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‘Mnuchin Rule’ Against Wealthy Tax Cuts Comes Back to Bite Him

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(Bloomberg) — A pledge not to give the wealthiest Americans an absolute tax cut is coming back to haunt Treasury Secretary Steven Mnuchin.

During congressional hearings this week, Democrats pressed Mnuchin repeatedly about his late November statement that President Donald Trump’s tax plan would benefit middle-class taxpayers, not the highest earners — an assurance that some quickly labeled “the Mnuchin Rule.” In response, he stopped short of repeating the pledge — and wouldn’t say whether Trump would refuse to sign tax legislation that would make top earners the biggest winners.

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Mnuchin’s go-to response: Administration officials are working on a plan that can get through Congress.

“I’m not personally guaranteeing anything at the moment,” Mnuchin said after questions from Bob Casey, a Pennsylvania Democrat, during the Senate Finance Committee hearing Thursday. “As opposed to the administration coming out with its own proposal, our intent is that we will work with the House and Senate, that we will come up with a combined proposal that will pass the House and Senate and be signed by the president.”

The Treasury secretary’s deference to the legislative process contrasts with previous comments by White House officials, who have said the Trump administration would be driving the train on a tax overhaul — unlike what happened with the health care bill.

The relentless questioning from Democrats suggests they’ll rally around possible windfalls for the wealthy as a message to try to turn public opinion against the eventual Republican tax plan. In November, Mnuchin said that any benefit that high earners would see from cutting tax rates would be offset by eliminating deductions that are currently available. But independent analysts say it’s unlikely that the one-page tax plan that Mnuchin and National Economic Council Gary Cohn unveiled last month could eliminate enough deductions to prevent a windfall for the highest income earners.

‘Populist Comments’

While Mnuchin wouldn’t repeat his earlier statement this week, he did say Trump still intends to overhaul the tax code in a way that will benefit working-class Americans.

“I guarantee you our proposal has been and will be a middle-income tax cut and that is our priority,” Mnuchin said Thursday.

Lloyd Doggett, a Texas Democrat on the House Ways and Means Committee, said he thought Mnuchin was equivocating when asked whether Trump would veto a tax plan that didn’t adhere to the Mnuchin Rule. Doggett said the administration ultimately will have to own its tax plan, even if it reverses promises made before the election and during the transition.

“It is an attempt I think to reconcile the populist comments that President Trump made in the course of the campaign with the reality of what he is a part of here in this process,” Doggett said in an interview after a Ways and Means hearing on Wednesday. “They really can’t escape responsibility for it or shift blame here, because they want to claim full credit for what is done.”

Collaborative Process

When asked if his responses during questioning about the so-called Mnuchin Rule shifts accountability to lawmakers, Mnuchin said that wasn’t his intention.

Money (Image: iStock)

(Image: iStock)

“Nobody’s blaming anybody,” Mnuchin told reporters after Thursday’s Senate hearing. “It’s a very collaborative process.”

Tax policy experts have said the White House tax plan’s current provisions would undoubtedly mean lower taxes for top earners, while the impact on middle incomes is less clear. The plan would directly reduce taxes for upper earners by cutting the top income-tax rate to 35% from 39.6%; eliminating the alternative minimum tax, which raises the tax bills of certain taxpayers on the higher side of the income scale; and scrapping a 3.8% net investment income tax under the Affordable Care Act that applies to individuals with incomes of more than $200,000. The House passed a health care bill to change Affordable Care Act spending and revenue provisions earlier this month that calls for repealing the 3.8% tax.

Trump also proposes to repeal the estate tax, which would save an estimated $200 billion over a decade for individuals with estates worth more than $5.45 million.

The one-page White House blueprint proposes, without specifics, to “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.” It calls for protecting the popular and costly deductions for mortgage interest and charitable giving.

Pass-Through Entities

Trump’s tax outline reduces the seven existing individual tax rates to just three, but doesn’t specify the income thresholds attached to the proposed rates of 10%, 25% and 35%.

The administration’s call to double the standard deduction, which is typically used by low-and middle-income earners who don’t itemize their deductions, would help many lower-and moderate-income people. The White House plan also advocates a child-care and dependent tax break to help the middle class, but doesn’t provide any specifics.

Under the plan, so-called pass-through businesses — including partnerships and limited liability companies — would pay the same 15% tax rate that Trump has proposed for corporations, which would financially benefit not only mom-and-pop shops but also big partnerships like law firms and business empires like his own.

Sen. Ron Wyden, the ranking Democrat on the Finance Committee, said the pass-through provision would be a “mile-wide loophole” for wealthy individuals to report their income as business revenue and pay the lower corporate rate. Mnuchin said, without giving details, that he “will absolutely make sure” the necessary safeguards would be codified in the tax overhaul to prevent abuse while still allowing small businesses to benefit.

Nonetheless, Wyden, who coined the phrase “the Mnuchin Rule” during the Treasury secretary’s confirmation hearings, said he’s concerned that the rule no longer applies.

“When I heard it originally, I said ‘this sure sounds like a step in the right direction — no absolute tax cut for the wealthy”’ Wyden said during a Bloomberg TV interview Thursday. “It didn’t take very long for him to start walking it back.”

— Read House Delays Medicare Tax Repeal on Wealthy in AHCA Bill on ThinkAdvisor.

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