WASHINGTON — The Trump administration released a series of basic principles for tax reform on Wednesday that have the backing of Republican leaders in both houses of Congress, but the dearth of details means it remains too early to say how the final product will affect financial services firms.
Treasury Secretary Steven Mnuchin touted the administration’s plan as “the biggest tax cut and the largest tax reform in the history of our country,” and added that both the administration and the Republican majorities in both the House of representatives and Senate “are committed to seeing this through."
“I think it’s clear that the House, the Senate, the administration are all on the same page: that tax reform is a major priority to boost the economy,” Mnuchin said. “The fundamental principles of making business tax competitive — we have a very uncompetitive system that is hindering the economy and jobs.”
House Speaker Paul Ryan, R-Wis., echoed that message of unity at a press conference Wednesday, saying that he and other congressional leaders have been briefed about the Trump plan and that it is “basically along the same lines as [where] we want to go.”
Yet the document outlining the administration's priorities was only one page, and appeared to reiterate many policies that President Trump has been pushing since he launched his presidential campaign. Some of the items in the blueprint ultimately could be very important to financial services companies, however.
Among the chief specific proposals is a reduction of the headline corporate tax rate from the current 34-35% to 15% — a substantial cut that would be especially beneficial to most financial institutions, since they tend to benefit little from other specialized deductions.
The administration's proposal would also eliminate almost all individual tax deductions except for the mortgage interest deductions and charitable donations — another item that could be helpful to financial institutions, particularly those for whom mortgage lending is a principal business line. The plan essentially mirrors Ryan's 2016 plan. But the loss of interest deductions for various other kinds of loans — including commercial and industrial loans, car loans, or loans between banks — could affect institutions’ businesses both directly and indirectly.
The proposal also calls for a territorial tax system, one that allows the U.S. to tax earnings of U.S. companies’ overseas affiliates — which could affect banks with sizable overseas activities. The proposal calls for a one-time repatriation tax on overseas earnings, rather than a permanent lower overseas tax rate. Trump’s campaign had favored a one-time 10% repatriation rate, after which overseas earnings would be taxes the same as U.S. earnings, but it is not clear whether the current proposal would do this.
Mnuchin and National Economic Council Director Gary Cohn, speaking during a White House press briefing Wednesday afternoon, also said that the administration would be conducting listening sessions over the course of the coming month with business leaders to hash out details. Mnuchin has pledged to complete work on a tax reform bill in 2017.
Perhaps the single most critical question about the administration’s push to reform the tax code is whether they can hammer out an agreement that can garner support in both chambers of Congress. Arguably the biggest obstacle to completing such a deal is resolving the question of how to pay for the size and breadth of tax cuts that virtually all in the Republican caucus favor — some fiscal hawks would not approve a package that is not revenue-neutral, while others may be less particular.
Mnuchin maintained that the tax plan would be largely or entirely paid for by the sustained increase in economic growth that would be spurred by tax reform.
“The president and I and others in the administration fundamentally think we can get to 3% sustained economic growth,” Mnuchin said. “That is very achievable. Tax reform is critical to it, [regulatory] reform is critical to it … and we are focused on creating economic growth.”
But there is some disagreement as to whether the U.S. is poised to post sustained growth at such a rate given the demographic headwinds of an aging population and stagnant productivity growth. Marshall Steinbaum, senior economist and fellow at the Roosevelt Institute, criticized the plan on this score, saying the proposal would actually do little for the working class taxpayers the plan is meant to help.
“Trump's proposal to cut corporate tax rates won't boost growth or create jobs,” Steinbaum said. “If Trump wants to encourage investment, he should close loopholes that CEOs exploit to move profits offshore and increase the effective tax rate on corporations, their CEOs and their shareholders.”