After months of closed-door negotiations, the “Big Six” on Wednesday unveiled its long-awaited plan to rewrite the tax code. The task now is selling the sweeping proposal to rank-and-file lawmakers. Republicans hope to get a bill to President Donald Trump’s desk by the end of the year. Here’s what you need to know about the plan negotiated by the top Republican lawmakers and administration officials:
For individuals: The big surprise here is that Republicans are backing away from plans to slash taxes on the rich. They are floating the idea of some sort of surtax on the well-to-do, though details are scant. That’s a major shift from what Republicans campaigned on in last year’s elections, when they proposed steep tax cuts for the wealthy. But they are trying to head off the inevitable attacks from Democrats, and maybe even win some of their support.
“We are committed to making sure the tax code is at least as progressive as the exiting tax code, that it does not shift the tax burden from high-income to low- and middle-income taxpayers,” a senior administration official told reporters.
Their plan would make a number of other changes to the individual side of the code, including collapsing the number of tax brackets to three from seven, with the top rate set at 35 percent but leaving open the possibility that it could be set higher for some. They would nearly double the standard deduction to $24,000 for couples while getting rid of the personal exemption.
Though many supply-side Republicans are skeptical of the child tax credit, the Big Six is calling for a major expansion of the popular break, while offering no details on how it might be increased. They’re also proposing a new $500 credit for non-child dependents like seniors.
They want to repeal the estate tax along with the alternative minimum tax, which was originally meant to ensure that the wealthy don’t avoid taxes altogether.
The plan calls for keeping education-, retirement- and work-related breaks, without getting into specifics.
The Big Six — which includes the top House and Senate leaders, the chairmen of the two chambers’ tax-writing committees, Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn — didn’t provide specifics about how the individual provisions would work, such as when the different tax brackets would kick in. So it’s hard to know if the aggregate effect of the various changes would really leave the relative tax burden among different groups untouched.
But an administration official says: “When all the pieces add up, that’s what you’ll see.”
For businesses: As expected, the plan calls for cutting the corporate rate to 20 percent, from the current 35 percent. Small businesses would pay 25 percent. Companies would be allowed to immediately write off investment expenses, though only for five years.
On the international front, the U.S. would adopt a “territorial system” where the government would no longer attempt to tax companies’ overseas earnings. At the same time, though, the plan proposes a foreign minimum tax to prevent businesses from moving abroad to avoid U.S. taxes altogether.
“For companies that are operating in tax haven countries, we do want to make sure there is at least a certain level of tax,” the official said.
It would offer a so-called repatriation holiday, allowing multinationals to bring home offshore profits at a reduced tax rate, though the plan offers few details. The corporate alternative minimum tax would be eliminated. The Republican plan would keep a popular research and development tax credit, and also an incentive to invest in low-income housing.
So who are the losers? Not a lot of detail here, though in some ways this is the most important question with Republicans’ tax plans.
It calls for killing a long-standing deduction for state and local taxes. It would also partially reduce a break for business interest expenses, though details are few. Republicans say they will get rid of “most” itemized expenses, though they’re hanging onto some of the largest, including deductions for mortgage interest and charitable contributions.
Republicans will need a lot more than that though to live within the budgets they’re developing. While their plans call for trillions in tax cuts, Senate Republicans are writing a budget calling for a $1.5 trillion tax cut while House Republicans want the plan to be deficit neutral.
How much is this going to cost? No word here, with Republicans saying that will be determined by whatever lawmakers agree to as part of their budget — though the assumption appears to be their plan will ultimately increase the budget deficit. “We are going to have a budget resolution from the House and Senate, which is going to tell us how much we can add to the deficit.”
Other surprises: Republicans aren’t proposing to cut the capital gains rate, though that’s been part of the party’s tax orthodoxy for decades. They also aren’t calling for any changes in the Earned Income Tax Credit, though there has been a lot of bipartisan agreement on expanding this wage supplement for the working poor for childless adults. Currently, the program — the government’s biggest assistance program to the poor — heavily favors those with children.
Sorry Paul Ryan: Though House Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady (R-Texas) have spent an enormous amount of time working on tax reform, the agreement released Wednesday rejected or scales back many of their ideas. Border adjustments — which generally would have taxed imports but not exports — are nowhere to be found, of course. Their other top priority, those business investment provisions — known in the tax world as “expensing” — are only temporary.
The Big Six only agreed to partially reduce the business interest deduction, which House Republicans wanted to eliminate. The plan is committed to maintaining the current progressivity of the tax code, something Ryan has previously rejected.
Unanswered questions: Aside from missing details on how exactly the various provisions would work, there are other TBDs such as how Republicans will prevent rich people from disguising themselves as small businesses in order to tap the lower 25 percent rate. The plan also calls for allowing both expensing and interest deductions, which tax experts across the political spectrum call a bad idea because the combination of the two can allow people to create tax shelters.
What’s next: The next major step for Republicans is passing a budget. They need it to tap the so-called reconciliation maneuver they’re relying upon to muscle their tax plans through the Senate over Democrats’ objections. Without it, their tax plans — at least as currently written — are dead.
Said Brady: “Without a budget, there’s no tax reform.”
The Republican leaders will start selling the plan to rank-and-file members immediately, with a meeting Wednesday at the National Defense University to discuss it.