Treasury Secretary Steven Mnuchin on June 12 defended the Trump administration’s tax reform proposals, including a proposal to tax passthroughs at a lower 15 percent corporate rate and the proposed elimination of the state and local tax deduction, and asked lawmakers to wait and see a final plan before passing judgment.
Testifying before the House Appropriations Financial Services and General Government Subcommittee, Mnuchin pushed back against subcommittee Democrats who suggested that President Trump’s tax proposals, which so far have only been described in a one-page summary, would violate the “Mnuchin rule” — so called because of comments he made shortly after his nomination that there would be no absolute tax cut for wealthy taxpayers.
“I didn’t name the rule,” Mnuchin said, adding that Trump would not veto a tax plan that included net tax cuts for the wealthiest earners. He asked committee members to withhold judgment until the administration publishes a distributional analysis showing who pays how much under its tax plan.
“We’re taking away almost every single deduction, so a huge component of the reduction will be offset with less deductions for the rich,” Mnuchin said. The administration favors eliminating all personal deductions except for those for home mortgage interest and charitable contributions, he noted.
Focusing on one of the deductions that would be eliminated, full Appropriations Committee ranking minority member Nita M. Lowey, D-N.Y., said that eliminating the federal tax deduction for state and local taxes would be an average $6,600 tax increase on 3.2 million New Yorkers who use the deduction.
“We are committed to simplifying personal taxes, reducing the number of brackets, raising the standard deduction, so that 95 percent of Americans can fill out their taxes on a large postcard,” Mnuchin said. “We don’t believe the federal government should be in the business of subsidizing states,” he said.
Mnuchin also pushed back when Rep. Sanford D. Bishop Jr., D-Ga., argued that the administration’s proposal to lower the corporate tax rate to 15 percent and apply that rate to passthrough entities would be an invitation to further explode a federal tax gap that tops $400 billion a year.
“I think the best way to address the tax gap is to simplify our tax system, which is way, way, way too complicated,” Mnuchin said. “I, too, share your concern about passthroughs,” he said, adding that the Treasury Department has more than 100 people working on proposed rules “so that passthroughs can’t be used by the wealthy to dodge taxes.”
IRS Budget and Tax Gap
The Treasury secretary presented the subcommittee with the administration’s proposed $11.2 billion fiscal 2018 budget for his department, $10.98 billion of which would be allocated to the IRS.
That’s a $260 million cut for the IRS compared with fiscal 2017 — or an estimated $630 million including inflation, statutory salary increases, and infrastructure maintenance, according to subcommittee ranking minority member Mike Quigley, D-Ill. The Trump budget would require the tax agency to reduce staffing by 6,000, Quigley said, on top of the estimated 17,000 employees already lost at the IRS since fiscal 2010.
“This is simply a formula for expanding the tax gap, empowering tax cheats, and confusing honest taxpayers,” Quigley said.
Quigley noted that Mnuchin testified at his confirmation hearing that the IRS was under-resourced, and that additional cuts would hamper the agency’s ability to collect revenue.
Lowey also blasted proposed IRS cuts that she said would curtail taxpayer services and tax code enforcement. “Without adequate funding levels for IRS enforcement, we will simply not have enough manpower to catch bad actors, making it very clear [that] if you want to cheat on your taxes, this budget is for you,” she said.
Debt Ceiling Planning
Regarding the imminent approach of the debt limit, Mnuchin said that Treasury has back-up plans to continue paying federal government expenditures into early September even if Congress fails to raise the debt ceiling before its August recess, but he added that financial markets would prefer legislators didn’t wait.
“The sooner we do this, the better,” Mnuchin said. “There could be events in the world that make it more difficult for us to borrow,” he added, without elaboration.
Mnuchin also reiterated his call for Congress to pass a “clean” debt ceiling increase. “My preference would be that we address the debt ceiling as a debt ceiling increase, and respond to budget decisions in a budget and through the appropriations process,” he said.