Remember when Trump promised in early February that he would unveil a “phenomenal” tax plan within two to three weeks? Well, it was just scrapped, because as AP reports, Trump has scrapped the tax plan he campaigned on and is going back to the drawing board, hoping to find a plan that will have Republican consensus, something his current proposal has failed to achieve. In doing so, the president threatens the timetable of what many had seen as the primary driver behind his entire first-year agenda, which is not in peril and may not come until early 2018 if not later.
According to the AP, while Trump’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps, it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats. Some view the search for new options as a result of Trump’s refusal “to set clear parameters for his plan and his exceedingly challenging endgame: reducing tax rates enough to spur faster growth without blowing up the budget deficit.”
The good news: the ambitious pace to figure out a plan reflects Trump’s haste to move quickly past a bruising failure to broker a compromise within his own party on how to replace the health insurance law enacted under President Barack Obama.
The bad news: administration officials cited by AP say it’s now unlikely that a tax overhaul will meet the August deadline set by Treasury Secretary Steve Mnuchin.
Why is the White House, by which we mean Gary Cohn and Goldman Sachs, bypassing Congress and coming up with its own tax plan? One reason proposed is that it is trying to learn the lessons from health care: rather than accepting a bill written by the lawmakers, White House officials are taking a more active role (again: see Gary Cohn).
While administration officials have signaled that they want to pass tax legislation with only Republican votes, yet they’ve also held listening sessions with House Democrats, in other words, there will be concessions for both parties. One problem, however, is how to raise offsetting government revenues to make the plan revenue neutral and not add to the budget deficit, something which would lead to further clashes with conservative and even moderate republicans.
White House aides say the goal is to cut tax rates sharply enough to improve the economic picture in depressed rural and industrial pockets of the country where many Trump voters live. But the administration so far has swatted down alternative ways for raising revenues, such as a carbon tax, to offset lower rates.
More details: “Trump, who brands himself as a deal-maker, has not said which trade-offs he might accept and he has remained noncommittal on the leading blueprint, from Rep. Kevin Brady, chairman of the Ways and Means Committee.”
One notable change: as expected, the BAT is dead.
Brady, R-Texas, has proposed a border adjustment system, which would eliminate corporate deductions on imports, to raise $1 trillion over 10 years that could fund lower corporate tax rates. But that possibility has rankled retailers who say it would lead to higher prices and threaten millions of jobs, while some lawmakers have worried that the system would violate World Trade Organization rules. Brady has said he intends to amend the blueprint but has not spelled out how he would do so.
Among the other options are being shopped on Capitol Hill, include changing the House Republican plan to eliminate much of the payroll tax and cut corporate tax rates. This would require a new dedicated funding source for Social Security. It would also mean that the Trumpflation trade, and any stock market upside as a result of reduced effective taxes are similarly dead.
As previously reported, instead of a BAT the administration is currently contemplating a VAT.
The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place.
This approach would give a worker earning $60,000 a year an additional $3,720 in take-home pay, a possible win that lawmakers could highlight back in their districts even though it would involve changing the funding mechanism for Social Security, according to the lobbyist, who asked for anonymity to discuss the proposal without disrupting early negotiations.
While the White House would not comment on the plan, it has recently said a value-added tax based on consumption is not under consideration “as of now.”
No matter what final shape Trump’s proposal takes, it appears almost inevitable that the president will again face significant internal opposition:
The lack of detail about how to significantly rewrite tax laws for the first time in 30 years may provide Trump some time to build consensus among Republicans. But without Trump laying down his hand, lawmakers appear reluctant to back a plan that will likely stir controversy. “Because there are trade-offs, congressmen need cover from the president to withstand the lobbyists and constituents who are going to complain,” said Bill Gale, an economist at the Brookings Institution who worked at the White House Council of Economic Advisers during President George H.W. Bush’s administration.
The Trump administration appears to have shut out the economists who helped assemble one of his campaign’s tax overhaul plans, which independent analyses show would have increased the budget deficit. “It’s a little frustrating that they feel they have to write a new tax plan when they have a tax plan,” said Steven Moore, an economist at the conservative Heritage Foundation who helped formulate tax policy for the Trump campaign.
Sen. Rob Portman, R-Ohio, a member of the Senate Finance Committee, said that all of the trial balloons surfacing in public don’t represent the work that’s being done behind the scenes. “It’s not really what’s going on,” Portman said. “What’s going on is they’re working with on various ideas.”
Meanwhile, as we showed several weeks ago…
… investors no longer believe Trump can deliver a tax plan, with Goldman’s high tax basket having wiped out all gains since the election.
Stocks rallied after his election on the promise of lower taxes and fewer regulations, but the Dow Jones Industrial Average has dipped 1.2 percent over the past month as the path for health care and tax revisions has become muddied.
“The White House is going to need its own clear direction, or it’s going to need to defer to Congress, but saying that your plan is forthcoming and then not producing a plan kind of puts everything in stasis,” said Alan Cole, an economist at the conservative Tax Foundation.
Reprinted with permission from Zero Hedge.