President Donald Trump had unveiled a one-page plan on Wednesday proposing deep US tax cuts, many for businesses, that would make the federal deficit balloon if enacted, drawing a cautious welcome from fiscal conservatives and financial markets.
While the proposed tax cuts would please those helped by them, such as multinational corporations and wealthy taxpayers, Trump's package fell far short of the kind of comprehensive tax reform that both parties in Washington have sought for years.
As his milestone 100th day in office on Saturday nears, Trump has been scrambling to show progress on his agenda. The tax plan, though meagre in detail, matched up closely with the promises he made during his victorious 2016 election campaign.
Investors, who had been awaiting tax-plan details for months, largely shrugged off the news, with many saying it was still short on specifics and faced a long road to enactment. “Wake me up when something actually gets signed into law,” said Greg McBride, chief financial analyst at Bankrate.com in West Palm Beach, Florida.
Only Congress can make major tax law changes, and Democrats immediately attacked the Republican president's plan as fiscally irresponsible.
"President Trump’s tax plan is short on details and long on giveaways to big corporations and billionaires," said Nancy Pelosi, the top Democrat in the House of Representatives.
House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and the top Republicans on the congressional tax-writing committees welcomed the Trump proposals, while leaving space for details to change as legislation evolves.
“The principles outlined by the Trump administration today will serve as critical guideposts" as Congress and the administration work on tax changes, they said in a statement.
US stocks pared gains on Wednesday after the plan was unveiled. While Wall Street has been optimistic about the prospect of corporate tax cuts since Trump's election in November, the stocks rally has stalled lately because of a lack of clarity about Trump's policies and concern over his failure to push through a healthcare bBll.
The benchmark Dow Jones industrial average of blue-chip stocks .DJI on Wednesday closed down one-tenth of 1 per cent.
Some analysts said investors were aware of the long road ahead before any tax bill is passed.
"We have a pretty good idea that he (Trump) is targeting lower corporate taxes, lower individual taxes and a simplification of the process, but all that is in an ideal world," said Andre Bakhos, managing director at Janlyn Capital in Bernardsville, New Jersey.
Business tax rate cuts
In the plan, unveiled at the White House by Trump economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin, Trump proposed cutting to 15 per cent both the income tax rate paid by public corporations and that paid by "pass-through" businesses, including partnerships, S corporations and sole proprietorships.
The top corporate rate is now 35 per cent, though few multinational companies pay it, thanks to loopholes that allow them to lower their effective tax rates. Despite this, corporations have pushed for a tax rate cut for many years, and Trump has obliged.
The top rate for pass-throughs, which account for most small businesses, is 39.6 percent, the same top rate paid by individuals. Unlike corporations, the profits of "pass-through" businesses flow directly onto their owners' tax returns.
In another concession to long-standing demands from corporate America, Trump called for bringing corporate profits being held offshore by multinationals into the country at a rate well below the current 35 per cent rate now owed on "repatriated" earnings. He did not say what that rate would be, but said the administration was working with Congress on a low rate.
About $2.6 trillion in profits are being held tax-exempt abroad by US multinationals under a rule that says they are only taxable if brought into the United States.
If enacted, the repatriation tax holiday would produce a one-time surge in government revenue. If it were dedicated to infrastructure spending, it could attract votes from Democrats.
The plan also urged adoption of a "territorial" corporate tax system that would largely exempt foreign profits of US-based corporations from federal taxation.
Ryan expressed optimism about Trump's plan, even though it excluded a "border adjustment" tax on imports he has promoted. That idea was part of initiatives floated by House Republicans as a way to offset revenue losses resulting from steep tax cuts.
State, local tax deduction targeted
For average US taxpayers, Trump proposed help by doubling the standard deductions for individuals who do not itemise; simplifying tax returns by reducing the number of tax brackets to three from seven; and providing unspecified tax relief for families with child and dependent care expenses.
He also called for repealing inheritance taxes on estates and the alternative minimum tax, both measures that would help a handful of wealthy taxpayers.
Trump's laundry list of tax cuts would reduce revenues for the US government, which is already running a deficit and deeply in debt. He offered few proposals to offset those losses.
Democrats and fiscal-hawk Republicans will be concerned about how much Trump's proposals would expand the deficit. To minimize that, Republicans will rely heavily on "dynamic scoring," an economic modeling method that attempts to predict economic growth and new tax revenues resulting from tax cuts.
Mnuchin said the revenue losses would also be offset by killing many tax loopholes. He said at a briefing that Trump's plan would kill most tax deductions, except those for charitable giving, retirement savings and mortgage interest.
Cohn said at the briefing that one deduction on Trump's chopping block is for state and local tax payments, which is estimated to cost the US Treasury $96 billion this year. Ending it would raise about that much in revenue.
Such a move would hurt high-tax states, which tend to vote Democratic, such as New York and California, where the state and local tax deduction is a major item, said some tax analysts.
Like all of Trump's proposals, this one would face intense scrutiny in Congress.
The No. 2 Democrat in the Senate, Dick Durbin, attacked the tax proposal and the fact Trump, a wealthy New York real estate developer, had declined to make public his personal tax returns.
"President Trump should release his own tax returns if he wants to have any credibility in a debate about America’s tax code," Durbin said. Mnuchin said on Wednesday that Trump did not intend to release his tax returns.