In less than 250 words, the Trump Administration outlined a tax reform plan on April 26. “This is going to be the biggest tax cut and the largest tax reform in the history of our country and we are committed to seeing this through,” said Treasury Secretary Steve Mnuchin.
The outline includes changes to decrease the tax rates for individuals and businesses. It also calls for the repeal of the individual alternative minimum tax (AMT), the net investment income tax (NIIT), and the estate tax. Other than eliminating certain deductions, the proposal did not include any definitive measures for increasing revenue to offset the cuts. The plan also did not address non-tax matters, such as infrastructure spending or construction of a border wall.
Headlining the White House’s plan was the size and scale of the proposed tax cuts. For individuals, the plan reduces the number of tax brackets from seven to three, with the new rates set at 10 percent, 25 percent, and 35 percent. The plan did not specify income thresholds for these new rate brackets. Corporations would see an even more dramatic cut, with the rate being reduced from 35 percent to 15 percent. According to Treasury Secretary Steven Mnuchin, the 15 percent business tax rate will also apply to “small and medium size” pass-through businesses.
Other major features for individuals under the plan call for the doubling of the current standard deduction, and the elimination of all itemized deductions other than those for charitable contributions and home mortgage interest. Notably, deductions for state and local income and property taxes would be eliminated, along with the employee business expense deduction, and the student loan interest deduction. The plan did not mention tax credits other than to call for tax relief for families with child and dependent care expenses. National Economic Council Director Gary Cohn said that retirement savings incentives would also be protected, but did not provide specific details.
On the business side, the plan supplemented its proposal for rate cuts with a call for a territorial tax system, a one-time tax on the deemed repatriation of foreign earnings, and an elimination of tax breaks for special interests. The plan does not specify whether the territorial tax system would be based on some version of the border-adjusted tax, although the Administration has indicated it is moving away from the BAT. It also does not specify the rate for the one-time tax on unremitted foreign earnings. Additionally, the plan does not specify which special interest tax breaks would be eliminated. Secretary Mnuchin vowed that the Administration would establish rules to prevent abuse of the 15 percent rate on pass-through entities in scenarios where a higher personal tax rate should apply. Again, no details were provided.
Overall, the plan will leave many with more questions than answers. It appeared that the plan and the press conference were presented as a ”first 100 days” event to drive enthusiasm for tax cuts, rather than a substantive step in the legislative process. The plan generally mirrors the one championed by President Trump during his campaign last year, but is noticeably shorter and focused on core principles. That being said, several changes the President made from his campaign plan aligned with the House Blueprint, the current tax reform proposal championed by Speaker Paul Ryan (R-WI) and House Ways & Means Chairman Kevin Brady (R-TX). With bipartisan support for major tax cuts unlikely, it appears that any ensuing proposal would have to pass via budget reconciliation.
Although Secretary Mnuchin indicated that the cost of the plan’s tax cuts would be offset by its elimination of deductions and its effect on economic growth, there are many who will question this notion. Notwithstanding the effect on economic growth (referred to a “dynamic scoring”), a few measures from the plan are worth noting. The cost of the plan’s proposal to eliminate the individual AMT could be offset by the elimination of most itemized deductions. Some estimates have said that the repeal of the state and local tax deduction alone would save $1.3 trillion over 10 years. However, the estimated cost of doubling the standard deduction is $1.5 trillion and the cost of the new credit for child and dependent care remains unknown. The plan’s 15 percent business tax rate could cost $3.7 trillion dollars over 10 years, with the repeal of the NIIT adding another $200 billion to that.
Overall, the Committee for a Responsible Federal Budget says the proposal could cost as much as $7 trillion dollars over 10 years, stoking fears that a deficit increase of this magnitude might create a drag on the economy that negates any growth from the underlying cuts. Rep. Vern Buchanan (R-FL) shared this concern, where he stated, “We will see, we got to get dynamic scoring. But I’m not interested in building up bigger deficits.”
If the plan is to be made into permanent legislation using budget reconciliation rules, it cannot increase the deficit outside of a 10-year period. American Action Forum President Douglas Holtz-Eakin noted that the plan could not be made permanent under these rules without additional revenue raisers.
Rep. Carlos Curbelo (R-FL) also commented on revenue raisers to offset the plan’s costs, where he stated, “This is one issue I’m going to insist on. Obviously there will have to be some compromise or the rate reductions won’t be as ambitious.”
The Joint Committee on Taxation released a report this week that stated a 20 percent corporate tax rate could only be maintained for two years before the effects of the cut began to increase the deficit outside of the 10-year period. Therefore, a 15 percent rate for corporations together with an equal rate for pass-through entities might not be sustainable under the reconciliation rules. When asked about making the plan’s proposals permanent, Secretary Mnuchin said that would be preferable, but that the Administration was open to a temporary 10-year tax cut. On the other hand, Way and Means Committee Chairman Kevin Brady (R-TX) stated that he wanted a tax code that is “built to last,” a notion that House Speaker Paul Ryan (R-WI) also supports in making tax reform permanent.
Outside of eliminating tax breaks and the one-time tax on unremitted foreign earnings, the plan does not outline revenue generating proposals. Thus it appears that any legislative text on tax reform, which must originate in the House of Representatives, will likely only use the plan as an opening bid where much more detail will be necessary. Tax cuts as aggressive as those proposed under the plan will be challenging to maintain in final legislation without other major structural changes that balance the costs associated with those cuts. Secretary Mnuchin and Director Cohn stated during the press conference that many details of the plan are still being negotiated, but Secretary Mnuchin added that the Administration was determined to implement tax reform this year. Therefore, taxpayers may be forced to wait and see what emerges during the legislative process to turn the plan into reality.
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