President Donald Trump’s new tax plan could vastly reduce the amount paid by corporations and individuals across the U.S. However, crucial details of the new plan remain unknown, and the Trump Administration likely faces a difficult path to receiving the bipartisan support needed to implement these dramatic changes.
The last time I wrote about tax reform, Treasury Secretary Steven Mnuchin had yet to be confirmed and the best information available was from the Trump campaign’s tax plan released last September and the House Ways and Means’ June report (the House "Blueprint").
As we neared the end of Trump’s first 100 days in office, he offered a one page press release of less than 250 words describing his new tax plan. The plan generally mirrors the one championed by 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.
“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 Secretary Mnuchin during a press conference rolling out the White House’s plan.
A broad look at the plan
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 was also silent on any non-tax matters, such as infrastructure spending or construction of a border wall.
Although not new, the grand prize of the White House’s plan was the size and scale of the proposed tax rate cuts.
Impact on individuals
For individuals, the new rates were set at 10 percent, 25 percent and 35 percent, down from a current high of 39.6 percent. No income thresholds were specified for these new rate brackets.
Other provisions would double the current standard deduction and eliminate 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. Gary Cohn, Trump’s chief economic advisor and director of the National Economic Council, said during the press conference that retirement savings incentives would also be protected, but did not provide specific details.
Impact on businesses
Stating that “our objective is to make U.S. businesses the most competitive in the world,” Secretary Mnuchin announced that corporations would see an even more dramatic tax cut, with the rate being reduced from 35 to 15 percent. According to Mnuchin, the 15 percent business tax rate will also apply to “small and medium size” pass-through businesses. He would not commit to the reduced rate being applied to self-employed individuals.
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 (BAT), although the Administration has indicated it is moving away from the BAT.
The plan also does not specify the rate for the one-time tax on unremitted foreign earnings, or 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.
Breaking down the cost
Although Secretary Mnuchin indicated 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 (the core principle of "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 have estimated 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.
The Committee for a Responsible Federal Budget says the entire 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.
The Joint Committee on Taxation released a report 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 budget reconciliation rules.
Likelihood of being enacted
With bipartisan support for major tax cuts unlikely, it appears that any ensuing proposal would have to pass via budget reconciliation. 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 proposed legislation 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 changes that balance the costs associated with those cuts. There is very little focus on the Senate, where members from both parties have expressed reservations about the President’s plan, as well as the Blueprint.
Secretary Mnuchin and Director Cohn have said that many details of the plan are still being negotiated, but Mnuchin added that the Administration was determined to implement tax reform this year. When asked about making the plan’s proposals permanent, Mnuchin said that would be preferable, but that the Administration was open to a temporary 10-year tax cut.
Therefore, taxpayers may be forced to wait and see what emerges during the legislative process to turn the plan into reality.