Trump Administration Introduces Tax Plan, But Comes Up Short On Details
The Trump Administration is out with a tax plan, but it's seriously lacking in details.
Yesterday, the Trump Administration rolled out its proposal for tax reform, but so far it’s little more than a summary of bullet points:
WASHINGTON — President Trump on Wednesday proposed sharp reductions in individual and business income tax rates and a radical reordering of the tax code that would significantly benefit the wealthy, but he offered no explanation of how the plan would be financed as he rushed to show progress before the 100-day mark of his presidency.
Mr. Trump’s skeletal outline of a tax package, unveiled at the White House in a single-page statement filled with bullet points, was less a plan than a wish list. Treasury Secretary Steven Mnuchin and Gary D. Cohn, the director of Mr. Trump’s National Economic Council, laid out the bare bones to reporters, part of a mad dash toward the administration’s 100th day on Saturday that has included the resurrection of a health care bill and near-daily signings of executive orders.
But they offered none of the standard accouterments of such rollouts, such as detailed charts showing the cost of each provision, phase-in periods, the impacts of the proposals on people and testimonials on the program’s potential benefits.
“We have a once-in-a-generation opportunity to do something really big,” Mr. Cohn said. “President Trump has made tax reform a priority, and we have a Republican Congress that wants to get it done.”
The proposal envisions slashing the tax rate paid by businesses large and small to 15 percent. The number of individual income tax brackets would shrink from seven to three — 10, 25 and 35 percent — easing the tax burden on most Americans, including the president, although aides did not offer the income ranges for each bracket.
Individual tax rates currently have a ceiling of 39.6 percent and a floor of 10 percent. Most Americans pay taxes somewhere between the two.
The president would eliminate the estate tax and alternative minimum tax, a parallel system that primarily hits wealthier people by effectively limiting the deductions and other benefits available to them — both moves that would richly benefit Mr. Trump. Little is known of Mr. Trump’s tax burden, but one of the small nuggets revealed in the partial release of a 2005 tax return this year was that he paid $31 million under the alternative minimum tax that year.
Corporations would not have to pay taxes on their foreign profits, an unusual proposal for a president who has championed an “America first” approach and railed against companies that move jobs and resources overseas. They would also enjoy a special, one-time opportunity to bring home cash that they are parking overseas, though administration officials would not say how low that rate would be or how they would ensure that the money would be invested productively.
Mr. Trump wants to double the standard deduction for individuals, essentially eliminating taxes on around $24,000 of a couple’s earnings. That proposal was met with alarm by home builders and real estate agents, who fear it would disincentivize the purchase of homes. The proposal would scrap most itemized deductions, such as those for state and local tax payments, a valuable break for taxpayers in Democratic states like California and New York.
But the president would leave in place popular breaks for mortgage interest, charitable contributions and retirement savings.
In a brief session with reporters, Mr. Cohn and Mr. Mnuchin said they had been toiling for weeks on the proposal, much of which closely resembles the plan Mr. Trump championed as a presidential candidate. They argued that it would spur robust economic growth that would — along with the elimination of deductions — cover the potentially multitrillion-dollar proposal entirely, a prospect that even many Republicans privately concede is virtually impossible.
“This will pay for itself with growth and with reduction of different deductions and closing loopholes,” Mr. Mnuchin said, repeating his optimistic estimate that the plan would spur the economy to grow at a rate of 3 percent annually. “The economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.”
Democrats rejected what they described as magical thinking behind the plan and condemned it as a giveaway to the rich masquerading as a tax overhaul.
“This is an unprincipled tax plan that will result in cuts for the 1 percent, conflicts for the president, crippling debt for America and crumbs for the working people,” Senator Ron Wyden of Oregon, the ranking Democrat on the Finance Committee, said in a statement. “Instead of providing a real tax reform plan as promised, this administration is offering cakes to the fortunate few.”
Bernard Baumohl, the chief global economist at the Economic Outlook Group, a forecasting firm, was unsparing.
“The effort to introduce more fiscal stimulus into the economy is genuinely underway,” he wrote to clients. “But the bare bones plan we saw unveiled today is already conceptually flawed and unlikely to go far in Congress. The final product will bear no resemblance to the principal points highlighted in today’s meager release. Certainly, the first step in this process was unimpressive.”
Mr. Cohn said the plan was “the most significant tax reform legislation since 1986” — the last time a comprehensive tax overhaul was enacted — as well as “one of the biggest tax cuts in American history,” in line with Mr. Trump’s grandiose portrayal.
Republican leaders who are eager for large tax cuts did not allow their internal divisions over elements of the package to obscure their overall support for Mr. Trump’s effort.
Mr. Ryan and Mr. Brady issued a joint statement with Senator Mitch McConnell of Kentucky, the majority leader, and Senator Orrin G. Hatch of Utah, the chairman of the Finance Committee, saying the principles outlined Wednesday would “serve as critical guideposts” as Congress and the administration worked together on a tax overhaul.
Mr. Trump also signaled support for revisions to the tax code that would help families with child-care costs, although his document provided no details. He called for ending the 3.8 percent tax on investment income that was imposed by the Affordable Care Act, restoring the capital gains rate to 20 percent.
