Wednesday, April 26, 2017
Trump's Tax Plan Should Benefit The Entire Economy
President Trump plans to unveil a tax cut blueprint on Wednesday that would apply a vastly reduced, 15 percent business tax rate not only to corporations but also to companies that now pay taxes through the personal income tax code — from mom-and-pop businesses to his own real estate empire, according to several people briefed on the proposal.
The package would also increase the standard deduction for individuals, providing a modest cut for middle-income people and simplifying the process of filing tax returns, according to people briefed on its details. That proposal is opposed by home builders and real estate agents, who fear it would diminish the importance of the mortgage interest deduction. And it is likely to necessitate eliminating or curbing other popular deductions, a politically risky pursuit.
As of late Tuesday, the plan did not include Mr. Trump’s promised $1 trillion infrastructure program, two of the people said, and it jettisoned a House Republican proposal to impose a substantial tax on imports, known as a border adjustment tax, which would have raised billions of dollars to help offset the cost of the cuts.
With that decision, Mr. Trump acceded to pressure from retailers and conservative advocacy groups, but the move could deepen the challenge of passing a broad tax overhaul in Congress, where concern about the swelling federal deficit runs high. His plan would put off the difficult part of a tax overhaul: closing loopholes and increasing other taxes to limit the impact of tax cuts on the budget deficit.
Republicans are likely to embrace the plan’s centerpiece, substantial tax reductions for businesses large and small, even as they push back against the jettisoning of their border adjustment tax. The 15 percent rate would apply both to corporations, which now pay 35 percent, and to a broad range of firms known as pass-through entities — including hedge funds, real estate concerns like Mr. Trump’s and large partnerships — that currently pay taxes at individual rates, which top off at 39.6 percent. That hews closely to the proposal Mr. Trump championed during his campaign.
But Mr. Trump’s decision to extend the corporate tax cut to real estate conglomerates like his own will give Democrats a tailor-made line of attack.
“Yesterday, we learned President Trump wants to slash the corporate tax rate, even though corporations already dodge most of their tax responsibilities while making record profits,” said Frank Clemente, executive director of the liberal Americans for Tax Fairness. “Today, we find out it’s even worse. In trying to slash taxes for ‘pass through’ business entities, Trump is seeking to dramatically reduce his own tax bill.”
The people who were briefed on the plan spoke on the condition of anonymity before a formal announcement that Mr. Trump has said will come on Wednesday, three days before he reaches the 100-day mark in office with nothing to show for his promises to cut taxes or revamp the health care system.
The border adjustment tax may be revisited later but was considered too controversial to include now.
Spokeswomen for the White House and the Treasury Department declined to comment on the details of the plan before Wednesday’s announcement, which is expected to contain only broad principles, leaving unanswered crucial questions about the financing of the package and the process for advancing it through Congress.
Emerging from a meeting at the Capitol where he briefed Republican congressional leaders on Tuesday evening, Treasury Secretary Steven Mnuchin said participants had “very, very productive discussions” and were united in their desire to accomplish a tax overhaul this year.
The broad contours of the plan seemed to please conservatives who had worried in recent weeks that Mr. Trump, who has dropped or modified many of the major proposals of his campaign, was drifting away from the plan he had laid out for voters.
“Conservatives are going to be very happy with this plan, because it achieves a lot of the objectives that we’ve wanted: lower business taxes, simplification and not a major tax increase that is unacceptable,” said Stephen Moore, an economist at the Heritage Foundation who advised Mr. Trump’s campaign and helped craft his tax proposal.
But Mr. Moore conceded that finding ways to offset the large revenue reductions envisioned in the blueprint would be a challenge.
“That’s the unknown right now, is whether there is some sort of pay-for for any of this,” he said.
Government officials crafting the tax plans are aware of the math problem, one of the people involved in the proposal said, but they see the 15 percent corporate tax rate as a compelling starting point for negotiations. Mr. Trump may yet reveal other tactics for replenishing lost tax revenue, someone who has been briefed on the plans said.
But the final plans remain very much in flux. At midafternoon on Tuesday, for instance, it was still not clear whether personal income-tax rate cuts or an increase in the standardized deduction for individuals would be part of Wednesday’s announcement.
The demise of the border adjustment tax was met with relief by Republicans in the Senate, who had been cool to it from the start.
On Tuesday, Senator John Cornyn, Republican of Texas, said it was safe to conclude that the provision was “not going anywhere” because of skepticism in the Senate.
But Mr. Cornyn described Mr. Trump’s plan to cut the corporate income tax to 15 percent as “pretty aggressive,” with unknown consequences for the deficit.
Other Republican senators appeared ready to embrace a tax proposal that adds to the deficit in the name of jump-starting the economy. Republicans appear intent on using parliamentary rules that would block Democrats from filibustering the plan in the Senate, but would also put a time limit on the tax cuts.
“I’m open to getting this country moving,” said Senator Orrin G. Hatch of Utah, chairman of the powerful Senate Finance Committee. “I’m not so sure we have to go that route, but if we do, I can live with it.”
Most analysts say the notion that Mr. Trump’s tax cuts will pay for themselves is unrealistic. A Tax Foundation analysis concluded this week that, on its own, a 15 percent corporate tax rate would reduce federal revenue by about $2 trillion over a decade. To make up for those losses without raising taxes elsewhere, the economy would have to become 5 percent larger.
Senator Roy Blunt, Republican of Missouri, said he was also open to tax cuts with an expiration date if that was the only way to get them passed without Democratic support, pointing to President George W. Bush’s cuts.
“You look at the tax cuts from 2002 and 2003 — well over 90 percent of them became permanent law,” Mr. Blunt said.
Democrats have criticized Republicans for failing to engage with them on a tax overhaul. Senator Ron Wyden of Oregon, the ranking Democrat on the Finance Committee, said he would be open to working with Republicans on a plan that would bring home corporate profits parked overseas and use some of the funds to pay for infrastructure.
But Senator Mitch McConnell of Kentucky, the majority leader, said on Tuesday that he intended to pass tax legislation through budget rules that would block a filibuster. He accused Democrats of being more interested in “wealth transfers” than in spurring economic growth.
So far, the Senate has taken a back seat in tax discussions. The abandonment of the border adjustment tax will deal a blow to the comprehensive rewrite of the tax code championed by Speaker Paul D. Ryan and Representative Kevin Brady of Texas, the chairman of the Ways and Means Committee.
Mr. Brady said Tuesday that he would press ahead with the import tax, not merely because it would make up for lost revenue but because it would protect American jobs.
However, he acknowledged that his goal of producing legislation before summer was slipping.
“I’m less focused on the month than on the year for tax reform, which would be this year,” Mr. Brady said.
Correction: April 25, 2017
An earlier version of this article misstated how much the economy would have to grow to make up for the loss in federal revenue caused by the proposed tax cuts, according to the Tax Foundation. It would have to become 5 percent larger, not five times larger.