How could the nation’s tax policy change as a result of Democratic election victories? For a look at the possibilities, GLG recently met with Victor Fleischer, a Professor at the University of California, Irvine School of Law and former Democratic Chief Tax Counsel at the U.S. Senate Finance Committee. Edited excerpts of the broader conversation follow.

There still seems to be a split among the Democrats’ more progressive and more centrist wings regarding wealth taxes and corporate taxation. How would you describe Joe Biden’s tax orientation?

What I can see coming out of the campaign is a very left-leaning platform that would raise a lot of money to fund an ambitious spending program to try to rebuild the economy. Having said that, the actual proposals coming to Capitol Hill are likely to reflect the reality of the Senate and its makeup. If the Democrats don’t take the Senate, we’re not going to see much of this make its way into law.

If the Democrats win the Senate and the White House, there’s the possibility they could do a reconciliation bill as the Republicans did, which could pass legislation with less than 60 votes and avoid a Senate filibuster. But there are lots of limitations on what you can do in a budget reconciliation bill, and you can do only one of them per year.

We also should remember that we’re still in a pandemic, so even if the Democrats win in a clean sweep, they might focus on additional economic relief before turning to tax reform. The key question is what Senate Democrats will want to do and what they can actually achieve, and that’s likely to be more moderate than what Biden has discussed.

Suppose there is a Democratic sweep. How might the more centrist and progressive wings of the party reconcile their differences?

I think the first thing on the agenda would be the corporate tax rate, on which there is widespread agreement that the old 35% rate was too high and had negative consequences in terms of encouraging U.S. corporations to shift their income overseas and consider inversions. So I think the first thing on the agenda is finding a rate that’s less than 35% but higher than the current 21%. A favorite number going back to the Obama administration has been 28%, but it could be 25%, 26%, or 27%. Raising the rate is a relatively easy way to raise revenue, and the economic data show that the government has lost a lot of revenue as a result of the reduction to 21% and it didn’t seem to have much of an effect on economic growth — which means we can probably raise the rate a bit and raise money without slowing the economy. The other reason I think the corporate tax rate is probably the first thing on the agenda is that it’s relatively easy to implement. You’re just changing the number. Some of the other proposals that the Biden campaign has put forward are a bit more complicated and would be more politically controversial.

The Trump administration’s Tax Cuts and Jobs Act included a tax on global intangible low-taxed income, or GILTI. Is that something you see a Biden administration and a Democratic Senate changing?

I think the basic framework, in which U.S. corporations must pay some tax, is likely to remain, but I expect that a Democratic administration and Senate would make some changes. For example, there’s a deduction provision that effectively gives you an imputed 10% return on investments in offshore depreciable property, which creates an incentive to offshore investments. So that, and the use of foreign tax credits in different jurisdictions as a whole versus on a country-by-country basis, would get some attention, as well as the tax rate on guidance related to GILTI income. There’s some appetite to raise the rate from the current 10.5% to something closer to 20%.

What about tax issues in financial services, such as carried interest or a financial-risk fee on large banks?

I’ve been involved in carried interest as an academic for a long time, and in my view, the 2017 bill was designed to give the appearance of changing the tax treatment of carried interest while actually doing very little. Section 1061 imposes a three-year holding period on certain partnership interests in order to get capital gains treatment. Of course, most private equity, venture capital, and real estate investments are held for longer than three years, so the section has very little impact. If there were a Democratic clean sweep, there would be a movement to treat carried interest as ordinary income. But we should keep in mind that Senate Democrats, while moving left, are not as left-leaning as the progressive wing of the Democratic Party in the House. I’m less sure about the political chances of some of the other taxes that could affect Wall Street, such as a transaction tax, which could impede the functioning of our capital markets.

What about capital gains?

There’s no question that the low rate of tax on capital gains is a big issue, and it’s a big issue not just because investors are paying a low rate of tax, but also because those who earn carried interest pay tax at capital gains rates on their labor income. It seems clear that if we’re going to try to raise taxes, it’s not fair to have folks who are earning their keep as fund managers pay tax at 20% while everybody else pays at a rate that will increase. The Biden camp has proposed raising the capital gains rate to the top ordinary rate for high earners. But I’m skeptical that Congress would want to go that high, effectively doubling the rate from 20% to 39.6%. Much more likely would be a moderate increase because my hunch is that Vice President Biden, if elected, would be more moderate than what we’ve been seeing coming out of the campaign.

Any last thoughts?

If we don’t have a Democratic clean sweep, we’re unlikely to see major legislation, but rather much smaller things. No matter who wins, the pandemic and economic recovery are going to be top priorities, and they’re expensive. There’s a recognition that we’re going to have to pay for this, and while current borrowing costs are low, we still have to pay back principal. If Biden is elected, there will be a push for more pandemic relief as well as support for small business. All that money going out the door will lead to a tax discussion and a desire to raise some revenue. And on my side of the aisle the things people have been talking about for some time are carried interest, the corporate tax rate, limitations on the use of interest deductions, and tweaking of GILTI.

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About Victor Fleischer

Victor Fleischer is a Professor of Law at the University of California, Irvine School of Law. He teaches and writes in the areas of corporate tax, international tax, partnership tax, tax policy, and alternative investments. He served as the Democratic Chief Tax Counsel for the U.S. Senate Finance Committee from 2016 to 2017. In this capacity, Fleischer led the committee’s tax policy legislative efforts and its communications and negotiations regarding tax issues with the Trump administration, Treasury, the Joint Committee on Taxation staff, Senate Republican and Democatic Leadership, and the House Ways and Means Committee. Prior to joining the USD School of Law faculty in 2013, he held tenured or visiting professorships at University of Colorado Law School, University of Illinois College of Law, UCLA School of Law, Georgetown University Law Center, and NYU School of Law. Before his accomplished career in academia, Fleischer practiced law at Davis Polk & Wardwell LLP and clerked in both the U.S. Court of Appeals for the Fourth Circuit and Ninth Circuit.

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This article is adapted from the October 1, 2020, GLG teleconference “U.S. Tax Policy Outlook: Democratic Perspective.” If you would like access to this teleconference or would like to speak with Victor Fleischer or any of our more than 700,000 experts, contact us.