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Trump Unveils His Tax Reform Plan

The plan as described would dramatically reduce government revenues.
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Steven Mnuchin. (Photo: Mandel Ngan/AFP/Getty Images)

Steven Mnuchin. (Photo: Mandel Ngan/AFP/Getty Images)

Earlier today, the Trump administration finally unveiled the broad outlines of its tax reform plan, although details have been leaking out all week. The scope of the plan is ambitious (at least according to administration officials)—Secretary of the Treasury Steven Mnuchin described it as “the biggest tax cut and the largest tax reform in the history of our country.” Here are the main components of the plan, as reported by the New York Times:

  • Lower individual income tax rates (including for wealthy Americans). The number of individual income tax brackets would be reduced to three, with rates of 10 percent, 25 percent, and 35 percent.
  • Lower corporate income tax rates. The business tax rate would be cut to 15 percent, and the cut would apply to both corporations and pass-through entities.
  • A doubling of the standard deduction and the elimination of most itemized deductions (except for the mortgage interest and charitable contribution deductions).
  • The elimination of the estate tax and the alternative minimum tax.

Notably, the plan does not include mention of the controversial border adjustment tax championed by Speaker of the House Paul Ryan and other GOP politicians, although it does express support for a territorial tax system. The administration is also reportedly considering proposing changes to the Child and Dependent Care Credit, meant to help middle- and lower-income families with childcare costs (its previous plan was criticized for delivering the bulk of its benefits to high-income Americans).

It’s unclear how likely any of this is to get through Congress. For starters, there’s the cost. The plan as described would dramatically reduce government revenues, and the administration hasn’t proposed any revenue-enhancing changes meant to offset the cuts. Instead, the administration seems to be relying on supply side economic theory — Mnuchin told reporters earlier this week that the cuts would spur enough economic growth to pay for themselves. It’s an assertion that makes liberal and conservative economists alike skeptical. Greg Mankiw, an economist at Harvard University who served as chairman of President George W. Bush’s council of economic advisers, told the Times that “[a] reasonable rule of thumb, in my judgment, is that about one-third of the cost of tax cuts is recouped via faster economic growth.”

Some Republicans, in fact, have already expressed their doubts about the scale of the proposed cuts and what effect they might have on the deficit.

As CNN’s Phil Mattingly reports, the GOP also faces a significant barrier in the form of Senate rules. In the absence of Democratic support for tax reform, the legislation will have to be passed via reconciliation (as Senate Majority Leader Mitch McConnell has said is his plan). The reconciliation process, however, can only be used for bills that do not increase the budget deficit in the long-run (over 10 years). A private analysis by the Joint Committee on Taxation (requested by Ryan), however, found that cutting the corporate tax rate to 20 percent for only three years would make the legislation ineligible for the reconciliation process (i.e. increase the long-term deficit).

The Trump administration, as well as other Republicans, has said it would be open to temporary tax cuts, but making the cuts temporary would also dramatically reduce any effect on growth. Here, for example, is what George Callas, who serves as senior tax counsel to Ryan, said on the topic earlier this week at a tax policy summit for the Institute of International Finance:

Here’s a data point for folks: A corporate rate cut that is sunset after three years will increase the deficit in the second decade. We know this. Not 10 years. Three years. You could not do a straight-up un-offset three-year corporate rate cut in reconciliation. The rules prohibit it. You might be able to do two years. A two-year corporate rate cut … would have virtually no growth effect…. It would just be dropping cash out of helicopters on corporate headquarters for a couple of years.

For the record, “dropping cash out of helicopters on corporate headquarters” was not listed among Donald Trump’s campaign promises.