Key Points
- President Donald Trump’s White House recently outlined a new tax plan.
- President Trump’s White House tax plan is similar in many ways to his tax plan while on the campaign trail. However, the new tax plan lacks considerable detail, and estimates of its impact will be revised as the plan gets more specific.
- Nonetheless, lessons from PWBM’s analysis of his campaign tax plan can help guide policymakers as they add more details to the White House tax plan.
President Trump’s New Tax Plan: What’s Changed?
On April 26th, 2017 President Trump outlined a proposal to change the U.S. tax system. Many items in his White House tax plan are similar to those he proposed while on the campaign trail in the fall of 2016.
Business Taxes
Table 1 shows that both President Trump’s White House and campaign tax plans reduce corporate and pass-through tax rates to 15 percent. Both plans also include a one-time lower rate to induce companies to bring foreign profits home. As shown, many of the specific details in the White House tax plan are yet to be announced, including expensing of capital equipment and interest deductibility.
The main known difference between the campaign plan and the new White House plan is that the White House tax plan includes shifting the U.S. to a territorial tax system rather than the current worldwide system used by the U.S. In a worldwide tax system, U.S. firms owe U.S. taxes regardless of where in the world they sell their goods and services, although they do receive a tax credit for foreign taxes paid. In a territorial system, by contrast, firms would pay U.S. taxes only for goods and services sold in the U.S. A territorial system is commonly used by the U.S.'s large trading partners. Adopting a territorial system, therefore, promotes more tax harmonization, although it can produce other side effects. However, given the substantially lower proposed corporate tax rate, the net impact from moving to a territorial system alone is much smaller than it would have been at the existing tax rate. Indeed, at a 15% corporate tax rate, many U.S. firms selling abroad would receive enough foreign tax credits to eliminate their U.S. tax bill, even under a worldwide tax system.
Table 1: A Comparison of Two Tax Plans
| President Trump's Campaign Tax Plan as in PWBM Simulator | President Trump's White House Tax Plan | |
|---|---|---|
| Business Taxes | ||
| Corporate rate | 15% | 15% |
| Pass-through rate | 15% | 15% |
| Repatriation rate | 10% on cash, 4% non-cash, paid over 10 years | Not yet determined |
| Interest deduction | Repealed for businesses who choose expensing | Not yet determined |
| Immediate expensing | Allowed for business who choose | Not yet determined |
| ACA taxes | Repeal net investment tax of 3.8% | Repeal net investment tax of 3.8% |
| Territorial Tax | No | Yes |
| Individual Taxes | ||
| Tax rates | 12%, 25%, and 33% | 10%, 25%, 35% |
| Adjusted gross income (AGI) tax rate thresholds | 12% bracket: < $52,500 (single), < $105,000 (married) 25% bracket: ≤ $52,500 to < $127,500 (single), ≤ $105,000 to < $255,000 (married) 33% bracket: ≥ $127,500 (single), ≥ $255,000 (married) |
Not yet determined |
| Alternative minimum tax (AMT) | Repealed | Repealed |
| Estate tax | Repealed | Repealed |
| Capital gains tax at death | Yes | Not yet determined |
| Personal exemptions | Repealed | Not yet determined |
| Head of household filing status | Repealed | Not yet determined |
| Standard deductions | $15,000 (single), $30,000 (married) | $12,600 (single), $25,200 (married) |
| Itemized deductions | Capped at $100,000 (single), $200,000 (married) | Repealed other than those below |
| State and local taxes | Subject to above cap | Repealed |
| Mortgage interest | Subject to above cap | Remains |
| Charitable giving | Subject to above cap | Remains |
| Child care | Expanded dependent care deduction and new deduction | Not yet determined |
Individual Taxes
The changes proposed to individual taxes contain a few more differences, but, overall, it is also similar. Table 1 shows that the White House tax plan includes a larger top marginal rate and a smaller standard deduction than the campaign tax plan. Both plans repeal the Alternative Minimum Tax (AMT), the estate tax, and expand tax benefits for child care. Details are yet to come, but expanded benefits for child care are expected to be different under the White House tax plan. The campaign tax plan proposed to limit all itemized deductions while the White House plan keeps only the deductions for mortgage interest and charitable giving.
Lessons from the Campaign Trail
Until more details are released about the White House tax plan, we are not ready to make estimates of how the plan will impact the budget and the economy. However, given the similarities between the tax plans, it is still worth revisiting some of the key lessons from the campaign tax plan, which can help guide policymakers in the design of the White House tax plan.
Penn Wharton Budget Model’s (PWBM) tax policy simulator results show that by 2028, President Trump’s campaign tax plan increases debt by 31.04 percent more than current policy. By 2040, the debt increases by 44.87 percent relative to current law. The increase in debt reduces private capital formation, unless international capital flows are substantially more robust than in the past. Larger spending cuts will be needed to avoid greater debt.
President Trump’s campaign tax plan stimulates the economy in the short run, by as much as 1.35 percent of GDP, but leaves the economy unchanged within just ten years. Thereafter, the economy does worse than under current law, due to growing debt. By 2040, GDP is 8.49 percent smaller than under current law, even after accounting for the dynamic impact on the economy.
It has been widely reported in the media that President Trump is considering renegotiating NAFTA, although he recently announced a delay of that decision. Trade policy and tax policy, however, closely interact. If trade policy were used to reduce the flow of goods and services across borders, cross-border capital flows must also fall, enhancing the negative effects of growing debt. For example, if international trade were fully shut down, the economy will be 15.42 percent smaller in 2040 relative to current law.
Conclusion
Both President Trump’s campaign and White House tax plans are very similar. Therefore, PWBM expects the impact on the economy and budget to be similar. However, our analysis will change when more details are released.
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