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Financial Planning > Tax Planning > Tax Deductions

Democrats plotting ‘collision course’ with Trump’s tax plan

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(Bloomberg) — Congressional Democrats say they’ll try to thwart Republican plans to overhaul the U.S. tax code by portraying them as a boon for the rich that betrays President-elect Donald Trump’s campaign promise to fight for working Americans.

“There’s going to be opposition if these tax cuts are directed to the people at the top again,” said Rep. Richard Neal, the Massachusetts Democrat who represents his party’s first line of defense as the next ranking member of the House’s tax-writing Ways and Means Committee. “We’re going to be pretty united.”

Neal and others say they’ll zero in on upper-income tax breaks pitched by Trump and House leaders in an attempt to make it politically difficult for Republicans to support large parts of the emerging plans. Their initial comments suggest that the 115th Congress, which convenes Jan. 3 with a Republican-led agenda of instituting a broad tax overhaul and repealing Affordable Care Act, will be peppered with debate over income inequality.

Related: Republicans find replacing the ACA easier said than done

Trump and House Speaker Paul Ryan of Wisconsin have endorsed across-the-board cuts in individual income tax rates. After Republicans took the White House and held onto majorities in Congress in November’s elections, both say they aim to achieve the most far-reaching overhaul of the U.S. tax system in a generation. Details remain to be filled in; for example, Ryan and others envision dramatic changes for corporate taxation that Trump’s economic team has yet to embrace.

Trump’s ‘contract’

Trump has sought to portray his plan as a pro-growth simplification of the tax code that would benefit the middle class. In a “Contract with the American Voter” published before the election, his campaign said of his proposal: “The largest tax reductions are for the middle class.”

Democrats plan to challenge this claim. “His populist image and the reality of his policies are on a collision course,” said Rep. Keith Ellison of Minnesota, a candidate for Democratic National Committee chairman. “And they’re going to crash.”

Consider two major provisions on which Trump’s and Ryan’s plans agree: First, they’d compress the existing seven individual tax brackets to three, cutting rates generally across the board. Yet the largest cut would be in the top rate, to 33 percent from 39.6 percent. That rate applies only to those with incomes well within the top one percent. Second, their plans would abolish the estate tax, which currently applies only to estates worth more than $5.45 million for individuals and $10.9 million for couples. Data from the Internal Revenue Service and the U.S. Census Bureau show that far less than one percent of the people who die each year pay any estate tax.

An independent analysis of House Republicans’ “blueprint” found that while households at all income levels would pay less tax, “the highest-income households would receive the largest cuts, both in dollars and as a percentage of income.” The very rich  —  the top 0.1 percent of U.S. earners, or those with incomes over $3.7 million chr(8212) would see after-tax incomes rise by almost 17 percent. At the same time, the bottom three-fifths of households would see average gains of 0.5 percent or less, according to the analysis by the Tax Policy Center, a Washington think tank that’s a joint venture of the Urban Institute and the Brookings Institution. Three quarters of the total tax cuts would go to the top 1 percent, that study found.

Another study of the House Republicans’ plan, by the more conservative Tax Foundation, came to a similar, if less pronounced, conclusion: On a “static” basis  —  that means, without accounting for the tax plan’s effects on the larger economy  —  the bottom 80 percent of taxpayers would see an increase in after-tax income of no more than 0.5 percent, while the top 1 percent would see a 5.3 percent increase. After factoring in macro-economic effects, the Tax Foundation found that all taxpayers would see an increase in after-tax income of at least 8.4 percent  —  but the top 1 percent would see a jump of 13 percent.

Social Security lesson

Democratic leaders haven’t put forth a tax plan of their own to counter the House Republican proposal; Neal said Democrats intend to introduce alternatives soon but didn’t provide details, saying only that any tax breaks should be targeted at the middle class.

The party will draw lessons from earlier fights when it was able to block changes despite lacking control of the White House and Congress, said Drew Hammill, the deputy chief of staff for House Minority Leader Nancy Pelosi of California. He cited the example of Democrats defeating Republican efforts to privatize Social Security in 2005.

Replicating that feat may prove difficult. In the prior instance Democrats successfully framed the privatization push as one that would imperil the wildly popular safety-net program and hurt senior citizens’ benefits, while their opponents struggled with internal divisions over the plan. Republicans today are more united, at least in principle, when it comes to reducing taxes — as well as undoing Obamacare.

Moreover, the tax plan’s promise of rate cuts for all may be attractive enough to survive arguments that it favors those with higher incomes.

In response to questions during a “60 Minutes” interview this month about the fairness of his party’s plan, Ryan emphasized that “everyone gets lower tax rates, but we plug loopholes to pay for it.”

Steve Mnuchin, Trump’s planned nominee for Treasury Secretary, made a similar argument in November, telling CNBC that any tax cuts for those with the highest incomes would be offset by a reduction in the number of deductions they can claim. Consequently, he said, there’d be no “absolute” tax cut for the upper class.

Experts have questioned whether that kind of trade-off is possible. Howard Gleckman, a senior fellow at the Tax Policy Center, wrote that Mnuchin’s assertion bore “little resemblance to any of the multiple plans that Trump proposed during the campaign.”

Related: Wall Street partners targeted for ACA tax in budget plan

Potential lines of attack focused on investors and investment managers emerged in a Dec. 8 memo authored by Democratic staff members on the Senate Finance Committee. House Republicans’ plan to cut the top tax rate on long-term capital gains to 16.5 percent from 20 percent, while abolishing the net investment income tax, a 3.8 percent investment-income tax that was part of Affordable Care Act, would be a major benefit for high earners, it said.

Carried interest

“The top 0.1 percent realize about half of all capital gains,” the memo said, arguing that the primary effect of cutting the rate would be “rewarding rich people for investments they would have made (or already have made) anyway.”

The memo also noted that by lowering capital gains taxes, the House plan might provide a tax benefit for many investment-fund managers, who are paid via “carried interest,” a portion of their funds’ returns. Trump has said carried interest should be taxed as if it were ordinary income, not capital gains. “Hedge fund guys are getting away with murder,” he said in August 2015, some two months after launching his presidential bid. But the House’s tax blueprint doesn’t recommend changes in the tax treatment of carried interest.

Asked to respond to Democrats’ initial criticisms, a spokeswoman for the lawmaker who will lead the Republicans’ tax-overhaul fight signaled that the party will cast its plans as being good for everyone.

“We are working on a tax code built for growth that will improve the lives of all Americans,” said Emily Schillinger, a spokeswoman for Rep. Kevin Brady, the Texas Republican who chairs the Ways and Means committee. Republicans have three main goals for tax policy, she said: speed economic growth, simplify the rules and laws, and redesign the IRS “to focus on customer service.”


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