Businesses would receive huge tax cuts and many middle-class Americans would see relief under a tax overhaul outline agreed to by President Trump and top congressional Republicans, according to people familiar with the plan.
But many of the specifics, such as whether the individual tax cuts would favor the wealthy, are still to be worked out.
After months of high-level negotiations, Trump will pitch what the party is calling its “unified tax reform framework” during a speech in Indianapolis on Wednesday. Crucial details still must be worked out by lawmakers as they try to craft legislation and pass it by the end of the year.
Republican leaders have acknowledged that the plan, if enacted, initially would add to the budget deficit. They claim that stronger economic growth spurred by the tax cuts eventually would offset the deficit increase. Democrats challenge that, based on experience with past tax cuts.
According to people familiar with the plan, it calls for slashing the 35% U.S. corporate tax rate to 20%. That’s not as low as Trump wanted, but is still a gigantic reduction, to the lowest top rate since 1940. The United States no longer would tax most foreign earnings.
Businesses have been lobbying heavily for a reduction in the corporate rate. It is the highest rate among developed nations, although many companies pay a lower rate, if any tax at all, by using loopholes and deductions.
For individuals, there is much less clarity.
The current seven tax brackets would be reduced to three: 12%, 25% and 35%. But Congress still must determine what the income levels are for those brackets.
The lowest tax bracket would increase from the current 10%. And the highest current tax bracket of 39.6%, which applies to income over $418,400 for single filers, would be eliminated.
The estate tax, which largely hits the wealthy, would be axed.
Many individual deductions also would be eliminated in an effort to simplify the tax code. The most notable is the deduction for payment of state and local taxes, which would be a big hit to Californians and residents of other states with high taxes and wealthy residents.
Californians received $101 billion from the deduction — nearly a third of the total value of the deduction nationwide — in 2014, according to the nonpartisan Tax Foundation.
Most of those states with high taxes voted Democratic in the last presidential election.
The deductions for mortgage interest and charitable contributions would be preserved, but could be scaled back.
The increase in the lowest tax bracket would be offset by nearly doubling the standard deduction, to $24,000 for married filers. That would be a major benefit to taxpayers who don’t have enough deductions, such as mortgage interest, to itemize.
Nearly seven in 10 tax filers claimed the standard deduction in 2013, the Tax Foundation said.
The existing tax credit of as much as $1,000 per child would be made substantially higher, but the figure hasn’t yet been determined.
The outline comes with a promise that the tax overhaul will be focused on relief for the middle class.
“We will cut taxes tremendously for the middle class. Not just a little bit, but tremendously,” Trump told reporters at the White House on Tuesday after meeting with Republicans and Democrats on the tax-writing House Ways and Means Committee.
But crucial details, such as the income levels for the individual tax brackets, still haven’t been hammered out and are being left to Congress.
Lawmakers also are being given the option of adding a fourth tax bracket for higher incomes if needed to make sure the tax code remains as progressive as it now is.
The outline was negotiated by a group known as the Big Six: Gary Cohn, the top White House economic advisor; Treasury Secretary Steven Mnuchin; House Speaker Paul Ryan (R-Wis.); Senate Majority Leader Mitch McConnell (R-Ky.); Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee; and Sen. Orrin Hatch (R-Utah).
“It lays out bold provisions for middle-class families, for our local small businesses,” Brady told reporters Monday. “It will deliver the lowest rates on our job creators in modern history and redesign the tax code so our companies can compete and win anywhere in the world, especially here at home.”
The plan is very similar to a blueprint that House Republicans released last year. The business tax rates are the same although the top individual rate in the earlier House Republican plan would drop to 33% instead of 35%. The nonpartisan Tax Policy Center said that plan would lower taxes for all income levels, but most savings would go to the highest-income households.
The House Republican plan also would add $3.1 trillion to the deficit during its first decade because of reduced tax revenue.