As noted in yesterday’s summary, the basic outline of the Trump Administration’s tax plan is largely similar to the Trump campaign proposals, with fewer details and with one notable shift toward the House Blueprint’s approach – the move toward territoriality. The table below shows how this latest plan compares to the House Blueprint and the Trump 2016 campaign plan.
In the press conference to announce the “broad-strokes” plan, both Treasury Secretary Mnuchin and National Economic Council Director Cohn said that they were in agreement with members of Congress over the four driving goals of tax reform – grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families, especially middle-income families and lower the business tax rate from one of the highest in the world to one of the lowest.
While this plan would obviously lower tax rates applicable to business income, may add some simplification to the tax code by eliminating the AMT and many deductions or exemptions, and may provide a tax cut to middle-income families, it is unclear if it would in fact create jobs and grow the economy, and tax cuts proposed appear to more heavily benefit higher earners.
Is the DBCFT dead yet?
While some observers see the lack of a destination based cash flow tax in Trump’s proposal as the death knell for the DBCFT, House republicans including Speaker Paul Ryan and Peter Roskam (R-Ill.), chairman of the House Ways and Means Tax Policy Subcommittee, seem to be holding out hope that the fleshed-out version of Trump’s plan could include a modified destination-based cash flow tax. The border adjustment feature of the DBCFT, in some form, may still be viable as a revenue raiser (in the budget window), which could be key to getting tax reform done through the reconciliation process. The Committee for a Responsible Federal Budget estimated that the plan outlined yesterday would cost between $3 trillion and $7 trillion over a decade, depending on various design choices lurking in the as-yet-undeveloped details.
The Democratic Response
Meanwhile, Democrats are critical of the 15% tax rate applicable to pass-through income, the repeal of the 3.8% Medicare tax on net investment earnings and the repeal of the estate tax, as well as the statement that the plan would pay for itself through increased economic growth. In addition, the plan lacks any pledge for infrastructure spending. Senator Chuck Schumer (D-NY) told the New York Times “We don’t need a tax plan that allows the very rich to use pass-throughs to reduce their rates to 15 percent while average Americans are paying much more . . .That’s not tax reform. That’s just a tax giveaway to the very, very wealthy that will explode the deficit.” Congresswoman Nancy Pelosi (D-CA) called the plan a “wish list for billionaires. . . the same Trickle Down Economics that undermined the middle class are alive and well in the President’s tax plan. Senator Ron Wyden (D-OR)’s reaction was similar: “This is an unprincipled tax plan that will result in cuts for the 1 percent, conflicts for the president, crippling debt for America and crumbs for the working people.”
- While the plan proposes retaining the mortgage interest deduction, doubling of the standard deduction may reduce the incidence of taxpayers actually making use of the mortgage interest deduction (if it remains an itemized deduction). This could generate push-back from the real estate industry (the same goes for the charitable deductions and push back from the charitable sector).
- The plan is silent on the denial of a deduction for net interest expense, a key tenet of the House Blueprint.
- The lower rate applicable to corporations may increase incentives for large corporations to retain earnings instead of distributing those earnings to shareholders (by way of dividends or share buybacks). If corporate rates are indeed lowered to 15%, the accumulated earnings tax may take on increased importance. Click here for more on the accumulated earnings tax.
- The plan proposes a shift toward a territorial system, but notably contained no mention of the destination-based cash flow tax, the means through which the House Blueprint accomplishes territoriality. If an alternative mechanism is used (for example, a dividend-exemption system akin to that proposed by the Camp 2014 discussion draft), complex anti-base erosion rules will need to be implemented to discourage U.S. taxpayers from shifting income offshore. Read more on this here.
- The plan proposes a one-time deemed repatriation of earnings accumulated offshore, but, unlike the campaign proposals, does not provide a rate. Will a low, split rate be adopted, along the lines of the House Blueprint and the Camp 2014 discussion draft? Or will the deemed repatriation be taxed at a high rate, and looked to as a more robust revenue raiser along the lines of Senator Sanders’ proposal released earlier this year (more on that here)?