President-elect Donald Trump likes to say he will “drain the swamp” of special interests when he takes up residence at 1600 Pennsylvania Avenue.
But a more apt metaphor may be a second “Showdown at Gucci Gulch” if the new president spearheads an ambitious effort to remake the federal tax code during his first year as president. Gucci Gulch, as the authors of a book on major 1986 tax reform under President Ronald Reagan wrote, refers to the swarm of well-heeled lobbyists who may stand in his way.
“Trump may not be someone who cares about what certain industries say about his proposals,” said Kyle Pomerleau, director of federal tax projects at the conservative Tax Foundation. “But in the real world there are challenges and legislation needs to go through a process in Congress. Some members will hear these concerns from certain industries and that makes it a challenge.”
During his campaign, Trump released a bare-bones tax plan containing some ideas familiar to Washington wonks, including deep rate cuts for businesses and individuals and changes to the way small businesses pay taxes. But many of the president-elect’s proposals — like a 15 percent rate for businesses and the elimination of most deductions for individuals — could alienate lawmakers in both parties, as well as spark a major fight with special interests who might support other parts of the Trump agenda.
Most of Trump’s tax ideas came up through his campaign advisers, who have more experience and closer ties to think tanks and boardrooms than to the Washington establishment. Trump’s tax reform push is expected to be led by Treasury secretary nominee Steven Mnuchin, a movie producer, Wall Street banker and former Goldman Sachs executive. Mnuchin has promised bigger than-expected economic growth of 3 to 4 percent in addition to deep tax cuts. But he’s said very little about the critical details of how that growth can be achieved.
“Our number one priority is tax reform,” Mnuchin said in a recent interview with CNBC. “This will be the largest tax change since Reagan.”
Lawmakers, particularly GOP tax writers on the House Ways and Means Committee that will helm an overhaul, have worked for months to develop more detailed proposals that Trump could adopt. But there is no guarantee he will support their ideas, particularly when it comes to tax breaks for individuals. Republicans and Trump are far closer in their thinking on business reform — but even that could be a challenge to accomplish.
“I think everybody assumes a Republicans Congress and President Trump can get a business tax plan passed but aside from just cutting rates, there’s a lot of disagreement.” said Len Burman, director of the nonpartisan Tax Policy Center.
Trump’s biggest hurdles will be figuring out how to pay for his big rate cuts, how to explain major breaks for the rich and how to make good on his promise to cut taxes for companies overseas. He’ll also need a gameplan for parrying pushback from off Capitol Hill, including possibly crafting a strategy for wooing Democratic support.
Here are five big things standing in the way of Trump’s tax reform promises:
1. Cutting rates without ballooning the deficit. Trump has promised to cut rates for every taxpayer. He has proposed slashing corporate taxes from 35 to 15 percent, setting the top small business rate at 15 percent and cutting the top individual rate from 39.6 percent to 25 percent. Those rate cuts are far below levels proposed in past GOP tax plans and most experts say such dramatic cuts will be hard, if not impossible, to achieve without sending the deficit soaring.
The Tax Policy Center estimates that Trump’s plan would cost the federal government as much as $9.5 trillion in the first decade. Even conservative groups like the Tax Foundation estimate that Trump’s plan would lose between $2.6 and $5.9 trillion over a decade, depending on which model they use.
Senate Majority Leader Mitch McConnell, R-Ky., House Ways and Means Committee Chairman Kevin Brady, R-Texas, and Mnuchin have all said they would prefer to do a tax overhaul that avoids such big losses.
“[The] national debt is dangerous and unacceptable,” McConnell said at a press conference in December. “My preference on tax reform is that it be revenue neutral.”
But experts say that may be impossible. Trump has proposed limiting itemized deductions in order to make up some of the cost — but Pomerleau and other experts said the code doesn’t contain enough deductions and special tax breaks to compensate.
“I don’t think the plan can get as close to revenue neutral as they’d like to,” Pomerleau said. “They’d still need to cut spending.”
2. Selling a plan that will help the super-rich. Trump has promised to cut taxes for everyone and while his plan may do that, experts say the biggest beneficiaries will be the wealthy, or those earning over $3.7 million. The proposals in Trump’s plan include a long list of goodies for the super-rich that go well beyond cutting the top individual rate.
Trump’s proposal includes limiting deductions taken by high-income earners — but most of those taxpayers would benefit from other changes in his plan. The wealthiest earners would also benefit from cuts to small business taxes and lower rates for income from investments. Trump has proposed cutting capital gains and dividends from a top rate of 23.8 percent to a top rate of 20 percent. Income from carried interest would top out at a rate of 15 percent.
That’s because most of the highest-income earners make more money off of investments and business income than they do from a regular salary. People like investors, hedge fund managers, and commercial real-estate brokers earn money through small business arrangements known as pass-throughs, which would see their tax rate cut from a top rate of 39.6 to as low at 15 percent.
