The Republican push to repeal and replace Obamacare may or may not be dead following the Senate's failure to pass "skinny repeal" in late July, but the White House, members of Congress and pundits have made it clear that they intend to tackle tax reform next.

On August 1 Senate Democrats signaled that they would be willing to help, albeit on their own terms: 45 of the 48 Democratic caucus members signed a letter urging Senate Republican leaders not to use the reconciliation process – which requires a simple majority rather than a filibuster-proof 60 votes – which would "undoubtedly result in outsized political influence on the process and significantly hinder lawmakers' ability to close loopholes and end special interest favoritism that plagues our current tax system."

The priorities laid out in the Democrats' letter clearly did not chime with Senate Majority Leader Mitch McConnell, who responded: "We will need to use reconciliation because we have been informed by the majority of the Democrats in a letter I just received today that most of the principles that would get the country growing again, they're not interested in addressing." According to reports, the Democrats' letter opposed tax cuts for the highest-earning Americans and cuts to programs such as Medicare, Medicaid and Social Security; it advocated tax cuts for the middle class. It said that the bill should not add to the deficit, which is a requirement for reconciliation in any case.

Republican Priorities

The White House and Congressional Republicans have so far provided little detail on what a tax reform proposal would include. In April Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn released a broad outline consisting of just a single page of bullet points (see here for the full text). The proposal aims to slash corporate and personal income tax rates, but does not mention a tax on imports, the "border adjustment tax" favored by some Republicans in Congress. Instead it mentions setting up a "territorial tax system," which could mean a number of things. The proposal does not include an infrastructure spending package, which had been floated as a sweetener to gain Democratic support.

The proposal would:

Lower individual tax rates: the top marginal rate would fall to 35% from the current 39.6%. The current seven brackets would be collapsed to three: 35%, 25% and 10%. There is no mention of what income levels these rates would apply to.

Double the standard personal tax deduction, which would bring it to $12,700 for individuals and $25,400 for joint filers. The plan did not mention the head of household filing status, which Trump said during the campaign he would scrap.

Provide child and dependent care tax breaks; these were not specified.

Eliminate itemized tax deductions, with the exception of those for charitable donations and mortgage payments.

Lower the corporate tax rate to 15% from the current federal rate of 35%.

Set the pass-through rate for business owners at 15%, replacing rules that tax business owners at the personal income rate.

Allow a one-time repatriation of corporate profits at a reduced rate. U.S. companies currently hold around $2.5 trillion overseas. The one-time rate was not specified. (See also, These 5 Companies Hold Over $500 Billion in Cash.)

Eliminate the estate tax, commonly referred to by anti-tax conservatives as the "death tax."

Repeal the 3.8% tax on the net investment income of individuals, estates and trusts, when such income exceeds statutory thresholds. The tax went into effect in 2013 as part of the Affordable Care Act, or Obamacare.

Repeal the alternative minimum tax, a device that reduces tax avoidance.

Eliminate tax breaks that benefit the wealthy and special interests; these were not specified.

These broad strokes are in line with plans floated by the Trump team during the campaign, but lack much of these plans' detail, making it difficult to estimate the reform's costs and benefits. The proposal closed with a promise to hold "listening sessions with stakeholders" and conversations with the House and Senate throughout the month of May.

The administration followed up in July with a joint statement with House and Senate Republican leaders. While it expressed confidence that "a shared vision for tax reform exists," the statement provided less detail than the April outline; its only substantive revelation was that Republican leaders had decided to not to pursue a border adjustment tax.

Based in part on Trump's campaign proposals, the fiscally hawkish Committee for a Responsible Federal Budget (CRFB) has estimated that the plan as outlined in April would add between $3 and $7 trillion to federal deficit over a decade, with a "base-case" cost estimate of $5.5 trillion. Cohn suggested that the plan would contribute to growth, writing in a statement on the White House's website, "the President has focused on three things since his campaign: job creation, economic growth, and helping low and middle-income families who have been left behind by this economy."

