The Trump administration’s long-awaited tax reform plan resurrects campaign proposals to tax businesses at a 15 percent rate and simplify individual taxes by eliminating most itemized deductions while doubling the standard deduction.
The plan — released as a one-page sheet of paper — was detailed at an April 26 briefing by Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn. The plan represents the “most significant tax reform legislation since 1986, and one of the biggest tax cuts in American history,” Cohn said.
The plan’s reception among policy observers was mixed, with many expressing concern that it lacked detail or that details available so far imply a final product that will hemorrhage revenue.
Cohn acknowledged that many details — such as income thresholds for individual tax brackets and the treatment of freelance contractors — remain to be determined. But Mnuchin added that Republicans in the White House and Congress “agree 100 percent” on the “core principles” of tax reform, which Mnuchin defined as making business tax rates more competitive, repatriating foreign corporate profits, simplifying personal taxes, and creating a middle-income tax cut.
While congressional reaction to the plan was mixed, Senate Majority Leader Mitch McConnell, R-Ky.; Senate Finance Committee Chair Orrin G. Hatch, R-Utah; House Speaker Paul D. Ryan, R-Wis.; and House Ways and Means Committee Chair Kevin Brady, R-Texas, said in a joint statement that the outlined proposals would serve as “critical guideposts” in tax reform discussions.
Speaking earlier in the day at an event in Washington sponsored by The Hill, Mnuchin said that while a permanent tax cut would be preferable, if it’s possible under the Senate reconciliation rules to do only a 10-year cut, “we’ll do that.”
Business Tax Changes
On the business side, the White House is proposing “a massive tax cut for businesses,” according to Mnuchin. The 15 percent business tax rate would be available to corporations as well as small and medium-sized businesses, though Mnuchin emphasized that the administration will “make sure that there are rules in place so that wealthy people can’t create passthroughs and use that as a mechanism to avoid paying the tax rate they should be paying on the personal side.”
The plan also proposes a one-time tax on repatriated foreign profits — at a rate not yet determined — along with a shift to a territorial tax system. “Right now you have a 35 percent corporate rate and worldwide income and deferral. It is perhaps the most complicated and uncompetitive business rate in the world,” Mnuchin said.
Not included in the plan is the House Republicans’ border-adjustable tax proposal — a major revenue-raising component of their “A Better Way” tax reform blueprint — nor is there an infrastructure spending package to draw Democratic support. Mnuchin didn't rule out the border-adjustable tax completely, saying that while it “doesn't work in its current form,” the administration will continue discussing revisions with GOP lawmakers.
Cohn said that President Trump “cares about making the economy work for all people” and that the plan would undo many of the “loopholes and special interest tax breaks [that] have made their way back into the tax code” since 1986. Cohn did not specify which “special interest tax breaks” would be eliminated on the business side.
Individual Tax Changes
On the individual side, the plan would establish three individual income tax brackets with rates set at 10, 25, and 35 percent, although the income thresholds for each of those rates has not yet been established, according to Cohn. The White House proposal also would create a child care tax credit, but it offers no detail of how the credit will be designed. During the campaign, Trump initially proposed a child care deduction, which was later revised to be a child care tax credit that could be applied against the payroll tax.
Mnuchin said that only the itemized deductions for charitable contributions and mortgage interest would be retained, while others such as the one for state and local taxes would be eliminated. Cohn, however, said that incentives for retirement savings as well as homeownership and charitable giving would be protected, but he did not elaborate. The briefing included no other mention of retirement benefits.
The plan also calls for eliminating the alternative minimum tax and the estate tax. Cohn clarified that the estate tax would be repealed immediately, rather than phased out.
The White House also proposed eliminating the 3.8 percent net investment income tax, which was implemented as part of the Affordable Care Act. Doing so would reduce the top tax rate on capital gains from 23.8 percent to 20 percent. “We believe restoring the 20 percent capital gains rate is critical to investment in this country,” Mnuchin said.
Undetermined Details Raise Revenue Concerns
Mnuchin predicted the economic growth from the cuts and the elimination of deductions would make the plan deficit neutral, a point of contention among many.
That claim is simply “not true,” said American Action Forum President Douglas Holtz-Eakin, a former Congressional Budget Office director. Holtz-Eakin called that his “sole reservation” about Trump’s tax plan, adding that without further base broadening, the plan could not be made permanent policy without losing revenue after 10 years — a violation of the budget reconciliation rules that are likely to be used to pass any tax reform or tax cut legislation.
