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.
The plan largely hews to tax-cut proposals Mr. Trump made during his presidential campaign last year, but it includes several crucial changes.
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Most notably, the GOP president 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.
Mr. Trump also is proposing a 35% top tax rate for individuals, down from the current 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 for mortgage interest and charitable contributions -- 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 also would drop to 15% instead of being taxed at individual tax rates.
The estate tax and alternative minimum tax would be repealed.
Mr. Trump's plan leaves several crucial issues unresolved: whether companies could immediately write off capital expenses; what happens to personal exemptions; 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.
Because of those omissions, it's difficult, if not impossible, to calculate the total fiscal impact of the plan and how it would affect individual households
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 said. "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 it to be approved by a majority vote, instead of the 60 votes that are typically needed.
The key to those procedures: Any tax plan can't increase budget deficits beyond a 10-year period.
Asked if he can promise his tax plan won't balloon the deficit, Mr. Trump said: "It's a great plan. It's going to put people back to work."
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. But lawmakers and Congress's nonpartisan tax-policy scorekeepers, the Joint Committee on Taxation, need to agree with that assessment to proceed.
"We've been hearing from the last administration that 3% [growth] is hard to get to and they couldn't get there," Mr. Mnuchin said. "That's why we got a new president. If they had been at 3%, maybe there would have been a different outcome."
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%.
Still, it wasn't clear on Wednesday how big the overall tax reduction would be and how that compares with previous tax cuts.
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 plenty 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), chairman of the House Ways and Means Committee, said. "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 of the wealthiest taxpayers.
Sen. Chuck Schumer of New York, the chamber's Democratic leader, 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 president's own real estate and branding businesses. These businesses don't pay the corporate tax rate.
Cutting their rates without opening loopholes could require very complex rules and lead to situations where law firm partners receiving profits pay lower tax rates than their junior attorneys do.
"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.
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.
Mr. Mnuchin said key pieces of the business tax plan were still being worked out. The House GOP plan repeals the deductibility of interest and allows business to write off capital expenses immediately.
Mr. Mnuchin said the administration favored some form of immediate write-off but didn't commit to any details. He also said the administration knew that some industries, including real estate and utilities, were concerned about losing the interest deduction.
"We do think some level of expensing is important," he said. "We're sensitive to that certain industries are very sensitive to interest deductibility and we want to make sure that we don't do anything that creates uncertainty in the economy."
--Nick Timiraos and Will Mauldin contributed to this article.
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
April 26, 2017 16:41 ET (20:41 GMT)