The White House unveiled the bare outlines of a plan to revamp the U.S. tax code on Wednesday, touting the proposal as the “biggest tax cut” in history but offering few fresh specifics about how the overhaul would work or how it would be paid for.
The proposal, which the White House promised would be the “the biggest individual and corporate tax cut in American history,” was strikingly short on details, from how much the goodies President Donald Trump is dangling would cost to how his Administration plans to patch the hole it would blow in the budget. That’s an especially pressing question given how zealous many Republican lawmakers have been in the recent past about keeping legislation revenue-neutral.
The cornerstones of Trump’s proposal are reductions in both the individual and corporate tax rates. The number of individual income tax brackets would be trimmed from seven to three brackets of 35%, 25% and 10%. Families would see the standard deduction doubled, effectively eliminating taxes on the first $24,000 of a couple’s income and receive tax relief for childcare. While most tax deductions would be scrapped, the two most popular—the mortgage-interest deduction and charitable deductions—would be preserved, Administration officials said.
Under the plan, the corporate tax rate would be slashed from 35% to 15%. Companies would also pay a special one-time tax—the amount was not specified—to repatriate foreign earnings.
Markets rose at the prospect of broad tax relief. But the enthusiasm might be misplaced if traders are expecting the one-page statement of principles the White House distributed Wednesday to become law anytime soon.
The Committee for a Responsible Federal Budget estimated the plan could cost between $3 trillion and $7 trillion. Its base-case estimate, $5.5 trillion, would be 20% of U.S. GDP. “Even if tax cuts could generate more growth than estimated,” the group wrote, “no plausible amount of economic growth would be able to pay for a substantial portion of the tax plan.”
The substance of the plan—which is so skeletal that it cannot be scored yet by the Congressional Budget Office—is being hashed out in conversations with Capitol Hill Republicans, explained Treasury Secretary Steven Mnuchin and economic czar Gary Cohn, who repeatedly parried reporters’ questions about the details. Despite what Mnuchin characterized as months of work, the proposal is almost identical to the principles Trump articulated on the campaign trail last year.
Nor is it any clearer how Trump plans to pay for the tax cuts. Notably, the plan does not include the so-called border adjustment tax, a proposal that would scrap levies on U.S. exports and impose a 20% tax on imports. That tax code revamp, championed by the likes of House Speaker Paul Ryan, could have earned up to $1 trillion in revenue over the next decade, according to a Congressional Budget Office analysis. Ryan used it to partially offset the revenue loss incurred by the Speaker’s plan to reduce the corporate tax rate from 35% to 20%. But the the idea ran a wall of opposition from powerful retailers, and Trump’s team soured on it.
There’s little question why the plan won a warm welcome on Wall Street, which has rallied during Trump’s presidency in large part due to the prospect of corporate tax relief and repatriation. There’s also plenty to like for high earners, including a repeal of the estate tax and alternative minimum tax. The current blueprint does not mention closing the carried-interest loophole used by wealthy private-equity and hedge-fund managers, which Trump often talked about on the campaign trail.
It’s unclear how Trump’s own finances would be affected by the proposal, since he has defied decades of presidential precedent by refusing to release his tax returns. But his recently surfaced 2005 return suggests he paid more than $31 million that year under the AMT, which he has long pushed the government to jettison.
While the proposal may be thin gruel as a policy document, there’s little doubt it has political appeal, which is especially important to Trump as he looks to soften coverage of his first 100 days. Tax breaks are popular, both among the voters who put Trump in office and the corporations counting on him to ease their burdens. Even if a true tax-reform package isn’t in the offing anytime soon—the last reform of the tax code took place more than 30 years ago—Trump’s party has the power to simply slash rates this year. That would juice the U.S. economy as Republicans head into a difficult election cycle in 2018. Which, to Trump, may be as good a goal as any.
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