CRFB president Maya MacGuineas doubts that growth can offset the plan's costs, however: "Unfortunately, it seems the Administration is using economic growth like magic beans – the cheap solution to all our problems. But there is no golden goose at the top of the tax cut beanstalk, just mountains of debt."

Can Reform Be Done?

People on both sides of the political spectrum agree that the tax code should be simpler. Since 1986, the last time a major tax overhaul became law, the body of federal tax law – broadly defined – has swollen from 26,000 to 70,000 pages, according to the House GOP's reform proposal. American households and firms spent $409 billion and 8.9 billion hours completing their taxes in 2016, the Tax Foundation estimates.

Nearly three quarters of respondents told Pew they were bothered "some" or "a lot" by the complexity of the tax system in 2015. In particular they were troubled by the feeling that some corporations and some wealthy people pay too little: 82% said so about corporations, 79% about the wealthy. According to the Tax Policy Center, 72,000 households with incomes over $200,000 paid no income tax in 2011. ITEP estimates that 100 consistently profitable Fortune 500 companies went at least one year between 2008 and 2015 without paying any federal income tax. There is widespread perception that loopholes and inefficiencies in the tax system – the carried interest loophole and corporate inversions, for example – are to blame.

Special Interests

Congress is partly responsible for this state of affairs. According to the Economist, "Where once the passage of bills was smoothed by including federal money for pet projects in congressmen's districts, tax breaks are now the preferred lubricant." This trend points to a major sticking point for reform efforts: while the overall benefits would be enormous, they would be diffuse, with each household and firm saving some money and some time. For a few interest groups, however, particular carve-outs and loopholes are essential, meaning they are willing to expend significant time and money lobbying against reform. (See also, Goldman Reduces Buyback Forecast After Trump Tax Reform Delay.)

One group is dependent not on any particular aspect of the complex tax system, but on the complexity itself: as NPR and ProPublica have reported, TurboTax maker Intuit Inc. (INTU) and H&R Block Inc. (HRB) have lobbied against bills that would allow the government to estimate taxes, saving much of the hassle on which the firms' business depends. Tax-preparation firms may also oppose bills aimed at simplifying the code itself, rather than the filing system.

The Pledge

As of the previous (113th) Congress, only 16 Republicans in the House and six in the Senate have failed to sign tax campaigner Grover Norquist's pledge not to raise taxes. If Norquist decides that an aspect of a Republican proposal violates the pledge, it could be dead on arrival. Even if he does not weigh in, however, Republicans who fear a primary challenge could invoke the pledge to avoid supporting reform.

Healthcare Hangover

Norquist told Yahoo Finance in late March that the Republicans must repeal Obamacare – which has proved difficult – before moving on to tax reform, since eliminating the taxes associated with the 2010 health law would give the federal government an additional $1 trillion in fiscal space. The concern that tax reform must not raise the deficit goes beyond politics and economics: according to the 1985 Byrd Rule, the reconciliation process can only be used to pass legislation that would not raise the deficit outside of a 10-year window. With 52 seats in the Senate, Republicans must use the reconciliation process, gain enough Democratic support to reach 60 votes, or risk a filibuster.

Internal Divisions

Before they can worry about the prospect of a Democratic filibuster, however, Republicans must shore up support in their own party. The Trump administration produced a proposal – more than one – during the campaign, while Republicans in the House have their own. A unified proposal has yet to emerge. (See also, Investors May Have to Settle for "Tax Reform Lite.")

Money has fueled the rivalry. The New York Times reported in April that three groups funded by the Koch brothers – influential Republican donors who opposed the failed health bill – were running campaigns against the border adjustment tax laid out in the House GOP's proposed tax reform. They argue that border adjustment would lead to higher prices for consumers. Big importers such as Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT) also lobbied against the measure. Norquist supported it. Trump was skeptical, telling Fox's Maria Bartiromo, "When I hear border adjustment, adjustment means we lose. We lose."

