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Trump Unveils Tax Overhaul Plan

3 October 2017USAPoliticsEconomics
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  • On 27 September, US President Trump unveiled a tax overhaul plan, which provided details on its vision for tax reform. The Framework calls for a substantial reduction in Federal revenue over ten years that include generous cuts in the corporate tax rate (from 35 to 25, or 20%).
  • It reduces individual tax rates, slashes the number of tax brackets from 7 to 3 (12, 25, 35%, with an optional fourth) and repeals the estate tax. It also eliminates popular tax credits including the deduction for state and local tax (SALT) payments.

  • Far from a done deal: This is a first draft that will be subject to considerable negotiation and significant revisions before it is ready to be presented for a vote.
  • Republicans must still also sort out whether it will attempt to pass the plan via normal legislative procedures, which would require Democratic votes, or via reconciliation. Reconciliation allows for only 51 "yes" votes in the Senate, but requires deficit neutral tax cuts that must be offset with additional revenue, and spending cuts. This will also affect whether the tax cuts are to be rendered permanent or temporary. Reconciliation disallows permanent tax cuts that are not paid for, and/or increase deficits beyond a specified window (e.g. 10 years).

Implications

  • Citi analysts estimate the plan might reduce cumulative Federal tax revenues by at least $2 trillion over 10 years, which exceeds Citi's base case of a $1.5 trillion cut.
  • The reduction in tax revenues, alone, suggests a cumulative add of ~3 percentage points to real GDP growth over the 2017-2021 span.

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