Thoughts on the Upcoming 2017 U.S. Tax Policy Changes: Part 3

Link to previous article in this series: Part 1 and Part 2

V. The Top 9 Ways These Changes Will Fundamentally and Irrevocably Alter All of Our Lives. No, This is Not Hyperbole.

In my opinion, the above changes will fundamentally and irrevocably alter our lives in the following 9 ways:

1) American corporations (aka large capital companies with public shareholders) will “come home”over time, both physically and in terms of capital deployed and earnings disbursement.  The globalization of American corporate thought, footprint, and investment has peaked. The combination of territorial tax policy, regulatory reform, and lower tax rates will make the physical confines of America more profitable and more competitive as a place to actually conduct physical business in.  This, combined with significant planned infrastructure investment, will create incentives to build and deploy capital and work forces in the physical confines of America.  Why form Irish subsidiaries taxed at 12% and hire workers overseas, when the very incentives that lead to that (e.g., double taxation of foreign dividends, high domestic tax rates and an unfavorable regulatory environment) are no longer there? No, the world will not change overnight, and sure, there will always be reason to deploy capital and property overseas.  However, the trend will start spinning in the right direction.  America will become the place to invest in; the place to park after-tax earnings.

2) Net direct foreign investment in the U.S. will substantially increase.  Overseas foreign companies, whose domestic countries already employ territorial tax, will be enticed by the significant lowering of the highest effective corporate tax rate in the world, to set up physical shop in the U.S. and actually “conduct trades and businesses” in the U.S.A (which are the requirements to be subject to U.S. corporate taxation as a foreign business), as opposed to placing their capital and machinery and products in low tax haven countries and selling into the U.S.A. (which in and of itself can many times not trigger U.S. corporate income tax nexus).

3) American closely held businesses (aka small capital companies with private shareholders) who have a need or desire to expand overseas (while keeping their U.S. operations intact) will substantially increase their overseas investment presence.  The repeal of the controlled foreign corporation rules (which are complex, expensive to comply with, and discourage the foreign placement of capital overseas in a whole variety of circumstances that the IRS deems to be “unfair,” especially in the case of small privately held firms) will create a new “event horizon” for the small closely held family business and the planning practitioner.  Practitioners in this area will experience unprecedented growth and demand for their services.  I know what I have done for clients overseas within the context of the controlled foreign corporation rules.  I start to sweat thinking how I can assist such clients when those rules are gone.

4) Estate tax planning will die a long deserved death and entire sections of financial planning industries will be decimated, but trust and family planning will experience a renaissance yet unseen in the annals of the English common law or global history.  Trusts were created in the Middle Ages by knights errant who transferred their wealth to “trusted” friends while they were away at war.  I have always asked clients: why do you think they call these things “trusts”? Answer: the “trustee” is the “trusted” person who manages your property in “trust.”  Having drafted trusts and estates for 30 years on a global basis, I eagerly look forward to a day where the plans of my family clients can be implemented without reference to the tax-tail wagging the dog.  I relish the opportunity to advise clients without reference to an almost impossibly obtuse transfer tax system. Families will be able to plan for the right reasons, do the right thing as to family members, preserve the wealth the way they want to, and have the faith that their decisions are done for their reasons, not the reasons of the tax man.  Trusts were the first non-human juridical persons on the planet and are the most unique combination of law and theory and practical application of any entities on the planet.  The use of them will thrive within the expected paradigm shift.

5) Any residual gift tax will eventually morph into a deemed disposition system.  Whatever gift tax system survives will eventually turn into a deemed disposition system which taxes, under the income tax, any lifetime or death time transfers of appreciated property at capital gain rates.  This system will be easy to administer and will never ever even remotely achieve the complexity of the current tripartite transfer system.  This is essentially the system the Canadian government uses.

Yes, I hear the folks saying: Well what about GRATs and sales to defective trusts and all those other gift tax strategies we developed to defeat the gift tax?  Won’t those have some viability in this new world since the gift tax will survive? Answer: No. The gift tax as rolled out and as amended will make these strategies irrelevant and illegal.

6) Asset protection strategies will emerge as the dominant form of advice that practitioners become expert in and will be the dominant consumer product in the financial services field.  If private wealth transfer taxes are substantially reduced or virtually eliminated, what is the next horizon? Preservation of wealth, and all the products and strategies that go with it, will become the dominant norm of creating value added advice and strategies for the high wealth or closely held business client.  Think trusts will be a part of that? Family LLCs? Foreign trusts?  These strategies will not only become the dominant form of advice, but they will become quickly internationalized as part of the internationalization of closely-held business capital noted in paragraph 3 above.  Foreign trusts owning small closely held business operations expanding overseas will become as common as S corporations. Mark my words, as common as S corporations.

