By Anna Edgerton, Ben Brody and Sahil Kapur
(Bloomberg) --President Donald Trump and Republican leaders launched an urgent effort to get a major legislative win this year, announcing a long-awaited tax plan that will immediately set off a fight over how much top earners should pay.
The framework proposes cutting the top individual rate to 35 percent -- but leaves it up to Congress to decide whether to create a higher bracket for those at the top of the income scale, according to the document released Wednesday.
The rate on corporations would be set at 20 percent, down from the current 35 percent, and businesses would be allowed to immediately write off their capital spending for at least five years. Pass-through businesses would have their tax rate capped at 25 percent.
U.S. stocks pushed toward all-time highs, with a Goldman Sachs basket of companies that pay the highest tax rates pacing gains. The group added 0.5 percent at 10:20 a.m. in New York, poised to outperform the broader market for a sixth straight day.
The plan sets out three tax brackets for individuals -- 12 percent, 25 percent and 35 percent, down from the existing seven rates, which top out at 39.6 percent. But that’s not firmly set, as congressional tax-writing committees will be given flexibility to add a fourth rate for the highest earners -- an effort to prevent the overhaul from providing too much of a benefit for the wealthy.
There’s significant support among Republican members of the tax-writing House Ways and Means Committee to create a special top income-tax bracket for the highest earners, according to a GOP member of the panel who asked not to be named because discussions are private. Still, House Ways and Means Chairman Kevin Brady of Texas has said he’s committed to offering across-the-board tax relief. Trump has repeatedly said he’s focusing on middle-class individuals.
At the same time, though, the tax plan calls for repealing the alternative minimum tax, the estate tax and the generation-skipping estate tax, all of which would be a boon for higher earners and the wealthy.
“The last thing we should be doing right now is providing hundreds of billions in tax breaks to the wealthiest people and most profitable corporations in this country,” Senator Bernie Sanders, a Vermont independent who caucuses with the Democrats, said in an emailed statement. “It is particularly obscene to repeal the estate tax that would provide a $269 billion tax break to the top 0.2 percent.”
The release of the plan -- which Trump will tout Wednesday during a speech in Indiana -- is the result of a months-long process to craft a tax overhaul that was a key promise in Trump’s campaign. But it marks only the start of what could be a brutal fight in Congress among lawmakers who disagree on key elements of the framework. One influential skeptic has been Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, who pledged his committee would not be a “rubber stamp” for the plan.
Other Republicans cheered the plan. “At first glance, the policies released today are good news to the American people,” Representative Mark Walker of North Carolina, chairman of a large conservative caucus, said in statement. “We need to begin acting on this framework legislatively as soon as possible.”
Trump selected Indiana for the speech because of the manufacturing resurgence experienced during the tenure of Vice President Mike Pence, who served as the state’s governor before his election last year. Democrats have attributed increases in manufacturing to recovery programs championed by former President Barack Obama. The speech is expected to include references to Indiana citizens who believe they would benefit from the proposed changes to the tax code.
The tax effort begins one day after Senate leaders decided not to move forward with a vote on repealing Obamacare, one of the most central promises of Trump’s presidential campaign. But Trump has said that tax legislation -- which he calls essential for stimulating economic growth -- has been his main focus.
Trump has told others that he expects lawmakers to work at a brisk pace. If not, he and the Republican Congress would end 2017 without a single major legislative victory.
On the international side, the plan would move toward a “territorial” approach that would scale back the U.S.’s unique worldwide approach to taxing corporate profits regardless of where they’re earned. But it includes “rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.” The amount of that reduced rate isn’t specified.
Companies with accumulated offshore profits would be subject to a one-time tax on those earnings -- clearing the way for that income to return to the U.S. The rates that would be applied are unclear, but there would be a higher rate for income held in cash compared to the rate for less liquid investments. Firms would be able to pay the new tax over several years.
Under current law, companies can defer paying U.S. tax on their offshore earnings until they bring them to the U.S. As a result, U.S. firms have stockpiled an estimated $2.6 trillion in profit offshore.
So-called pass-through entities, which include partnerships and limited liability companies, would see their rate capped at 25 percent. Currently, those businesses -- which can range from mom-and-pop grocers to hedge funds -- don’t pay income tax themselves but pass their earnings through to their owners, who then pay tax based on their individual rates.
While the pass-through rate cut would represent a major tax break for lucrative pass-throughs, tax-writers would craft measures aimed at preventing individuals from recharacterizing their personal wages as business income.
In terms of middle-class benefits, the framework outlines a near doubling of the standard deduction -- to $12,000 for individuals and $24,000 for married couples -- and calls for “significantly increasing” the child tax credit from the current $1,000 per child under 17. It would also expand eligibility to include more upper-middle class parents.
The tax plan still lacks extensive details about ways to offset its rate cuts with additional revenue. It says most itemized deductions for individuals should be eliminated, without providing specifics -- while calling for mortgage interest and charitable giving deductions to be preserved. The tax exemption for municipal bonds would also be retained.
However, the state and local tax deduction would be abolished. Ending that break, which tends to benefit high-income filers in Democratic states, would raise an estimated $1.3 trillion over a decade. The move faces some Republican headwinds from lawmakers in districts that use the deduction heavily.
The plan would also limit the interest deduction companies can take on their borrowing, but no additional details were provided. Congress’s tax-writing committees will be tasked with limiting other business credits to help generate additional revenue.
House leaders have proposed abolishing the corporate interest deduction, a move opposed by debt-reliant industries like private equity and commercial real estate. Senate leaders, including Hatch and John Thune of South Dakota, the chamber’s No. 3 Republican, have said they want to maintain the deduction at some level at least.
The lack of consensus on how to offset tax cuts -- a prerequisite to making them permanent under the procedure that Senate leaders plan to use to pass the legislation -- poses hurdles. If they fail to raise enough money to avoid a long-term hit to the deficit, at least part of the package would have to expire within a decade under current rules.
But as tax writers surface ideas to raise revenue by closing loopholes or ending specific tax breaks, they’ll unleash a torrent of lobbying similar to the campaign that killed a proposed border-adjusted tax earlier this year.
“We’re already working on it,” said Carlos Curbelo, a member of the Ways and Means panel, in reference to finding offsets.
“There are a number of pay-fors out there that are not just pay-fors, but also good elements of tax reform that will level the playing field across the economy and lead to greater growth,” said Curbelo, a Florida Republican. He said the committee’s goal is to make the tax changes as permanent as possible.
“So we’re in search of it and we’re getting close, very close,” he said.
--With assistance from Justin Sink.To contact the reporters on this story: Anna Edgerton in Washington at [email protected] ;Ben Brody in Washington at [email protected] ;Sahil Kapur in Washington at [email protected] To contact the editors responsible for this story: Alexis Leondis at [email protected] Justin Blum