Trump's Tax-Cut Plans May Draw Congress to Art of the Deal

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(Bloomberg) Businesses and individuals may get major tax breaks if President-elect Donald Trump can successfully meld his own tax proposals with similar ones favored by House Republicans.

With Republicans in control of both chambers in Congress, the most urgent question on taxes is how well Trump will work with House Speaker Paul Ryan to enact the deep cuts to individual income-tax rates and the corporate income tax that both favor. The pair had a strained relationship during the campaign.

“The likelihood of tax reform is meaningfully greater than most tax experts would have predicted 48 hours ago,” said Donald Moorehead, a tax partner in the public policy group at law firm Squire Patton Boggs. “The Trump sweep materially increases the likelihood of passage of a significant tax reform package.”

Trump, a billionaire businessman who frequently touted his deal-making skills during the campaign, will get a chance to display them. He has pitched a 15 percent tax rate for corporations; House Republicans want the rate at 20 percent. While Democrats don’t like the idea of overhauling international corporate taxes or handing out individual breaks, Republicans may resort to special budget procedures known as “reconciliation” that let the majority party approve fiscal changes without Democratic support once Congress passes a budget.

Trump is eager to work with Congress, said Peter Navarro, an economist who served as a senior adviser to the campaign—but he’s not likely to tip his hand on possible compromises. “No smart negotiator goes into a bargaining situation making concessions beforehand,” Navarro said.

Possible Compromise
Senator Chuck Schumer of New York, the incoming Democratic leader, has indicated his willingness to compromise on a plan that would cut corporate taxes—if proceeds from returning an estimated $2.6 trillion in U.S. companies’ profits that are now held offshore were devoted to nationwide infrastructure improvements. “You’ve got to do what’s possible,” Schumer said.

Provisions in current tax law have led U.S. companies to avoid billions in taxes by stockpiling income overseas. With European officials looking to collect more taxes on that income, pressure is building for U.S. action that would induce companies to bring that income home.

In August, the European Commission found that Ireland must collect roughly $14.5 billion in back taxes from Apple Inc., which has amassed about $200 billion in offshore earnings. EU officials are conducting similar tax investigations of other major U.S. companies, including McDonald’s Corp. and Inc.

“Things have reached critical mass, and it’s hard to imagine an incoming president not putting a bill together,” said Cathy Koch, Americas Tax Policy leader at EY, the global tax and financial-services advisory firm. She added: “There’s kind of a consensus that something needs to be done.”

The U.S. has the highest corporate tax rate among developed nations, 35 percent. It’s also the only industrialized nation with a “worldwide” system that taxes its companies on their global profit, regardless of where it’s earned. Yet the code allows companies to defer paying tax on their overseas profit until they repatriate it. Those three provisions have spurred corporate tax planners to shift as much income as possible to overseas units in lower-tax countries like Ireland—and then leave it offshore indefinitely.

Trump will first have to mend fences with Ryan, who has been the driving force behind the House blueprint for a tax overhaul. Ryan endorsed Trump relatively late in his campaign, then declined to campaign with him last month after a 2005 video surfaced in which Trump bragged about groping women. Trump blasted Ryan as a “weak and ineffective leader.”

Republicans’ Plan
Still, in September, Trump revised his tax proposals to more closely resemble those of Ryan and other House Republicans. Both propose consolidating the existing seven individual income rates to just three—offering reduced rates across the board: 12, 25 and 33 percent. The current top rate is 39.6 percent; the cuts would have the most benefit for high earners, according to various studies. Both Trump and House Republicans also call for repealing a 3.8 percent tax on investment income that was part of the Affordable Care Act.

Both also want to eliminate the estate tax, which currently applies a 40 percent rate to estates worth more than $5.45 million. And Trump wants to tax carried interest—the portion of investment funds’ returns that are paid to fund managers—as regular income. Carried interest is currently taxed as capital gains, at rates as low as 23.8 percent.

The House plan is silent on carried interest, but it does propose to cut taxes on capital gains. Individual filers could exclude half their income from gains, dividends and interest—setting up three new tax rates for them: 6, 12.5 and 16.5 percent. Trump hadn’t proposed any change related to capital gains.

And while both Trump and House Republicans propose increasing the standard deduction—a move that would benefit middle-income taxpayers—they differ on the size of the increase. Trump wants a $30,000 deduction for joint filers and $15,000 for singles. The House plan seeks $24,000 for joint filers; $18,000 for single parents and $12,000 for other singles. Under current law, joint filers get $12,600, and singles get $6,300.

For those who itemize deductions, Trump would cap their value at $200,000 for married filers and $100,000 for singles. The House plan calls for eliminating all deductions except for those related to mortgage interest and charitable contributions.

During the campaign, Trump’s tax plan stirred concern that it would result in deficits and add as much as $5.3 trillion to the federal debt over the next decade, according to an estimate by the nonpartisan Committee for a Responsible Federal Budget. Trump’s economic advisers have argued that his tax plan, coupled with his agenda for overhauling U.S. trade agreements, rolling back business regulation and stimulating domestic energy production, will lead to economic growth and produce enough federal revenue to avoid deficits. Trump has said his plans would lead to 4 percent annual growth—double the 2 percent annual growth that the Congressional Budget Office currently projects for the next decade.

Finding “politically acceptable spending cuts needed to finance a Trump-sized or even a House-like tax cut still will be tough,” wrote Howard Gleckman, a senior fellow at the Tax Policy Center, a Washington-based group, in an online article. The center is a joint venture of the Urban Institute and Brookings Institution.

While it’s unclear how Trump’s individual tax plans might shake out in Congress, the path is somewhat clearer on corporate taxation. “An international tax reform package is the priority, and the potential just increased,” said Henrietta Treyz, an analyst with Height Analytics LLC, a financial research firm. She believes efforts to cut individual taxes might take a back seat to trade and immigration issues, she said. “Those are a bigger priority right now.”

Trump’s plan and the House Republicans’ blueprint both propose a tax break for companies aimed at inducing them to bring their offshore profit back to the U.S., a move known as repatriation. Trump would set that rate at 10 percent; the House plan would make it 8.75 percent for assets held in cash and 3.75 percent otherwise.

It’s unclear whether any of the proceeds from that one-time infusion of tax revenue would be devoted to infrastructure spending, as Democrats like Schumer hope. Trump has instead proposed a $1 trillion infrastructure renewal plan that would ask Congress to approve $137 billion in tax credits to attract private investments in highways, bridges, seaports and airports.

House Republicans don’t want to use repatriation proceeds for new spending, said AshLee Strong, a spokeswoman for Ryan. Officials want revenue from repatriation to offset a broader rate cut for corporations, she said.

Lower Rate
Corporations also favor tying repatriation to a lower tax rate, said Kenneth Kies, the managing director of the Federal Policy Group, a Washington tax-lobbying firm. “They kind of view it as their money,” he said. He predicted a tax overhaul would pass before Congress’s August 2017 recess.

“First presidents have a window to do big things, and it doesn’t stay open forever,” Kies said.

Neither Trump’s plan nor the House’s would place any restrictions on how companies could use the profit they return to the U.S. via repatriation. In 2004, when Congress enacted a voluntary repatriation by offering a one-time tax rate of 5.25 percent, 843 companies chose to bring $312 billion back to the U.S.—and used the money to pay dividends to shareholders and buy back stocks, according to a Senate subcommittee report in 2011. The arrangement cost the federal government $3.3 billion in lost tax revenue over a decade, according to the report.

The biggest difference between Ryan’s plan and Trump’s lies in international taxation going forward. Trump proposes to end deferral, requiring companies to pay taxes annually on their overseas earnings. But the House plan calls for a much more extensive change: After paying a reduced tax rate on the income they’ve amassed offshore, companies would no longer owe tax on overseas income. The House’s “Better Way” blueprint calls for scrapping the current worldwide approach in favor of taxing only economic activity in the U.S.—focusing on where goods and services are consumed, not where they’re produced.

Asked whether the House plan is open for discussion, Strong said, “House Republicans are focused on tax reform in the context of our ‘Better Way’ agenda.”

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