27 Apr 2017

Trump’s 2018 budget headlines


With only a few days left before his 100 day anniversary, President Trump announced his 2018 budget proposal on Wednesday 26 April.  Making it clear that the proposal was merely a discussion paper, the one-page plan lacked detail as well as answers on how the tax cuts would be funded.  The proposal stayed true to campaign promises of reducing tax rates and simplifying the code but made no mention of the border adjustment tax.

The headline proposals include:

- Corporate tax 

  • Cutting the tax rate from the current 35% to 15% for corporations, small businesses and partnerships
  • Instituting a one-off repatriation tax - but with no detail on the rate

- Income tax

  • Collapsing the seven income tax brackets down to three - 10%, 25% and 35% - but with no detail on where the brackets will start and end
  • Repealing Alternative Minimum Tax
  • Doubling standard deductions
  • Retaining mortgage interest and charitable donation deductions but eliminating all other itemised deductions including state and local taxes
  • Eliminating the 3.8% tax on investment income which helped to pay for the Affordable Care Act, thereby reducing the overall capital gains tax rate to 20%
  • Instituting tax relief to help pay for child and dependent care expenses

- Estate tax

  • A proposed repeal of federal estate tax

- Philanthropy

  • Charitable deductions remain  

President Trump will spend the next month to six weeks gathering support for the proposals before turning them into legislative text over the summer. 

In order for the budget proposals to pass, Trump will likely be relying on the legislative process known as reconciliation. Used in the Bush era, and historically by Republicans wishing to push through tax reform, reconciliation requires a simple majority of the House and Senate to pass a bill.  The Republicans could therefore pass these proposals with their 52 seats in the Senate, without the aid of the Democrats.

However, the reconciliation process requires proposals to be tax neutral and special rules apply to prevent reconciliation from being used for provisions which would increase the deficit beyond 10 years after the bill has passed.  This last came into play in 2001 with Bush’s Economic Growth and Tax Relief Reconciliation Act which gradually reduced, and then fully repealed the estate tax, only to bring it back again in 2011.

How Trump plans to pay for his tax cuts, and therefore qualify for reconciliation, remains unclear.