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President Trump and the congressional Republican leadership released their newest highly-promoted tax plan today. Although the president promised yesterday it would be a “very comprehensive report,” it is in fact only a broad outline that is silent on key details. It sketches out big tax cuts for businesses and high-income households, modest tax cuts for middle-income taxpayers, and simplification of the individual tax code—all of which would reduce federal revenues by trillions of dollars over the next decade.
Here are six key takeaways from the framework:
It is not a plan. Much like the White House effort last April, it is little more than a rough outline. Trump is approaching tax reform very differently than President Reagan, who kicked off the debate over what would become the Tax Reform Act of 1986 with a comprehensive opening bid. Today’s document leaves out many crucial details. It even fails to identify individual tax brackets (it describes the rates but not the income levels to which they’d apply). Oddly, it describes three individual income tax rates—12-25-35--then says a fourth higher bracket “may apply.”
It isn’t tax reform. It is a tax cut. There is no plausible way Congress can fully fund all of the tax cuts in this outline while complying with its constraints on revenue-raisers. Businesses would receive the biggest tax cuts, which would ultimately benefit the highest income households.
It leaves the dirty work to Congress. The framework highlights tax cuts—for corporations, pass-through businesses, and many (if not most) individuals. Yet, it fails to identify a single individual tax preference it would eliminate. Despite early rumors to the contrary, it is even silent on the state and local tax deduction.
The outline does explicitly identify those tax breaks the authors would protect, including such big-ticket preferences as the deductions for mortgage interest and charitable giving, as well as tax subsidies that “encourage work, higher education, and retirement security. “ Similarly, it identifies only one business-side revenue-raiser, a “partial” limit on interest deductibility, while promising to preserve business credits for research and low-income housing.
It would mostly benefit very high-income households. It may cut taxes modestly for some middle-income households, but it appears to be a far bigger tax cut for high-income households. Individual rate cuts, repeal of the Alternative Minimum Tax and the estate tax, and preservation of tax preferences for charitable giving, mortgage interest, and retirement savings all primarily benefit those with high-incomes. Tax cuts for corporations and, especially, pass-through businesses, would mostly benefit the highest-income households.
It would simplify the individual income tax. By doubling the standard deduction and repealing the individual AMT, it would make filing simpler for millions of taxpayers. The framework also calls for simplifying the tax treatment of education and retirement savings, a long overdue idea. However, as with so much else, it says nothing about how.
It would not generate three percent economic growth. Despite the president’s promises, it is implausible that this plan would permanently boost the economy. Trillions of dollars in lost revenue would add to the federal debt, raise interest rates, and make it more costly for businesses to invest. Those costs would offset the benefits of lower corporate tax rates and expensing.
However, those beneficial provisions are less generous in this plan than in earlier Trump proposals that included even lower corporate tax rates and a provision to allow firms to fully--and permanently-- expense their capital investments in the year they are acquired. Some analysts argued the expensing provision alone would significantly boost growth. But today’s framework would permit expensing for only five years—a provision that may accelerate the timing of new investment but do little or nothing to increase the long-term capital stock.
Today’s tax framework tilts more closely to the plan proposed by the House Republican leadership in 2016 than it does to past Trump ideas. But by saying so little about how the president would pay for big tax cuts, this framework gives Republican lawmakers no political cover on the many tough choices they face. Thus, for all the hype, it barely moves the ball at all.
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