How to Tell If Trump’s Tax Plan Is Dead on ArrivalBy
Tax cuts for high earners and deficit debate among key issues
‘Until I see it, I have nothing but worries,’ economist says
President Donald Trump pronounced a Republican framework for overhauling the U.S. tax code “very comprehensive, very detailed” Tuesday, but lingering uncertainties over whether Congress can pass an ambitious and controversial rewrite of the tax code has Washington advocates fretting.
“Until I see it, I have nothing but worries,” said Republican economist Douglas Holtz-Eakin. “If you do tax policy in Washington, D.C., you live a life of disappointment.”
Lobbyists who’ve seen details of the framework -- which will be released Wednesday -- say it would target a corporate rate of 20 percent or so, down from the current 35 percent, while slicing the top individual rate to 35 percent from 39.6 percent. Trump has repeated his view that the corporate rate should be 15 percent. Even if he acquiesces, though, the proposed rates face a gantlet of questions and some ready-made opposition.
Here’s how to tell whether the plan has a fighting chance.
Will it offer tax breaks the public doesn’t want?
Six out of 10 Americans believe corporations pay too little in taxes, according to a Politico/Morning Consult poll released this month. A NBC/Wall Street Journal poll taken Sept. 14-18 found that just 16 percent wanted taxes cut for corporations and only 12 percent wanted them for wealthy people.
That may explain why Trump has repeatedly said his intentions are “not to benefit the wealthy; this is to benefit the middle class.” Still, cutting the top individual rate by almost 5 percentage points would almost certainly provide a benefit to the top 1 percent of earners -- roughly, people who make more than $465,600 a year. Similarly, a call for cutting the top rate on certain “pass-through” business income to 25 percent -- down from 39.6 percent -- would mean a major benefit for top earners, experts say.
Treasury Secretary Steven Mnuchin said in November that the tax legislation would end enough tax breaks and deductions “so that there will be no absolute tax cut for the upper class.” On Sunday, he recalled that statement: “It was never a promise and it was never a pledge,” he said on CNN’s “State of the Union.”
The pitch for the corporate tax cut is somewhat different. Trump said Sunday it’s “for companies so they can bring back jobs.” Economists disagree on whether a tax cut would be the best way to spur companies to hire U.S. workers.
To be sure, GOP tax planners say the framework will also offer middle-class benefits -- including a likely doubling of the standard deduction, which is currently $6,350 for individuals. In all, it’s a lot of proposed tax relief -- “the largest tax cut in the history of our country,” Trump said Sunday.
Will it have enough ‘pay-fors’?
The plan may contain $5 trillion or more in tax cuts over 10 years -- assuming it follows some popular Republican goals in addition to the probable rate cuts that have been widely reported -- said Kyle Pomerleau, the director of federal projects at the Tax Foundation, a Washington policy group.
It’s possible for Congress to offset much of that revenue loss -- by repealing various business tax breaks, eliminating most individual deductions and other means -- Pomerleau said. “Whether they outline those tomorrow is another question,” he said. Still, “it’s totally possible” for lawmakers to reduce the size of the revenue loss to $1.5 trillion over 10 years, he said.
That’s an important figure. Last week, key GOP senators struck a deal to advance a 2018 budget resolution -- a step toward passing a tax bill -- that would allow for reducing federal revenue before accounting for any growth in the economy. While they didn’t specify a number, Senator Ron Johnson, a Wisconsin Republican, said the Senate Budget Committee is considering $1.5 trillion.
Still, it’s not easy to eliminate tax breaks -- and if the tax framework doesn’t include many, that may be a sign of trouble ahead.
“Those are always politically difficult, and all of them have defenders,” said William Galston, a senior fellow in governance studies at the Brookings Institution. One proposal -- to raise more than $1 trillion by no longer allowing individuals to deduct their state and local taxes -- will be opposed by municipal officials, by realtors who fear it would hurt housing prices and by some Republican House members who represent high-tax districts in states like California, New York and New Jersey.
Will it increase the federal deficit?
