The chances of a major tax cut package passing next year just got a lot larger. For the first time in years there will be unified Republican control of both chambers of Congress and the White House. Unified party control will likely pave the way for legislative action, including a tax cut.
The starting point for any tax legislation next year will almost certainly be Republican Speaker of the House Paul Ryan’s “A Better Way” tax reform plan released in June 2016. Overall, Speaker Ryan’s tax plan would cut taxes by $4 trillion over 10 years, with about 60 percent of the benefits of the tax cut going just to the top 1 percent of taxpayers.
Of the $4 trillion in tax cuts, more than $2.4 trillion of the revenue loss would come in the form of corporate tax cuts, where Ryan is proposing to lower the corporate income tax rate from 35 to 20 percent, allow for the full and immediate expensing of capital investments and move the international code to a territorial tax system where foreign profits will never be taxed. On the individual side, Ryan’s plan would reduce the progressivity of the tax code by lowering the top marginal tax rate to 33 percent, eliminating the estate tax (even though only the top 0.2 percent of estates owe even a penny of estate tax), creating a special low rate on pass-through business income and reducing the tax rate on capital gains and dividends to 16.5 percent (half the proposed top rate on wage income). To be clear, Ryan’s proposal does include some base-broadening measures such as eliminating most itemized deductions and eliminating the deductibility of net business interest payments, but as the numbers above show, these base broadeners do not come close to making up for the regressivity or cost of the other provisions in the proposal.
For his part, President-elect Trump released a revised tax plan in September, which would lose less revenue than his original plan and is more in sync with Ryan’s plan. Overall, Trump’s plan would cut taxes by $4.8 trillion over 10 years with 44 percent of the cuts going to the top 1 percent of taxpayers. Like the Ryan plan, Trump proposes to cut marginal personal income tax rates. But on corporate taxes, Trump’s plan goes further by lowering the corporate and business pass-through rate to 15 rather than 25 percent. He also would repeal the estate tax. Trump’s plan does differ from Ryan’s in several specific ways, such as capping itemized deductions rather than just eliminating most deductions as Ryan proposed. More broadly however, both Ryan and Trump propose to substantially cut taxes for the wealthy and corporations. For a complete look, ITEP has created a chart with the breakdown of how the plans compare.
One of the biggest questions yet to be resolved is the extent to which Republican lawmakers are interested in making tax reform legislation bipartisan. Republican Senator and Chairman of the Finance Committee Orrin Hatch indicated his intention to move any tax reform legislation in the committee on a bipartisan basis. If this is the case, it could have major implications as Democrats would likely push for the legislation to be less costly or even have a revenue-neutral impact. Additionally, Democrats would likely push for more tax breaks targeted to low-income individuals and for reductions in the amount of cuts going to the wealthiest taxpayers.
If Trump and the Republican leadership decide against a bipartisan approach or such efforts break down, there is also a path for lawmakers to pass tax reform legislation with little to no input from Democratic lawmakers. The key is that Republicans could use a legislative maneuver know as budget reconciliation to pass the tax reform bill, which could allow them to sidestep any efforts by Democrats in the Senate to filibuster the package. This is precisely the approach Republicans took to pass the Bush tax cuts in 2001 and 2003.
At a time of growing deficits and income inequality, it remains to be seen whether public pressure can scale back the cost and regressive impact of the tax cuts for the wealthy and corporations. Unfortunately, unless the public and lawmakers stand up for progressive taxes, that is exactly the direction we are heading under the leadership of the Trump administration.