Post-Election Analysis 2016: Tax

Transition Team for Tax Policy

• William Hagerty – Director of Appointments, Trump Transition Team
• Eric Ueland – Staff Director, Senate Budget Committee
• Paul Winfree – Heritage Foundation economist

Tax Advisors

• Peter Navarro – Professor, Univ. of California Irvine
• Wilbur Ross – Investor, WL Ross and Co.
• Anthony Scaramucci – Managing Partner, SkyBridge Capital
• Larry Kudlow – Economic analyst, commentator, and syndicated columnist

ADMINISTRATION PRIORITIES

President-elect Trump has outlined a tax plan that would provide substantial cuts across the economy, particularly for businesses and wealthy individuals. The major elements of his plan for individual income and corporate tax reforms are outlined below.

Individual Income Tax Changes. President-elect Trump proposes a number of cuts and reforms affecting individual taxpayers:

• Rate Consolidation and Cuts. President-elect Trump's plan would consolidate individual tax brackets down to three: 12 percent, 25 percent, and a top rate of 33 percent. The plan would eliminate the individual alternative minimum tax (AMT) and repeal the 3.8 percent "Obamacare tax" on investment income.
• Deductions. President-elect Trump would propose to eliminate personal exemptions and dramatically raise the standard deduction to $30,000 for joint filers and $15,000 for individuals.
• Childcare. The President-elect's proposal would enact an above-the-line deduction for children under age 13 and provide exclusions for childcare of up to $5,000 per year.
• Estate Tax Reform. President-elect Trump would propose to eliminate the estate tax but would tax capital gains held at death valued over $10 million.
• Other. The President-elect's plan would not change the current capital gains rate structure and would tax carried interest as ordinary income.

Corporate Tax Reforms. President-elect Trump has made corporate tax reform a centerpiece of his tax strategy, maintaining that making business tax rates more competitive will help keep jobs in the US. He has promised to pursue the following issues:

• Tax Rate. President-elect Trump would dramatically lower the business tax rate from 35 percent to 15 percent. The rate would be available to all sizes of businesses.
• AMT. President-elect Trump would eliminate the corporate AMT.
• Offshore Profits. President-elect Trump would provide a deemed repatriation of corporate profits held offshore at a "one-time" tax rate of 10 percent.
• Expensing. President-elect Trump would permit firms engaged in manufacturing in the US to elect to expense capital investment while losing the deductibility of corporate interest expenses. Such an election may only be revoked within the first three years (which would then prompt amended returns in prior years).
• Corporate Tax Incentives. President-elect Trump would eliminate most corporate tax expenditures but proposes keeping the Research and Development credit. His plan also would expand the tax credits for onsite childcare and would permit businesses to deduct contributions made to an employee's childcare expenses.

In all, President-elect Trump's plan would result in dramatic cuts, and while some tax expenditures would be eliminated under the plan, a number of deductions/exemptions remain, which could have otherwise helped defray the cost of the cuts. Even some of the most optimistic analyses of the plan place the price tag at nearly $5 trillion over 10 years.

AGENCY LEADERSHIP

The Trump Administration is expected to be heavily-populated by non-career politicians with substantial ties to business and the financial sector. The Treasury Secretary position is no exception. The President-elect is expected to nominate Steve Mnuchin, former Goldman Sachs partner and co-founder of hedge fund Dune Capital Management. Other rumored picks for the post currently include:

• Larry Kudlow, economic analyst, commentator, and syndicated columnist
• Bob Corker, US Senator from Tennessee
• Carl Icahn, investor, founder of Icahn Enterprises
• Henry Kravis, co-founder of private equity firm KKR & Co.
• Jack Welch, former CEO of General Electric

CONGRESSIONAL LEADERSHIP

House. Rep. Kevin Brady (R-TX) will remain chair of the House Ways & Means Committee, having ascended to the position in 2015. On tax matters, Chair Brady will undoubtedly be working in close concert with Speaker Paul Ryan (R-WI), who chaired the Committee for 10 months in 2015 and remains a leading voice on tax policy. Rep. Sander Levin (D-MI) will remain the ranking member of the Committee, a position he has held since 2011.

Senate. Sen. Orrin Hatch (R-UT) will remain chair of the Senate Finance Committee, a position he has held since 2015. Sen. Hatch also is the President pro tempore of the Senate and is the most senior Republican senator. Sen. Ron Wyden (D-OR) will remain ranking member of the committee. Sen. Wyden previously served as chair in 2014.

CONGRESSIONAL PRIORITIES

With the Republicans retaining control of Congress and seizing the White House, we expect that the tax reform debate will begin in earnest in 2017. In June 2016, the House GOP released its tax plan, which, like the President-elect's plan, includes substantial tax cuts for individuals and businesses. While there remain substantial differences between the Trump plan and the House GOP plan, we do not expect this to prevent Congress's consideration of reforms.

While Sen. Hatch and the Finance Committee have been working on a number of reform proposals, Senate Republicans have not offered any tax plan as broad or detailed as their House counterparts. Thus, we expect Speaker Ryan and Chair Brady to drive the debate initially, which could lead to action on some of the major components of the House GOP plan, including:

• Corporate Rate Cuts. The House GOP will aim to reduce the corporate tax rate from 35 percent to 20 percent. It also would eliminate the corporate AMT and create a new tax rate for pass-through entities to be capped at 25 percent.
• Individual Rate Cuts. Like President-elect Trump's proposal, House Republicans will look to consolidate individual tax brackets down to three: 12 percent, 25 percent, and a top rate of 33 percent. They also will propose to eliminate personal exemptions and the individual AMT. Additionally, they are likely to increase the standard deduction substantially, although not to the level proposed by President-elect Trump.
• Eliminating Deductions. The GOP plan proposes eliminating nearly all itemized deductions – including even the deduction for state and local taxes. The only itemized deductions that the House GOP proposes to keep would be the mortgage interest deduction and the charitable contribution deduction.
• Business Expensing. We expect the GOP to eliminate the deduction for net interest expenses, but allow capital investment costs to be fully and immediately deductible. The plan also would prohibit carryback of net operating losses but allow them to be carried forward indefinitely and increased to account for inflation.
• Territorial System. Republicans propose creating a territorial tax system that exempts foreign income from US tax.
• Finally, we expect Congress to continue its almost annual process of extending some non-controversial tax provisions that are otherwise scheduled to expire at the end of 2016. There will certainly be debate about putting an extenders package together though there seems to be less enthusiasm for such a package than in recent years.

While there is a fair amount of common ground between the President-elect's proposals and the House GOP plan, it remains to be seen how well the two sides will work together, given the discord between Speaker Ryan and President-elect Trump during the campaign. With Trump as President, there also are questions about Paul Ryan retaining his leadership role as Speaker, with dissension in the Republican Conference.

Assuming a mutually agreeable plan is pursued, it is possible that parts of the GOP tax overhaul plan could be moved via the budget reconciliation process (which would allow the plan to pass the Senate by a simple majority rather than needing a filibuster-proof 60 votes). This scenario is particularly possible if Senate Democrats use procedural tactics to block consideration of tax legislation. Indeed, it is likely that the Senate, with the Republicans holding only a narrow majority, will be ground zero for Democratic efforts to block action on GOP priorities – much the same as it was for Republicans in the first two years of the Obama Administration. The possibility of major tax reform, while greater now given unified Republican control, is tempered by the narrow margin they hold in the Senate.

Our full analysis of the 2016 election is available below.

(Downloadable PDF)