House Republicans have abandoned the policy, according to the joint statement they issued with Senate leaders and the White House in July. That statement limited itself to the broadest strokes and did not include a single number. The ideological fissures the Obamacare repeal effort exposed (and exacerbated) could make finding a Republican consensus on tax reform painful, if not impossible. A bipartisan effort would likely, though not necessarily, prove even more difficult. (See also, Cisco CEO on Trump's Proposed Tax Reforms.)

Trump's Tax Plans: A History

In September 2015, Trump unveiled "tax reform that will make America great again." The four-page document laid out steep cuts to personal and business income tax rates and promised that, by closing loopholes and pushing companies to repatriate foreign profits, the reform would be "fully paid for."

Experts begged to differ. The conservative Tax Foundation estimated that the deficit would balloon by $11.98 trillion over 10 years. The more liberal Tax Policy Center came up with a similar estimate, adding that by 2036 the debt would have risen by $34.1 trillion, due to higher interest. As of March 28 the gross national debt stands at $19.9 trillion.

The Tax Foundation backed up Trump's claim that the plan provided "tax relief for all Americans," but forecast that some would be more relieved than others. The lowest-earning 10% of taxpayers would get a 1.4% break. The richest 1%, a 21.6% break. These disparities narrowed slightly after factoring in the plan's expected macroeconomic effects. The Tax Policy Center also found the plan's benefits to be top-heavy. (See also, Opinion: Will Donald Trump's Tax Reforms Reform Anything?)

Given that 79% of respondents surveyed by Pew think the wealthy don't pay their fair share in taxes, these findings proved to be a liability. In an August 2016 speech in Detroit, Trump presented the outlines of a revised tax plan, which he fleshed out in a speech in New York the following month.

Government Revenue and Macroeconomic Forecasts

According to the Tax Foundation, the hit to national coffers, fell from a revised $12.3 trillion under the 2015 plan to $4.4-$5.9 trillion under the 2016 revision. The range of potential impacts on government revenue was so wide due to ambiguity in the 2016 proposal: pass-through income – business earnings that are taxed as personal income – could be taxed at the 15% business rate, the 33% personal rate, or somewhere in between. The Tax Policy Center assumed that the rate would be 15% (they assumed correctly; this is the rate anticipated by the 2017 proposal), except for income from "large" pass-through businesses, which would be taxed as dividends.

The Tax Foundation expected the Trump's 2016 plan to have positive macroeconomic effects: a 6.9% boost to 2016-2025 gross domestic product (GDP) growth (assuming the higher pass-through rate) or 8.2% (assuming the lower one), over and above the 19.2% real growth forecast by the Congressional Budget Office. The think tank forecast that capital stock would rise by 20.1% to 20.3%, wages by 5.4% to 6.3%, and full-time jobs by 5.3 million. These effects would offset the hit to government revenues, bringing it to $2.6-$3.9 trillion.

Forecasts under Trump's 2015 and 2016 plans, 2016-2025
Metric 2015 2016
Real GDP 11.5%* 6.9% to 8.2%
Capital investment 29.0% 20.1% to 23.9%
Wages 6.5% 5.4% to 6.3%
Full-time equivalent jobs (thousands) 5,329 1,807 to 2,155
Government revenues (trillions) -$12.3 (static, revised) -$4.4 to -$5.9 (static)
-$2.6 to $3.9 (dynamic)
Source: Tax Foundation; *"long term" boost to growth; in addition to 19.2% 2016-2025 growth forecast by CBO

The Tax Policy Center, on the other hand, cautioned that Trump's 2016 plan would push up the national debt by an estimated $20.7 trillion by 2036 – more than doubling the gross figure, in other words. The resulting rise in interest rates would crowd out private investment and offset "some or all of the plan's positive effects." Despite an initial boost to the economy, the eventual effect would be lower GDP, capital stock, wages and labor supply compared to forecasts under current law.

