State of Play of Leading Tax Proposal (Dec. 22)

At the heart of the GOP economic legislative agenda for 2017 is tax reform.  Both the incoming Trump administration and leaders on the Hill have signaled its centrality.  Treasury Secretary-designate Steve Mnuchin has said that tax reform will be introduced within 90 days of inauguration.  Speaker Paul Ryan, former chair of House Ways and Means, has sought comprehensive tax reform for years and Committee’s current chair Kevin Brady has said that the Trump administration presents the best chance  for tax reform in the last 30 years.

Congressional leadership has set an ambitious timetable for tax reform this spring and discussions on various aspects of reform are being actively discussed and debated in private staff meetings as well as in the public domain.

Below we provide an analysis of the most prominent tax plans in play and preview some of the competing visions and interests, trade-offs and compromises  awaiting in the year ahead in tax policy.

Happy holidays and best wishes for 2017!



House Tax Plan:  Blueprint

The major plan from House Republicans Congress — the “Better Way” Blueprint — was first put forward by Ryan and Brady this past June.  It promises tax cuts for every America while remaining revenue neutral and not being rigged for the rich.

  •  Rate vs. Deductions

The largest promise of the Republican proposal is tax cuts across the board.  The plan reduces the number of individual tax brackets from the current seven to three — 12, 25, and 33 percent. The corporate tax rate would drop to 20 percent from the current 35 percent and pass throughs will be taxed at a maximum   25 percent rate.  Capital gains would be taxed at half the individual rate – 6, 12.5, and 16.5 percent.  To pay for these tax cuts, Republicans plan to reduce the number of deductions on personal and business taxes.

The House GOP Blueprint identifies a few tax breaks it would keep — the deductions for mortgage interest and charitable contributions — and would specifically eliminate the deduction for businesses’ net interest expenses and the deduction for state and local taxes.

Republicans will also restructure the way that deductions are accounted.  Capital investment will be fully deductible, while deductions for interest payments will be eliminated to incentivize businesses to transition from debt financing to equity financing models.

  • International Tax Overhaul

The main innovation called for in the  Blueprint is an overhaul of the current taxation of overseas earnings by U.S. firms, replacing the regime with a “border adjustable” policy under which profits from imports are taxed and those from exports are exempt.  The policy, a pet project of Chair Brady, seeks to promote exports and discourage imports, boosting revenues and close the trade deficit.

There is considerable debate about whether this approach would lead to trade conflicts in the World Trade Organization and if it is even legal under international trade rules against discriminatory subsidies.

Many experts believe that any benefits in the trade deficit this create would be negated by an appreciation of American currency, making out goods on the international market more expensive and imported goods relatively cheap.

Senate:  Hatching Tax Plans

While the Senate has remained quieter on the subject of tax reforms, some members have released mostly piecemeal ideas that suggest a less ambitious  Senate outlook.  But the plans currently lack the comprehensive vision or details of the House Blueprint.

Orrin Hatch, chair of Senate Finance, has made some important statements recently about his initial plans.  Hatch spent much of this year developing a narrower tax proposal known as “corporate integration” to eliminate double taxation of corporate earnings.

Hatch had originally been advocate of the integration of corporate rates, however has since stepped back from this and opened himself up for more comprehensive tax returns. He has said that he still  wantscorporate integration, but now within the context of broader tax reform.

Hatch aside, it’s not clear that GOP senators will go along with a House plan.  Sen. Pat Roberts has suggested it might be better for Congress to do a bill that’s narrower than comprehensive tax reform.  Sen. Rand Paul said in an op-ed for Breitbart that tax reform should not be revenue-neutral and everyone should get a tax cut.

Ranking Finance member Ron Wyden has also put forward plans to streamline energy taxes and simplify capital depreciation rules.

Trump:  Tax Policy “Proposals”


Trump has repeatedly signaled that he will let Congress take the lead on tax reform and his tax plan has evolved  to fall  substantially in line with the Ryan/Brady plan.  He has suggested eliminating “most corporate tax expenditures except for the research and development credit” and capping itemized deductions at $100,000 for single people and $200,000 for married couples.

Trump’s choice for Treasury secretary, Steve Mnuchin, said last month that the mortgage interest deduction and perhaps others would be capped.  But incoming White House Chief of Staff Reince Priebus said more recently that limiting the deduction was not a fait accomplis.

  • Differences with the Blueprint

Trump has long argued for and seems still to support a 15 percent corporate tax rate, as opposed to Ryan’s 20.  Ryan has indicated that he is open to aligning his rate with Trump’s in the future but many are betting on parties settling on 20.

The problem with cutting the rate to 15 percent is that it could add more to the budget deficit than Ryan and the House GOP can countenance, and the tax package mustbe revenue neutral to pass through budget reconciliation.

  • Repatriation

Trump also wants a 10 percent repatriation tax holiday rate on corporate profits coming back into the United States after being held overseas.

Criticism of Republican Plans


Senate Finance Democratic staffers describe the House Blueprint as regressive and fiscally irresponsible.  They especially regard the border adjustment concept as risky, untested, vulnerable to unforeseen consequences, and subject to consumer price spikes.

Democrats have also attacked the GOP plans as heavily favoring the rich, lowing their net taxes, while eliminating deductions that mostly benefit lower and middle class American, while keeping those that benefit the wealthy.

Some sectors of Wall Street have also come out against the proposals from the House.  JPMorgan released a paper last week assailing the border adjustments plan, saying it would lead to high levels of volatility in the market, could seriously hurt American retailers, risk higher consumer prices, and impair American productivity in sectors relying on imported resources.

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