President Trump has finally revealed the framework of his tax reform plan, courtesy of a press conference delivered Wednesday afternoon by Director of the National Economic Council Gary Cohn and Secretary of the Treasury Steve Mnuchin. They presented the tax proposal as the most significant piece of legislation since 1986. Cohn described the current political landscape as a “once in a lifetime opportunity” for an important and meaningful simplification and modification of both the personal and corporate tax code.
On the personal tax side, the president is bringing several initiatives to the table, chief among them is cutting rates. President Trump’s plan calls for a modest reduction to 35% from 39.6% for high earners. However, the suggestion to reduce the overall number of brackets from seven to three and to make the second and third rates 25% and 10% means there is the potential for a much greater level of tax relief for individuals farther down the income ladder.
While Cohn was not prepared to detail the exact bounds of the three new tax brackets, he did reveal that the standard deduction would double. A married couple would now be able to pay zero taxes on their first $24,000 of income. Assuming nothing else inside the tax code were to change, this alone could save typical middle-class families up to $3,000 a year.
Other changes to the personal tax structure include the elimination of every single deduction except breaks for mortgage interest and charitable contributions. However, since you have to pick between the standard deduction or itemizing, the goal of the new plan is to make it more beneficial for most people to simply take the standard deduction. Again, the goal is simplicity.
Director Cohn also explained that the president would like to eliminate the estate tax, the alternative minimum tax, and the Obamacare taxes on capital gains and dividends, which would return to a tax rate of 20%. The left will decry all of these as giveaways to the wealthy. When it comes to the alternative minimum tax, as long as most deductions disappear, high earners will cease to have the tricks they have used which inspired the creation of the AMT in the first place. Capital gains taxes stifle investment, and the estate tax is argued to be unfair to farmers or small business owners whose children need to sell their parent’s company just to pay Uncle Sam
On the corporate side, the push again was for simplicity and lower rates. At 35%, American companies are subject to the highest tax rate of any developed country in the world. By lowering the corporate tax rate to 15%, President Trump is creating a friendlier business environment. Such a drastic reduction will cause companies to invest more, creating additional jobs and further expanding the economy. His plan also changes the way the government taxes “pass-through” business income. Right now, many small business owners are required to report their business income as personal income. This regulation means they miss out on the corporate tax break. President Trump’s plan changes the rules so that these sole proprietors can enjoy a much greater share of their profits to reinvest back into their business, expand, and hire more employees. For these business owners, moving from a 39.6% to a 15% rate is, to steal a term, huge.
The president is also attempting to secure a one-time windfall through a plan to offer repatriated profits a chance to return to the United States at a significantly discounted rate. There is a quirk in our tax code, unique among developed nations, in which profits earned overseas are taxed only when they return to the United States. This rule creates the perverse situation in which a company will form a foreign subsidiary, route most of its profit through that entity, and then sit on the cash overseas without paying anything to the government. This avoidance scheme and others happen with alarming regularity. Right now, a mountain of cash is sitting outside U.S. borders. Giving companies an incentive to bring it back inside the country will help to raise additional funds to cover a one-time program. Infrastructure spending, anyone? Moving forward, Secretary Mnuchin indicated that the president wants to switch to a territorial tax system, meaning that any money earned overseas would not be subject to the corporate tax in America whatsoever.
Notably absent from the plan is any mention of the border tax – a funding measure championed by Speaker of the House Paul Ryan (R-WI). This loss illustrates how little power Ryan holds over the legislative agenda at this point, thanks in no small part to his bungling of the health care reform push.
As to the question of how to pay for all this, Secretary Mnuchin and Director Cohn suggested that such a dramatic overhaul would spur a tremendous amount of economic growth, with a net increase in tax revenues in spite of the cuts. They also pointed out that while the wealthiest Americans may have their top rates reduced, the fact that they are losing their deductions will mean that most of their tax bills will remain more or less unchanged. As to the debt, they argue that the more important number is the ratio between debt and GDP. If Congress implements Trump’s plan, it will increase the GDP more quickly than the debt, resulting in a lower ratio.
This tax plan has already been labeled by Democrats as a huge giveaway to the wealthiest Americans while doing nothing for the Average Joe. When it comes to the personal tax rates, this is simply not true. Many middle-class Americans will benefit from the new tax plan. Additionally, small business owners will see tremendous savings on their tax bill. After factoring in vast simplifications to the code, this plan is truly something to be proud of and rally behind.
And if it gets through the legislative process, it will, no doubt, be a game changer for a lackluster American economy.