Yesterday in a speech in Indiana, President Trump unveiled the broad outlines of the tax reform plan that will likely be the main focus in Congress for at least the remainder of this year:
INDIANAPOLIS — President Trump on Wednesday began an ambitious push to slash taxes and salvage what remains of his embattled legislative agenda in Congress this year, proposing a politically challenging array of tax cuts for individuals and businesses that would constitute the most sweeping changes to the federal tax code in decades.
Mr. Trump, smarting from the latest defeat this week of his efforts to dismantle the Affordable Care Act, cast the tax plan as an economic imperative and the fulfillment of a promise to his working-class supporters to deliver benefits in the form of lower taxes, better jobs and higher wages.
“This is a revolutionary change, and the biggest winners will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor and as wages start going up at levels that you haven’t seen in many years,” Mr. Trump told hundreds of supporters in a speech at the Indiana State Fair Grounds.
But the president offered no measure of the plan’s cost and scant detail about how working people would benefit from a proposal that has explicit and substantial rewards for wealthy people and corporations, including the elimination of taxes on large inheritances and deep reductions in the rates paid by businesses large and small.
After months of secret talks among Republicans, the nine-page proposal produced by the so-called Big Six working group prompts as many questions as it provides answers. Without more details, it is difficult to show how middle-income families will see the most benefit from the tax overhaul — or if it will favor the richest American
On the individual side, the plan would collapse the tax brackets from seven to three, with tax rates of 12 percent, 25 percent and 35 percent, the president said. The current top rate is 39.6 percent and the lowest rate is 10 percent. The framework also gives Congress the option of creating a higher, fourth, rate above 35 percent in the tax plan to ensure that the wealthy are paying their fair share.
The plan aims to simplify and cut taxes for the middle class by doubling the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly. That would allow people to avoid a complicated process of itemizing their taxes to claim various credits and deductions. It would increase the child tax credit from $1,000 to an unspecified amount, and create a new $500 tax credit for non-child dependents, such as the elderly.
Provisions such as the alternative minimum tax and the estate tax, a levy on inherited wealth that Mr. Trump has derided for years, would be gone under the Republican proposal.
The proposal calls for reducing the corporate tax rate to 20 percent from 35 percent, a shift that supporters say is needed to make American companies more competitive with their counterparts around the world.
A new tax rate of 25 percent would also be created for so-called pass-through businesses, such as partnerships and sole proprietorships, which are currently taxed at the rate of their owners. About 95 percent of businesses in the United States are structured as pass-throughs and they generate a majority of the government’s corporate tax revenue.
“This will be the lowest top marginal income tax rate for small and midsize businesses in this country in more than 80 years,” Mr. Trump said.
While Republican leaders claim to be united on the tax plan, they must now sell it to lawmakers who have been deeply divided this year. The push began at a House Republican retreat on Wednesday at Fort McNair in Washington, where Representative Kevin Brady of Texas, the Republican chairman of the Ways and Means Committee, walked members through the blueprint and talked about the importance of coming together to fix the tax code.
Later, in a hopeful sign for Republican leaders fretting privately about keeping their rank and file together, the conservative Freedom Caucus, whose members have derailed the party’s initiatives with hard-line demands, issued a statement of support calling the plan “forward looking” and pledging to back the party’s budget designed to ensure its passage.
The political stakes are high for a president who is desperate to score a legislative win before his first year in office draws to a close. Mr. Trump, who has eschewed the advocacy tours that his predecessors have used to build support for their top domestic priorities, made a rare direct appeal to voters during his speech, imploring them to call their representatives and senators and demand action on the tax proposal. “Let them know you’re watching,” Mr. Trump said. “Let them know you’re waiting.”
In an apparent nod to the harsh political realities the tax plan faces, Mr. Trump made an explicit overture to Democrats to support the plan
“Democrats and Republicans in Congress should come together, finally, to deliver this giant win for the American people,” Mr. Trump said.