If Senate Republicans adopt a budget that allows deficit-enhancing tax cuts, they’ll abandon years of fiscal-discipline positions their party took during Democratic President Barack Obama’s administration. But the House is advancing its own budget measure, which calls for a tax bill to be deficit-neutral.
The resolution of that split may determine whether the tax bill’s provisions are permanent or temporary. Under the procedure Republicans want to use to advance the bill through the Senate, any provisions that add to the long-term deficit would have to be set to expire.
If this week’s framework suggests that the Senate’s view has prevailed, expect to hear renewed debate over the use of “dynamic scoring.” That method of gauging legislation attempts to account for macro-economic benefits from tax cuts -- but it’s controversial and economists disagree on the best way to do it.
Senator Bob Corker, a Tennessee Republican and self-described deficit hawk who agreed last week to pursue a budget with a deficit-boosting tax cut, indicated an openness to some dynamic scoring and said he’ll insist that final tax legislation pay for itself. “We’re not going to use some crazy scoring mechanism,” he said.
Corker gave up some of his leverage by agreeing to a budget resolution that allows for higher deficits -- he holds a pivotal vote on the panel tasked with initiating the process.
The Tax Foundation’s Pomerleau called it “very unlikely” that tax writers could rely on dynamic scoring to cover a $1.5 trillion tax shortfall.
Will it help create jobs?
What is there to guarantee that corporate America would spend its tax savings on creating jobs instead of paying shareholder dividends or buying back stock to prop up share prices? House GOP leaders say they have the answer: extend another tax break that would encourage investment in new equipment.
Companies can already recover the cost of their capital improvements through depreciation, but only over a number of years. House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady have called for “full, immediate” expensing, saying it would lead companies to invest for growth.
Senate Republicans are less keen on the idea. It’s not just the anticipated cost, $2 trillion over 10 years. Full expensing doesn’t pair well with an existing corporate tax break: the ability to deduct interest paid on loans. Combining the two would distort the economic value of debt and spur companies to borrow chiefly for tax advantages, economists say.
House leaders proposed killing interest deductibility, a move opposed by debt-reliant industries like private equity and commercial real estate. Senate leaders, including Hatch and John Thune, the chamber’s No. 3 Republican, have said they want to maintain the deduction at some level at least.
Where the tax framework lands on this clash of tax breaks will help signal the degree of unity behind it. One plan that’s getting extensive discussion among tax experts and lobbyists would allow for full expensing -- but only for five years. And companies’ interest deductions would be capped. It’s unclear whether those provisions will make it into Wednesday’s plan.
Will Congress unite around it?
The tax debate was supposed to be different from health care, where Republican party fractures have so far led to failure on a seven-year promise to repeal and replace the 2010 Affordable Care Act. So far, though, the tax effort has some haunting similarities.
Leaders of the House Freedom Caucus have complained about secrecy in the tax framework’s drafting -- complaints that arose earlier about health-care legislation. “Is the bill being written behind closed doors because it will only help the connected class and their high-paid consultants?” wrote representatives Jim Jordan and Mark Meadows in an op-ed last week.
Jordan and Meadows have refused to green-light the House’s 2018 budget resolution until they see some tax-plan specifics. They “wanted to make sure they sunk their teeth into more details,” said Representative David Schweikert of Arizona, a member of the caucus and the tax-writing Ways and Means Committee. He said he thinks the framework “will get them there.”
But that doesn’t mean it’ll please everybody. Senate Finance Chairman Orrin Hatch has said repeatedly that his panel won’t be a “rubber stamp” for any particular plan and won’t necessarily be bound by the framework. On Monday, he released a statement saying: “As we continue to work toward the release of a unified framework that will serve as a base for the tax-writing committees in both chambers to draft legislation, what we are trying to achieve for the American people remains the same.”
It’s hard to overstate the importance of getting past the infighting, said Jason Pye, vice president of legislative affairs for FreedomWorks, a conservative advocacy group.
“If Republicans can’t get this tax bill done, we’re facing a few existential problems,” he told reporters Friday. “It could be the end of the GOP as we know it.”