Yesterday morning, before the release of the Trump Administration’s tax reform blueprint, Secretary of the Treasury Steven Mnuchin stated that it “is going to be the biggest tax cut and the largest tax reform in the history of our country and we are committed to seeing this through.” At an event hosted by The Hill and American Bankers Association, Mnuchin presented a positive push on both tax and regulatory reform that will lower tax rates, broaden the base, and simplify tax filing and exemptions. If this plan or something similar wins enactment, it will be the first comprehensive tax reform in over 30 years.
The twin goals of President Trump’s tax reform outline released yesterday are to provide relief to taxpayers and to ramp up economic growth. Taxpayer relief will come in two forms: lower rates and a reduction in compliance burdens. In our latest report on tax complexity, we found that the time that Americans spend working on taxes consumes 6.98 billion hours and costs the economy $263 billion. The lower rates and reduction in complexity will stimulate the economy, which has experienced a record 10-year period of sluggish growth of less than 3 percent annually.
The administration is confident that the resulting long-term economic growth along with the reform’s simplification of deductions would offset the immediate drop in tax receipts. In yesterday’s morning event, Mnuchin agreed with some other speakers that tax reform will need to be coupled with spending reduction and regulatory reform in order to rein in the growing national debt and fully unleash economic growth.
However, for taxpayers awaiting bottom line answers about how these plans will affect their finances and those of their children, what matters most are the details that will eventually emerge in legislation. Mnuchin and Director of the National Economic Council Gary Cohn laid out a broad overview of what the administration would like to see enacted, but noted that many details, such as the border adjustment tax in the House GOP’s “A Better Way” reform blueprint, are to be worked out with Congress as the process moves forward. Based on the President’s proposal, five principles for tax reform seem to be guiding the administration.
1.Simplify Individual Tax Brackets and Increase the Standard Deduction: Trump’s plan would consolidate the existing seven tax brackets into three tax brackets of 10%, 25%, and 35%. This would lower the top personal income tax rate by 4.6%, from 39.6% to 35%. In order to further target savings to lower- and middle-income households, the plan also calls for doubling the standard deduction which would mean that a joint- filer couple would pay a 0% tax rate on the first $24,000 of their income, and would not have keep track of as many receipts for tax filing purposes. Moreover, the Trump plan calls for “providing tax relief for families with child and dependent care expenses,” which would most likely take the form of refundable tax credits.
2.Eliminate Deductions: On the individual tax side, the Trump plan proposes to eliminate all deductions except the mortgage deduction and charitable donation deduction. Additionally, the plan calls for the closing of tax breaks that disproportionately benefit the wealthiest taxpayers. Depending on how this principle is integrated into legislation (i.e., no new measures aimed at punishing certain groups or industries) it could be a promising development in ridding the cronyistic and protectionist loopholes that plague the current Code.
3.Repeal Taxes that Hinder Economic Growth: The repeal of the Estate Tax, the Alternative Minimum Tax, and the 3.8% Obamacare investment income tax are also at the forefront of Trump’s tax plan. Not only are these taxes fundamentally unfair and major sources of compliance burdens, but they also heap a major opportunity cost on investments and savings -- sources of capital that are necessary for economic growth.
4.Reduce the Corporate and Small Business Tax Rate and Move to Territorial System: Trump’s plan would cut the current corporate tax rate from 35% -- the highest in the developed world -- to 15%. This reduction would mean the United States would have a lower tax rate than other OECD countries, like France, Mexico, Spain, Italy, United Kingdom, Norway, and others. The only OECD countries with the same or lower tax rates would be Poland (15%), Latvia (15%), Canada (15%), Ireland (12.5%), Hungary (9%), and Switzerland (8.5%). According to Mnuchin, small- and medium-sized businesses would also be eligible for the 15% rate. This would make the United States more competitive in the increasingly globalized economy and free up investment capital for businesses. Moreover, the U.S. is one of the few countries that taxes income regardless of where it is earned. This means a company must pay U.S. taxes on overseas earnings when it repatriates these profits. The result is that many multinational corporations opt to keep foreign earnings abroad due to what is described as the “lockout effect.”
5.Repatriation: Trump’s plan would also include a one-time tax on the repatriation on wealth that is currently being held overseas by businesses and individuals because of our current tax law. Although the plan does not provide a specific rate, leaving that rate to be determined by Congress, Cohn ensured the American people that it would be a “competitive” rate. During the campaign, Trump initially proposed a 10% repatriation charge, but it is unclear if that is what the White House means by “competitive.” Repatriation could go a long way in increasing the available capital for business to invest and build in the United States.
There are many admirable reforms included in the White House’s plan to alleviate the burdens imposed on taxpayers through our horribly complex Tax Code, and to recharge a lackluster economy. There is also a wealth of additional proposals included in the House’s Blueprint for tax overhaul, and from other Members of Congress on both sides of the aisle. The relatively easy part of the reform process is bringing these ideas to the table. The challenge will be crafting legislation and bringing Members on board with fundamental change. That’s when we might learn who is actually serious about reforming the Code, and not just talking about it. Taxpayers must also continue to push for tax reform that is coupled with spending reform in order to achieve both a sustainable government and a prosperous economy.