“Pass-through businesses are across the income scale but most of it is at the very top income bracket,” Pomerleau. “One-third of their income is labor income, one-third is capital and one-third comes from small-business income.”
The average taxpayer in that top .1 percent tax bracket would have one-third of their income taxed at 15 percent, one third at 20 percent and one-third taxed at the top rate of 33 percent, assuming these taxpayers aren’t eligible for any other breaks or benefits.
Those rules could also make it easier for moderately high income taxpayers to avoid paying taxes by asking to be hired as contractors instead of employees. Under Trump’s plan, contractors could file as small businesses and lock in a 15 percent top rate.
“That is a loophole to drive a truck through,” Burman said. “If I’m supposed to be taxed in the 33 percent tax bracket, I tell my employer I’m an independent contractor and all of a sudden I’m taxed at 15 percent.”
3. Finding a way to tax international businesses. Lawmakers have long argued that the current system makes it easy for companies to stockpile cash offshore and avoid paying U.S. levies by only taxing companies when they reinvest foreign-earned money back home. Republicans also argue that high corporate tax rates have led to a recent spate of companies shifting their tax base overseas.
Trump has promised to crack down on these companies but hasn’t detailed how. He has used Twitter to float ideas like a 35 percent tariff on goods shipped to the United States by companies that send jobs overseas:
“The U.S. is going to substantialy reduce taxes and regulations on businesses, but any business that leaves our country for another country,
fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. ……
without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies ……”
The idea of a tariff is controversial in Congress and wouldn’t solve the issue of how companies who already operate overseas should be taxed. Members of the House Ways and Means Committee have proposed a plan that would, in part, tax the sale of imported goods and not the sale of exports through a process known as border adjustability.
Some tax experts think Trump could just adopt that proposal as part of his plan.
“There’s a good reason to think that the GOP could sell Trump on border adjustment,” Pomerleau said. “A fundamental misunderstanding of the plan could make it seem like a tariff.”
But Democrats and even most Senate Republicans aren’t on board with House GOP plan. Members of the Senate Finance Committee have been working on their own plan for corporate tax reform. Finance Committee Chairman Orrin Hatch, R-Utah, has held a series of hearings on how to prevent companies from stashing cash overseas and has been working with committee Democrats since last year to craft a bipartisan plan.
4. Getting Democrats on board. Congress is planning to establish a process allowing some elements of a tax reform to be approved without the threat of obstruction in the Senate. But most tax writers say they’d rather include Democrats in the process.
Senate Republicans have been discussing bipartisan reform ideas with Democrats since 2013. Hatch renewed that push last year when he convened a series of bipartisan working groups tasked with reviewing thorny issues Trump hasn’t touched, like how a tax code rewrite will handle breaks and credits for community development, infrastructure and education.
Hatch said last month that his dedication to bipartisanship hasn’t wavered since Trump was elected.
“”I don’t think it can be done except in a bipartisan way,” Hatch said in November.
House Republicans, including Brady, have also hinted they’re open to talking to Democrats.
“Join us, engage, bring us your best ideas for how to grow the economy,” Brady told reporters this month. “[Democrats] watching the same companies we do consider moving their manufacturing plants and their research overseas.”
Trump’s tax vision is filled with ideas that Democrats revile, like cutting taxes for the rich and repealing the estate tax. So far, no Democrats have seemed willing to work with Trump on his proposals.
“Trump’s plan is corporate welfare coming and going,” Sen. Bernie Sanders, I-Vt., wrote in a blog post published in November.
5. Persuading the business lobby. Trump says he will use his expertise as a businessman to win fights in Washington. But those skills may be put to the test when business lobbyists take sides in what could be the second coming of the Gucci Gulch battle.
Tax reform is one of the biggest, most profitable lobbying areas in all of Washington. More than 1,500 different groups paid millions to lobby lawmakers on tax reform in 2016, according to the Center for Responsive Politics.
Those numbers are expected to boom next year when companies start to flood congressional offices to argue in favor of their favorite tax breaks and benefits. Manufacturers want big breaks to make it easier to invest in equipment and materials, retailers want it to be cheaper to import popular goods from overseas, technology firms want a huge tax credit for research and development. And that’s just a start.
Major groups like the National Retail Federation, the National Association of Manufacturers, oil and gas producers and national telecom groups are among the groups expected lobby hard to make sure they are protected when a tax code overhaul is complete.
“The next few months will offer many opportunities for us to educate lawmakers on our priorities,” National Retail Federation President and CEO Matthew Shay said in a post-election statement. “As President Trump begins staffing his administration, we are hopeful that pragmatism will prevail over ideology so that all branches of government can work together.”