White House tax plan: Lowers rates, attacks blue states, cuts tons of breaks

In a briefing at the White House, Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn introduced a one-page summary of tax reform provisions that hew closely to Trump’s campaign proposals overall, but also stake out new ground. Trump was not present.

While details of the blueprint had been hinted at and leaked in the days leading up to Wednesday’s rollout, it also presented several new ideas. One is a top 35 percent tax rate for individual income, down from 39.6 percent today. The administration also called for the elimination of deductions for state and local taxes and for ending the Treasury’s practice of taxing businesses’ overseas income.

The new outline, which also envisions a 15 percent tax rate for business income, represents a bet on the efficacy of lower tax rates, but does not include any of the details that will have to be hashed out before legislation can move in Congress. Like Trump’s campaign platform, it is well outside what congressional Democrats would consider voting for, because it would result in major tax reductions for high earners.

“We have a once-in-a-generation opportunity to do something really big,” Cohn said at the briefing, saying the plan would be the biggest reform since President Ronald Reagan’s.

Discussing Trump’s proposed tax rates on the Senate floor, Senate Minority Leader Charles Schumer of New York called it “just a tax giveaway to the very, very wealthy that would explode the deficit.”

One addition effectively would be a tax cut for the top 1 percent: Repeal of the 3.8 percent surtax on investment income that was used to help finance Obamacare.

Eliminating that tax would cut $156 billion from federal revenue over a decade, according to a March analysis from the Joint Committee on Taxation, Congress’ in-house panel of tax experts. Of that, 90 percent would accrue to the top 1 percent of income earners, according to the Tax Policy Center, an outside think tank.

House Speaker Paul Ryan has said that, having so far failed to repeal Obamacare, Congress should leave the Obamacare taxes out of the tax reform discussions, although other members of Congress have indicated openness to repealing some of those taxes in the tax legislation.

At the same time, Trump is proposing to eliminate a particular deduction that mainly aids wealthy people in blue states, namely the deduction for state and local taxes.

Cutting that break would raise $1.8 trillion over 10 years, according to the Tax Foundation, hitting California and New York the hardest. Nearly 90 percent of the benefits of the break flow to earners with more than $100,000 in income, according to the think tank.

Eliminating the deduction would be an enormous task. Leonard Lance, a New Jersey Republican, immediately announced his opposition Wednesday afternoon, in a sign of the resistance the proposal would get from blue-state members of Congress. “New Jersey taxpayers would lose under that plan,” Lance said. “I will be a leading voice in negotiations for maintaining that deduction.”

On the campaign trail, Trump had suggested capping itemized deductions at higher incomes, effectively limiting the value of all breaks. Now, he is taking a different approach. The administration will protect the charitable and mortgage interest deductions but eliminate all others, Mnuchin said at the briefing. “We think that will be sweeping reform,” he noted.

The White House also wants to double the standard deduction. Together, those moves would make filing taxes simpler for many families, while reducing a range of tax incentives for various activities for high earners who are more likely to itemize deductions rather than claim the standard deduction.

“This isn’t going to be easy,” Cohn said of the plan to limit tax breaks, explaining that “we will be attacked from the left, we will be attacked from the right,” but that Trump would prevail.

Another major change from the Trump campaign tax plan is that businesses would no long be taxed by the Treasury on their international income. Today, the U.S. requires corporations to pay the 35 percent corporate tax rate for overseas earnings, while allowing credits for taxes paid to foreign governments. But because that worldwide tax, unusual among developed nations, is not levied until earnings are brought back into the country, corporations have left an estimated $2.4 trillion in earnings abroad. If those were brought back, they would be subject to a one-time tax at a rate to be determined in the Trump plan.

Wednesday’s tax plan introduction lacked information on some of the biggest questions members of Congress will have about the president’s intentions, such as the effect of the reform on the Treasury and the impact of the cuts among different income groups.

Cohn suggested that middle-class families would receive a tax cut, but declined to offer a basis for that assertion. In the plan, the current seven tax brackets would be reduced to three, with the lowest set at 10 percent, two percentage points lower than Trump’s campaign plan and matching the current lowest rate. But the officials said the exact income levels at which the brackets would be set are not yet ready to be made public, making comparisons impossible.

And while increasing the standard deduction would result in tax cuts for many middle-class families, others could face net tax increases if they lose other breaks, such as personal exemptions, which were targeted in the Trump campaign plan.

“This kind of irresponsibility is light on details for people who work for a living and is based off of a failed trickle-down economic theory,” Oregon Sen. Ron Wyden, the top Democrat on the Finance Committee, said in a scathing statement on the plan.

Mnuchin and Cohn insisted that the details would be worked out in negotiations with Congress. The principles they introduced were sufficient to win plaudits from Republican members of Congress, as well as outside conservative groups.

“It’s now time for people across the conservative movement to stop drawing lines in the sand here, and start wading into the surf” in support of comprehensive tax reform, said Pete Sepp, president of the National Taxpayers Union, a conservative group.

In a joint statement, the Republican leaders of the House and Senate and the chairmen of the tax-writing committees indicated that they too viewed the plan as up for discussion and negotiating, calling them “critical guideposts for Congress and the administration as we work together to overhaul the American tax system.”

One major detail that Congress will have to address is whether Trump’s principles would add to the federal deficit. Not only will some lawmakers be concerned about the possibility of increasing the federal debt, but leaders also will have to weigh whether a net tax cut would be able to pass through the special legislative procedure known as reconciliation. Reconciliation would allow a bill to pass with only a simple majority in the Senate, giving Republicans an opportunity to pass tax reform without Democrats.

Mnuchin said Wednesday that the administration’s tax rate cuts were meant to be paid for by eliminating tax breaks and accelerating economic growth. Faster economic growth would result in more taxes flowing to the Treasury.

Yet outside analyses of Trump’s campaign proposals suggested that they would not come close to paying for themselves and instead would add trillions to federal deficits, even including the effects of faster economic growth. For example, the Tax Foundation found in a “dynamic” analysis that counted the growth that would result from the campaign plan that it would add $3.9 trillion to the deficit in a decade.

The White House did not provide the math behind its own calculations that the plan would pay for itself, but it would have to envision much faster economic growth.

“Unfortunately, it seems the Administration is using economic growth like magic beans — the cheap solution to all our problems,” said Maya MacGuineas, head of the Committee for a Responsible Federal Budget, which advocates for deficit reduction. “But there is no golden goose at the top of the tax cut beanstalk, just mountains of debt.”