Everything You Need To Know About The One-Page Tax Plan That Will Never Become Law

Even with just 170 words, it's a doozy.
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Gary Cohn and Steve Mnuchin pull a comic routine for the ages. (Getty Images)

Republicans like to emphasize just how much shorter their bills are than those of their pinko opponents on the other side: Just look at the pride on Sean Spicer's face while unveiling the dramatically shorter stack of papers representing the soon-to-be-failed American Health Care Act bill against the still-alive-and-kicking Obamacare law. President Trump—not exactly a noted reader—has taken this zeal for terseness to a whole new level with his old-new tax proposals: Just 170 words to replace the current tax code, which numbers in excess of 10 million verbal units.

Of course, once the lobbyists and Hill staffers get their hands on it, the tax reform bill is likely to get slightly longer. After all, statements like “biggest individual and business tax cut in American history” do need to get fleshed out with actual numbers, even if they aren’t true in the nutshell version. But let’s say that Trump gets his way and Paul Ryan gives him a legislative version of the talking points. Here’s what we have to look forward to: Just three tax brackets, twice the standard deduction, no A.M.T. or inheritance tax, slightly lower capital gains taxes, substantially lower corporate taxes, and just two remaining individual itemized deductions, for charitable giving and mortgage interest.

Sounds great, right? Well, probably not if you’re a Dealbreaker reader, which means you’re very likely to be making a Wall Street salary and live in a place like New York, New Jersey, Connecticut, Massachusetts or California.

The tax policy outline Mr. Trump unveiled Wednesday proposes repealing the deduction for state and local taxes, which lets individuals subtract their home-state levies from their federal taxable income…..

Repealing the deduction, before taking into account other changes in the GOP plan, would raise taxes on about 27% of New York households, increasing their federal bills by an average of $4,250, says the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. In New Jersey, 32.9% of households would see their federal taxes go up if the deduction were repealed, with an average increase of $3,522. Similar increases would happen in Maryland, Connecticut, California and Massachusetts.

Your bosses, on the other hand, will probably learn to love it.

Banks like Citigroup and Bank of America would have to take some sour with the sweet: A lower tax rate would mean they will have to take billions of dollars in charges against earnings to write down the value of their giant piles of “deferred tax assets….”

The hit to earnings would be a one-time event, though. The offset is that the banks “are going to make more money for life,” said John McDonald, a bank analyst at Sanford C. Bernstein. “What the market does care about is earnings and their earnings would be permanently improved.”

Now, about extending that 15% corporate tax-rate to pass-through businesses…..

Lawrence Gibbs, a former IRS commissioner under Ronald Reagan who is now with Miller & Chevalier in Washington, said if this measure becomes law, “you will have scams coming out of the woodwork.”

“Large tax-rate differentials encourage abusive tax planning,” he added.

As you might expect from a one-page tax plan, some rather key matters are left out, such as the fact of the carried-interest loophole, which candidate Trump liked to hold against the hedge-fund paper-pushers he subsequently filled his administration with, and the small matter of all of those trillions Silicon Valley is holding overseas.

For the tech giants, the cut to the corporate tax rate isn’t “that big of a deal to them since they’re not paying it anyway,” said Lawrence A. Zelenak, a Duke University law professor who specializes in tax policy. “The biggest issue that kind of dwarfs everything else is how this affects the big piles of cash held offshore.” President Trump’s plan didn’t provide clarity on the repatriation of cash overseas.

In interviews, several tax experts and Wall Street lawyers said that by not mentioning the matter at all, the administration seemed to be signaling that the tax proposal would effectively eliminate the unique taxation of carried interest.

Sounds bad, right? Well, not if your name is Henry Kravis.

That reading is based on the proposal subjecting pass-through entities — which include partnerships like private equity firms and hedge funds — to a 15 percent tax rate, which is lower than the rate on capital gains and much lower than the top rate on ordinary income.

In other words, it appears that if the Trump plan is enacted, private equity executives would not just avoid higher taxation; their taxes would actually decline.

Of course, it’s all quite academic, since just about no one—least of all the markets, which reacted with a barely noticeable shrug to the package of gifts the president proposes giving it—thinks this tax reform has any hope of passing. The thinking goes that if Trump couldn’t repeal an exceedingly unpopular healthcare law that his party has been campaigning against for its entire existence, wading into the minefield of tax reform wasn’t likely to go much better. To wit: Did you know that there are 28 Republican congressmen from New York, New Jersey and California, and that Republicans currently enjoy only a 22-seat majority in the House? And that none of those Republicans sound particularly eager to see the deduction go?

New York and New Jersey Republicans already resisted the GOP leadership’s health-care bill in March. Rep. Dan Donovan of Staten Island, N.Y., says losing the deduction would “crush” his constituents, and Rep. John Faso of Kinderhook, N.Y., says it would be “double taxation.” Rep. Tom Reed of Corning, the lone New York Republican on the tax-writing Ways and Means Committee, says he intends to fight to protect the break….

The lawmakers to watch in coming weeks are the blue-state Republicans in the House, including Rep. Chris Collins of New York, an early supporter of Mr. Trump. He said Wednesday that repeal is a “big concern” for GOP lawmakers from New York, New Jersey and California.

“Ever since our proposal first came out in January, I said I will fight to keep those deductions,” he said.

And then there’s the matter of the cost. Trump insists that the resultant economic growth will easily cover the $7 trillion in lost revenues over the next 10 years, much like he insisted that Mexico would pay for the Wall. Economists aren’t convinced. Maybe the conservatives who sank the healthcare bill won’t be, either.

After years of fiscal hawkishness, conservatives now face a moment of truth about whether they truly believe America’s economy is drowning in debt….

The debate over the impact of the plan is only beginning. If Republicans are not able to make the cuts revenue-neutral — that is, causing no increase in the deficit — they will need the support of Democrats to get 60 votes in the Senate and make the legislation permanent under budget reconciliation rules. Otherwise, any changes to the tax code will expire in 10 years.

The 7 Key Elements of the White House Tax Plan [NYT]
Trump’s new one-page tax plan is the same as his old, one-page tax plan [WaPo]
Next Tax Battle: Trump’s Bid to Ax a Favorite Blue State Deduction [WSJ]
Tax Cut Would Cost BofA, Citi Billions. Here’s Why They Still Win. [WSJ]
Trump Tax Cut: Pro-Business Or Pro-Scams? [WSJ]
Trump Tax Plan Silent on Carried Interest, a Boon for the Very Rich [DealBook]
Trump Tax Plan Doesn’t Solve Tech’s Multibillion-Dollar Overseas-Cash Problem [WSJ]
Is Trump’s tax cut the biggest ever? Probably not [CBS Money Watch]
5 Hurdles to the Adoption of Trump’s Tax Plan This Year [NYT]
Markets Think Trump Speaks Loudly But Carries No Stick [WSJ]
Economists Fear Trump’s Tax Plan Only Heightens a ‘Mountain of Debt’ [NYT]
Trump’s Tax Plan Is a Reckoning for Republican Deficit Hawks [NYT]

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