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Trump’s tax plan tries to take away the drinks tray

Donald Trump’s promise of the biggest tax reforms since the Reagan era has cast minds back to the go-go years of postwar Manhattan, when cocktail glasses brimmed, steaks bulged and meal bills soared.

The generous treatment of business meal expenses fuelled a phenomenon called the “three martini lunch”. As good for networking as it was bad for afternoon acuity, the more money diners spent on liquor, the more they could trim off their tax bills.

“It was an axiom. It was like breathing,” says one lobbyist recalling 1980s Wall Street. In the show Mad Men the libations spurred the creativity of 1960s ad men. But in a 1986 tax revamp lawmakers turned against them, a move to raise revenue that holds lessons for today’s reformers.

Mr Trump has put tax reform at the centre of his economic agenda, proposing to slash rates for companies and individuals to boost growth and prosperity. But the White House has yet to convince even Republican lawmakers it has a viable plan.

A one-page list of White House goals last month said far more about cutting rates than paying for them. Assurances that economic growth would fill a looming deficit gap were met with scepticism. The Committee for a Responsible Federal Budget estimated the proposals would lead to a loss of $3tn to $7tn over 10 years, hard to swallow for many Republican lawmakers.

If Mr Trump wants Congress to pass substantive reforms before next year’s Congressional elections, he needs to find ways to pay for them. Some funds could be scraped together by eliminating loopholes and exemptions that pock the tax code. But the three martini lunch is a reminder that every break is cherished by someone and often has an institutional constituency ready to fight for it.

“People just love their exemptions and deductions in this country, even if they’re a small thing,” says Steve Rosenthal at the Tax Policy Center, a think-tank, who tracked the 1986 reforms as a junior lawyer. “They feel like they’re getting away with something.”

According to the Center on Budget and Policy Priorities, the government in 2015 spent a whopping $1.2tn on deductions and exclusions, more than it spent on the Medicare and Medicaid health programmes combined.

When Steven Mnuchin, Treasury secretary, unveiled the sketchy White House tax plan he said it wanted to eliminate most personal tax deductions. But he signalled it had no desire to tamper with two sacred cows: the ability of individuals to deduct mortgage interest and charity donations from their taxable income. That was good news for banks, which like home loan incentives, and non-profit groups, which depend on gifts.

The White House’s plans would mean the end of deductions for interest paid on student loans and contributions to retirement accounts.

David Brockway, a lawyer who was chief of staff for Congress’s joint committee on taxation in 1986, said: “If you want to raise revenue by broadening the tax base, you have to take something away from the public. If you do that, you start losing members of Congress.”

The White House says it would cushion the blow by doubling a portion of earnings that go tax free to $24,000 for married couples. One deduction it has been eager to knock off lets people subtract what they have paid in state and local taxes from their federal taxable income, costing the US an estimated $96bn this year alone, according to the Tax Policy Center.

As it happens, that deduction hands the biggest benefits to well-off people in left-leaning, high tax states such as New York, Connecticut and Maryland, which did not vote for Mr Trump.

The most expensive individual tax break, which differs from a deduction, ensures people do not get taxed on payments from their employers for health insurance. It cost the government an estimated $144bn in 2016, but is not on the chopping block.

Change can be made in increments. The ability to deduct business entertaining expenses was not eliminated in 1986. Instead the write-off was cut from 100 per cent of expenses to 80 per cent — and would later be slashed in 1993 to 50 per cent.

The move had an anti-elitist thrust that would resonate today. People were already drinking less at lunch than they used to, but the three martini lunch endured as a symbol of privilege subsidised by the less fortunate, said Mr Brockway.

Executives responded that entertaining helped them create jobs, but they did not lead the fight against the reform. Instead, organised opposition came from the restaurant industry, which warned it would lose billions of dollars in revenue as people gave up business lunches. The industry lost the argument.

If Mr Trump persists in trying to take the drinks tray away from more tax break beneficiaries this year, he will have a few fights on his hands.

@barneyjopson

Via FT