In his bid for the White House, Donald Trump promised tax cuts. Big ones. Lots of ’em. For everyone.
Given that Republicans will control both the House and Senate during at least the first two years of Trump’s administration, the prospects for tax reform have never been better.
But the tax cuts may not be quite as large as Trump has touted.
The reason: His tax plan is seen by experts and deficit hawks as just too expensive, potentially costing between $6 trillion and $7 trillion on the high end.
It’s too early to say exactly how conservative deficit hardliners in Congress will react to Trump’s pricey plans. But Republican leaders in the House have already put forth their own tax reform blueprint, estimated to cost about half as much as Trump’s.
There are some top-line similarities between the House GOP plan and Trump’s. Among them, a bigger standard deduction, only three income tax brackets and generally lower income tax rates for individuals and businesses. And in the latest iteration of Trump’s tax plan, he already raised the income tax rates he originally proposed (10%, 20%, 25%) to conform to those in the House plan (12%, 25%, 33%).
“But just because everyone buys into the premise of tax reform doesn’t mean they agree on all the details,” said Greg Valliere, chief global strategist at Horizon Investments.
And even if they can find agreement and pass something quickly, the changes might not take effect until the fall, Valliere said.
His sentiments were echoed by Kyle Pomerleau, director of federal projects at the Tax Foundation. “They agree on the easy stuff, like having lower rates. But not the hard stuff.”
One example of the “hard stuff” is which tax breaks to keep and which ones to kill. One reason why the House plan is much less expensive than Trump’s is that it eliminates all but two deductions — those for mortgage interest and charitable contributions, Pomerleau notes. Trump’s plan, by contrast, caps the value of itemized deductions at $100,000 for singles or $200,000 for joint filers, a more costly proposal.
There’s also likely to be some negotiations over the tax rates for small businesses and partnerships. Trump wants to lower the business tax rate to 15% from 35% for corporations and 39.6% for sole proprietorships and partnerships. But the House plan would cut the business tax rate to 25%, 10 percentage points higher than Trump.
And it’s very possible that the 12%, 25% and 33% tax rates for individuals may be subject to further negotiation upwards if lawmakers decide they want to make tax reform less expensive. It’s worth noting, too, that the 12% bracket is higher than the lowest rate today, which is 10%.
Lower and middle-income parents actually might do better if Trump adjusts his proposals to the House GOP plan. Under his current proposal millions of families — especially those with single parents — might pay more under Trump’s plan because in addition to hiking the lowest income tax rate, he’d also get rid of personal exemptions and head of household status. Other changes he’s proposed that would favor low-income families won’t be enough to compensate. But the House plan preserves the head of household status and like Trump also expands tax breaks for child care.
There are a couple of areas where there’s likely to be resounding agreement between Trump and the House. Getting rid of all taxes associated with Obamacare, which they plan to repeal, and killing off the estate tax, long a GOP priority.
“The estate tax is history,” said Len Burman, director of the Tax Policy Center.
Estate tax repeal, though, will only benefit the wealthiest Americans. Only about 0.2% of estates every year are subject to the federal estate tax.
