Republicans prepare plunge into perilous tax fight

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WASHINGTON, DC — SEPTEMBER 26: Rep. Kevin Brady, R-Texas listens as President Donald Trump speaks during a meeting with members of the House Ways and Means committee in the Roosevelt Room at the White House. (Jabin Botsford/The Washington Post) (Jabin Botsford/The Washington Post)

By Damian Paletta and Mike DeBonis By Damian Paletta and Mike DeBonis October 31 at 3:50 PM

House Republican leaders on Wednesday will propose keeping the top income tax rate for high levels of personal income, four people briefed on the planning said, a last-minute adjustment to their sweeping plan they hope to push into law by the end of the year.

The details came during a briefing House Speaker Paul Ryan (R - Wis.) had Tuesday afternoon with conservative activists. House Republicans had planned to collapse the seven existing income tax brackets into three brackets, lowering the top rate from 39.6 percent to 35 percent.

But after weeks of internal deliberations, they decided to retain the 39.6 percent rate for very high levels of income, the four people who attended the meeting said. The tax rate could be applied to income at levels such as 750,000 or $1 million, though the details remained in flux.

Currently, families pay the 39.6 percent rate on income above $470,700, so the proposal would still lower taxes for people for anyone who earns above the lower amount.

Grover Norquist, president of Americans for Tax Reform, is one of the people who confirmed the 39.6 percent rate would remain for the highest income.

“Overall, I’m very happy with the bill,” said Adam Brandon, chief executive of FreedomWorks, who attended the Ryan briefing. “My read is that everyone is going to be seeing a tax cut.”

The House Republican plan will also eliminate the estate tax, though it will be phased out over a number of years. Senate Republicans are wavering on this idea and could retain the estate tax.

The proposed changes are part of the House Republicans’ ambitious and fraught legislative effort to rewrite the tax code, as they reveal — for the first time — details of their tightly held proposal that President Trump hopes to soon sign into law.

House Ways and Means Committee Chairman Kevin Brady (R — Texas) will introduce a bill that aims to slash corporate tax rates, simplify taxes for individuals and families, and lure the foreign operations of multinational firms back to the United States with both incentives and penalties.

“It will be the biggest tax event in the history of our country,” Trump promised on Tuesday during a meeting with business trade groups at the White House, a claim he has made repeatedly but is nearly impossible to validate.

The implications of the changes envisioned by GOP leaders could be sweeping, but numerous aspects remain uncertain.

House Majority Leader Kevin McCarthy (R — Calif.) said Tuesday that Brady’s tax plan would lower the corporate tax rate from 35 to 20 percent, though the people attending the meeting with Ryan said there were some budgetary issues with this, and it’s possible they might have to phase out this reduction after a number of years if the impact on the deficit is too severe.

Thousands of other companies, meanwhile, which pay their taxes through the individual income tax code, would see their rates lowered on top income from 39.6 percent to 25 percent.

The new proposal is expected to include a new “minimum tax” that U.S. companies will be required to pay on certain foreign earnings as a way to prevent them from moving U.S. operations to low-tax countries. And businesses are watching carefully on how the House bill deals with U.S. companies that produce goods overseas and then sell it back into the U.S., as tougher tax rules for these companies could hit pharmaceutical companies particularly hard.

The House GOP plan will also allow companies to immediately expense capital investments, such as new equipment, for five years, but cut back the ability to deduct interest payments. Precise details of how these changes would work could not be learned.

Many businesses and the wealthy are expected to be the biggest beneficiaries, according to initial versions of the plan, while the impact on many in the middle class is disputed and less clear.

The proposal would roughly double the “standard deduction” that many Americans can claim to exempt a portion of their income from taxation, but it would also eliminate the “personal exemption,” which tends to benefit families with multiple children. But the tax plan is expected to expand the child tax credit, something Ivanka Trump has said will help working families.

Retaining the top tax rate for the highest levels of personal income achieves two White House objectives. They want to try and retain as much revenue as they can in order to prevent the changes from adding too much to the deficit. They are also concerned about designing a tax bill that gives too many benefits to the wealthy, as much of the changes would already disproportionately benefit those with the highest levels of income.

The House GOP plan will allow Americans to deduct the property taxes they pay from their income but prohibit, for the first time, Americans from deducting the state and local income taxes they pay from their federal taxable income, a simmering issue that threatens to rip apart the GOP coalition needed to approve the bill.

