President Donald Trump has ordered White House aides to draft a tax plan that slashes the corporate tax rate to 15%, even if that means a loss of revenue and exacerbating the procedural and partisan hurdles he faces in search of his first major legislative victory, according to people familiar with the directive.
During a meeting inside the Oval Office last week, Mr. Trump told staff he wants a massive tax cut to sell to the American people, these people said. He told aides it was less important to him that such a plan could result in a loss of revenue, though that could make it more difficult to pass through Congress. Mr. Trump told his team to "get it done," in time to release a plan by Wednesday.
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Mr. Trump's push for a 15% corporate tax rate would prioritize steep rate cuts over attempts to prevent deficits from running higher. That choice could make it much harder to pass tax cuts that are permanent because Republicans plan on using a procedural tool that allows legislation to pass with a 51-vote majority in the Senate. Under those rules, changes can't add to deficits beyond a decade.
"It's the same discussion they had about the Bush tax cuts in the previous administration: Are you better off having a smaller cut that is permanent, or a larger cut that is temporary," said Mick Mulvaney, the president's budget director, in an interview last week.
Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn are scheduled to meet Tuesday to discuss Mr. Trump's tax proposals with Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, Senate Finance Chairman Orrin Hatch and House Ways and Means Chairman Kevin Brady of Texas. The meeting comes in advance of a Wednesday announcement by Mr. Trump about his principles for tax policy.
"This is part of our continuing dialogue with the Trump administration on tax reform," said AshLee Strong, a spokeswoman for Mr. Ryan.
Mr. Trump during the campaign proposed to cut corporate rates to 15% from 35%. There likely aren't enough business tax breaks that could be repealed to offset the fiscal cost, meaning such a move would increase budget deficits. Roughly, each percentage-point cut in the tax rate lowers federal revenue by $100 billion over a decade, so a 20-point cut would cost the government $2 trillion over a decade, according to the congressional Joint Committee on Taxation.
Any plan that adds to budget deficits would be difficult to advance on Capitol Hill. The president's fellow Republicans, who control both the House and Senate, are aiming to pass a tax bill through a process known as reconciliation, which means they wouldn't need votes from Democrats. However, bills passed under reconciliation can't increase deficits beyond the typical 10-year time frame against which tax and spending policies are projected.
That makes it difficult if not impossible for Republicans to pass a deficit-financed tax cut that doesn't expire without getting Democratic votes in the Senate.
Some White House advisers have said changes that aren't permanent would undercut the rationale for a corporate-tax cut, which is to boost business investment. Businesses are "making long-term capital decisions. People are deciding to move this to the United States, and...they need some permanence of the tax code," Mr. Cohn said at a conference last week.
Democrats are against large tax cuts for corporations, especially at a time when Mr. Trump is proposing cuts to government spending programs they prioritize, like housing, arts and the environment.
Mr. Trump's call for a 15% corporate tax rate puts him at the low -- and possibly unrealistic -- end of recent proposals. Former President Barack Obama sought a 28% rate for most companies. A 2014 Republican plan had a 25% corporate rate. And House Republicans want a 20% rate, with the cost covered by including a border-adjustment feature that taxes imports and exempts exports. Mr. Trump's White House has sent mixed messages about whether it would support the border-adjustment plan.
Asked Monday if the president's tax plan would be revenue-neutral, meaning it wouldn't add to the debt, Mr. Mnuchin told reporters that it would "pay for itself with economic growth." By that he meant that the administration expects to be able to project faster growth due to tax cuts, which would in turn increase revenue and avert the risk of bigger budget deficits. Many economists doubt whether economic growth can ramp up on a sustained basis without a big pickup in productivity and labor-force growth, and it is uncertain the tax-policy changes would do that.
"They will lose a boatload of revenue that we can't afford to lose and far more than this team will offset by closing loopholes," said Jared Bernstein, who was an economic adviser to former Vice President Joe Biden. Cutting marginal tax rates for businesses could generate some economic growth, he said, but not nearly enough to pay for itself with increased revenue.
"These promises about all kinds of growth and investment that are going to be triggered by these tax cuts never appear, and the empirical historical record is clear on that," Mr. Bernstein said.
Mr. Trump, so far, is sticking with core elements of his campaign plan when it comes to the tax issue, showing no signs of molding political promises to legislative dynamics in Congress or any significant fiscal constraints. Mr. Trump's aides have been working on a detailed tax proposal, but that isn't ready yet.
The announcement on Wednesday is expected to focus instead on broader principles, including proposed changes to the individual tax rates. Mr. Trump has said he wants to reduce the number of brackets for individual payers, and also to deliver tax cuts to the middle class.
Mr. Trump's statement last week that he would announce details of his plan later this week caught his team off guard, said people familiar with the matter.
In an interview with the Wall Street Journal on April 12, Mr. Trump said he wouldn't release even a set of tax principles before Congress passes major health-care legislation, which hasn't happened. The timing was also a surprise because, for weeks, top advisers in the White House have said they would like to forge consensus with lawmakers on a single plan before releasing more details.
The U.S. has the developed world's highest statutory corporate tax rate, and advocates for lower corporate tax rates say the system discourages job creation and investment in the U.S. Including state and local taxes, the U.S.'s corporate rate is 39.1%, according to the Congressional Budget Office.
Over the past decade, other countries have been lowering their tax rates to attract corporate investment, while the U.S. has left its federal rate at 35%. American companies have thus increasingly found ways to book their profits in low-tax foreign jurisdictions.
The gap in corporate tax rates between the U.S. and other countries is smaller under a measure that looks at taxes as a share of income after deductions and other breaks, also known as the average rate. In 2012, the U.S. average tax rate was 29%, according to a recently released CBO study. That still ranked third highest in the G20, and the U.S. rate was more than 10 percentage points above Australia, Canada, Germany and the U.K.
The actual tax rates paid by companies vary widely, with global high-tech and pharmaceutical companies paying relatively low rates and retailers and primarily domestic firms paying higher rates.
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(END) Dow Jones Newswires
April 24, 2017 17:10 ET (21:10 GMT)