Republicans have finally released their proposal for tax reform. The bill includes dramatic changes to the current tax code that, if enacted, will be largest overhaul of the tax system since the Reagan era.
The new plan maintains the top individual tax rate at 39.6 percent per Politico, but would reduce the corporate tax rate to 20 percent. New individual tax brackets of 12, 25 and 35 percent would be created. Income levels for these brackets are not yet available.
The plan doubles the standard deduction and increases the child tax credit to $1,600. The exemption for the estate tax would be doubled and the estate tax would be repealed after six years. The plan also keeps the popular retirement savings vehicle, the 401(k) account, which some Republicans had hinted could be eliminated.
The plan’s treatment of the mortgage interest deduction is sure to be controversial. The bill would limit this popular deduction to newly purchased homes less than $500,000. Realtor associations are already gearing up to oppose this change.
Republicans also maintained the deduction for state and local taxes. The new plan allows taxpayers to write off up to $10,000 in state and local property taxes, which critics say subsidizes states with high tax levels. Republicans from high tax states sought to preserve this deduction, but the limit is less than property taxes in many blue states.
The tax rate cuts would be offset by the elimination of targeted tax loopholes that favor certain industries and activities. The details of the loopholes to be closed are not yet available.
There are other questions that have yet to be answered as well. There was no clear indication on whether the tax rate cuts would be permanent or have a sunset clause as the 2001 Bush tax cuts did.
The bill also reportedly contains elements to discourage corporations from relocating to other countries. These details also have yet to be revealed.
There was also no word on whether the border adjustment, a tariff on imports, was part of the final plan. Tim Phillips, the president of Americans For Prosperity, had previously warned against the import tax, saying, “We strongly oppose adding a new tax that would raise prices on everyday goods while disproportionally hurting the poor and middle class.”
A weakness of the bill is the failure to lower the top tax rate. While cutting taxes for the wealthy is politically unpopular, per OMB Director Mick Mulvaney the top 20 percent of taxpayers pay 95 percent of the taxes. These taxpayers will benefit from rate cuts to lower brackets, but a cut in the top rate would also be beneficial.
Now that the Republican tax plan is written, the next step is to sell it to the country. Democrat disinformation is already being used to attack the reform proposal with the result that Americans oppose the plan out of the gate by 35-25 percent in a new NBC News poll. The good news is that almost 40 percent have not made up their minds.
If Republicans can unite and if Donald Trump can stay focused on the issue at hand, tax reform may turn out to be the first real GOP legislative victory of the Trump era. Republicans need this win badly.