President Trump has begun stumping for tax reform, starting with an August 30 speech touting his plan in Springfield, Missouri. As Trump himself surely knows, he’ll be lucky to get half of what he wants. Here’s some handicapping on four main aspects of Trump’s plan:
Cutting the top corporate rate from 35% to 15%: Not gonna happen. Many policymakers acknowledge the top US rate of 35% is too high, because other developed nations have been cutting rates and almost all now undercut the US system. That’s why American multinational keep around $2.5 trillion in profits overseas, and some even relocate to other countries.
The problem is a 15% rate would be way too low. Congress will be under heavy pressure to cut taxes without adding much, or anything, to the $19 trillion national debt, and cutting the corporate rate by 20 percentage points would cost the Treasury about $200 billion per year in revenue, according to the nonprofit Tax Foundation, which favors lower taxes. Key Republican Senators, such as Orrin Hatch of Utah, who chairs the committee that will oversee tax cuts, have said 15% is too low. More likely: a reduction to 25% or so, if other tradeoffs limit the revenue los even that would generate.
Bringing back overseas profits at a discounted tax rate: Likely. Congress has declared “repatriation tax holidays” before, and there’s powerful reason to do it again: it would provide some new tax revenue allowing tax cuts elsewhere. The trick is getting the rate right. If it’s too low, Democrats and populists will howl about corporate welfare. If it’s too high, companies simply won’t bring much money home. A repatriation bill Congress passed in 2004 set the temporary rate at 5.25%, and many critics think that did little except inflate corporate profits. A rate between 10% and 15% might be more plausible this time around.
Simplifying the tax code: Sounds good but don’t expect much. Everybody favors a “simpler” tax code in principle, but what that means in reality is stripping out tax breaks that favor constituencies sure to lobby furiously to keep them intact. This is precisely the kind of infighting sure to bog down progress on tax cuts, so Trump may have to toss this priority if he wants legislation by mid 2018 or earlier.
Middle-class tax cuts: Essential, but they’ll probably be modest. There’s virtually no way Republicans in Congress can cut corporate taxes without giving working- and middle-class taxpayers a break as well. As with corporate cuts, however, Republicans are hemmed in by the math. Major cuts that swell the national debt won’t happen, and the tradeoffs meant to keep federal revenue unchanged lead back to the trench warfare over goodies for interest groups that would gum up the whole process. The path of least resistance for Republicans is a package of middle-class tax cuts that appease populists but doesn’t break the bank. If Trump would settle for that, he might be able to declare victory on taxes by the time the 2018 midterm elections roll around.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman