Steve Mnuchin – banker, movie producer, hedge fund manager, newcomer to politics – leads the effort to achieve one of the top priorities of the young trump administration. As Treasury secretary, he has joined with his fellow Goldman Sachs alumnus, National Economic Council Director Gary Cohn, in trying to persuade Congress to cut taxes as part of the first comprehensive reform of the Internal Revenue Code in a generation.
The effort is interwoven with the simultaneous White House effort to repeal and replace the Affordable Care Act — including the tax increases President Obama used to finance it. Elements of both initiatives were reflected in the Trump budget released on Tuesday, which drew intense fire from Democrats and criticism from some Republicans, too.
Mnuchin sat down to discuss the tax and budget outlook with CNBC's John Harwood at the 2017 Fiscal Summit of the Peter G. Peterson Foundation, an organization dedicated to curbing U.S. government deficits and debt. What follows is an edited transcript of their conversation:
Harwood: Good morning. So, you're still a little bit new to this Washington game. Does it feel fun?
Mnuchin: It doesn't feel new anymore, but thank you.
Harwood: Is it fun?
Mnuchin: It is fun.
Harwood: OK, good. Let's have some fun.
Let me start with a variant of something that Mick Mulvaney told a group of us at the White House yesterday when he was briefing on the budget. He said that the test that they applied in the budget was, 'Can I justify to a teacher in Kenosha, Wisconsin, spending money on programs with their tax money. That was the justification for deep cuts in Medicaid, which go to poor people and old people in nursing homes, food stamps and many other programs benefiting the vulnerable. So, my question for you is: how do you justify to that teacher in Kenosha giving large tax cuts to wealthy people through the administration's plan to eliminate the estate tax, to cut the capital gains rate for high-income taxpayers and to cut the top rate?
Mnuchin: Well, first of all, let me just say on the budget that's coming out, I think the president made some very difficult decisions and the overriding issue is he feels that we need to make a significant investment in our military, and that's a priority in the budget, and you see that. I think also it is important that we get to a balanced budget within the 10-year period of time as you've outlined. Now, on the tax side, the president's agenda is all about creating economic growth, and what I would say to that teacher or anybody else, we have had sub-par economic growth for the last eight years, and we fundamentally believe that the economy can get back to more normalized levels of sustained economic growth, which is getting to 3 percent GDP. That's not this year or next year. It phases in over a period of time, and the president's agenda is to create economic policies to create that growth, which is around tax reform, is around regulatory relief, and is around renegotiating our trade deals to have fair and balanced trade. So, our tax plan is about economic growth. On the personal side, we are cutting the top tax rate in return for eliminating almost all deductions.
Harwood: Right, but let me give you the results of the distributional table. Tax Foundation, a conservative group, last year after the president during the campaign revised his tax plan. They say the people in the 40 percent to 60 percent income bracket would gain 1.3 percent in after-tax income from the president's plan. People in the 60 percent to 80 percent bracket would gain 1.9 percent from the president's plan. People in the 99 to 100th tax bracket would gain anywhere from 10 percent to 16 percent from their income. Both in absolute dollars and in percentage terms, much higher increase at the top. Why is that necessary, given the trade-offs required in the budget?
Mnuchin: Well, let me just comment that I think you're looking at the campaign plan. You're not looking at our current plan. I was actually with the head of the Tax Foundation yesterday, and they haven't scored the plan yet because they don't have all the details.
Harwood: Well right, but the outline you guys have put out so far resembles reasonably well the campaign plan.
Mnuchin: Not, not really. The Tax Foundation and others, and I've said this, when we come out with all the details of the plan, we're working closely with the House and Senate. When we come out with the details of the plan, it will be scored and the distributions will be reviewed. And the president's priority is about creating a middle-income tax cut. Two things I would just comment on: you mentioned the estate tax and you mentioned capital gains tax. The capital gains tax is being eliminated as part of the health care reform.
Harwood: Doesn't have to be.
Mnuchin: Taxes. It doesn't have to be but most people feel that the tax on capital gains is perhaps the most inefficient tax. Capital gains are what increase investment in this country.
