President Trump’s long-awaited tax plan, revealed on Wednesday, would cut corporate rates and nearly double the standard deduction.
The 9-page document is vague in some areas, leaving plenty of space for congressional tax-writing committees to work out the details as they craft legislation.
Republicans are aiming for a tax overhaul that will simplify the tax code, reduce taxes on the middle class, and make American corporations more competitive with those from other countries.
“We will dramatically cut the business tax rate so that American companies and American workers can beat our foreign competitors and start winning again,” Trump said Wednesday as he delivered a speech about the proposal to a crowd in Indianapolis. “The biggest winners will be middle-class workers as jobs start pouring into our country, as companies start competing for American labor, and as wages continue to grow.”
Here are the basics:
• Establishes three individual tax brackets: 12%, 25%, and 35%
• Increases standard deduction to $12,000 for individuals ($24,000 for married couples)
• Calls to increase the size of the child tax credit
• Provides $500 to help pay for non-child dependents
• Repeals estate tax (AKA “death tax”) and alternative minimum tax
• Lowers corporate rate from 35% to 20%
• Allows businesses to write off the full costs of capital investments for five years (AKA “full expensing”)
The plan increases taxes on people in the lowest tax bracket from 10% to 12%, but the increase in standard deduction is designed to increase the number of people who end up in the 0% tax bracket. The plan decreases taxes on those in the highest tax bracket from 39.6% to 35%, but allows room for lawmakers to add a fourth tax bracket for the richest taxpayers if they see fit.
The childcare benefit is largely thanks to Ivanka Trump, who has made the issue a top priority during her father’s presidency.
The plan eliminates most itemized deductions, excepting tax incentives for charitable contributions and mortgage interest. In addition, the 9-page framework asks lawmakers to keep tax incentives for retirement savings, higher education, and work.
The plan calls to decrease the top rate on pass-through businesses and to establish measures that would prevent wealthy individuals from reclassifying their income as “business income” in order to avoid paying taxes.
In terms of international changes, the document calls to establish a minimum tax on foreign profits but does not tax dividends from US companies’ foreign subsidiaries. As we transition to the new tax system, there would be a one-time tax on foreign earnings that American companies currently have held in other countries. The details on this rate have not been specified.
On Tuesday, Trump claimed that the incentives in his plan would bring at least $2.5 trillion in foreign investment back into the country.
“This is a once-in-a-generation opportunity to fundamentally rethink our tax code. We can unleash the economy – promoting growth, attracting jobs, and improving American competitiveness in the global market,” said Kentucky Senator Mitch McConnell. “We can lower taxes for individuals and families, so hardworking Americans are able to keep more of their hard-earned money.”
The next step for Republican lawmakers will be to pass a budget resolution that will allow a tax bill to get through the Senate with a 51-vote majority. From there, the House and Senate will have to negotiate a consensus budget resolution. When that has passed through both chambers, it will be up to the Senate Finance Committee and the House Ways and Means Committee to start drafting and amending tax legislation.
The political stakes are high for Republicans, whose tax reform plans have been stalled by repeated efforts to repeal and replace the Affordable Care Act.
Senator Patrick Toomey (R-PA) admits that hard trade-offs are ahead, saying lawmakers will have to find offsets of about $3 trillion over the next 10 years to align the tax plan with the budget resolution.
“We’ve definitely identified the items that can get us there,” said Toomey. “The question is, will we have the political will to do it?”