President Donald Trump and Republican leaders were poised to launch 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% — 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 a copy obtained by Bloomberg News. The White House confirmed its authenticity Wednesday.
The rate on corporations would be set at 20%, down from the current 35%, and businesses would be allowed to immediately write off their capital spending for at least five years, three people familiar with the plan told Bloomberg News. Pass-through businesses would have their tax rate capped at 25%.
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% at 10:20 a.m. in New York, poised to outperform the broader market for a sixth straight day.
The tax plan will set out three tax brackets for individuals — 12%, 25% and 35%, down from the existing seven rates, which top out at 39.6%. 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.
Congress members haven’t signaled that they’ll take that option. Key Republicans on the tax-writing Ways and Means Committee, including Chairman Kevin Brady, have said they’re 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 release of the plan — which Trump is expected to 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.
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 rate that would be applied is unclear, but it would vary depending on whether the income was held in cash or less liquid investments. Firms would be able to pay the new tax over several years.
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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%. 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.
The tax plan will still lack 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.
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, 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.
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