Trump Taking New Approach on Tax Reform

Trump Taking New Approach on Tax Reform

White House aides have told the Associated Press that President Donald Trump has decided to scrap the tax reform plan he campaigned on and start from scratch as a way to bring in more Republicans.

Trump and House Republicans already endured one defeat when many Congressional Republicans would not vote for their healthcare plan. The White House wants to take a more active role with tax reform so failure does not happen again.

From The White House

The aides explained to the AP that the legislation remains in the “early stages and the White House has kept much of it under wraps.” But one proposal includes “a drastic cut to the payroll tax, aimed at appealing to Democrats.” Trump would like to “cut tax rates sharply enough to improve the economic picture in depressed rural and industrial pockets of the country where many Trump voters live.” However, he has decided not to accept many “alternative ways for raising revenues, such as a carbon tax, top offset rates.” The Associated Press continued:

Other options are being shopped on Capitol Hill.

One circulating this past week would change the House Republican plan to eliminate much of the payroll tax and cut corporate tax rates. This would require a new dedicated funding source for Social Security.

The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform [Rep. Kevin] Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place.

This approach would give a worker earning $60,000 a year an additional $3,720 in take-home pay, a possible win that lawmakers could highlight back in their districts even though it would involve changing the funding mechanism for Social Security, according to the lobbyist, who asked for anonymity to discuss the proposal without disrupting early negotiations.

The AP also reported that the administration has “shut out the economists who helped assemble one of his campaign’s tax overhaul plans.”

Like I said, the White House does not want a repeat of the healthcare fiasco. The House Republicans could not find enough votes to pass the healthcare bill, mainly from the Freedom Caucus. Last week, that caucus also warned the GOP leadership on tax reform. From Politico:

The head of the ultra-conservative group said Monday evening that lawmakers need to see the draft of a tax overhaul bill before it’s leaked to the media — which is what happened on the health care repeal bill. That measure failed in large part because it was written by leadership, and Freedom Caucus members felt they had no input.

“When a member sees the text for the first time in a leaked draft from Politico, therein is a problem,” said Rep. Mark Meadows (R-N.C.).

Trump’s Old Tax Plan

In September 2016, then-candidate Trump released his plan called “Tax Reform That Will Make America Great Again.” His goals in this plan included tax relief for the middle class, a simplified tax code, and reform that would not add to the debt or deficit.

Trump’s plan wanted to eliminate income tax for single people who made less than $25,000 and married couples who jointly earned $50,000. Trump suggested that all businesses, regardless of size, would not pay more than 15% of the business income in taxes. The plan also eliminated the death tax.

He also proposed four brackets instead of seven:

House Tax Reform Plan

I have reported numerous times about the tax reform plan that has floated around the House. Trump has not shown any commitment to a plan touted by Rep. Kevin Brady (R-TX), the chairman of the House Ways and Means Committee. Brady has suggested a border adjustment tax, which has received backlash from his colleagues in the House and the Senate. From The Wall Street Journal:

A border-adjusted tax would impose a levy on imports, including components used in manufacturing, and exempt exports altogether. Opposing it are retailers, car dealers, toy manufacturers, Koch Industries Inc., oil refiners and others that say it would drive up import costs and force them to raise prices.

Speaker Paul Ryan (R-WI) or Brady have not released a tax bill yet so we do not have exact details on how they plan to make this work. But the plan might add this tax “to the U.S. corporate income tax, which is expected to drop to 20% from 35%”

The GOP expects this idea “to raise roughly $1 trillion over a decade, and could offset the cost of cutting corporate-tax rates.” Since the country “imports more than it exports” we now have a trade deficit. With this approach, the country will raise “money by effectively taxing the trade deficit.”

The tax also will supposedly remove “the incentive to book profits outside the U.S. or to put a country’s legal address outside the U.S. for tax purposes.” The Wall Street Journal reported that this move “could remove significant complexity from the tax system.”

Timeframe

In March, the White House and Secretary of Treasury Steven Mnuchin wanted tax reform finished by August.

But even then, Senate Majority Leader Mitch McConnell (R-KY) said that most likely would not occur. From CNBC:

“I think finishing on tax reform will take longer. But we do have to finish the health-care debate, up or down, win or lose, before we go to taxes,” McConnell told Politico.

In an interview with The Financial Times, Trump appears to have dropped the timeframe:

Can you cut a deal on tax reform this year, and what would the terms be?

Well, I don’t want to talk about when and I don’t want to talk about timing. We will have a very massive and very strong tax reform. But I am not going to talk about when . . .

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