As President Trump prepares to unveil his “massive” tax cuts on Wednesday, an outline of his plan is starting to emerge. According to reports from the Wall Street Journal, it’s basically the same as what he’s been touting all along: trillions of dollars in tax cuts for corporations and owner-operated businesses (“pass-throughs”), plus a small tax break for child care expenses.
And we still don’t know how he plans to pay for it all, because he’s not including the border adjustment tax proposed by House Republicans, which would have offset some of the lost revenue by about $1 trillion over 10 years.
The only provision so far that will raise some money is a one-time 10 percent tax on foreign profits that US multinational corporations have stashed overseas. Right now, American companies have $2.6 trillion in untaxed income earned abroad — a move many use to avoid paying the 35 corporate tax rate. Trump’s “repatriation holiday” is supposed to encourage them to bring that money back at a lower tax rate, though there is no telling how many companies would do so.
The Washington Post has also reported that the White House wants to increase the standard deduction for working families, though it’s unclear by how much.
A drastic tax break for corporations
Trump’s primary goal appears to be lowering the corporate tax rate from 35 percent to 15 percent, according to the Wall Street Journal. It’s a drastic cut, and lower than the 20 percent rate proposed by House Republicans. The 15 percent rate alone could cost $2.4 trillion over 10 years, according to budget estimates.
Lowering the corporate tax rate is a popular idea, particularly because the United States has one of the highest in the world. This has encouraged multinational corporations to shift billions of profits to lower-tax countries as a way to decrease their tax bill.
Leonard Burman of the Tax Policy Center worries that a 15 percent rate could also create a loophole for wealthy taxpayers:
Combining a corporate tax rate of 15 percent with a top individual rate of 37 percent (another likely Trump proposal) would create a powerful incentive for wealthy people to squirrel away a large portion of their assets in a corporation. They’d pay 15 percent tax on profits versus 20 percent on capital gains and dividends or 37 percent on interest, rents, or royalties. If they hold their corporation until they die, they could transfer their assets tax-free to heirs, who could continue to accumulate lightly-taxed profits by simply keeping the assets in the corporation.
A huge tax cut for pass-through businesses
One of the more questionable proposals yet is Trump’s decision to stick to his plan to lower the tax rate for owner-operated businesses, known as pass-throughs, from 39.6 to 15 percent. The vast majority of pass-through businesses are already taxed at a 15 percent rate, so lowering the top rate would disproportionately benefit the wealthiest of them, mostly hedge fund managers, lawyers, and doctors, according to the Center on Budget and Policy Priorities. It would also be a major benefit for Trump, as most of his businesses are pass-throughs.
Another concern about such a major cut on pass-through taxes is that it will encourage individuals to report their wages as business income as a way to avoid paying up to 33 percent in individual taxes (33 percent is the top individual tax rate proposed by House Republicans). That would create a huge loophole, and the Tax Policy Center believes such tax avoidance would cost $650 billion.
It would be hard to prevent such gaming. Congress and the IRS already struggle to design and enforce rules preventing high earners from reclassifying their wages as “business income” to avoid payroll taxes, and this tax break would create an even greater incentive to use such schemes.
Child care tax breaks will be included
Trump is planning to include child care tax breaks as part of his plan. From the Wall Street Journal:
Mr. Trump also plans to include a tax break for child-care expenses, similar to the one he proposed during the campaign at the urging of his daughter, Ivanka, now one of his top advisers in the White House.
During the campaign, Trump proposed using tax credits, a tax deduction, and child care savings accounts to help cover the cost of child care for some Americans. Then, as now, the idea was attributed to his daughter Ivanka.
Under that plan, lower-income families — either single parents making $31,200 a year or less, or two working parents making $62,400 or less — would qualify for a refundable tax credit to cover child care expenses. (A “refundable” tax credit means that if the credit ends up being more than the taxes you owe, the government pays you the difference.)
Taxpayers could also deduct the cost of child care from their income. Single parents making $250,000 or less, or couples making $500,000 or less, would qualify.
Both tax benefits would be capped at a certain rate, based on the average cost of child care in the state where the family lives.
Trump’s campaign plan also allowed people to contribute up to $2,000, per child per year, tax-free into a dependent care savings account. They could then use that money to pay for child care.
The bottom line of all these policies, though, is that they would largely benefit Americans with higher incomes. From the Tax Policy Center:
Our analysis finds that about 70 percent of benefits go to families with at least $100,000 and 25 percent of benefits go to families with at least $200,000. Very few benefits go to the lowest income families who are likely to struggle most with paying for child care.
Trump won’t back controversial border tax
The most hotly debated tax proposal over the past few months was what’s called a border adjustment tax.
The tax is complicated, but the gist is this: Companies would not be taxed on goods they export out of the United States, but would be taxed on goods they import into the US. It would fundamentally change how American businesses are taxed, prioritizing domestic production.
This was a key part of the House Republican plan — and it was essential to raising revenue so the plan would pay for itself and comply with the complex Senate rules that allow Republicans to pass a bill with a bare majority in the upper chamber.
But it looks like Trump is going to kill the concept. Per the New York Times, “The Trump administration has dropped any support for a so-called border adjustment tax on imports, according to two people who have been briefed on the matter.”
This is important for two reasons. First, politically this decision puts the White House fundamentally at odds with House leaders on a crucial piece of the latter’s plan.
Second, it removes another tool from Trump’s toolbox if he is serious about making the hard choices necessary to ensure his plan is deficit-neutral. The Tax Foundation had estimated that the tax would raise $1.1 trillion over 10 years.
Though, as we documented earlier, Trump may instead be positioning himself to use unrealistic economic projections, showing the tax cuts fully paying for themselves, to get around that issue.