By Richard Rubin
President Donald Trump called for deep reductions in business
tax rates and major changes to the individual tax system in a bid
to reinvigorate his economic and legislative agenda as he nears the
100-day mark of his presidency.
The plan largely hews to tax-cut proposals Mr. Trump made during
his presidential campaign last year, but it includes several
crucial changes.
Most notably, the GOP president is proposing to repeal a
provision of the tax code that allows individuals to deduct the
state and local taxes they pay from their reportable income. That
will hurt residents of high-tax states such as New York, New Jersey
and California, and spur objections from some Republican lawmakers
in those states.
Mr. Trump also is proposing a 35% top tax rate for individuals,
down from the current 39.6% rate but above the 33% rate he backed
during the campaign. Lower brackets would be set at 10% and 25%.
The standard deduction for all individuals would be doubled, but
all other deductions -- except for mortgage interest and charitable
contributions -- would be eliminated.
The corporate tax rate would drop to 15% from 35%, and U.S.
companies would owe little or no U.S. tax on their future foreign
profits. The tax rate on business income reported on individual
returns also would drop to 15% instead of being taxed at individual
tax rates.
The estate tax and alternative minimum tax would be
repealed.
Mr. Trump's plan leaves several crucial issues unresolved:
whether companies could immediately write off capital expenses;
what happens to personal exemptions; where to set the one-time tax
rate on U.S. companies' stockpiled foreign earnings; how a break
for child care would be structured; and where the tax brackets for
individuals would be set.
Because of those omissions, it's difficult, if not impossible,
to calculate the total fiscal impact of the plan and how it would
affect individual households
Treasury Secretary Steven Mnuchin and Gary Cohn, the director of
Mr. Trump's National Economic Council, said those issues would be
worked out later, partly in negotiations with Congress.
"Clearly we have a unique opportunity to do something major
here," Mr. Cohn said. "It's our intention to create a huge tax cut
and equally as important, a huge simplification of the tax system
in America."
Mr. Trump's tax agenda is headed for a challenging road through
Congress, where budgetary hurdles and complex politics could make
it difficult for him to get a quick victory. Unless he can attract
Democratic votes -- which appears unlikely -- the plan must comply
with legislative procedures that allow it to be approved by a
majority vote, instead of the 60 votes that are typically
needed.
The key to those procedures: Any tax plan can't increase budget
deficits beyond a 10-year period.
Asked if he can promise his tax plan won't balloon the deficit,
Mr. Trump said: "It's a great plan. It's going to put people back
to work."
Mr. Trump's team intends to argue that his tax cuts will spur
economic growth and increase revenue, which will help to avert
increased deficits. But lawmakers and Congress's nonpartisan
tax-policy scorekeepers, the Joint Committee on Taxation, need to
agree with that assessment to proceed.
"We've been hearing from the last administration that 3%
[growth] is hard to get to and they couldn't get there," Mr.
Mnuchin said. "That's why we got a new president. If they had been
at 3%, maybe there would have been a different outcome."
Mr. Mnuchin said the tax cut would be the biggest ever. Asked
how he measured that, he pointed to the size of the rate cut for
corporations from 35% to 15%.
Still, it wasn't clear on Wednesday how big the overall tax
reduction would be and how that compares with previous tax
cuts.
Republicans largely praised the plan in the days and hours
leading up to Wednesday's announcement, though they cautioned that
differences remained to work through. Republicans are split on how
big a tax cut they think is feasible and what tax breaks should go
away, and there are plenty of details that may divide GOP lawmakers
along regional lines.
"It really makes clear the president's commitment on tax reform
and delivering it in a very bold way this year," Rep. Kevin Brady
(R., Texas), chairman of the House Ways and Means Committee, said.
"We've still got some work to do. There's no question about
it."
Democrats said the plan appeared heavily tilted toward
high-income households. They pointed to lower rates on individuals,
the 15% rate for pass-through businesses and estate-tax repeal as
significant benefits for some of the wealthiest taxpayers.
Sen. Chuck Schumer of New York, the chamber's Democratic leader,
said the proposal to cut tax rates for pass-through businesses
would just benefit high-income people like the president
himself.
Most U.S. businesses are pass-throughs, called that because
their income and deductions pass through to their owners'
individual returns. That group includes many small firms, but also
large global law firms, hedge funds and the president's own real
estate and branding businesses. These businesses don't pay the
corporate tax rate.
Cutting their rates without opening loopholes could require very
complex rules and lead to situations where law firm partners
receiving profits pay lower tax rates than their junior attorneys
do.
"The very wealthy are doing pretty well in America," Mr. Schumer
said on the Senate floor on Wednesday. "God bless them. Let them do
well. They don't need another huge tax break."
Mr. Cohn said the goal of the plan isn't to deliver tax cuts to
upper-income households. "What we're doing is we're just broadening
the base of taxable income," he said. "Their effective rate is what
you have to look at."
But he said the administration didn't have a particular target
yet for how that would be measured.
Among the biggest changes is the repeal of the state and local
tax deduction; the effect of that would be to shift the tax burden
from low-tax states such as Texas and Florida to high-tax states
such as New York and New Jersey. Eliminating the deduction could
raise more than $1 trillion over a decade, and it brings Mr.
Trump's plan closer to a plan advanced in the House.
"It's not the federal government's job to be subsidizing the
states," Mr. Mnuchin said. "We're not looking to necessarily raise
taxes on the top 1% but we want to get the federal government out
of the business of what's the state's business."
Democratic objections will force Republicans to find
near-unanimity in their own ranks as they struggle with
trade-offs.
"We're in agreement on 80%, and then that 20%, we're in the same
ballpark," House Speaker Paul Ryan (R., Wis.) said.
Mr. Mnuchin said the administration's proposal won't endorse the
border-adjustment feature that is central to the House GOP plan.
The provision attempts to raise revenue by taxing imports, but not
exports. Mr. Mnuchin said the administration wasn't opposed to the
provision in concept, and that he liked aspects of it. But he said:
"We don't think it works in its current form."
Mr. Ryan hasn't backed down on the border-adjustment idea, but
he said Wednesday that he knows the proposal needs modifications in
response to criticism from retailers and others. "We don't want to
have severe disruptions," Mr. Ryan said.
Mr. Mnuchin said key pieces of the business tax plan were still
being worked out. The House GOP plan repeals the deductibility of
interest and allows business to write off capital expenses
immediately.
Mr. Mnuchin said the administration favored some form of
immediate write-off but didn't commit to any details. He also said
the administration knew that some industries, including real estate
and utilities, were concerned about losing the interest
deduction.
"We do think some level of expensing is important," he said.
"We're sensitive to that certain industries are very sensitive to
interest deductibility and we want to make sure that we don't do
anything that creates uncertainty in the economy."
--Nick Timiraos and Will Mauldin contributed to this
article.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
April 26, 2017 16:41 ET (20:41 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.