Distributional Effects

By the Tax Foundation's reckoning, Trump's 2016 plan would — on a static basis, ignoring estimated macroeconomic effects — have benefited the highest-earning 1% by 12.0% to 16.0%, while the lowest-earning 20% would gain 1.2%.

Incorporating estimates of the plan's macroeconomic effects, the plan would have boosted the after-tax earnings of the top 1% by 12.2% to 19.9%. The boost to the bottom 20% would have been 6.9% to 8.1%.

Middle Class Tax Hike?

The Tax Policy Center's analysis tells a slightly different story. The think tank also estimated the effects of the 2016 Trump proposal on each income quintile's after-tax incomes, and the results were broadly in line with the Tax Foundation's. A more granular look at the proposal shows that some middle-class filers would have seen a tax hike, however: single filers earning between $15,000 and $19,625 per year and childless married couples making between $30,000 and $39,250, who pay a 10% marginal rate under current law, would have paid 12% under Trump's 2016 plan.

Tax Policy Center: 2016 tax rates under current law and Trump proposal
Single filers Childless married couples filing jointly
Adjusted gross income (up to) Current marginal rate Trump marginal rate Adjusted gross income (up to) Current marginal rate Trump marginal rate
$10,350 0% 0% $20,700 0% 0%
$15,000 10% 0% $30,000 10% 0%
$19,625 10% 12% $39,250 10% 12%
$48,000 15% 12% $96,000 15% 12%
$52,500 25% 12% $105,000 25% 12%
$101,500 25% 25% $172,600 25% 25%
$127,500 28% 25% $252,150 28% 25%
$200,500 28% 33% $255,000 33% 25%
$423,700 33% 33% $433,750 33% 33%
$425,400 35% 33% $487,650 35% 33%
Over $425,400 39.6% 33% Over $487,650 39.6% 33%
Note: only applies to filers who take the standard deduction; bold typeface denotes a tax hike under Trump's plan

Reciprocal Taxes (Tariffs)

Trump announced his candidacy in June 2015 with a promise to slap tariffs on the cars Ford Motor Co. (F) produces in Mexico: "Every car and every truck and every part manufactured in this plant that comes across the border, we're going to charge you a 35% tax, and that tax is going to be paid simultaneously with the transaction, and that's it." He has also promised 45% tariffs on Chinese imports.

Trump's tax plans have not explicitly included such tariffs. In April he discussed the idea of matching tariffs, telling Fox's Maria Bartiromo, "You can call it a reciprocal or a matching tax or a mirror tax. There are numerous terms." He added, "nobody gets angry when you say reciprocal tax. When you say we're going to charge a border tax – we'd be a rich nation if we did it, by the way … but when you say reciprocal, nobody fights you."

The House GOP's Plan

Skip to top

On June 24, 2016, Speaker of the House Paul Ryan and House Ways and Means Committee chair Kevin Brady, both Republicans, released a tax plan that differs from Trump's 2016 plan in a number of key ways.

Individual Income Tax

The House Republican plan would collapse the current seven individual income tax brackets into three, cutting the top marginal rate to 33% from 39.6%. It would not eliminate the head of household filing status, as Trump's 2016 plan would have. The House plan would tax dividends, long-term capital gains and interest as ordinary income and exclude the first 50% of such income from tax. It would also repeal the 3.8% net investment income tax, yielding a top effective rate of 16.5% on dividends; the current rate, including the surtax, is 23.8%.

House GOP Plan
Income tax rate Long-term capital gains, dividend rate Single filers Married filers Heads of household
12% 6% $0 to $37,650 $0 to $75,300 $0 to $37,500
25% 12.5% $37,651 to $190,150 $75,301 to 231,450 $37,501 to $75,000
33% 16.5% $190,151+ $231,451+ $75,001 to $225,000

The plan would raise the standard deduction from $6,300 to $12,000 for singles; it would be $24,000 for married couples and $18,000 for heads of household. The plan would eliminate all itemized deductions except for the mortgage interest deduction and the charitable giving deduction. That would include the state and local tax deduction, which mostly benefits residents of blue states: New Yorkers reduced their tax bills by 9.1% of adjusted gross income in 2014 using the deduction, according to the Tax Foundation, while Californians received a 7.9% break.

