WASHINGTON – A sweeping Republican tax overhaul plan backed by President Donald Trump calls for slashing rates on businesses and the wealthy but offers few details about how to pay for the cuts without driving up the federal deficit.
Hammered out over months of high-level talks among Trump aides and top Republicans in Congress, the plan would lower corporate income tax rates, cut taxes for "pass-through" businesses and reduce the top income tax rate for individual Americans, according to a framework seen by Reuters.
The future of the proposal, announced on Wednesday, was uncertain given that Republicans have produced no major legislative successes since Trump took office in January even though they control the White House and both chambers of Congress.
The tax plan was outlined the day after the Republicans' top legislative priority, an overhaul of the U.S. healthcare system, collapsed in the Senate, while another key item on Trump's wish list, infrastructure spending, has yet to materialize.
A comprehensive tax overhaul has eluded lawmakers for decades. The last one was passed in 1986. Trump has said the tax overhaul would provide tax relief to middle-class Americans.
Wall Street opened higher on Wednesday partly on rising expectations of a December interest rate hike, with a focus also on Trump's tax plan. Stocks later pared gains.
While it would lower the top individual rate from to 35 percent from 39.6 percent, the Trump plan would roughly double the standard deduction, a set amount of income exempt from taxation, for all taxpayers.
DEFICIT WORRIES
Republicans argue that the tax cuts would be offset by new revenues raised from eliminating tax loopholes and would drive more robust U.S. economic growth, predictions that critics are sure to question.
At a time of slow but steady U.S. economic expansion, the Trump tax-cut package has some support in Congress, even among Republican fiscal hawks who only a short time ago routinely opposed deficit-financed fiscal proposals.
Trump and his Republican allies made completing a tax overhaul in 2017 a top promise of the 2016 election campaign and are under mounting pressure to finish the job since the failure of the latest Republican effort to overturn the Obamacare healthcare law.
Republicans proposed eliminating some existing tax deductions, though they retain deductions for mortgage interest payments and charitable deductions. They proposed scrapping the deduction for the amount a taxpayer pays in state and local taxes, which could hurt people in high-tax states including California and New York that tend to vote Democratic.
Senate Republicans, walking away from their party's long-held view that tax cuts or increased federal spending should be done in a way that does not add to deficits, tentatively agreed last week that the tax overhaul would cost $1.5 trillion over a decade, but forecast it would become revenue neutral thereafter due to predicted economic growth.
The plan foresees a 20 percent corporate income tax rate, down from 35 percent now. The current rate is high by global standards and corporations have been seeking a tax cut for years, even though many of them pay much less than the headline rate due to loopholes and tax breaks.
Profits of small, pass-through businesses that go directly to the owners are now taxed at the individual income tax rates, often at the top level of 39.6 percent. The Republicans' proposal would set up a new 25-percent tax rate for pass-through businesses including partnerships.
Analysts have warned that huge tax cuts would balloon the federal deficit and debt if the economic growth projected by Republicans fails to materialize amid rising interest rates.
(Additional reporting by Susan Heavey, Doinca Chiacu and Amanda Becker)