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The new Republican tax plan, explained

Congress and the administration have put together a joint “framework.” Here’s what it does.

President Trump Speaks On Infrastructure Meeting Held At Trump Tower
NEC director Gary Cohn, Treasury Secretary Steve Mnuchin, and President Trump.
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Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

On Wednesday, President Donald Trump is set to unveil a framework for tax reform, building off work done by the so-called Big Six: a group of top tax policymakers in the Trump administration (Treasury Secretary Steve Mnuchin and National Economic Council director Gary Cohn), the Senate (Majority Leader Mitch McConnell and Finance Committee chair Orrin Hatch), and the House (Speaker Paul Ryan and Ways and Means Committee chair Kevin Brady).

The framework is not a complete piece of legislation. Key aspects of it, including what the corporate tax rate and the top individual income tax rate will be, are not yet determined.

But during a Tuesday background briefing for reporters, senior administration officials offered the clearest statement to date on how Republican leaders are planning to tackle tax reform. Their plan seeks to radically cut corporate taxes (including totally exempting income earned overseas from taxation), to collapse individual tax rates to three (or maybe four — they’re not sure yet) brackets, and radically expand the standard deduction and child tax credit for individuals.

Perhaps the most important goal they laid out, though, is a promise that will dominate the debate and analysis, and will likely prove impossible for them to meet. According to a senior administration official, the goal is a tax code that is “at least as progressive as the current system and doesn’t shift the burden from higher-income to lower-income households.” That’s a very high bar, similar to the one set by Mitt Romney’s campaign in 2012; famously, independent researchers found that the tax cuts he was promising couldn’t meet the standard he set.

The same appears to be true of the Trump/Ryan Framework. “It’s impossible to say what the precise distributional effects will be without more details, but I don’t think it is at all plausible that the framework will maintain the current level of progressivity,” Lily Batchelder, a professor of law and public policy at NYU and a former top tax policy aide to President Barack Obama and Senate Finance Committee chair Max Baucus, says. “It’s about as likely as the president never tweeting again.”

Batchelder and other experts note that the framework is very similar to the “Better Way” proposal unveiled by Ryan, Brady, and other House Republicans in 2016. The Tax Policy Center has found that the Better Way plan is extremely regressive. In its first year, the Better Way proposal would increase after-tax incomes for people making more than $1 million a year by 14.7 percent (or $329,530) on average, but middle-class families making between $50,000 and $75,000 would only see a bump of 0.5 percent, or $270. By 2025, fully 99.6 percent of the benefits from the plan would go to the top 1 percent.

This is the plan the Trump tax framework seems to be modeled after.

“It seems extremely unlikely” that the plan would maintain current levels of progressivity, Leonard Burman, a senior fellow at the Urban Institute and professor of public administration at Syracuse University, says.

What the Republican tax framework says

The basics of the new tax reform framework (which draws on Trump’s campaign plans in addition to the Better Way proposal) are:

  • The seven current individual income tax brackets will be consolidated to three: 12, 25, and 35 percent. The framework also specifies that Congress can add a fourth bracket above 35 percent, for the purpose of ensuring the new tax code is “at least as progressive as the current system and doesn’t shift the burden from higher-income to lower-income households.”
  • The standard deduction will be raised to $24,000 for couples and $12,000 for individuals, a near doubling from current levels.
  • The child tax credit, currently $1,000, will grow to an unspecified higher level. It will also be expanded to more high-income households; it currently phases out at $75,000 in income for single parents and $110,000 for married couples.
  • (Sens. Marco Rubio (R-FL) and Mike Lee (R-UT) have spent months working with Ivanka Trump, and persuaded her to abandon her plan to add a tax deduction for child care in favor of an increased child tax credit. It appears that the Big Six have adopted this approach as well.)
  • The personal exemption (currently offering households $4,050 per person in deductions) is eliminated, replaced by the higher child credit and standard deduction.
  • Mortgage interest and charitable deductions would remain but almost all other tax deductions would go, including the deduction for state and local taxes. Retirement incentives like 401(k) and IRA provisions, as well as the exclusion for health care, would remain.
  • The corporate income tax rate will be lowered from 35 percent to 20 percent.
  • The corporate tax will be “territorial”: Foreign income by US companies will be tax-free, and all untaxed income currently held oversees will be immediately taxed at a fixed rate. This one-time tax will have different rates for money held in cash (or bonds, stock, etc.) and for money invested abroad in harder-to-sell assets like factories.
  • Instead of having companies “depreciate” investments by deducting them over several years, companies could immediate expense all their investments. This benefit would last at least five years but might go away after that.
  • Companies would face a limit on how much debt they can deduct from their taxable income, a significant change for highly leveraged companies like banks; Mnuchin had signaled skepticism about this provision, which makes its inclusion a little surprising. Interest deductibility wouldn’t go away completely however.
  • “Pass-through” companies, which are overwhelmingly owned by rich individuals like Donald Trump, would pay a lower 25 percent rate rather than the top individual rate (which they pay currently).
  • Two big existing credits for corporations — the Research & Development tax credit and the Low Income Housing Credit — won’t be repealed.
  • The Alternative Minimum Tax, which increases taxes for certain affluent or upper-middle-class households, is repealed.
  • The estate and gift tax, the most progressive component of the federal tax code, only paid by extremely rich estates, is abolished.