Democrats are ready to battle Mr. Trump over the tax cuts, which they are determined to tie to his refusal to release his tax returns.
“Trump’s latest proposal is another gift to corporations and billionaires like himself,” said Thomas E. Perez, the Democratic Party chairman. “Trump must release his tax returns, as millions of Americans are demanding, before Congress can consider any Trump tax plan. We must know how much Trump would personally financially benefit from his own proposal.”
The plan contrasts starkly with the one championed by House Republicans, who proposed paying for their tax cuts in part with the new tax on imports, an effort to ensure that the measure would not swell the deficit.
The White House plan does call for “a territorial system to level the playing field for American companies,” akin to a component of House Republicans’ plan that would allow United States corporations to pay taxes only on their domestic profits.
“I worry that the Trump proposal would shift a tremendous amount of income abroad,” said Alan B. Krueger, who was a chairman of President Barack Obama’s Council of Economic Advisers. “It’s hard to square that with incentivizing investment in the U.S.”
One major change from what Republicans on Capitol Hill have called for is that the Trump Administration’s proposal allows for the possibility that the tax cuts would expire after ten years, much like the original Bush tax cuts did when they were passed early in the Administration of President George W. Bush. Then, as now, the purpose of such a limitation would be to enable the tax package to pass through the Senate in a form that would not permit it to be filibustered by the Democratic minority. Under Senate rules, that’s only possible if the tax cuts expire after a decade. Republicans in Congress, however, have long pushed for more permanent cuts, arguing that placing a time limit on a major overhaul of the tax code only serves to increase uncertainty and make it harder for businesses to engage in the type of long-term planning that makes investment and growth possible. There’s much truth in this argument, of course, but political reality makes it clear that a bill that didn’t have a time limit likely wouldn’t make it through the Senate at all. As a result, there have been at least some signals from House Republicans in particular that they’d be willing to accept the ten-year limit for now. Of course, as we all know, the Bush tax cuts were eventually mostly extended and eventually made permanent by President Obama during his first term in office. It’s possible that whoever would be President when the Trump tax cuts would expire would be pressured to do the same thing.
In reality, though, it’s hard to comment more than generally about this tax plan because there really isn’t much of a plan. As noted above, yesterday’s press appearance by the Treasury Secretary was long on promises and short on details, and the only thing the Administration has released on paper so far can literally fit on one sheet of paper:
The promised Trump tax plan, as distributed to press moments ago: pic.twitter.com/WVWhpPAZp0
— Matthew Nussbaum (@MatthewNussbaum) April 26, 2017
Given the lack of details, it’s hard to gauge what the real impact of this proposal will be, but it is possible to make a few preliminary points. On the surface, reducing corporate tax rates to the point where they are more competitive with the rest of the world is a good idea that even many liberal economists have advocated. For one thing, such a move would likely mean that many major American corporations would repatriate profits from their foreign operations which are currently invested overseas in an effort to take advantage of lower tax rates. At least in the short term, this would result in increased revenue to the Treasury although it’s likely that this revenue would come in at a slow pace since corporations would likely space out the extent to which they do repatriate money so that they don’t face a large up-front tax bill. Additionally, the idea of lower, flatter tax rates in exchange for ending most deductions is one that has a lot of appeal in no small part because it would lead to a simpler tax code and potentially increased revenue overall. Politically, though, this would be difficult given the fact that many deductions are both politically popular and supported by strong business interests who employ armies of lobbyists precisely for the purpose of influencing legislation such as this. For example, the Trump Administration proposal would keep the mortgage interest deduction, which is probably among the most politically popular tax deductions, but eliminate the deduction for state and local property taxes, a move that would impact millions of taxpayers and which is likely to be opposed by Senators and Congressman from states with high property taxes. Finally, some of the plan’s proposals would, as noted, make it easier for businesses to restructure to take advantage of lower tax rates, a move that would likely lead to lower revenues while not necessarily contributing to economic growth.
Despite the lack of details, the Trump Administration and its allies were out in force after yesterday’s announcement to argue the benefits of the tax plan. Among the most often cited is the claims is the idea that the lower rates would lead to increased economic growth, with some advocates going so far as to forecast 4% growth in Gross Domestic Product, a figure we haven’t seen on a sustained basis for about twenty years now and even then only for a quarter or two. Economists from outside the Administration who have commented on the proposal so far, though, have cast serious doubt on this forecast, and this includes several conservative economists who have long advocated comprehensive tax reform. The problem for the Trump Administration, though, is that absent the assumption of that increase in GDP growth, the promises that the tax plan would not contribute to or raise the Federal budget deficit likely would not come true since the cuts would mean decreased revenue to the Treasury. Add into that the increases in spending that Trump is proposing, which include increases in defense spending and an as-yet-unrevealed infrastructure plan that would total something close a trillion dollars over its lifetime, and it’s easy to see how this could all result in significant increases in the deficit and the national debt, something that is likely to be a problem for Republican deficit hawks.
In any case, until we get a real bill and further details, including scoring by the Congressional Budget Office, it’s impossible to make any real judgment about this tax plan. On the surface, though, it doesn’t look very promising, and it looks less than likely that it would actually pass Congress.