On Tuesday night, the President will speak to a joint session of Congress, where he could finally outline details of a major overhaul to the personal and corporate tax system. Last week, Treasury Secretary Steven Mnuchin told CNBC that the administration is “primarily focused on a middle-income tax cut and simplification for business. And what we are focused is that on the high end, if there are tax cuts, that they are offset with reduction of deductions and other things.”
During the campaign, candidate Trump released a tax plan that would reduce the number of tax brackets to three (12%, 25%, 33%), which would shrink the total tax bill taxes for most Americans. The plan also called for a higher standard deduction and childcare benefits; eliminated head-of-household filing status; capped itemized deductions; and limited exemptions. Even with limitations to deductions and exemptions, the biggest tax cuts would flow to those at the top of the income distribution.
According to the Tax Policy Center (TPC), a joint venture of the Urban Institute and Brookings Institution, the highest-income taxpayers (0.1 percent of the population, or those with incomes over $3.7 million in 2016 dollars) would experience an average tax cut of nearly $1.1 million, over 14 percent of after-tax income. Those in the middle fifth of the income distribution would receive an average tax cut of $1,010, or 1.8 percent of after-tax income, while the poorest fifth of households would see their taxes go down an average of $110, or 0.8 percent of their after-tax income.
One other big finding from TPC: Trump’s proposed plan, including interest costs, would increase the federal debt by $7.2 trillion over the first decade and by $20.9 trillion by 2036. Trump argued that his fiscal plans would increase US economic growth to 3.5 or 4 percent annually, a sizable jump from the 2-2.2 percent GDP over the past few years, not only by revamping the personal tax code, but also by slashing and restructuring the corporate tax code. Trump claimed that accelerated growth would make up for the cuts in revenue and therefore, would not increase the deficit.
Separately, in June 2016 the House GOP released its blueprint for broad income tax reform. Like the Trump plan, it would reduce tax rates across the board, but it also would close loopholes, which lawmakers claim would make the plan revenue neutral. The Tax Policy Center did not agree with that assertion and found that the House GOP plan would reduce federal revenue by “at least $3 trillion over the first decade and by least $6.6 trillion over the second ten years.”
Another component of the GOP plan is a change to the corporate tax code, to incorporate a “destination-based cash flow tax (DBCFT).” Here’s what that would practically mean: the government would end the current practice of taxing global profits and replace it with a system that would tax only US earnings. Part of the new system would include a “border adjustment tax,” which would tax imports, but not exports. According to Kevin Brady, the chairman of the House ways and means committee, the new plan “eliminates every tax incentive for a US company to move jobs, manufacturing or their headquarters overseas.” More importantly, the border adjustment tax would provide roughly $1 trillion of revenue.
But there are a few issues with the border adjustment tax. As President Trump noted, the plan is “complicated”. And while US manufacturers back the plan, big retailers like Wal-Mart and Target, which rely on imports, claim the new plan would force them to raise prices and/or cut jobs. Additionally, it would hurt those companies that import crude oil from other countries, which could lead to higher prices at the pumps. GOP funders Charles and David Koch, whose company relies on imports, say the plan would “distort” the market.
Economists believe that the border adjustment tax would not necessarily be so damaging, because currency markets would likely equalize the effects of the changes. In other words, the whole world will react to the changes, leading to a rise in the US dollar, but critics say that currency markets are impacted by a variety of factors and count be counted on to balance out the effects from the new plan. And of course, a stronger dollar would impact everything from world commodity prices (which are priced in greenbacks) to foreign governments that borrow in dollars and earn local currency.
Given the pushback and the potential unintended consequences of the border adjustment tax, it is not clear whether or not President Trump will incorporate these vast changes into his proposal. Mnuchin said that the administration is “looking at” the border adjustment tax because it has “interesting aspects,” but he also said “there are some concerns.”