Retroactive Taxation and the Baucus Proposal
Senator Max Baucus (D-MT), chairman of the Senate Finance Committee, has released a series of staff discussion drafts that suggest numerous changes in international taxation, tax enforcement, and the tax treatment of capital costs. The centerpiece of the plan is a cut in the federal corporate income tax rate, which is currently the highest among the world's developed economies. The draft does not specify the target rate, because that will depend on revenue estimates and refinement of the plan, but Senator Baucus expects it will be under 30 percent. To pay for the lower rate, the plan would expand the definition of taxable income, an action known as base broadening.
Senator Baucus hopes the proposals will provide the basis for tax reform legislation. A press release issued by the Senate Finance Committee stated that while this is “not a final plan, the staff discussion drafts are intended to spur a conversation about areas where Republicans and Democrats may be able to reach agreement on how to fix the broken tax code.”
The senator states that while he “believes tax reform as a whole should raise significant revenue,” the current proposals are “intended to be long-term revenue neutral.” However, it is likely the plan would be a net tax increase in the short term, although the draft documents are unclear on this point.
A notable feature of Senator Baucus’s proposal is that it includes three major, retroactive tax increases that will be used to pay for the corporate tax rate reduction. Retroactive tax increases are not unprecedented and may be legal, but they do raise serious policy issues and more than a few eyebrows. They smack of breach of faith, and they have the potential to discourage future economic activity by undermining certainty and trust in the tax system and the government. This Fiscal Fact describes the proposed retroactive taxes and then briefly outlines policy arguments for and against retroactive taxation.