Ten Taxing Questions for 2017
With president-elect Donald Trump taking office this month, the world nervously awaits potential changes to the nation’s fiscal agenda. Here are ten key tax issues to be on the lookout for in 2017:
Tax cuts or tax reform?
One of Trump’s (and Congressional GOP leaders’) campaign promises was reform in the US tax code in 2017. However, rather than making real reforms such as eliminating tax preferences in return for rate reductions, or shifting to a business cash flow tax, the Trump administration and Congress may just opt for a big tax cut.
D.C. sources say that Congress will pass not one, but two major tax bills by April. Passing any new bill or making new policy is extremely complex and time-consuming; none more so than tax policy. As if that weren’t enough to keep our lawmakers occupied early in 2017, many may have their hands full through March with Trump nominations riddled with strife, while others may find themselves charged with repealing the Affordable Care Act.
Tax cuts for the rich?
Steven Mnuchin, Trump’s nominee for Treasury Secretary, has assured taxpayers that high-income households will not get an “absolute” tax cut. The Tax Policy Center (TPC), however, estimates that president-elect Trump’s most recent plan would cut millionaires’ taxes by an average of $317,000 in 2017. Unless Congress plans to pass an entirely different plan, Mnuchin’s claims are completely false.
How much new debt will Republicans tolerate?
This could be 2017’s million-dollar (or in this case trillion-dollar) question. According to the TPC, over the span of a decade, Trump will add $7 trillion to the national debt (the House GOP blueprint would add $3 trillion). How much more debt will Congressional Republicans – especially those Senate deficit hawks – tolerate?
How will the tax bill be scored?
To measure the cost of their tax bill, Congressional Republicans will rely on dynamic scoring. However, even factoring in economic effects, any tax cuts offered by Trump and the House Republicans will not generate as much growth as supporters hope. In fact, estimates by the TPC and the Penn-Wharton Budget Model have found that by 2025, Trump’s rapidly increasing debt would slow economic growth. Congress could attempt to remedy the scoring problem by instructing the Joint Committee on Taxation (JCT) to assume annual growth of four percent (for instance) when it models the cost of any tax bill. However, a projection such as this would be utterly worthless on the merits and damage the JCT. So why do it all you ask? Because it would allow Trump and Congress to claim that their tax cut adds less to the deficit than it likely would.
How will business respond to Trumponomics?
While running for president, one of Trump’s constantly repeated campaign promises was that he was going to restore US-based manufacturing jobs. This is counter-intuitive to his tax plan though, as his tax plan is likely to raise costs to businesses due to a boost in deficits and interest rates. On a similar note, a stronger American dollar would render US exports less competitive as would tariff-induced broken supply chains. So the question here is; will big tax cuts be sufficient in offsetting the aforementioned effects or will Trumponomics perversely hinder US business investment and hiring?
How will Congress treat specific tax preferences?
A big tax cut is bound to target some existing tax breaks for businesses and individuals, but the question remains: which ones and by how much? Trump proposed capping individual deductions and also promised to eliminate some unidentified business breaks, but the House GOP has been particularly silent on what preferences will be targeted.
Will a tax cut attract Democratic support?
When President Obama passed his Affordable Care Act (ACA) Congressional Republicans were not happy with him to say the least. They blasted him for cutting them out of the debate. Now that the GOP holds the power in D.C., will Congressional Republicans attempt to make any tax bill bipartisan by reaching out to Democrats? If so, will Democrats be willing to respond – and at what price?
How will Congress pay for health insurance subsidies?
It is likely that one of Congress’s first agenda items will be to repeal the taxes that accompanied the Affordable Care Act. However, they can’t just leave those who were depending on the ACA hanging. Lawmakers will need to design a replacement for the health law, and when they do, they will need some form of subsidy to help low- and middle- income households pay for insurance. If they repeal the ACA taxes, where will they get the money to pay for these expensive new tax subsidies?
Trump has made threats to impose heavy tariffs on both China and Mexico, but in recent weeks his aides have dropped hints contradicting those statements. Republicans from the Hill have carefully sidestepped the issue, hoping it will simply go away as many of them are committed free-traders. The question is: will it?
Just weeks before the presidential inauguration, Trump’s economic policy remains murky at best – full of vague notions and contradictory proposals. It’s only a matter of time though before we find out which of the President-Elect’s propositions or statements we can take seriously, and which ones were simply campaign rhetoric.