7) A form of value added tax or national sales tax is certain to emerge.  With the lowering of corporate and individual tax rates, and the elimination of the estate tax, Congress will turn to a value added tax or a national sales tax (or whatever they call it) to make up the difference and to put in a place a vehicle which will, over time, become the primary source of government revenue. The above reforms will be the reason and excuse the government and tax reformers have always sought in the U.S. to institute such a system.

8) An invigorated America will look more like America, but it will also look more like Europe and the rest of the world.

The irony about these tax changes is that they will make our tax system much more “European” in content and style than most Americans are used to or can favorably contemplate.  Participation exemptions, the end of the death tax, and VATs will be familiar to my European counterparts.  They are long overdue in America.  For the past 30 years, America has not set the global stage for tax policy.  We have become complacent and have been laid back, watching others experiment in ways that we should have.  I have traveled all over the globe delivering the same message to many groups: the lack of corporate tax reform is the single greatest impediment to American competitiveness.  We can thank our European counterparts in many ways for showing us the way.  It is time American tax policy joined the world.  It is OK for an American to think like a European!!!!!!!!

On the other hand, these changes will highlight and showcase our uniquely American strengths and will reinvigorate them. My friends around the globe always ask me:  What does it mean to be an American?  I always answer that question the same way:  

America has always been about believing in limitless horizons derived from the physicality of the continent that became America.  America has been and will always continue to be about land: from sea to shining sea. The limitless vistas of human opportunity that stem from a limitless horizon of land stretching as far as the eye and heart can see and envision. There are no serfs, no castles, no moats, no boundaries.  Americans are thus bold.  We take action. We win. We do not settle for second best. We literally climb the mountains of our hinterlands. We see no limits.  Alexis de Tocqueville, noted that the size of America, from a European perspective, created a “continental fear” in Europeans, which they could never get over.  Often I meet many great and friendly Europeans and hear them say they have “been” to America.  Virtually 99% of the time the answer is that they have either been to New York City or Disney World.  Nice places indeed, but that does not qualify one as having been to America.

American companies and the American government and workers will return to the “I can” part of being an “American.”  We will dream big again. Horizons will be conquered.  Challenges will be met in big and bold ways.  The latent competitive and industrial strength of America will be unleashed in ways we can only imagine.

9) America Will Survive & Prosper As The New Rome.

The Roman Empire fell because it could not successfully traverse the natural tension between the benefits brought by an ever expanding globally required governmental system, derived by empire and the complexities and costs that went with it (such as a global tax system that needed administration, massive bureaucracies, immigration conflict, constant war, inflation, and corruption).  These burdens of ancient “globalism” were all foisted on the common Roman citizen in one form or another.  In other words, the common man in Rome over time figured out that the Empire, and the government that went with it, wasn’t necessary to their lives anymore and was not working anymore in any event.  Some historians call this phenomenon “the ever decreasing personal and cultural marginal returns of the complexity of modernity and modernization.”  At some point, complexity just is not worth it to you as a person anymore.  In other words, Rome died because the idea of Rome died.  It became exhausted. The complexity of modern life just got to the Romans.  They gave up.  I have always told my children that life is all about ideas.  It is ideas that give us strength.  It is ideas that allow us to forge ahead.

The expected 2017 tax changes are more than just tax changes.  They are America’s long overdue way of reinstating its uniqueness on the global economic stage, as well as resurrecting the unique things that make America, well, America.  They are ways to make modernity relevant to, and profitable to, the common almost forgotten man.  If I were Trump and the Republicans in Congress, I would call the expected 2017 tax act: The Reducing Of (And Making) Complexity Work Tax Act of 2017.  All of the tax rules that will be repealed never made since anyway, in my opinion, and were needless complexity and cost foisted on the common American by an ever more intrusive government – often times without purpose or intent.  These expected changes will increase the marginal utility of modern complexity.  The idea of America, as America, as a working government, as a place of personal freedom and opportunity, will be believed in again.  Unlike the Romans, we will not collectively give up.  We will rise to the challenge of globalism.  We will conquer it.

VI. Conclusion.

Dramatic change is coming.  It will come quickly.  Those that adapt can take advantage of these changes and reap huge rewards.  America will never look the same again.  Small, closely held business clients and wealthy families have unprecedented opportunities to expand overseas and preserve wealth already created.  Savvy and adept practitioners who see the potentials will prosper if they serve these clients and these unique emerging needs. We all have a chance again: A chance not to be mere participants in an almost meaningless tax system existing solely to serve itself and its own ends, but participants in our clients lives, their dreams and aspirations, and in the resurrection of a new American century based on ideas, not forms.  Based on the creation of wealth, not compliance.  In short, we all get that one last chance to be creatures of significance again.