The plan would increase the child tax credit to $1,500 per child, $1,000 of which would be refundable. The credit would begin to phase out at $150,000 rather than $110,000. It would scrap the personal exemption and replace it with a $500 non-refundable credit for dependents who are not children.

The proposal would also eliminate the alternative minimum tax, the estate tax, the generation-skipping transfer tax and the gift tax.

Corporate Income Tax

The House Republican plan would cut the top corporate tax rate to 20% from the current 35% (Trump proposes a cut to 15%). The top rate for pass-through businesses would be 25%.

The plan includes a number of changes that would fundamentally change the corporate tax system. First, businesses would be allowed to immediately deduct the full cost of capital investments, rather than depreciating them over the life of the investments. Land and inventories would be excluded from this change. Second, net interest expense would no longer be deductible. (See also, What is the tax impact of calculating depreciation?)

Third, the plan would introduce a destination-based cash-flow tax (DBCFT), the most notable feature of which would be border adjustment: companies would pay taxes on imports and domestic sales but not on exports. Since only sales to U.S. consumers would be taxed, the system is also referred to as a consumption tax. The current system focuses on production, which encourages companies to shift profits – and occasionally their headquarters – to overseas subsidiaries in lower-tax jurisdictions. (See also, Manufacturing Giants Back US Tax Reforms.)

According to one interpretation, the DBCFT is a value-added tax (VAT) of the kind most countries already have. It would replace the corporate income tax, making the U.S. the only advanced economy not to have one. On the other hand, wages would be deducted, meaning that the World Trade Organization (WTO) might consider the proposal an income tax. The WTO permits border adjustment on VATs, and most countries include it, but prohibits it on income taxes. (See also, IMF, WTO and World Bank: How Do They Differ?)

VATs were until recently anathema Republican purists. Norquist called them "an extremely efficient money machine for big government," arguing that since they were mostly hidden from view, they could be hiked relatively easily. Heading into the 2016 elections, however, two Republican senators – Kentucky's Rand Paul and Texas' Ted Cruz – proposed VATs; fearing ideological challenges, they labeled them a "business activity tax" and a "business flat tax," respectively.

The proposal would require repatriation of U.S. companies' foreign profits at a rate of 8.75% for cash profits and 3.5% for other profits. It would restrict deductions for net operating losses to 90% of net taxable income; it would allow these losses to be carried forward indefinitely, instead of the current 20 years, and adjusted for inflation. It would not allow them to be carried back, as they currently can for two years. The plan would scrap the corporate alternative minimum tax and all section 199 deductions with the exception of the research and development credit.

Government Revenue and Macroeconomic Forecasts

The Tax Foundation forecasts that the GOP plan would reduce federal government revenues by $2.4 trillion over the course of a decade, but factoring in the macroeconomic effects it expects the proposal to have, it forecasts a more modest reduction of $191 billion. The think tank bases that assessment on estimates that the House GOP plan would boost GDP by 9.1% over the long run, as well as growing wages, capital stock and the pool of full-time equivalent jobs.

Forecasts under House GOP's plan, "long run"
GDP 9.1%
Capital investment 28.3%
Wages 7.7%
Full-time equivalent jobs 1,687,000
Government revenues* -$2.4 trillion (static)
-$191 billion (dynamic)
Source: Tax Foundation; *next decade

The Tax Policy Center is less optimistic. On a static basis, it expects a $3.1 trillion fall in federal revenues over the next decade under the House GOP's plan. After factoring in macroeconomic effects, it expects a reduction of $2.5 trillion to $3.0 trillion. As with Trump's plan, it expects an initial boost to GDP, wages, capital stock and labor supply. As the rising federal deficit drives up interest rates, however, it expects these benefits to fade; wages, growth and investment would eventually begin to lag behind forecasts under current law.

