Donald Trump has already done the impossible by winning the presidency, but once he takes office he may have to do so again — by finding a way to pay for the across-the-board tax cuts he promised during his campaign. "Trump's plan is vague on the 'pay-fors,'" said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting. "They're aware of the problem, but haven't yet identified a solution."
The large-scale revision to the Tax Code that Trump has proposed will be limited by the usual partisan divisions as well as differences Trump has had with members of his own party.
"Trump's proposal is straightforward," said Dean Zerbe, national managing director of alliantgroup and former senior counsel on the Senate Finance Committee. "He wants to cut taxes. But people forget that a not-insignificant part of the Republican base is concerned about the deficit, and Trump's current proposal would increase the deficit. It would be interesting to see House Republicans negotiate with a Republican president who is more fervent about tax cuts than they are."
Zerbe predicted that a compromise would result in a smaller-than-proposed reduction in the corporate rate, a reduction in the individual rate, and no changes to the estate tax.
Others saw problems ahead for Trump's proposals.
"Trump's plan would require massive reductions in tax benefits currently enjoyed by many industries, unless he plans to pay for it with increased deficits," said Tom Wheelwright, founder and chief executive of accounting firm ProVision.
But every major tax overhaul produces unintended consequences, warned Wheelwright.
"The unintended consequence of the Reagan tax plan was the failure of the savings and loans and the massive loss of wealth to those who owned real estate," he said. "The loss of value in real estate as a result of the 1986 Tax Act was much greater than the loss of value in 2009 and 2010 as a result of the mortgage failures. Until we get details of where Trump will cut tax benefits, we won't know which industries will be affected. We just know that there will absolutely be unintended consequences whenever you have major changes to the incentives in the tax law."
Even small initiatives can run afoul of the complexity of the Tax Code, experts said.
"It sounds simple to say you'll put in a new deduction or credit or a sliding scale or a longer holding period, but in practice it becomes very complex when it goes into the code or regulations," said Roger Harris, president of Padgett Business Services and a past chair of the IRS Advisory Council. "If you want to make child care expenses deductible, how many pages of rules and regulations do you think it will take?"
"Trump's proposals follow the traditional Republican approach of reducing taxes, both for businesses and individuals, in order to stimulate economic growth," said Julian Fortuna, partner at Taylor English. "The expectation is that the reduction in tax rates will stimulate the economy because businesses and consumers would use those tax savings to spend on goods and services."
His plan calls for lowering taxes across the board and reforming the Tax Code overall, according to Cathy Mueller, director of taxes at Peoples Income Tax.
"Trump's plan would consolidate the tax brackets into three with the biggest tax cuts going to middle class workers who are married with children," she said. Tax rates would be 12%, 25%, or 33%. The business tax rate would be lowered to 15%.
Trump would keep the existing capital gain rate structure, but would tax carried interest as ordinary income. He would repeal the Affordable Care Act, which would eliminate the additional Medicare tax, the net investment income surtax, the medical device excise tax and the Cadillac tax on certain high-cost health plans.
Trump proposed a repeal of the estate tax but his plan would tax estates' unrealized capital gain above $10 million, and would disallow contributions of appreciated assets to a private charity established by the decedent or the decedent's relatives.
Other specifics include:
• An above-the-line deduction for child care expenses, capped at the average cost of such expenses in the taxpayer's state of residence.
• A similar deduction for elder care, capped at $5,000 per year.
• An expansion of the earned income tax credit.
• Tax favored contributions of up to $2,000 per year to Dependent Care Savings Accounts.
• The elimination of all business tax incentives except for the R&D credit.
• A one-time deemed repatriation of corporate cash held overseas at a discounted 10% tax rate, and an end to the deferral of taxes on corporate income earned abroad while retaining the foreign tax credit regime.