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Trump Tax Plan’s Scant Details Could Reflect Dealmaking Strategy

Posted on May 11, 2017 by Jonathan Curry

The April 26 release of a one-page tax reform outline by the White House surprised many with how few details it included and how it largely reiterated President Trump’s campaign tax proposals, leading many to assume it was less a serious document than a hastily assembled set of talking points.

At a tax reform discussion hosted by Tax Analysts just days after the White House released its outline, the five panelists largely agreed that the outline did little to advance the tax reform debate and in fact may have set it back somewhat. They noted that the White House plan had even fewer details than Trump’s campaign tax proposals and said that it called for deep tax cuts with no realistic hope of offsetting the revenue loss.

Some observers, however, see wisdom behind the decision not to wade into the weeds on tax policy particulars just yet.

“The way I saw the Trump one-page proposal was that it was designed not to get in the way of tax reform, first and foremost. There was no part of it that would preclude almost anything that the House Ways and Means Republicans were considering,” Jeffrey H. Birnbaum, BGR Group president and coauthor of Showdown at Gucci Gulch about the passage of the 1986 Tax Reform Act, told Tax Analysts.

Statements by Trump administration officials in the days after the announcement largely reinforce Birnbaum’s point.

“The reason we didn’t come out with more details is, we want to work with the House and Senate and have a joint agreement, so when we release this plan, it’s something that can pass Congress and the president can sign,” Treasury Secretary Steven Mnuchin said May 1 on CNBC.

National Economic Council Director Gary Cohn expressed a similar sentiment, telling Fox Business Network in a May 5 interview that the administration's approach to tax reform would be different from its initial, failed approach to get a healthcare reform bill passed in the House. The administration will solicit input from various Republican Party factions, “conservative thought leaders,” and industry groups before it throws its backing to a tax reform plan, he said.

“By the time we get a bill drafted, we’re going to know everyone’s issues. We’re going to have dealt with those issues, and we think it’s going to make it substantially easier to get that through Congress,” Cohn said.

Although many details were left out of the White House plan, there were still enough to draw some overall conclusions, Nick Giordano of EY said at a May 5 webinar hosted by the firm. The administration came out firmly in support of a move to a territorial tax system, putting to rest uncertainty about where the White House stands and bringing it into alignment with House and Senate Republicans, he said. He noted that it also closely aligned itself with House Republicans’ “A Better Way” tax reform blueprint on eliminating almost all itemized deductions.

And rather than being irritated at the lack of detail in the plan, many Republican lawmakers likely breathed a sigh of relief that much was left unsaid. “I think the Congress was very appreciative of the fact that the president weighed in, but also appreciative of the fact that it didn’t come out with a whole prescribed set of details,” Giordano said. The details that the White House did offer will “be part of a discussion that will ultimately lead to a formal process about tax reform in the Ways and Means Committee,” he said.

Michael Mundaca, co-director of EY’s national tax department, agreed, saying during the EY webinar that the one-page proposal was “potentially helpful to the process as it doesn’t lay out particular markers that people will have difficulty moving out from,” while at the same time offering an “outline for goals that the House and Senate can move towards,” such as lower corporate and individual rates and a broader tax base through the elimination of tax breaks.

However, Harry Stein of the Center for American Progress was unconvinced there was anything of significant value in the tax plan. “If you don’t know these issues, it’s easy to think you’re looking at something that’s meaningful when it’s not,” Stein told Tax Analysts. He noted that the plan says it will be the biggest business and individual tax cut in history, but he pointed out that a deficit-increasing tax cut can’t be enacted permanently through the budget reconciliation process. “There’s very little in here that gets to reform. It’s just cuts,” he said.

G. William Hoagland, senior vice president of the Bipartisan Policy Center, took a more ambivalent view. “When you don’t have your key political appointments in place, such as the assistant secretary for tax policy at Treasury, it’s probably not the worst thing that could happen to put out a blueprint as vague as that,” he told Tax Analysts. (Trump announced the nomination of David J. Kautter for Treasury assistant secretary for tax policy late May 10.) The White House knows it has to work with Congress, and by not locking itself into “hard-nosed” positions early on, it gives the administration more flexibility in negotiations, Hoagland said.

Illustrating Trump’s nonspecific approach to tax reform, a White House spokesperson clarified to Tax Analysts May 2 that the administration’s tax plan would not quite double the standard deduction for individuals.

“It’s roughly doubling,” the White House aide said of the standard deduction. “Under our tax reform plan, the standard deduction will rise to $12,000 for a single filer and $24,000 for a married couple filing jointly,” the aide said in an email.

The one-page written outline of the administration’s tax reform plan states that individual reform would include “doubling the standard deduction,” but does not mention a figure. However, as he helped unveil the plan April 26, Cohn said that it would double the standard deduction to $24,000.

Other details of the Trump tax plan remain unknown. The same White House aide told Tax Analysts May 10 that the administration could not yet comment on whether the standard deduction and income tax brackets will be indexed over time; whether personal tax exemptions will be repealed, as under the Trump campaign plan; and when the administration might release income thresholds for its proposed tax brackets, which are 10, 25, and 35 percent on the individual side.

“That feature can be enormously important to the cost of those rate cuts and their distribution,” Howard Gleckman of the Urban-Brookings Tax Policy Center (TPC) wrote of the income thresholds for the proposed tax brackets in a May 9 blog post. The TPC estimated the revenue cost and distribution of two scenarios, one in which the taxable income brackets lined up with the brackets Trump specified during the campaign, and another that doubles the taxable income levels. That change would increase the revenue cost of the plan from $165 billion in 2018 under the campaign brackets to $428 billion under the latter scenario, with the bulk of additional tax cuts going to high-income taxpayers, according to Gleckman.