Distributional Effects

As with Trump's proposal, the wealthiest would enjoy the largest tax cuts under the House GOP plan. According to the Tax Foundation, the bottom 20% of earners would see a 0.3% boost in after-tax earnings, while the top 1% would emerge with an extra 5.3%. Factoring in expected macroeconomic effects, the think tank sees after-tax incomes rising 8.4% for the bottom quintile and 13.0% for the top 1%.

The Tax Policy Center comes to similar conclusions: The lowest-earning 20% would enjoy a $100 tax cut or a rise of 0.5% in after-tax income. The highest-earning 1% would receive a $239,720 break, for a 10.6% rise in after-tax income. This segment of the population would receive a 99.6% share of the overall tax cut. The top 0.1% would get a 13.5% boost to after-tax income, paying $1.4 million less in tax per person. They would collectively account for over 60% of the tax cut. (See also, How Tax Cuts Stimulate the Economy.)

Effects on Incentives

The Tax Policy Center expects the House GOP plans' incentives to be largely in line with those of Trump's 2016 plan. It would lower marginal effective tax rates, encouraging new investment. It would make equity financing more attractive than debt financing. It would drive up wages and encourage more workers to enter the labor force. These benefits would be temporary, however: rising deficits would drive up interest rates, offsetting the tax reform's benefits.

Unlike Trump's 2016 plan, which would scrap the deduction for charitable donations, the GOP plan would not reduce the incentive to donate money to nonprofits. Trump's most recent proposal would retain the deduction.

The House GOP plan would reduce the incentive for U.S. multinationals to shift their profits abroad in order to avoid U.S. taxes. Corporate inversions, an extreme version of this tax avoidance method, would lose their appeal. (See also, Corporate Inversion: How It Works.)

While the border adjustment provision would appear to favor exporters over importers, most economists tend to think that currency exchange rates would adjust to cancel out these effects.

Take the Tax Foundation's example: a business imports goods to sell in the U.S. It takes in $100 in revenue from domestic sales and spends $60 on imports, making its taxable income under the current system $40. It pays a 20% rate, or $8, leaving $32 in after-tax income. Under the GOP proposal that business would no longer be able to deduct the $60 cost of its imports, so its taxable income would be $100, leaving with $20 in after-tax income.

If reality cooperates, however, market forces will correct this imbalance: the prices of imported goods will rise, reducing demand for them, making dollars more scarce and therefore more valuable abroad and driving the value of dollar up by somewhere around 20%. The hypothetical business' costs of goods sold will accordingly drop to $48, leaving it with the same $32 in after-tax income it started with.

Effects on firms that import goods to sell domestically
Current law After border adjustment After 20% rise in USD
Revenue $100 $100 $100
Cost of goods sold $60 $60 $48
Taxable income $40 $100 $100
Tax (20%) $8 $20 $20
After-tax income $32 $20 $32
Adapted from the Tax Foundation

An exporter would experience the same shifts in mirror image. Under the current system, $100 in sales abroad and $60 in domestic production costs yields a taxable income of $40 and an after-tax income of $32. Under the GOP proposal its taxable profits would be -$60, so the Treasury would write it a $12 check for an after-tax income of $52. If the dollar appreciates, however, its revenues would drop to $80, leaving its bottom line unchanged at $32.

Effects on firms that produce goods domestically for exports
Current law After border adjustment After 20% rise in USD
Revenue $100 $100 $80
Cost of goods sold $60 $60 $60
Taxable income $40 -$60 -$60
Tax (20%) $8 -$12 -$12
After-tax income $32 $52 $32
Adapted from the Tax Foundation

The Tax Foundation points out that these exchange rate adjustments could be expected to take place fairly quickly, but affected companies' lobbying efforts indicate that not everyone is convinced by the economists' neat theorizing.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.