3 Things You Can Count On When Trump Unveils His New Tax Plan

By Sean Williams Markets Fool.com

President Trump is closing in on the 100-day mark in the Oval Office, and if he's learned one thing about working in Washington, it's that legislation doesn't come easy. Though he's been among the most active presidents with regard to signing executive orders, Trump has yet to sign and see passed what would be construed as any major legislation in Congress.

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In March, the American Health Care Act (AHCA) was unveiled to a mixed audience as a replacement for the disliked Affordable Care Act (ACA), which many people refer to as Obamacare. With Republicans holding a majority in the House and Senate, it was widely expected that the AHCA would easily displace Obamacare, but that wasn't the case. Some Republicans within the House felt the AHCA went too far in removing ACA funding to low-income individuals and families, while others believed that the AHCA was just "Obamacare Lite," and that a full repeal was necessary of Obamacare's Title 1 laws (e.g., insurance industry mandates) before they'd support it. Long story short, the AHCA never even made it to vote.

Image source: Donald J. Trump's official Facebook page. Photo by Shealah Craighead.

The AHCA's failure causes Republicans to rethink tax reform

Just weeks later, the Trump administration announced that it was also going back to the drawing board with its tax plan. The passage of the AHCA was expected to reduce the federal deficit by $337 billion over a decade (mainly a result of lower Medicaid payouts to states), and so without these savings Republicans had to rethink a number of aspects of their tax proposal.

For those who may not recall, Trump had been campaigning on essentially mirroring the House Republicans' individual tax plan. This would have shrunk the number of ordinary income tax brackets from seven (10% minimum and 39.6% maximum) down to three (12%, 25%, and 33%), and according to Trump it would have led to a considerably simpler U.S. tax code. On the corporate side of the equation, as a candidate, The Donald had trumpeted lowering the corporate tax rate to 15% from 35%, as well as providing a special repatriation-holiday tax rate to encourage businesses to bring international income back to the United States.

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However, we can probably take what we thought we knew about the Republican proposal and safely toss it out the window. Some pundits have suggested we may not even see a clear tax plan until early 2018, while President Trump has assured Americans that a plan will be presented with haste.

Here's what you can count on with Trump's new tax plan

While it's impossible to know the finer points of a plan that's still being developed, I'd opine that there are three things you can just about count on with Trump's new tax plan when it is unveiled.

Image source: Getty Images.

1. Trump is going to fight tooth and nail for a corporate tax rate of 20% or less

Though some might view Trump's tax plans to cut individual and corporate tax rates as equally important, Trump is first and foremost a businessman, so he, in my opinion, is far more likely to fight tooth and nail for as much of a corporate tax cut as possible. He campaigned for a 15% corporate tax rate last year, but given the failure of the AHCA to pass, 20% would probably be more likely.

Why focus on lowering the corporate tax rate? For one, Trump believes that if businesses have more income left over after taxes, they'll put it to work by hiring American workers and expanding their domestic operations. Since our economy is so driven by consumption, these added jobs and the income generated by these workers should flow right back into the U.S. economy.

A lower corporate tax rate would also likely stem the appeal of tax inversion deals. Tax inversion is a practice in which s U.S. company and a foreign company in a country with a notably lower maximum corporate tax rate, like Ireland, merge, allowing the U.S. company to relocate its headquarters to the foreign location to take advantage of the lower tax rate.

The other important aspect of a lower tax rate is that it makes investing in the U.S. far more attractive to foreign businesses. It's possible that a lower corporate tax rate could bring foreign investment dollars into the U.S.

Image source: Getty Images.

2. There will be a significantly more simplified U.S. tax code for individual taxpayers

Second, it seems highly likely that Trump and Republicans will place more focus on simplifying the individual tax code than on the actual tax cuts themselves. Don't get me wrong: The full expectation is that middle-class Americans will be paying a lower ordinary income tax rate than they're paying under the current tax schedule. However, the magnitude of cuts might not be anywhere near as aggressive as Trump's first proposal (0%, 10%, 20%, 25%) or his second proposal, which is the aforementioned adopted House suggestion of three brackets (12%, 25%, and 33%).

Trump's focus on deregulating the energy and banking industries, as well as the nature of his executive order requiring that two federal regulations be removed for each new federal regulation put into law, provides all the evidence we need that he's serious about simplifying the U.S. tax code. A tax code, mind you, that's ballooned to more than 10 million words!

During his campaign, Trump touted that the charitable giving deduction and mortgage interest deduction would be saved, and that taxpayers would see a more than doubling in their standard deduction. In turn, nearly all other deductions and credits would disappear. It's tough to say if the new tax plan would take a similar tone, but I would count on it removing a number of deductions and credits in favor of a more simplified standard-deduction approach.

Image source: Getty Images.

3. The overall plan will be revenue-neutral

Last, following the failure of the AHCA even with the odds stacked in the GOP's favor, you can almost count on Trump's new tax plan to be revenue-neutral over a 10-year period.

What's the purpose behind a revenue-neutral plan? It allows the Republicans to make changes that impact the federal budget (i.e., taxes) through the reconciliation process. Reconciliation only requires a majority vote, meaning 51 votes in the Senate as opposed to 60. A revenue-neutral tax plan wouldn't have to garner a single vote by a Democrat in the House or Senate if all Republicans were to stick to the party line.

However, this means that Republicans are going to need to find a way to generate revenue after cutting individual and corporate taxes. Therein lies the great question mark for the time being. One idea that's purportedly been floated around is a value-added tax, or VAT. A VAT is a tax that's placed on different stages of the production or distribution of a product, and it's a common tax passed along in Europe. A VAT may be able to raise enough revenue to offset the cut in individual and corporate taxes, but it may also make goods more expensive for consumers and families.

How Republicans will increase revenue still remains to be seen, but there's a nearly 100% chance, in my opinion, that we see a revenue-neutral tax plan from Trump and GOP legislators.

The next step at this point is to merely watch and wait for the tax plan to be unveiled.

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