While many analysts are focusing on the differences between the House Ways & Means Committee’s tax cut and the just-released version proposed by Senate Finance Committee Chair Orrin Hatch (R-UT), the two bills are, at their core, very similar.

They’d both cut taxes by a net of at least $1.5 trillion over the next decade and significantly after that. Both would cut corporate income tax rates and tax rates on pass-through businesses, such as partnerships; and their tax cuts would primarily benefit businesses and high-income households. By roughly doubling the standard deduction, they’d simplify taxes for millions of low- and moderate-income households. But they’d also limit the benefits of itemizing to a relative handful of mostly high-income taxpayers.

Individual income tax cuts (excluding the lower rate on pass-through income) account for about one-third of both measures while two-thirds of the benefits would go to corporations and non-corporate businesses.

The Hatch plan would:

• Cut the corporate tax rate from 35 percent to 20 percent, but not until 2019.
• Cut taxes on pass-through businesses by allowing them a 17.4 percent deduction for qualified domestic income, equivalent to a top rate of about 32 percent.
• Retain seven individual income tax rates, with a top rate of 38.5 percent.
• Raise the standard deduction to $12,000 for individuals and $24,000 for married couples but repeal personal exemptions.
• Increase the child tax credit from $1,000 to $1,650 and make it available for 17-year-olds and for families making as much as $1 million. It would also create a new $500 credit for other dependents.
• Repeal the Alternative Minimum Tax
• Roughly double the estate tax exemption but retain the tax.
• Repeal the deductions for state and local income, sales, and property taxes but keep deductions for mortgage interest, charitable giving, and medical expenses.
• Index tax rates and other provisions using the chained CPI method that is less generous than the inflation index used currently.
• The Finance outline was silent on repeal of the Affordable Care Act’s tax penalties for those who do not have health insurance—a recent priority of President Trump’s.

While the Ways & Means and Hatch measures are similar at a high level, many details are at odds and working out those differences—while keeping within the $1.5 trillion price tag Congress set for itself-- will be challenging.  

Both bills would keep most big-ticket individual income tax preferences, such as the exemptions for employer sponsored health insurance and retirement savings. But they’d treat high-profile deductions somewhat differently. The House bill would repeal most of the state and local tax deduction but retain a limited deduction for property taxes. The Hatch bill would scrap the entire deduction. The House bill would impose new caps on the mortgage interest deduction while the Senate bill would end the deductibility of home equity loans but otherwise leave that subsidy alone. The House bill would repeal the deduction for medical expenses while Hatch’s plan would retain it.

The plans would also treat pass-throughs differently. The House bill would tax them at a headline rate of 25 percent, with an additional low rate for business owners making less than $75,000. The Senate bill would reduce the rate for all pass-through businesses by allowing them a 17.4 percent deduction, implying a top rate of about 32 percent—far higher than the House and twice as high as President Trump was demanding during the campaign.    

Hatch’s plan will surely change over the next several weeks. But it is an indication of the enormous challenges Republicans face in trying to pass such a large, complex bill, one that creates tens of millions of winners and losers.

Even though the Finance Committee draft reduces federal revenue by $1.5 trillion over the next 10 years, and by $217 billion in 2027 alone, its tax rate cuts are far more modest than Trump and many in the GOP hoped.

The individual rate reductions are relatively small, with the top rate falling by only 1.4 percentage points. The implied top pass-through rate of 32 percent is a more generous change from current law—about an 8 percentage point reduction--but the cut is far less than the GOP had been promoting. The corporate rate cut from 35 percent 20 percent remains substantial, but Hatch would delay it for a year to make the bill look less costly within the 10-year budget window.

Still, the bills face a serious fiscal problem. If the Senate is to pass a bill with just 51 votes, the tax cut cannot add to the deficit after 10 years. But both the House Ways & Means Committee bill and the Hatch draft result in large tax cuts in the 10th year. And there is nothing to suggest the bills would add revenue after that. As a result, don’t be surprised if even the relatively modest rate reductions in the Senate bill are scaled back further before Congress passes a final tax cut.