Harwood: Let me just press on this one more time. When you look at Medicaid: $800 billion cuts over 10 years. That benefits vulnerable, poor, old people in nursing homes. Why would you tell those people that a tax plan that has such substantial benefits for people at the top is fair?
Mnuchin: Well again, you know as I've said, and I've talked about this repeatedly, we'll look at the distribution when it comes out. The president's objective is to create a middle-income tax cut. It's not to create tax cuts on the high end, and we'll look at those numbers. Again, this is about economic growth. You know, I would just comment on the business side. There are many economic reports that show more than 70 percent of the business tax is passed on to workers. So, another big part of our priority is to create a competitive business tax system. We have one of the highest tax rates in the world. We tax on worldwide income. We have this concept of deferral. It's not a surprise there's trillions of dollars left offshore, and making business taxes competitive will benefit American workers, which is also a big priority of ours.
Harwood: Now, you said on my network, after the president was elected, that there would be no absolute tax cut for people at the top because the elimination of deductions would offset the rate reductions. Now, your campaign plan had a cap on deductions but did not achieve that goal. It had a big tax cut for people at the top. Are you pledging now that when we do the distribution analysis of the administration tax plan that there will be zero benefit for, say, the top 10 percent or top 1 percent of taxpayers, and a much larger benefit for middle-income taxpayers?
Mnuchin: That comment that I made on CNBC has now become so infamous that it's been named the Mnuchin rule. During my Congressional hearings...
Harwood: We coined it.
Mnuchin: …And I said I felt I was in great company with the Buffett rule and the Volcker rule, now that there's a Mnuchin rule. So, what we're doing now is working closely with the House and the Senate. Our objective is to come out with a unified plan, that the House and the Senate will support, and that can be signed by the president. So, what I've said repeatedly is, the president's objective is to create a middle-income tax cut. We're going to be working closely, but again, that's our intent. I can't pledge what the results will be, since the results are going to be a combined effort of the administration and the House and the Senate.
Harwood: But your intent would then be a middle-income tax cut and a zero tax cut for people at the top.
Mnuchin: Again, what I had said is the president's priority has been not cutting taxes for the high end. His priority is about creating a middle-income tax cut. So, we'll see where it comes out. Different people have different views, but that's the president's objective.
Harwood: Let me ask you about the budget and how it reflects taxes. You've said that you thought the administration tax reform plan would result in a $2 trillion boost to revenue as a result of economic growth, the dynamism of the tax cut.
Mnuchin: Correct.
Harwood: Larry Summers, who sat in your (Treasury) chair, wrote a piece in The Washington Post today where he said that the administration budget has committed the most egregious accounting error he has seen in 40 years. Which is this: the administration assumes that $2 trillion revenue boost that you talked about, but does not reflect at all the cost of the tax cut itself, which has been estimated by the Committee for Responsible Federal Budget in a median range of about $5.5 trillion. He said that you are double-counting the effects of the tax cuts in ways that he would flunk a freshman economic student for.
Mnuchin: I can assure you that when we come out with the details of the tax plan, we are not going to propose something that costs anything like $4 or $5 trillion. People who have estimated that, in my mind, are just not responsible because they don't know the details. Now as it relates to the president's budget, the president proposes a budget. There will be many changes to this budget made by Congress. Congress controls the purse strings. We felt it was premature to put in any changes to the budget as a result of taxes, since we're not far enough along to estimate what that impact will be.
So the budget was built on, what is the administration's economic plans, and economic numbers which we've talked about, which are getting to 3 percent growth. So I think Larry, I think in all fairness to him, the issue is more of this is a preliminary document that will be refined, as we go through a process with Congress determining how money is spent. And as we go through the process of working with the House and the Senate on taxes, the numbers will be completely transparent. It will be scored by the joint tax group. It will be scored by outside groups. It will be scored by the Treasury department. We have over 100 people working on this, and it will be a completely transparent process.
Harwood: Let's talk about economic growth. You have said that growth is your objective. And your budget projects that you get on a sustainable basis to 3 percent growth after that.
Mnuchin: That's correct.