Alan D. Viard of the American Enterprise Institute was pessimistic that base broadeners would ever emerge. “Although the information released by the White House is quite vague, it appears that they envision a large deficit-financed tax cut, which would crowd out investment and worsen the long-term fiscal imbalance,” Viard said, calling that approach a mistake.
The Concord Coalition’s Robert Bixby praised the administration for proposing to eliminate many tax deductions, but he warned in a statement that it “would likely not be enough growth to offset the tax cuts Trump is proposing.” Ultimately, that would lead to “higher debt and thus a limit on any economic growth gains the administration hopes to get from tax reform in the first place,” he said.
Marc Goldwein of the Committee for a Responsible Federal Budget told Tax Analysts that despite some indication that the Trump administration saw a place for base broadening in tax reform, so far the plan is shaping up to impose a huge debt burden.
More of the Same
While the tax plan sheds some new light on the administration’s tax positions, much of it appears to be a rehash of what Trump proposed during the campaign.
“Somewhat surprisingly, this plan is even shorter, and contains even less detail, than the plan he campaigned on,” Saba Ashraf of Ballard Spahr LLP told Tax Analysts. There are no dramatic differences between what Trump proposed as a candidate and what he’s proposing as president, and the few noteworthy differences that are there come mostly on the individual tax side, she said.
Ashraf noted that Trump’s earlier tax plan proposed capping itemized deductions at $100,00 for individual filers and $200,000 for joint filers, while the current plan proposes to eliminate almost all deductions. She also pointed out that the White House’s new proposed standard deduction expansion would mark a decrease from the $30,000 limit Trump proposed during the campaign. Doubling the tax break, as the latest outline calls for, would allow couples to deduct up to $25,400 for 2017, though Cohn cited a figure of $24,000.
Steven M. Rosenthal of the Urban-Brookings Tax Policy Center agreed, telling Tax Analysts that his impression of the plan was that it was “underwhelming” and that with all the focus on tax cuts, it was “devoid of original thought.” He also dismissed the White House’s claims of simplifying the tax code, contrasting it with Mnuchin’s statement about creating rules to prevent passthrough entities from gaming the system. “Rules like this are what make the tax code so long,” he said.
Holtz-Eakin said that assessing the White House’s tax reform proposal will be difficult until its details are fleshed out. “Not only has the tax return been reduced to one page, but tax reform has, too,” he said. “That’s where we are."
Border-Adjustable Tax Down but Not Out
The exclusion of any mention of the border-adjustable tax in the outline was an intentional omission, but not everyone interpreted that as the final word on the controversial tax proposal.
“The administration’s failure to endorse the border adjustment casts further doubt on its political viability,” said Viard. However, Holtz-Eakin had a different assessment, saying that the border-adjustable tax’s viability is chronically underrated due to its revenue potential.
Goldwein similarly said that Trump’s proposal is compatible with the border-adjustable tax and myriad other policy features.
Michael Mundaca, co-director of EY's national tax department, speaking at EY's annual domestic tax conference in New York, said that he didn’t “expect today’s announcement to be a specific call for the death of border adjustments.” Instead, he predicted that the plan's principles “would be flexible enough to include . . . some version of border adjustability.” The administration has spoken in the past on a border tax that could be structured in the confines of the House blueprint proposal, he noted.
Ray Beeman, a former Republican House Ways and Means Committee staffer now with EY, said that the beauty of tax policy is that everything has a range of possibilities, so “some aspects of the border tax could survive tax reform without the full-fledged treatment of imports and exports.”
Jeffrey Saviano of EY noted that the border-adjustable tax has already had an effect. “The mere mention and inclusion in the House blueprint of border adjustability has prompted some companies to reexamine where to locate” and perhaps hedge against some form of border adjustability, he said.
Companies are also reexamining where their suppliers are located, Beeman said. Whether or not the blueprint’s border-adjustable tax becomes law, “its lasting impact will be a reexamination of a lot of things,” such as supply chain issues and whether the WTO makes sense from a U.S. perspective, he said.
Cathy Koch, a former chief adviser to former Senate Democratic Leader Harry Reid, agreed that some provision consistent with border adjustability will likely be in a final tax reform bill because the need for more manufacturing — fewer imports and more exports for the U.S. — was a campaign issue. With Trump’s proposed 15 percent business tax rate, it will be interesting to see if some people think that’s enough to keep companies in the United States, she said.
Emily L. Foster contributed to this article.
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Correction, April 27, 2017: Figures for the doubled standard deduction have been corrected.