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White House Touts Trump’s “Massive Tax Cut”

In the Administration’s first official move on tax reform, the new Treasury Secretary Steve Mnuchin, and the President’s chief economic advisor, Gary Cohn, promised, “…the most significant tax reform legislation since 1986 – and one of the biggest tax cuts in American history.” Cohn, the Director of the National Economic Council, in a White House briefing on April 26, 2017, characterized the historic nature of the promised tax cut as follows:

In 1935, we had a one-page tax form consisting of 34 lines and two pages of instructions. Today, the basic 1040 form has 79 lines and 211 pages of instructions. Instead of a single tax form, the IRS now has 199 tax forms on the individual side of the tax code alone. Taxpayers spend nearly 7 billion hours complying with the tax code each year, and nearly 90% of taxpayers need help filing their taxes.

The plan offered by Mnuchin and Cohn includes the major changes outlined below:

  • Individual Brackets: Reduce the current 7 tax brackets to three brackets: 10 percent, 25 percent, and 35 percent. The current brackets range from 10 percent to 39.6 percent.
  • Double the Standard Deduction: Married couples will pay nothing on the first $24,000 of income they earn.
  • Repeal the Alternative Minimum Tax (AMT): The AMT began in 1970 in response to 155 high income households that owed no tax. It now affects millions of tax filers. A total repeal would remove this possible filing and tax calculation from all possible affected filers. Tax filers with income of $150,000 or more who utilize personal deductions of state income tax are the most likely to be affected. Filers in high tax states would generally be affected more than low tax states.
  • Capital Gains and Dividends: Return the top tax rate on capital gains and dividends to 20 percent by repealing the 3.8 percent net investment income tax. (Note that repeal of the NII tax already is in the House-passed American Health Care Act.)
  • Repeal the Estate Tax: Currently estates below $5 million are not subject to the tax, while estates in excess of $5 million are taxed at a rate of 40 percent. With repeal, no estate, regardless of value, would be subject to taxation.
  • Eliminate Most Deductions: Home ownership, charitable giving, and retirement savings will be deductible – but other tax benefits will be eliminated. Notably, the state and local tax deduction will be eliminated. Secretary Mnuchin was vague about whether the exclusion for employer-provided health care would be limited or removed.
  • Corporate and Pass-through Tax Rate: Lower the business rate to 15 percent. Small and medium-size businesses will be eligible for the business rate as well. So the 15 percent rate would apply to corporations and to pass-throughs, such as S Corporations, Partnerships and LLCs. Secretary Mnuchin indicated that the plan will impose rules, “…so that wealthy people can’t create pass-throughs and use that as a mechanism to avoid paying the tax rate that they should be on the personal side.”
  • International Taxation: Change the U.S. to a territorial system. Impose a one-time lower tax on “trillions” of overseas profits. During the campaign, Trump called for a 10% rate on offshore profits.

Core Principles ‘Non-Negotiable’

When asked by the press whether Congress was on board with the elements of this plan or whether it was subject to negotiations, Secretary Mnuchin replied, “The core principles of this — we’ve been meeting with the House and Senate and they agree a hundred percent. The core business is make [sic] business rates competitive, bring back trillions of dollars to create jobs, simplify personal taxes, create a middle-income tax cut. So those core principles are non-negotiable.”

Despite this statement, all tax reform plans have winners and losers, so we can expect intense negotiations on the details of any tax reform proposal before Congress.

How Much Will It Cost the Federal Fisc?

The cost to the federal government of a massive tax cut is likely to cause problems for the legislation, especially with the House Freedom Caucus. Several Washington think-tanks already scored Trump’s campaign tax plan as a big revenue loser. Secretary Mnuchin, however, had an answer to the deficit issue, too. “This will pay for itself with growth and with reduced — reduction of different deductions and closing loopholes,” Mnuchin assured reporters. “This plan is going to lower the debt-to-GDP [ratio]. The economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.” Despite these assurances, you can expect that the possible revenue loss will be an important issue in the tax reform debate.

Timetable

Mnuchin explained that the Administration would be working with Congress to formulate an agreement during the month of May. “And when we have an agreement we will release the details and go through it with all of you,” Mnuchin said.

The passage of the American Health Care Act has paved the way for the House, at least, to start working in earnest on the tax reform bill. Tax reform is tied to health care changes in an important way. House passage of the health care bill was essential to starting work on tax reform because the health care bill will significantly reduce federal revenues by making Medicaid a block grant program, thereby limiting its cost, and by reducing federal spending on health insurance subsidies. This action frees up more federal funds to apply toward tax cuts.

Still, the Administration and Congress have a limited window of time to power tax reform legislation through to enactment – about six months. If comprehensive tax reform is not completed by year’s end, it may be doomed. Once we are in to 2018, the mid-term election season will be underway, and Congress will be unwilling to undertake a major initiative without the time to sell it to their constituency.

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