Trump's tax reform plan would dramatically lower rates for businesses, some individuals

President Donald Trump's tax reform plan would lower the corporate rate to 20 percent, and pass-through business rate to 25 percent.

The plan, set to be unveiled Wednesday, would also reduce the number of individual tax brackets from seven down to three, with a possible fourth bracket if needed.

The plan already faces stiff opposition from Democrats and skepticism from economists.

Published 59 Mins Ago Updated 18 Mins Ago CNBC.com
September 27, 2017

Republicans will unveil sweeping changes to America's tax code Wednesday in a proposal that dramatically lowers taxes on businesses and many households but remains silent on thorny issues such as how to pay for it all.

The framework—a joint product of the Trump administration and Republican leadership—calls for lowering the corporate rate from 35 to 20 percent. It would also bring down the rate for so-called pass-through businesses to 25 percent; currently, they are taxed under the individual code.

The plan, described to CNBC by multiple sources, would collapse the current seven personal tax brackets to just three: 12, 25 and 35 percent. It eliminates the deduction for state and local taxes, but nearly doubles the standard deduction. The child tax credit also would be substantially increased, though it was unclear by exactly how much.

Those broad brushstrokes were hashed out during months of negotiations between Treasury Secretary Steven Mnuchin, National Economic Director Gary Cohn and top Republicans in the House and Senate, a group that has come to be known as the "Big Six." Tax reform has become the clarion call for the party amid rising frustration among conservatives over the failure of the repeal and replace of Obamacare.

"Tax reform is the most important thing we can do to restore confidence to this country, to get jobs and prosperity and that's why we are so singularly focused on getting this done this year," House Speaker Paul Ryan, a Big Six member, said on Tuesday.

But despite the unity around the framework that will be announced Wednesday, Republicans still face plenty of roadblocks on the road to reform. Perhaps the biggest obstacle is sharp criticism from Democrats and skepticism from tax experts, who argue that the proposal primarily benefits large corporations and wealthy households—which could leave Trump's populist base feeling that the president is breaking his campaign pledge to make tax reform benefit the middle class.

The tax reform plan being unveiled Wednesday cuts the top individual income tax rate from 39.6 to 35 percent, although lawmakers received the green light to add a higher fourth rate to respond to pushback, according to a source familiar with the discussions.

Tax analysts also said the lower rate for pass-throughs could wind up being a giant loophole for the wealthy, who could reclassify their income to take advantage of it. Lawmakers who will craft the legislation have been tasked with writing rules to prevent such abuse, a source told CNBC, but drafting language that achieves this has proven insurmountable in the past.

In addition, the framework raises the bottom tax rate from 10 to 12 percent, which primarily affects low-income households. Doubling the standard deduction and expanding the child tax credit could offset that increase for poor households—and possibly result in more people paying no taxes at all.

But experts said that the income brackets that lawmakers set for each tax rate would determine whether that is the case. Under previous analysis of Trump's tax proposals, analysts found that low-income households—particularly single parents—could wind up paying more. That would violate the president's own promise that the benefits of his plan would not be skewed toward the rich.

"They can't achieve that promise and create a structure like this," said Howard Gleckman, a senior fellow at the Tax Policy Center.

Note: This version of the story has been updated to clarify attribution.

https://www.cnbc.com/2017/09/27/trum...dividuals.html