Trump tax reform plan heads into quagmire

Donald Trump’s ambitions on tax reform, regulation and government spending have pushed Wall Street stocks higher

The Trump administration’s hopes of achieving tax reform this year are already being questioned by current and former congressional aides as Washington faces a fiscal quagmire over the next three months and intense wrangling over the details of the changes.

Donald Trump on Monday swore in his new chief of staff John Kelly as he attempts to instil greater discipline on the White House and push forward with a policy agenda in the wake of failures like the repeal of Obamacare.

The president has repeatedly told Republicans they need to remain focused on healthcare in the past few days but the effort within the Senate and House is switching decisively to tax reform, as members urgently seek a legislative victory before the 2018 midterm elections.

Republicans say they are optimistic about their ability to hammer out a tax package, with the momentum to be driven increasingly by two powerful congressional committees rather than the chaotic Trump administration.

However the party must first tackle highly contentious budget negotiations, a looming debt ceiling impasse, and a host of legislative hurdles — including the need to renew the National Flood Insurance Program — before it can get into the meat of the debate. 

“As far as getting it signed into law before the end of this year, that is pretty optimistic,” said one Republican Senate aide. “Early next year is possible. It depends on how well things progress through the process — there could be landmines that scuttle the whole effort.” 

Last week party leaders ditched plans for an import tax, recognising that the highly divisive measure was dividing the business world and becoming a barrier to ambitions to cut taxes. A statement by top party lawmakers, together with Steven Mnuchin and Gary Cohn, respectively the Treasury secretary and National Economic Council director, said they expected tax legislation to move through congressional committees in the autumn.

President Donald Trump with John Kelly in the Oval Office after the swearing in of the new White House chief of staff © Reuters

In coming weeks the administration, lawmakers and advocacy groups will undertake a concerted campaign for tax reform. Caroline Harris, chief tax policy counsel at the US Chamber of Commerce, said the unity now being displayed by the Republicans on tax was an important development. She added, however: “We will not be satisfied until we see the implementation of comprehensive pro-growth tax reform.” 

To maximise their chances of getting tax changes through Congress without relying on Democratic support, lawmakers need to pass a budget resolution with so-called reconciliation instructions after their summer break. They also face the need to avoid a government shutdown after the fiscal year ends on September 30, and they have to lift the $19.8tn ceiling on the US government debt before the Treasury runs out of cash — which will probably happen in early to mid-October.

The administration and congressional Republicans see tax reform as a means of igniting economic growth, investment and consumption by cutting tax rates for businesses and individuals while simplifying the US’s convoluted tax code. With US multinationals complaining that a 35 per cent federal income tax rate hobbles them globally, Republicans want to bring the rate below the OECD average of 25 per cent. Mr Trump’s ambitions for a 15 per cent corporate tax rate are seen as unrealistic. 

The present system has been blamed by politicians from both parties for encouraging US companies to flee America via so-called inversion deals and other tax manoeuvres. One of the hardest questions for policymakers is how to handle more than $1tn of earnings that US companies have parked overseas.

Once the debate over the detail of tax changes starts, rifts could re-emerge within the corporate world. Among the looming flashpoints are proposals to reduce businesses’ ability to deduct interest payments from their corporate tax payments, and the detailed provisions behind a targeted shift to a territorial system under which companies are only taxed on their domestic earnings.

However Rohit Kumar, a former aide to Senate leader Mitch McConnell who is now at PwC, said none of the issues were as divisive as the border-adjusted tax that has now been ditched.

For individuals, Republicans want to lower tax rates across the board and stress their desire to help middle-class families. But Democrats say all the proposals they have put out in recent months would deliver more benefits to the wealthy than anyone else. 

Steve Rosenthal at the Tax Policy Center, a think-tank, predicted that different factions of corporate America would end up in a lobbying competition for the biggest giveaways. “Tax reform is harder than healthcare, but tax cuts are easier. Right now I think we’re seeing a publicity campaign that will label tax cuts as tax reform. We have not seen any reform measure with any viability.”

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