The Trump administration on Wednesday released a one-page summary of its plan for overhauling the tax code, providing relatively few details about what White House Chief Economic Adviser Gary Cohn nevertheless called a “historic” proposal during a White House briefing conducted alongside Treasury Secretary Steve Mnuchin.
The administration hadn’t been expected to provide much information at all about how it proposes to pay for the plan, but Mnuchin was surprisingly clear about several changes that will save the government money. Income deductions claimed by individuals, he said, would all be eliminated with the exception of the mortgage interest deduction, retirement savings, and the charitable giving deduction.
That’s big news if the administration follows through. Among other things, it would do away with the deduction for employer contributions to employees’ health care premiums, a break worth an estimated $236 billion in 2018, deductions for state and local taxes, worth about $63.3 billion.
They also confirmed that the administration would like to cut the corporate tax rate from 35 percent to 15 percent, and that small business structured as “pass-through” entities, where the owner pays taxes on business earnings through the individual tax code would also be eligible.
The presentation left an awful lot of questions unanswered.
For example, Cohn and Mnuchin unveiled a simplified tax bracket structure for the individual income tax, with rates of 10 percent, 25 percent, and 35 percent. However, they offered no indication of what income levels those rates correspond to. The only sure thing is that the highest-earning Americans will be looking at a cut in their top marginal rate, from 39.6 percent to 35 percent.
There are also a lot of questions remaining about how the plan would be paid for. Mnuchin insisted multiple times that the proposal would be effectively self-funding.
“This will pay for itself with growth, with reduction of different deductions and with closing loopholes,” Mnuchin said. He added, “This plan is going to lower the debt to GDP. The economic plan under Trump will grow the economy and will create massive amounts of revenues trillions of dollars in additional revenues.”
However, economists have long challenged the idea that tax cuts are self-financing, and there are serious questions about how high the US economic growth rate can credibly be expected to go.
Despite the many questions the plan raises, there were enough details released to identify at least some big winners and some potential losers.
No surprise here, really, but if you are a wealthy American, you probably heard a lot more things you liked than things you disliked in the briefing. In addition to the news that the top marginal tax rate on personal income would drop from 39.6 percent to 35 percent, the Trump proposal would eliminate multiple taxes that generally fall only on the wealthy.Among them:
-- The Estate Tax, which affects only multi-million dollar bequests
-- The Alternative Minimum Tax, which was designed to prevent high-income individuals from avoiding taxation
-- The 3.8 percent Net Investment Tax on dividends and capital gains that was imposed as part of the Affordable Care Act
And the three tax deductions that Mnuchin pledged to save -- mortgage interest, retirement savings, and charitable giving -- all disproportionately benefit the wealthy.
While the steep drop in the corporate tax rate will benefit all US businesses, US firms with operations overseas stand to benefit even more because the Trump plan would transform the US tax code into a “territorial” system. That means the overseas profits of US firms would no longer be taxed. This would bring the US in line with most other developed countries worldwide. In addition, Mnuchin indicated that the plan is to create a special rate for money currently stockpiled overseas because of high business rates, with the aim of encouraging companies to repatriate those funds.
Business Owners and Professionals
The treatment of pass-throughs under the proposal could result in a tremendous reduction in the tax burden on business owners – from doctors and lawyers in private practice to plumbers and restaurant owners. If business earnings are currently taxed as personal income, their top marginal tax rate is the same as every other individual: 39.6 percent. However, under this plan, they could see their taxes cut by more than half.
Mnuchin said that rules would be put in place to discourage income-shifting by people trying to take advantage of the new rules.
There’s no denying that this tax plan will be hugely beneficial to Donald Trump and his family. All the tax benefits work to the benefit of Trump and his children, including the changes to the corporate code.
Analysis of Trump’s 2005 tax return, a portion of which was made public last year, show that the president paid $38.5 million in federal taxes that year, largely because of the alternative minimum tax, which the plan eliminates. Without the AMT in place, Trump would have paid $7.5 million, putting his effective tax rate on $153 million in income at less than five percent.
Residents of High-Tax States
For some Americans, the ability to deduct state income taxes from their federal taxable income isn’t as big a deal as it is for others. In the Dakotas, the state income tax rate tops out at 2.9 percent. In Indiana, it’s 3.23 percent. But for others, it’s a significant tax break. California’s rate goes as high as 13.3 percent, Maine’s to 10.2 percent, Oregon’s at 9.9 percent and multiple others are in the neighborhood of 8 percent.
For residents of those states who itemize their taxes, that eliminated a significant deduction.
People with Employer-Sponsored Health Insurance
The single largest tax expenditure the government makes every year is allowing people whose compensation package at work includes health benefits to exclude premium payments made by their employer from their taxable income. Mnuchin made it plain that the administration wants to eliminate that particular deduction, which is projected to cost the Treasury $236 billion next year.
People concerned about the size of the federal deficit and the growth of the national debt will not be cheered by Trump’s tax plan.
In a statement released Wednesday afternoon, Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said that the tax code is in dire need of reform, but added, “tax cuts are not the same as reforms, nor do tax cuts pay for themselves.” She went on to blast the administration for its insistence that economic growth would finance rate reductions.
“Unfortunately, it seems the Administration is using economic growth like magic beans – the cheap solution to all our problems,” she said. “ But there is no golden goose at the top of the tax cut beanstalk, just mountains of debt. Instead of banking on fantasy growth rates to offset debt-financed tax cuts, we should be pursuing sustainable economic growth to lift incomes and reduce budget deficits.”
If folks like MacGuineas can find any comfort in the plan released today, it likely lies in the knowledge that any tax plan that makes it through Congress will be argued over for months, if not years (notwithstanding Mnuchin’s claim Wednesday that it will get done by year-end) giving its opponents plenty of time to make their case.