President Donald Trump called for deep reductions in business tax rates and major changes to the individual tax system in a bid to reinvigorate his economic and legislative agenda as he nears the 100-day mark of his presidency.
Continue Reading Below
The plan largely hews to tax-cut proposals Mr. Trump made during his presidential campaign last year, but it includes several crucial changes. Most notably, Mr. Trump is proposing to repeal a provision of the tax code that allows individuals to deduct the state and local taxes they pay from their reportable income. That will hurt residents of high-tax states such as New York, New Jersey and California and spur objections from some Republican lawmakers in those states.
The plan doesn't eliminate the exemptions for home-mortgage interest and charitable contributions. The two deductions are among the most popular for individual U.S. taxpayers, making them two of the most costly for the federal government.
Mr. Trump is also proposing a 35% top tax rate for individuals, down from today's 39.6% rate but above the 33% rate he backed during the campaign. Lower brackets would be set at 10% and 25%, The standard deduction for all individuals would be doubled, but all other deductions, except mortgage interest and charity, would be eliminated.
The corporate tax rate would drop to 15% from 35%, and U.S. companies would owe little or no U.S. tax on their future foreign profits. The tax rate on business income reported on individual returns would also drop to 15% instead of being taxed at individual tax rates.
The estate tax and alternative minimum tax would be repealed.
Continue Reading Below
Mr. Trump's plan leaves several crucial issues unresolved, including whether companies could immediately write off capital expenses, where to set the one-time tax rate on U.S. companies' stockpiled foreign earnings, how a break for child care would be structured and where the tax brackets for individuals would be set.
Treasury Secretary Steven Mnuchin and Gary Cohn, the director of Mr. Trump's National Economic Council, said those issues would be worked out later, partly in negotiations with Congress.
"Clearly we have a unique opportunity to do something major here," Mr. Cohn told a small group of reporters in the White House on Wednesday morning. "It's our intention to create a huge tax cut and equally as important, a huge simplification of the tax system in America."
Mr. Trump's tax agenda is headed for a challenging road through Congress, where budgetary hurdles and complex politics could make it difficult for him to get a quick victory. Unless he can attract Democratic votes -- which appears unlikely -- the plan must comply with legislative procedures that allow for a party-line vote in the Senate.
The key to those procedures: Any tax plan can't increase budget deficits beyond a 10-year period.
Mr. Trump's team intends to argue that his tax cuts will spur economic growth and increase revenue, which will help to avert increased deficits.
Asked if he can promise his tax plan won't balloon the deficit, the president said: "It's a great plan. It's going to put people back to work."
But lawmakers and Congress's nonpartisan tax policy scorekeepers -- the Joint Committee on Taxation -- need to agree for the plan to proceed.
"The combination of tax reform, tax cuts, regulatory relief and trade policies are what will get this country back to its proper sustained economic growth," Mr. Mnuchin said.
Mr. Mnuchin said the tax cut would be the biggest ever. Asked how he measured that, he pointed to the size of the rate cut for corporations from 35% to 15%.
Republicans largely praised the plan in the days and hours leading up to Wednesday's announcement, though they cautioned that differences remained to work through. Republicans are split on how big a tax cut they think is feasible and what tax breaks should go away, and there are thousands of details that may divide GOP lawmakers along regional lines.
"It really makes clear the president's commitment on tax reform and delivering it in a very bold way this year," Rep. Kevin Brady (R., Texas), the House Ways and Means Committee chairman, said Wednesday. "We've still got some work to do. There's no question about it."
Democrats said the plan appeared heavily tilted toward high-income households. They pointed to lower rates on individuals, the 15% rate for pass-through businesses and estate-tax repeal as significant benefits for some the wealthiest taxpayers.
Senate Democratic leader Chuck Schumer of New York said the proposal to cut tax rates for pass-through businesses would just benefit high-income people like the president himself.
Most U.S. businesses are pass-throughs, called that because their income and deductions pass through to their owners' individual returns. That group includes many small firms, but also large global law firms, hedge funds and the GOP president's own real estate and branding businesses. These businesses don't pay the corporate tax rate.
"The very wealthy are doing pretty well in America," Mr. Schumer said on the Senate floor on Wednesday. "God bless them. Let them do well. They don't need another huge tax break."
Mr. Cohn said the goal of the plan isn't to deliver tax cuts to upper-income households. "What we're doing is we're just broadening the base of taxable income," he said. "Their effective rate is what you have to look at."
But he said the administration didn't have a particular target yet for how that would be measured.
Among the biggest changes is the repeal of the state and local tax deduction; the effect of that would be to shift the tax burden from low-tax states such as Texas and Florida to high-tax states such as New York and New Jersey. Eliminating the deduction could raise more than $1 trillion over a decade, and it brings Mr. Trump's plan closer to a plan advanced in the House.
"It's not the federal government's job to be subsidizing the states," Mr. Mnuchin said. "We're not looking to necessarily raise taxes on the top 1% but we want to get the federal government out of the business of what's the state's business."
Democratic objections will force Republicans to find near-unanimity in their own ranks as they struggle with trade-offs.
"We're in agreement on 80%, and then that 20%, we're in the same ballpark," House Speaker Paul Ryan (R., Wis.) said Wednesday.
Mr. Mnuchin said the administration's proposal won't endorse the border adjustment feature that is central to the House GOP plan. The provision attempts to raise revenue by taxing imports, but not exports. Mr. Mnuchin said the administration wasn't opposed to the provision in concept and that he liked aspects of it. But he said, "We don't think it works in its current form."
Mr. Ryan hasn't backed down on the border-adjustment idea, but he said Wednesday that he knows the proposal needs modifications in response to criticism from retailers and others. "We don't want to have severe disruptions," Mr. Ryan said.
--Nick Timiraos and Will Mauldin contributed to this article.
Write to Richard Rubin at email@example.com and Nick Timiraos at firstname.lastname@example.org
(END) Dow Jones Newswires
April 26, 2017 15:40 ET (19:40 GMT)