What we still don’t know

The framework still leaves a huge amount unspecified. For one thing, two of the most contentious parts of the package — the lower top individual income tax rate and lower corporate rate — are not given a specific number. But the problem is deeper than that. The framework also fails to say:

  • Where the individual bracket thresholds are: e.g., when the 12 percent bracket stops and 25 percent begins.
  • If there will be a fourth tax rate for rich people with $410,000 or more in taxable income (the current group paying a 39.6 percent marginal rate), and if so, what it will be.
  • What the child tax credit will be increased to, or whether it will be expanded to more low-income families who are currently ineligible.
  • Which corporate tax breaks will be closed, beyond taxing more interest on corporate debt.
  • How the plan will avoid having companies relocate operations to generate foreign income, which will now be exempt from US taxes; White House officials say provisions will be developed to address this problem, but offered zero specifics.
  • How much interest deductibility will be limited
  • How long full expensing of investments will be allowed

And then there are the two big questions about any tax reform effort: How much will this cost, and who will it help or hurt?

Senior administration officials talking to reporters insisted that they wanted it to be revenue-neutral — but that’s after taking the economic growth they think the tax plan will create. A key question, then, is how optimistic those estimates are.

Past versions of Trump’s tax plan have been estimated to cost trillions over 10 years, about $3.5 trillion in one recent estimate. And because most analysts assume that corporate tax cuts mostly benefit shareholders (who are very wealthy), it’s likely that analyses of the distribution of Trump’s plan will show it mostly helping top earners, not the middle class.

But it’s hard to know if the plan really is reasonable in cost, and really does hold the middle-class harmless, without more details, especially about what the brackets are and what their thresholds are.

One analysis of Trump’s campaign plan concluded that its changes, which bear strong similarities to the framework, would leave millions of middle-class families worse off. We don’t know if the same is true of the current plan. We can’t know without more details.

How will the Trump administration define “progressive”?

What does seem clear is that the plan is unlikely to be as progressive as the current code, despite the Trump administration’s promises.

“This is a very large tax cut for capital/business, which will go disproportionately to the very top,” David Kamin, an NYU law professor who also served in the Obama administration, says of the new White House/congressional plan. “And they do not have anything close to enough offsets to cover it.”

Perhaps the only way the Trump administration could meet its promises, Burman reasons, is by redefining them: If by “equally progressive” the administration and congressional GOP mean that each income group will see an equivalent percentage decrease in their tax burden, perhaps that could work. But because the federal tax code is already progressive, an equivalent decline in tax burden would amount to a much larger cut — both in dollars and as a share of actual income — for the rich than the middle-class. And it is unlikely the public will believe that the resulting legislation is fair.

A similar trick would be to measure progressivity by the share of taxes paid by each group — so if, say, the richest 1 percent currently pays 25.4 percent of federal taxes and the poorest 20 percent pays 0.8 percent of them, the new plan will commit to keeping those shares the same. “That is a horrendous way to measure progressivity when tax levels are changing,” William Gale, a senior fellow at the Brookings Institution specializing on tax policy, says.

“Suppose in system 1, poor guy pays $1, rich guy pays $1 million,” Gale explains. “Then they reform the tax system so that poor guy pays zero and rich guy pays $1. Is this a progressive change? Obviously not by common sense standards — the rich guy got a $999,999 tax cut, which is (let’s assume) a bigger share of his income than the $1 tax cut the poor guy got. But if you look at share of taxes paid, the share paid by the rich guy went up — to 100%.”

The White House declined to specify what exact measure of progressivity they’re using. But from what we know about this bill, and its massive cuts to progressive taxes like the corporate tax, AMT, and estate tax without corresponding increases in the wealthy’s taxes, it’s hard to imagine its gains won’t be concentrated at the top, giving a bigger break to top earners than the middle class.

Join the conversation

Are you interested in learning more about tax reform? Join us for a tax reform Q&A with economist Jared Bernstein, senior fellow at Center on Budget and Policy Priorities and former Chief Economist and Economic Adviser to Vice President Joe Biden, on September 29 at 2 PM in The Weeds Facebook group. RSVP to the Facebook invite to receive a reminder notification on Friday.