these taxes will only increase in size and scope and capture more of the industry,” said Paul Merski, executive director of congressional relations and chief economist at the Independent Community Bankers of America. “It’s a very dangerous precedent.”
Camp’s carried interest proposal is similar, in that it borrows language from Obama, who has said that private-equity managers shouldn’t be able to get preferential capital gains tax rates on their profits. “Anyone else,” Camp wrote on the Wall Street Journal’s website last night, would call that “normal wage income.”
The private-equity industry reacted quickly, having anticipated that Camp might adopt a proposal Democrats have been trying to advance for seven years and use it to pay for lower tax rates.
Steve Judge, president of the Private Equity Growth Capital Council, an industry trade group, called Camp’s proposal “disappointing” in a statement last night
“Key policy makers from both parties have already made clear that the discussion around this draft proposal will be brief,” Judge said. “Camp’s proposal penalizes long-term capital investment, which he and other members of the House Ways and Means Committee have purported to support.”
Corporate jets wouldn’t get faster write-offs, also mirroring an Obama proposal. Some owners of small businesses such as law firms wouldn’t be able to escape payroll taxes on some of their income. And taxpayers who contribute more than $8,750 to retirement accounts would be pushed into Roth-style plans, which generate up-front revenue for the government.
Camp also wrote that he would increase the standard deduction and the child tax credit.
Unlike Obama’s bank tax, which would apply to banks with more than $50 billion in assets, Camp’s proposal would affect the very largest banks and insurers.
The plan would take effect Jan. 1, 2015, and the levy would be assessed each quarter, applying the 0.035 percent rate to each company’s total consolidated assets after subtracting the $500 billion exemption.
In addition to banks, systemically important financial institutions would have to pay the tax. The government has already designated GE’s finance arm, American International Group Inc. and Prudential Financial Inc. as such institutions. MetLife Inc. is in the final stage of the designation process.
Jon Diat, a spokesman for AIG, declined to comment. So did Mark Costiglio, a spokesman for Citigroup, Wells Fargo’s Ancel Martinez and Bank of America’s Jerry Dubrowski.
Jamie Dimon, the chief executive officer of JPMorgan, told analysts yesterday that splitting up the bank in response to the tax and other arguments might look “awful stupid” in five years.
MetLife had $885.3 billion in total assets as of Dec. 31, according to a document on the company’s website. Prudential has $663.4 billion in assets, according to a document on its website.
Randy Clerihue, a spokesman for MetLife, declined to comment on the proposal, as did Bob DeFillippo, a Prudential spokesman.
The basic arithmetic suggests that JPMorgan, which had $2.4 trillion in assets at the end of 2013, would pay $2.7 billion a year, or about 15 percent of 2013 net income. The tax would be deductible against the corporate income tax, reducing the net cost to the companies.
Unlike in Obama’s proposal, the banks wouldn’t be eligible for a discounted rate or an exemption applied to items such as insured deposits or long-term liabilities, the aide said.
The implications of Camp’s broader tax proposal won’t become clear until after he releases the full plan today. Many Republicans worry about the political costs of proposing limits on popular tax breaks, and Democrats object to revising the code without raising additional revenue for the government.
Camp has kept the details of the plan secret, fueling speculation among lobbyists this week about provisions that may be included.
The Washington Post reported Feb. 24 that the plan would include a 10 percent surtax on some income of individuals exceeding about $450,000. Manufacturing and farming income would be exempt from the surtax, the newspaper reported.
The Wall Street Journal reported that the plan could cut effective tax rates on capital gains and dividends. Both newspapers cited unpublished nonpartisan congressional estimates they had reviewed.
Mike Nicholas, chief executive officer of the Bond Dealers of America, issued a statement warning about the potential for the 10 percent surtax to be applied to municipal bonds, which are currently exempt from federal tax.
“That translates to higher borrowing costs for state and local governments and capital improvement projects that are delayed, scaled back or canceled altogether,” he said.
The bank tax proposal could serve as a counterweight to the industry-by-industry effects of the rest of Camp’s plan.
Unlike manufacturers that can accelerate write-offs of capital equipment or technology companies that conduct tax-advantaged research, banks are eligible for few breaks and typically have higher effective tax rates.
“It could still be a positive for them, just less than it’s going to be for the rest of the industry and less than it would have been otherwise,” said Brian Gardner, senior vice president for Keefe, Bruyette & Woods in Washington.