Businesses and individual taxpayers have waited a long time for the federal tax system to be overhauled. They might not have to wait much longer, with Republicans in control of Congress and an incoming president who says he can boost the economy by cutting taxes.
The nation’s corporate tax rate, one of the highest in the world, is a prime target. If President-elect Donald J. Trump gets his way, personal income taxes — particularly for the wealthiest earners — also would drop, the estate tax would go away, and tax rules might be simplified.
Those and other provisions would add up to the most significant changes in federal tax codes since the Tax Reform Act of 1986 under President Ronald Reagan. Like Reagan’s reforms — and those carried out under other presidents — they would surely become part of Trump’s legacy.
“The odds of Congress enacting serious tax reform just went up dramatically,” said Jon Traub, managing principal of the Deloitte consulting firm’s tax policy group in Washington.
Trump is the latest Republican candidate to rise in power on the promise of lower taxes. Both Reagan and George W. Bush pushed cuts through during their first years in office, although a good portion of Bush’s later expired.
“It’s a massive force of our economy,” said James Angelini, an accounting professor at Suffolk University. “The tax man has his finger in every pie.”
Lowering taxes as a way to grow the economy is, of course, not a novel concept. Historically, it’s a strategy that often has been favored by Republicans. Democrats have argued that such cuts mostly benefit the rich while worsening the budget deficit. Those familiar battle lines probably will be drawn this time, too. But if Wall Street’s initial reaction to Trump’s election is any indication — the DowJones industrial average had its best week since 2011 — Congress might be willing to go along with his economic agenda.
Trump is returning to a playbook championed by his predecessors: Shrink federal spending, the theory goes, and government will be forced to become more efficient. Companies and consumers that don’t have to hand over as much in taxes will instead pour that money into the economy. For major corporations, that means investing in jobs, facilities, and big-ticket equipment purchases.
That’s the theory, anyway.
The reality, as shown through history, isn’t so straightforward. Trump’s aggressive tax cuts, some economic experts say, might drive up the federal deficit or prompt risky reductions in spending on crucial federal programs. The interest rate on a 10-year Treasury note last week rose to its highest level since January, an indication that bond investors fear tax cuts could drive up the deficit and lead to inflation.
Indeed, Trump’s tax plan could shrink federal revenue by an estimated $4.4 trillion to $5.9 trillion over the next decade, according to the nonpartisan Tax Foundation. That’s why the Republican leaders in Congress will probably take a more conservative approach. As with tax-cutting presidents before him, Trump probably won’t get everything he wants.
To cover some of the anticipated budget shortfall, lawmakers will comb through the federal government’s long list of corporate and consumer deductions, credits, and loopholes, with the goal of excising or reducing some and simplifying a convoluted tax code. Some of the largest deductions are also some of the most popular in Massachusetts: offsets for mortgage interest, charitable donations, and health insurance payments.
“The problem is we have three large deductions in the code, [and] they tend to be Massachusetts-friendly,” said US Representative Richard Neal, a Democrat from Springfield who sits on the budget-writing House Ways and Means Committee.
Neal said he expects to begin working on a tax reform package with colleagues over the next several weeks and hopes a tax bill can be signed into law next year.
Cutting corporate taxes might be one of the easier tasks. Leaders in both parties already agree that the 35 percent rate is too high. Lowering it would make US companies more competitive globally and dissuade them from parking income overseas or moving their headquarters.
Trump favors a 15 percent corporate rate, but Neal says a number in the mid-20s is more realistic. One possible way to help pay for it: taxing the approximately $2 trillion or more in profits that corporations have stashed overseas. Lawmakers have talked about using that money to pay for infrastructure projects. That’s Neal’s preference, but he concedes at least some of the money could be set aside for tax reform.
Trump says his tax cuts could effectively pay for themselves by prompting a surge in economic activity. “Mr. Trump’s proposals have said we are going to create so many different jobs, and stimulate the economy so much, that’s going to pay for the cuts,” said Mary Burke Baker, government affairs adviser with the K&L Gates law firm in Washington.
But many experts remain skeptical. The Tax Foundation, for example, predicts a significant decline in net revenue — at least $2.6 trillion over 10 years, or much more if one key business tax is changed — even after factoring in economic expansion.
The think tank also has looked at what Trump’s tax plan would mean for personal income: an approximately 1 percent increase in take-home pay for all filers, while the top 1 percent of earners would gain about 10 percent. Trump would shrink the number of personal income tax brackets from seven to three, with the top earners paying 33 percent, compared with 39.6 percent today.
“The greatest impact of his proposed legislation would be to reduce the taxes for the top,” said Harry Miller, co-chairman of the tax department at Boston law firm Burns & Levinson.
Wealthy Americans would also benefit from Trump’s push to eliminate the estate tax, which applies to individuals who transfer estates worth more than $5.45 million. “The thinking is that now that we have an entirely Republican House, Senate, and president, the political climate is positioned for a repeal of the estate tax,” said Sarah Connolly, a trust and estates lawyer at Nixon Peabody in Boston.
Some economists say it will be difficult for Trump to push his tax cuts while increasing spending on infrastructure — without adding to the deficit.
“It could be a political drug: Initially it makes you feel good, but then there’s a big hangover later,” said Michael Klein, an economics professor at Tufts University’s Fletcher School who served in the Obama administration. “At a very broad level, you have to pay back what you borrow, or if you borrow too much, people are going to be reluctant to lend to you or interest rates are going to have to go up.”
Then there’s the challenge of getting the reforms through Congress, where all of the existing tax breaks, credits, and deductions have champions. Democrats remain in the minority, but they still have significant clout.
“Both sides of the aisle agree that we need to do something,” said Roberton Williams, an analyst at the Urban Institute, a Washington think tank. “The question is what can we agree on. . . . I don’t think we’re all going to sit down and sing ‘Kumbaya’ around a campfire.”