While the outline released yesterday is more detailed than what was unveiled with much fanfare back in April, it’s still somewhat early to judge the package as a whole. To a large degree, that will have to wait until a bill is unveiled and it begins making its way through the appropriate committees in the House and the Senate. For that reason, the devil is still very much in the details that we don’t have in front of us quite yet. For example, it’s unclear if the tax cuts that Republicans are proposing would be permanent as was the case when a tax reform package was passed under President Reagan in 1986, or whether they will be temporary as was the case with the tax cuts that were passed in the Administration of President George W. Bush. The answer to that question will likely have to wait until we have a clearer idea of what the expected impact of the cuts will be on the budget deficit and whether or not changes will have to be made to qualify the bill to qualify the package for consideration under the Senate’s budget reconciliation rules, which would, of course, make it easier for Republicans to get the bill itself through Congress. That is a question that we won’t have a clear answer to until there’s a full bill for the Congressional Budget Office and other relevant agencies to evaluate, and that’s weeks if not months away.
All that being said, there is still enough in the proposal that was released yesterday to allow for some observations that could have a significant impact on how the bill is likely to fare going forward.
The first thing to be said that what the GOP is proposing here are tax cuts, not real tax reform. While there are some significant changes to the tax laws in the proposal, such as the doubling of the Standard Deduction that most taxpayers use rather than itemizing their deductions, the outline that was released yesterday consists of changes to tax brackets for individuals and tax rates for businesses. While this would have an impact on the tax liability that individuals and businesses would likely face in the future, it doesn’t make the tax code any simpler and it doesn’t fundamentally change the tax code in the way that the 1986 tax reform package did. For example, popular deductions for individuals such as those for real estate taxes and mortgage interest remain in place, as do most of the more complicated individuals and businesses that make the tax code so complicated and requires so many people to hire experts to sort through the laws and regulations. The only real exceptions to this observation are the portions of the proposal that would eliminate the Alternative Minimum Tax and the Estate Tax, but even these can be characterized as more akin to tax cuts than real tax reform. In other words, even if this package were to be passed into law intact, which is unlikely given how the legislative process actually works, the tax code will not be simplified and tax planning and preparation could end up being more complicated for some people than it is today.
As for the tax cuts themselves, whether or not they are a good thing depends in no small part on what you believe about the purpose of the tax code itself ought to be. For those who believe that the main purpose of the code should be to raise revenue for the government, what the Republicans are proposing is arguably a good thing because there’s a good argument to be made that lowering rates and shifting brackets will actually end up increasing government revenue due to the elimination of some deductions and the fact that corporations and individuals end up stimulating the economy as a whole. The extent to which this economic stimulus will have an impact on revenues is debatable, of course, but there is a demonstrable relationship between past tax cuts and increased government revenues to some extent. Additionally, Republicans on Capitol Hill and in the White House have argued that lowering tax rates will benefit the economy as a whole and lead to improvement in the jobs market and other areas that will benefit consumers and ordinary Americans. If on the other hand, you believe the tax code should serve purposes beyond simply raising revenue then there’s going to be a lot to object to in this proposal. While the cuts proposed do benefit middle-class and poorer Americans, there will also be substantial benefits for upper-income Americans thanks to reductions in top tax rates that will allow them to keep more of their money, not all of which will necessarily be invested back into the economy. These arguments are likely to take up a large part of the debate about this package on Capitol Hill in the months to come.
The next step in the process, of course, will be to put all of these ideas in the form of a bill that would actually make up the plan that Members of Congress will be debating over the next several months. That task will fall first to the House of Representatives due to the Constitutional requirement that all bills related to raising revenue must originate in the House of Representatives. While this will arguably make the process easier for Republicans since they can control the process and the vote much more easily than they can in the Senate, it doesn’t mean that passage is by all means certain. Much of will depend on whether or not the final bill is able to get even a small bit of Democratic support, or whether House Republicans will depend entirely on the GOP Caucus to get the bill passed. If it’s the latter, then the health care reform debacle showed quite plainly how difficult that could prove to be even in the House. In the Senate, the fate of the bill will depend in no small part on whether or not the tax bill ends up qualifying for reconciliation, which would mean that it only needs 50 votes (plus the Vice-Presidents tie-breaking vote) to pass or whether the bill will be required to measure up to the far more stringent procedures of regular legislation, which would require support from at least eight Democrats to get the sixty votes necessary to invoke cloture. If the bill ends up falling into the second category, then the odds of it passing into law without at least some Democratic input would be somewhere between slim and none. Of course, even passage via reconciliation could prove difficult if the GOP caucus isn’t united around whatever bill is presented to it. In other words, prepare for another long and uncertain legislative battle that could easily end up blowing up in the GOP’s face if it isn’t handled correctly.