The plan would also abolish the alternative-minimum tax, a system set up to ensure people don’t claim so many deductions that they pay too little in taxes, McCarthy said.

And despite months of promises that the tax plan will lead to big tax cuts for virtually all Americans, Republicans have left open the possibility that taxes for some people could rise.

The economic success of the package hinges on controversial economic theories that assume large tax cuts for businesses and the wealthy will lead to economic growth and wage gains for everyone else, a conclusion that economists and policymakers have debated for decades.

But Republicans have a rare lock of political power, controlling the White House, House of Representatives, and Senate, and they hope they can swiftly navigate the tax changes into law before the end of the year. They are desperate to regain political footing lost after a number of missteps this year, particularly the failure to rewrite health care policy.

“The speed with which they are doing this is more about politics than it is about policy,” said Rep. Richard E. Neal of Massachusetts, the top Democrat on Brady’s committee. “They don’t want people to see what’s in it, and I think they need a victory.”

The tax package is expected to reduce revenue by more than $4 trillion or $5 trillion over 10 years through a combination of rate reductions, new incentives, and the elimination of things like the AMT. Republicans hope to recoup some of that lost revenue by eliminating a number of tax breaks, but they have so far been careful not to identify all of these changes, in part because they expect a revolt from interest groups that would be impacted.

They are already bending the legislation to deal with political pressure. House Republicans have scrapped plans to toughen taxation on goods brought into the U.S. for sale after a backlash from retailers and automotive companies. They have also agreed to allow people to exempt property taxes, but held firm — so far — on prohibiting people from deducting their state and local income taxes.

Republicans have flirted with the idea of changing the 401(k) program, which tens of millions of Americans use to save money for retirement, but they face dissension within their own party over how to proceed. The House Republican plan is expected to include some changes to retirement savings benefits, though these could not be learned.

Democrats are trying to make these divisions deeper.

“They’ve got $4 trillion worth of tax promises, and they basically at this point have got virtually no revenue in order to pay for it,” said Sen. Ron Wyden (D — Ore.) on Tuesday. “So what they have done is basically made it clear that their promises to the middle class are really not worth the paper they are written on. They are false promises to the middle class.”

The White House and GOP congressional leaders have met for months to try to establish the framework for rewriting the tax code, but they only agreed on broad parameters, and big tests now loom for Brady and his Senate counterpart, Orrin G. Hatch of Utah, to craft legislation that can pass both chambers.

Budget watchers will be closely scrutinizing what economic assumptions Brady tries to factor into his proposals. Treasury Secretary Steven Mnuchin has said the tax cuts would lead to roughly $2.5 trillion in new government revenue over 10 years, a number far higher than most budget experts have said is likely.

Some economists believe that cutting taxes helps grow the economy, while others say the short-term benefit can be outweighed by slower economic growth caused by adding to the debt. Both of these arguments will be debated intensely in the next few weeks, as lawmakers brawl over details.

The U.S. government collects roughly $4 trillion a year in taxes and other revenue, a threshold that still falls short of how much money it spends. Trump believes the changes could lead to an immediate jolt in economic growth, saying on Tuesday that it could lead companies to bring more than $4 trillion in past foreign earnings back to the United States. He also said it would lead to a flood of companies moving back to the U.S., lured by big tax cuts and the threat that their foreign earnings will be subject to stricter taxation for the first time.

“We have companies that really want to move back into the United States now because of what we’re doing with taxes,” Trump said. “And some big ones are going to be announcing very soon.”

It’s details like these, though, that will be the focus of several intense weeks of negotiations in the House and Senate, as they try to swiftly pass a bill into law even if the implications remain unclear. And there are already key differences between the House and Senate approaches. House and Senate GOP tax writers are also expected to have a much different approach to the taxation of profits overseas.

Resolving these differences will be crucial because Republicans have signaled they will try to push the tax cuts into law without any support from Democrats, likely putting a test to the slim margin they control in the Senate and their balky caucus in the House, where the defection of just a few members could imperil the whole process.

“Given that they are trying to do this with a one-party approach, they don’t have a lot of flexibility,” said Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at the University of California — Berkeley.

— Mike DeBonis contributed to this report.

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