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Trump’s 'tax plan' isn’t a real plan

Steven Mnuchin, U.S. Treasury secretary, right, takes a question during the White House press briefing with Gary Cohn, director of the U.S. National Economic Council, center, and Sean Spicer, White House press secretary, in Washington, D.C., U.S., on Wednesday, April 26, 2017.
Andrew Harrer | Bloomberg | Getty Images
Steven Mnuchin, U.S. Treasury secretary, right, takes a question during the White House press briefing with Gary Cohn, director of the U.S. National Economic Council, center, and Sean Spicer, White House press secretary, in Washington, D.C., U.S., on Wednesday, April 26, 2017.

The Trump administration released a skeletal single-page outline for tax reform on Wednesday, one that was almost entirely ripped from the president's campaign proposals and concentrated on reducing rates for corporations and high earners.

The rollout focused on the easiest part of tax reform — cutting taxes — while avoiding the hard part: picking the losers of reform, who will see their taxes rise to offset the cuts.

"They are telling them all the good news," says Michael Graetz, a tax law professor at Columbia University, "but there must be some bad news for someone."

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There will be, eventually, if Trump hopes to craft a bill with congressional leaders that can make its way to his desk. But first, administration officials will have to fill in the blanks of his outline and make some hard choices about who — now or in the future — will pay the price of tax cuts today.

There are a lot of blanks left to fill in. Here are the most crucial ones:

1) How does Trump expect to pay for all this?

The White House plan doesn't give any indication on how it expects to fill the as much as $7 trillion-plus hole that some experts say his plan could open up in the federal budget over the course of a decade.

The plan does raise revenue in a few ways, mainly by eliminating almost all personal deductions and exemptions, such as student loan payments and property tax deductions. That may offset some of the money lost from expanding the standard deduction, but no economic model has yet to predict that those changes will suffice to cover the trillions of dollars lost from lowering the tax rate on corporations and businesses.

The administration's plan also included a one-time "repatriation" tax on foreign profits that US multinational corporations have stashed overseas. Speaking at the White House, Treasury Secretary Steven Mnuchin didn't give a figure on how much that tax would be, but Trump has previously pushed for a 10 percent tax.

Right now American companies have $2.6 trillion in untaxed income earned abroad — a move many use to avoid paying the 35 corporate tax rate. Trump's "repatriation holiday" is supposed to encourage them to bring that money back at a lower tax rate, though there is no telling how many companies would do so.

2) How do you stop wealthy taxpayers from abusing a new loophole?

Trump is also sticking to his decision to lower the tax rate for owner-operated businesses, known as pass-throughs, from 39.6 to 15 percent. Most US businesses are classified as pass-throughs because their income and deductions are filed through their personal tax returns.

The vast majority of pass-through businesses are already taxed at a 15 percent rate, so lowering the top rate would disproportionately benefit the wealthiest of them, mostly hedge fund managers, lawyers, and doctors, according to the Center on Budget and Policy Priorities. Such reductions would also be a major benefit for Trump, as most of his businesses are pass-throughs.

Lowering the tax rate on these business also encourages individuals to report their wages as business income instead of personal income, to avoid paying up to 35 percent in individual taxes (35 percent is the top individual tax rate that the plan proposes). The Tax Policy Center believes such tax avoidance would cost $650 billion.

On Wednesday, Mnuchin acknowledged this loophole, but promised to write rules to stop people from creating businesses for this reason. "Let me be clear: This is for small businesses, not a loophole for rich people to lower their tax bill," he said.

Yet at the briefing, Mnuchin didn't explain how he could close the loophole.

"That concerns me," Graetz says. "Those kinds of rules are very difficult to write. I am not sure they're even possible to write."

It's worth noting that Trump aides promised to craft such rules during the campaign, when similar concerns were raised over pass-throughs, but they never followed through.

3) Will it be a temporary tax cut or a permanent cut?

Mnuchin said over and over Wednesday that the goal is to make these tax cuts permanent, though temporary tax cuts "are better than no tax cuts."

Calculating the cost of cuts will be crucial to the success of tax reform. The easiest route for Republicans, politically, is to get a bill passed through budget reconciliation, which only requires a simple majority in the Senate. For a permanent tax cut, the legislation would have to be revenue-neutral and not add to the deficit after 10 years. Lawmakers could skirt this rule by declaring the cuts would "sunset" after a period of years, in order to minimize their budgetary impact — and then plan to renew them later.

Mnuchin repeatedly promised the White House plan would "pay for itself," because the tax cuts will spur so much economic growth that the government will recoup most of the lost money. Yet no budget estimates using that model, known as dynamic scoring, have projected the Trump campaign cuts would produce anywhere close to enough growth to pay for themselves. The administration hasn't presented any evidence to support its rosy forecast.

This all comes back to the cost problem. One partial solution for it would be to revive the border adjustment provision that House Republicans have proposed. The idea of taxing imports and exempting exports was the House's main solution to offset the cost of cutting corporate rates.

Wednesday morning, Mnuchin suggested that the White House is warming up to the idea of reworking the border adjustment in some way. "We just don't think it works in the current form," he said.

He offered no details about how to fix it.

Commentary by Alexia Fernández Campbell, economic policy writer at Vox. Follow her on Twitter @alexiacampbell.

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