President Donald Trump’s call for a dramatic overhaul of the tax code sets in motion his most ambitious legislative initiative to date, testing whether he can cut the deal of his life on an issue that has long bedevilled Washington.

Last Wednesday, Trump issued a one-page outline for changes to the tax code, pinpointing numerous changes he would make that would affect almost every American.

He wants to replace the seven income tax brackets with three new ones, cut the corporate tax rate by more than 50pc, abolish the alternative-minimum tax and estate tax, and create new incentives to simplify filing returns.

But the White House stopped short of answering key questions that could decide the plan’s fate. For example, Trump administration officials didn’t address how much the plan would reduce federal revenue or grow the debt. They also didn’t specify what income levels would trigger inclusion in each of the three new tax brackets.

The goal, White House officials said, was to cut taxes so much and so fast that it led to immediate economic growth, creating more jobs and producing trillions of dollars in new revenue and wealth over the next decade.

Despite its brevity — it was less than 200 words and contained just seven numbers — the document marked the most pointed blueprint Trump has presented Congress on any matter.

“This is about economic growth, job creation, America first, and that’s what [Trump] cares about,” White House National Economic Council Director Gary Cohn said. “Our tax plan is a big leg of that stool. It’s a big leg. And in many respects, he thinks it’s the most important leg.”

The goal was to cut taxes so much and so fast that it led to immediate economic growth, creating more jobs and producing trillions of dollars in new revenue over the next decade

The plan now must navigate a legislative and political gantlet on Capitol Hill that has killed numerous other efforts to rework the tax code.

Business groups were already squaring off. The National Association of Realtors called the proposal a ‘non-starter,’ alleging that it would remove tax incentives for people to buy homes because of changes it would make to certain tax deductions.

The US Chamber of Commerce, by contrast, issued a statement saying the plan would ‘help drive job creation, investment, and economic growth.’

The Committee for a Responsible Federal Budget said the plan would probably lead to a loss in government revenue by roughly $5.5tr over 10 years.

Speaking last Wednesday morning on Capitol Hill, House Speaker Paul Ryan, called Trump’s framework “a critical step forward in this effort… So we see this as progress being made, showing that we are moving and getting on the same page. We see this as a good thing.”

Democrats, meanwhile, must decide whether to negotiate with an unpopular president who is threatening to pull away tax revenue that pays for many of their cherished social programmes.

“This is an unprincipled tax plan that will result in cuts for the [wealthiest Americans], conflicts for the president, crippling debt for America and crumbs for the working people,” said Sen. Ron Wyden (Ore.), the top Democrat on the Senate Finance Committee.

Trump’s proposal includes significant changes to both of the major elements of the tax code, the individual side and the business side.

For individuals, it would eliminate the seven existing income tax brackets and replace them with three brackets, containing new rates of 10pc, 25pc and 35pc, based on a person’s income. White House officials haven’t specified which income levels would hit the higher tax brackets, as they see this being part of ongoing discussions with Capitol Hill.

The proposal would also roughly double the standard deduction that Americans can use to reduce their taxable income. The deduction for married couples would rise from $12,600 to $24,000. This would incentivise people not to itemise their tax returns and instead use the larger standard deduction, simplifying the process and potentially saving taxpayers thousands of dollars each year. It may also change how people value certain tax breaks: For example, fewer people might buy homes with the help of the mortgage interest deduction if they don’t itemise their taxes.

The White House plan would eliminate the alternative-minimum tax and the estate tax, provisions that raise billions of dollars each year and mainly raise the taxes paid by wealthier Americans.

To offset the loss of revenue from lower tax rates and other changes, Cohn and Mnuchin said they were proposing to eliminate virtually all tax deductions that Americans claim, provisions that they argued primarily benefited wealthier Americans. Cohn said they would preserve tax breaks for mortgage interest, retirement savings and charitable giving. But almost all others would be jettisoned.

This includes the tax deduction people can claim for the state and local taxes they pay each calendar year, a provision that saves taxpayers more than $1tr every 10 years. These taxes can be particularly high in states with higher income taxes, such as California and New York, so the change could be acutely felt there.

“It’s not the federal government’s job to be subsidising the states,” Mnuchin told reporters at the briefing with Cohn.

For businesses, Trump’s proposal would lower the corporate tax rate from 35pc to 15pc. It would also allow millions of small businesses, structured in such a way that they are affected by the individual tax rate, to use the 15pc rate as well. These businesses, known as ‘pass-throughs’ or ‘S corporations,’ are often small, family-owned firms.

But they can also be large law firms and lobbying shops, with highly paid top executives. Mnuchin said special protections would ensure that the wealthiest of these earners don’t take advantage of the 15pc rate, although he didn’t say how the White House would do this.

The White House is also proposing a one-time tax ‘holiday’ to encourage companies to bring several trillions of dollars held in other countries back into the United States. They didn’t specify what that tax rate would be, saying it’s part of negotiations on Capitol Hill.

That GOP plan, led by Ryan and House Ways and Means Committee Chairman Kevin Brady, R-Texas, would have offset broad reduction in rates with a change in the way imports and exports are taxed, a proposal known as a ‘border adjustment tax.’

But House Republicans have sought to lower the corporate tax rate only to 20pc. Lowering it even further, as Trump has proposed, would lead to such a loss in revenue that the proposal could become difficult to pass through Congress, many lawmakers contend.

Mnuchin said their goal was to permanently change the tax code, but they would consider a shorter-term change if necessary to win political support.

One of the biggest tests for Trump’s plan will be fending off critics who allege that his plan would grow the deficit and add trillions of dollars in debt. White House advisers allege that cutting tax rates and eliminating certain deductions will lead to so much economic growth that trillions of dollars in new revenue will be generated. Congress’s nonpartisan budgetary referees at the Joint Committee on Taxation won’t work off that same assumption.

Republicans hold 52 seats in the chamber, and without 60 votes, Trump and his fellow Republicans would only be able to pass more narrowly tailored cuts. Those cuts would eventually expire unless Congress takes action, setting up another fight over taxes.

The Washington Post Service

Published in Dawn, The Business and Finance Weekly, May 1st, 2017