Harwood: Mainstream economists that I have seen have settled on their growth estimates of in the range of 2 percent, a little above, a little below. Where do you see that growth coming from in light of this fact? Economic growth is a product of labor, and productivity. The administration is proposing through its immigration policies to actually reduce the supply of labor. Where does the productivity increase come from that gets you to 3 percent that your economic colleagues think is unrealistic?
Mnuchin: Well, let me just first comment on the immigration policy. The president is focused on stopping illegal immigration.
Harwood: He's working with Congressional Republicans, Tom Cotton, for example, on reducing legal immigration.
Mnuchin: I understand, but the primary focus is on illegal immigration. Now, two things. The published unemployment rate as you know is very low, roughly around 4.5 percent. A good component of that is people that have left the workforce because they can no longer find jobs, so they stop looking at jobs. So we think that if you look at the real unemployment rate, it's somewhere between the 4.5 percent level and the 8 and 9 percent level. So, one component of this is making sure that we create jobs for people who want jobs and will come back into the workforce. And the other component as you said is productivity and capital investment, and a big part of our economic plan is about boosting capital investment in this country.
Harwood: Let's talk a little bit about the path for tax reform. The initial plan from Republicans in Congress was to have health reform on the president's desk by Easter, have tax reform on his desk by August. You have said that, for obvious reasons, that's an optimistic timeline on tax reform. Mitch McConnell, the Senate Republican leader has said his aim is to pass tax reform in this Congress. Does that mean it is your expectation that if tax reform takes place, it is more likely to be in 2018 than 2017?
Mnuchin: Well, I would hope that we get this done this year. It is critical to our plan for economic growth, and I can assure you, you know, we are working very closely with the House and the Senate to get that done. And I think I had said on your show earlier in the year that we were going to try to do that by August. I think it's pretty clear now we're not going to get that done by August.
Harwood: You notice, by the way, that all significant things that the Treasury secretary says he says on CNBC. I have to just point that out.
Mnuchin: I can't acknowledge that comment because that would be promoting your show, which I'm not allowed to do.
Harwood: Fair enough I'll handle that.
Mnuchin: Just want to be clear on that. But our objective is to get it done this year and I'm still hopeful that that's the case. It's our No. 1 priority.
Harwood: You know it's very difficult for a couple of reasons. First, you cannot move, if you're going to do the tax plan that Republicans have envisioned through the reconciliation process, you have to first finish health care reform, which is very much not done. Then you've got to pass a new budget, some variant of what you proposed and what Republicans want, create a new reconciliation process and move on tax reform. All that's very difficult. Some Senate Republicans are entertaining the idea of working with Democrats, which implies a different tax plan if you need Democratic cooperation. What do you think are the chances that we end up with, as a something that can attract broad support, a much more limited tax program that does not include some of the cuts in the top rate, estate tax and capital gains and instead focuses on international tax reform, for example, that brings money back that is parked overseas?
Mnuchin: I think it is critical that we do comprehensive tax reform. It's been 30 years since we've had a major change. I think the personal tax system is way too complicated. Our plan, 95 percent of Americans won't need to itemize and will be able to do their taxes on a large postcard. This will save an enormous amount of money and government resources at the IRS. We're moving towards a large part of the population doing electronic filing, and this is about creating efficiency for the American taxpayer, and simplifying the system and creating a middle-income tax cut. So, the changing the personal side is a big priority of ours, and same on the business side. This isn't just about, you know, bringing back one-time overseas profits. This is about changing the system so that American workers have a fair chance in competing. And the American companies can be successful.
Harwood: I had an interview recently with Josh Bolten, former White House chief of staff, former budget director, now the president and CEO of the business roundtable. He said — perhaps for obvious reasons since he's at the business roundtable — that the critical element of tax reform is not the personal side. It would be nice, some people might like to get a tax cut, but the growth comes from the business side. Is that true?
Mnuchin: I would say it's all true. So yes, we need to fix the business side so that it's pro-growth. But we want to create a middle-income tax cut to boost the economy, and we want to simplify taxes for American people. Of course, this isn't easy. It hasn't been done in 30 years, so we can listen to all the reasons why it can't get done, but we're not going to follow that. And I hope this can be done on a bipartisan basis. The types of things that we're doing are pro growth and pro the American worker and I hope there are Democrats that are on board with that plan.