‘Conference Bait’

Although critics see the plan as overly ambitious and unrealistic, others suggested the White House is simply setting itself up for negotiations.

“I think that some of its positions, in particular the very low rate structure and the proposal to eliminate all but two tax preferences, were meant to take an extreme position that could be compromised along the way in a way that the people who were able to retain what they wanted to keep would feel relieved even if they lost some of their benefits along the way,” Birnbaum said.

The president himself seemed to say as much shortly after the plan was announced. “Everything’s a starting point” for negotiations, Trump said in a May 1 interview with Bloomberg, though he also said that he hoped he wouldn’t have to change much of it. Later, when asked if there was anything he would be willing to give up from the plan, he responded, “There’s always something you can lose.”

Such a strategy would not be without precedent, according to Birnbaum. In 1986, House Democrats and Senate Republicans each passed versions of a tax reform bill that included what they knew to be provisions unacceptable to the other side in what was termed “conference bait,” Birnbaum said. Those provisions were included so that they could be traded away for something that they actually wanted once the bill got to conference.

“They’ve laid out what is clearly a bargaining position and signaled that they’re eager to bargain and expect to. And that gives the taxwriters as much leeway as they need,” Birnbaum said.

Language of Reformers

“When I saw the radical removal of tax breaks, I thought that that sentiment of ‘go for it’ is what really made tax reform happen in 1986,” Birnbaum said.

The administration’s choice of language — calling for the elimination of targeted tax breaks for wealthy taxpayers and “special interests” — includes an important rhetorical device, Birnbaum said. “If you’re going to build support for a major overhaul of the federal tax system, you need to vilify parts of it,” he said. “When they started using those terms, I had the sense that, despite their inexperience in Washington, they’d learned enough about tax reform to say the things that they had to in order to move their concept forward.”

Stein, however, sees such language as a red herring. “I think it represents a recognition that tax breaks for special interests and tax breaks for the wealthiest Americans are incredibly unpopular, and you should say that you’re getting rid of them,” he said. But he argued that there was a credibility gap between what the Trump administration is saying and what it is proposing, citing as an example the proposed 15 percent business tax rate and the tax treatment of carried interest.

Trump has called repeatedly for taxing carried interest as ordinary income in order to “close the carried interest loophole,” but by proposing a 15 percent business tax rate that would be available to passthrough entities, hedge funds organized as passthroughs would claim that carried interest as business income taxed at the 15 percent rate, even lower than what they currently have to pay, Stein said. The net effect is that Trump “does something that attracts attention without actually being meaningful,” he said.

The Trump administration maintains that the 15 percent rate would be available only to small and medium-size passthroughs and that rules would be implemented to prevent “gaming,” although many experts caution that designing effective rules would be a challenge.

Hoagland was also skeptical that White House rhetoric would match reality. “I think they’re trying to sell the point of making it more distributionally fair, but I think we need to wait and see what the distributional tables say,” he said.

Birnbaum, however, argued that while it is indeed unlikely the White House will be able to fulfill its pledge in its “purest form” and eliminate all itemized deductions except the charitable and mortgage interest deductions, “you shouldn’t assume it will all be compromised away.”

Sunlight vs. Closed Doors

Some surmised that the administration, by punting on hard tax reform questions like providing specific revenue raisers or stating whether it would support the House Republicans’ border-adjustable tax, was signaling that it would conduct much of its negotiations behind the scenes.

Hoagland said that although it “runs counter to open government and sunshine and all that,” the unfortunate reality is that difficult issues do need to be worked out outside of the spotlight.

Hoagland also said it is essential that tax reform be bipartisan, arguing that it would prove extremely challenging to “jam this through the reconciliation process” on a purely party-line vote. And particularly if tax reform is done in a bipartisan fashion, then some of the decisions and trade-offs “will have to be done without the full glare of public light on them,” he said. Decisions made behind closed doors will give lawmakers the ability to say they reached an agreement without having to specify what they had to give up to get to that agreement, Hoagland said.

“Unfortunately, I think that’s the only way we can get stuff done these days,” he said.

Stein argued that if Republicans want a bipartisan plan, the one announced by the White House was a political non-starter for negotiations.

“There’s nothing in here that acknowledges the existence of trade-offs,” Stein said, interpreting the lack of detail in the plan as evidence that the White House was setting itself up to back off from making hard choices to truly reform the tax code. Instead, it looks ready to simply settle for “huge tax cuts for the wealthiest people” and corporations, which Democrats will never agree to, Stein said.

The White House won’t want to avoid the spotlight entirely, though, according to Birnbaum. Republican leaders need to “take history as a guide” and organize groups that support the tax reform effort. They then need to “spotlight them to show . . . that there are groups and in particular business groups that are very eager for this kind of reform,” Birnbaum said. Doing that will “split the business community and in that way weaken those groups that want to prevent the bill from going forward,” he explained.

Details Expected Soon

If the purpose of releasing a tax reform outline was to simply establish overarching principles and save the substantive discussions for negotiations out of the spotlight, the White House will only have bought itself a few weeks’ time at best, according to Hoagland.

The Trump administration is set to announce its budget proposal the week of May 22, but the intervening four-week period between when the White House tax plan was announced and when the budget will be released will hardly be enough time for Congress and the administration to have “worked out all the bells and whistles of a unified Republican plan,” Hoagland said.

And unlike the “skinny” budget released by the administration in March, the budget to be released later this month will be expected to feature detailed policy proposals with revenue and long-term growth estimates, Hoagland said.

“I do think, come two weeks from now, there’s going to have to be a lot more meat on the bones, and they’re going to have to be a lot more specific,” Hoagland said.

Luca Gattoni-Celli contributed to this article.