I’ve never seen anything quite like it: A presumptive presidential candidate proposes a major policy initiative and a month before he is due to be formally anointed at his convention, his own party’s House members roll out a dramatically different plan.
That, of course, is exactly what House Speaker Paul Ryan and his caucus just did to Donald Trump and his tax reform proposal. While there are some similarities between the two blueprints—both would cut taxes primarily for business and high-income households—there are also major differences. The contrasts are so strong that it is hard to imagine how candidates sharing the same ticket can square them.
The biggest difference is on the business side. Trump would cut tax rates but double-down on the taxation of worldwide income. House Republicans go in the opposite direction: They’d take a major step towards adopting a business cash flow tax—essentially a consumption tax--and would exempt foreign income of U.S. multinationals from tax.
They’d get there by allowing all business to immediately write off (or expense) investments while eliminating the deduction that firms take for their net interest costs. This is a variant on a proposal offered by failed GOP presidential primary candidates Marco Rubio and Jeb Bush. Trump retains the current depreciation system for business investment and says he’d cap the interest deduction in some way, but does not say how.
Like Hillary Clinton, Trump would retain the current worldwide tax system that most Republicans reject. While he’d slash the corporate rate from 35 percent to 15 percent, he’d also end the practice of deferral, which allows U.S. firms to delay paying tax on the income of their foreign subsidiaries. Ryan and the House Republicans would cut the corporate rate to 20 percent but tax businesses only on their U.S. income. Foreign income would not be subject to U.S. tax.
The other big difference is the way Trump and Ryan would treat pass-through firms, such as sole proprietorships and limited partnerships. Trump would tax them at 15 percent, while Ryan settled on a significantly higher 25 percent rate.
For individuals, Trump’s tax cuts are far more generous than the House Republicans. His top rate is 25 percent, while theirs is 33 percent. Both would raise today's standard deduction of $12,600, but Trump would boost it to $50,000 (for joint filers) while Ryan would go to $24,000. Thus, nearly two-thirds of households would pay no income tax under the Trump plan, many more than under the House GOP plan.
Of course, there is a cost to Trump's generosity. The Tax Policy Center estimates his plan would add $11.5 trillion to the debt over the next decade(including added interest), unless it is offset by as-yet unspecified spending cuts. While TPC has not yet scored the Ryan plan, it would likely cost significantly less. TPC estimated that the Rubio and Bush proposals, which Ryan’s plan resembles, would have been about one-third less costly than Trump’s.
If Trump paid for them, his rate cuts would increase incentives to work, save, and invest. But by adding so much to the nation's debt, his plan would likely push up interest rates and create a drag on the economy. Though Ryan’s plan cuts rates less, it would do more to encourage investment by effectively eliminating business-level tax on new business purchases. And it would add less to the public debt.
In the end, the House Republicans seem to have cast their lot with the tax reform agendas of the GOP candidates Trump defeated in the primaries, rather than with their soon-to-be standard bearer. I really have never seen anything like it.