Harwood: The president talks much more about deep tax cuts than he does about tax reform. So I think there's concern among some in Congress that the least common denominator is going to end up just cutting rates and not doing tax reform. You don't like the border adjustment tax. There's resistance to eliminating the deductibility of interest, for example. What other conceivable ways would you have of broadening the base to finance a drop in the corporate rate?
Mnuchin: Oh, there's lots of ways. As I said, we've got a huge team in Treasury that's working on this, and this is about broadening the base. There are a lot of companies that pay no taxes, that pay a lot less than the 35 percent. This is about growth.
Harwood: Is there anything you could point to that says we are going to press hard to close this loophole in particular? Or to tax something that we're not now taxing?
Mnuchin: Well, there are a lot of things that we can do, and I would just say…
Harwood: Any particular one you'd point to?
Mnuchin: I want to be careful, until we have a plan and release the whole plan, not to pick one thing. One of the things I think is important is that, whatever we do, we create a level playing field. One of the problems with the border adjusted tax is that it doesn't create a level playing field. It has very different impacts on different companies. It has the potential to pass on significant costs to the consumer. It has the potential of moving the currencies. We want to make sure that we create a level playing field. And on the personal side, one of the biggest deductions that rich people take are state and local taxes, and we've said we think we should get the federal government out of the job of subsidizing the states on taxes. That raises a significant amount of money. For the two places that I've lived, which is California and New York, that's not creating a tax cut.
Harwood: It wouldn't offset the benefit of lower rates, no estate tax, lower capital gains taxes for people at the top. It just wouldn't mathematically.
Mnuchin: Again, we're looking at the capital gains as part of health care and health care reform. It was put on because of health care, it's getting taken off because of health care. That is not part of the tax plan.
Harwood: But if you left it in place your plan would be more fiscally responsible.
Mnuchin: I think our plan will be fiscally responsible, and just as you see, the health care is paying for itself. We'll see the tax plan when it comes out. Now look, the estate tax, also called the death tax, the reality is a lot of rich people use a lot of estate planning and don't pay it. This hurts a lot of farmers. It hurts a lot of people who have businesses that they want to pass on.
Harwood: If you look at the actual incidence of the estate tax, it falls heavily to a pretty small number of wealthy families.
Mnuchin: It does. OK. And I would just say there's a lot of people who feel that the estate tax, death tax, is a tax on top of when people have already paid taxes. And as you said, its impact for those people it impacts, it does have a big impact, and many people have to sell their family business, many people have to sell their family farm. But again, this is something where people come down on both sides of it, OK.
Harwood: Michael Peterson mentioned in his opening remarks that the president has pledged not to touch main Social Security and Medicare. He said that to the people who he said had been getting a raw deal and he was going to protect them. He also said he was not going to touch Medicaid. The Medicaid cuts that you propose in this budget, and that were proposed in the American health care act, go much beyond what would be required to roll back the expansion of Medicaid that was in the Affordable Care Act. So my question is, why did the president break that promise not to touch Medicaid — separate from the ACA expansion? And does that mean — perhaps to the gratification of people in this room - that he is also likely to break his promise on Social Security and Medicare?
Mnuchin: I think the president has no intention on changing Social Security. I will tell you as a trustee of the Social Security Trust Fund, this is something that Congress may look at, OK, but the president does not want to change entitlements.
Harwood: But if he doesn't want to change entitlements, why did you go along with the Medicaid reductions?
Mnuchin: Again, I think the Medicaid reductions, and what's gone on, what the president is trying to do is control health care costs. I think as you heard in the introduction, health care costs are one of the largest challenges. We have a system that was broken, and we're trying to fix that system and that's what the health care plan is all about.
Harwood: Right, but he did say in the campaign he wasn't going to touch that health care program, Medicaid, and Medicare as well.
Mnuchin: I'm not going to comment on the health care. The health care is going through the system. Again, the tax plan is all about creating jobs and growth.
Harwood: Secretary Mnuchin, thanks so much for joining us.
Mnuchin: Thank you, John.