Republicans have set out plans to overhaul the US tax system radically, seeking to win over businesses and middle-class Americans as they attempt to secure a first major legislative victory for Donald Trump’s turbulent presidency.
But despite cutting the top corporate tax rate from 35 per cent to 20 per cent, the proposal provoked a backlash from business, with the US Chamber of Commerce saying “a lot of work remains to be done”.
The small business lobby said it was not receiving enough help, estate agents said home values were threatened, and big borrowers complained of being penalised. Multinationals also face higher-than-expected tax on offshore earnings.
The White House is pinning its hopes on tax reform as its best chance to retain Republican control of Congress next year amid the instability of the Trump presidency.
The tax plan, which delivers on a Republican pledge to cut the corporate rate from one of the highest levels in the developed world, contains mixed results for the wealthiest Americans.
Paul Ryan, the Republican speaker of the House of Representatives, described the plan as relief for “people living pay cheque to pay cheque”, saying the typical family of four would save $1,182 a year on their taxes.
Kevin Brady, chairman of the tax-writing ways and means committee, said the bill would increase the deficit by $1.5tn over 10 years - within the threshold that would enable Republicans to pass it with no Democrat support.
Party leaders began the task of selling the plan to their members, triggering a high-stakes phase of horse-trading and furious corporate lobbying on Capitol Hill, ahead of a vote in the House of Representatives next week.
The plan says companies with offshore cash piles led by Apple, Microsoft and Google-owner Alphabet would face a 12 per cent tax - a higher rate than previous proposals to help pay for other rate cuts. Offshore earnings already reinvested would be taxed at 5 per cent.
Irish tax experts said that the latest US proposals were broadly along expected lines, but that the detail of whatever emerges will be important for companies here.
Peter Vale, tax partner in Grant Thornton, said that the headline Irish rate of corporation at 12.5 per cent would remain well below the proposed US rate of 20 per cent, which when state taxes are included would rise to 25 per cent in many cases. The key for Ireland, he said, was to remain the most competitive location for US companies looking at Europe.
The National Federation of Independent Businesses, a small business lobby group, said it could not support the bill, expressing concern that 85 per cent of small businesses, which are structured not as corporations but as so-called “pass through entities”, would not benefit from the proposed lower 25 per cent rate aimed at them.
For individuals, the bill curtails Americans’ cherished ability to deduct mortgage interest costs from their taxable income, denying the tax break to people buying new homes worth more than $500,000.
The proposal sent share prices of the country’s largest homebuilders lower and prompted William Brown, president of the National Association of Realtors, to say the bill confirmed the property sector’s worst fears. “Eliminating or nullifying the tax incentives for home ownership puts home values and middle class homeowners at risk,” he said.
Tax writers largely stuck with a controversial proposal to limit the ability to deduct state taxes paid from their federal taxes, saying people would only be allowed to write off state property taxes up to $10,000 - another blow to the rich.
Chuck Schumer, the Democratic Senate minority leader, attacked the bill, singling out the partial elimination of the state and local tax deduction, which he said would hurt many of his New York constituents.
“What we are seeing today is a plan that exacerbates the unfairness and inequality in our tax code,” Mr Schumer said.
The top rate of personal tax would stay at 39.6 per cent but some well-off Americans would benefit from increasing the income rate at which it kicks in. Mr Brady backed down on a plan to limit tax-free contributions to 401(k) retirement savings accounts.
For companies, while the party is nominally ending US taxation of future foreign earnings, tax writers proposed measures that would result in a 10 per cent tax on some foreign profits - a level likely to provoke corporate resistance.
The proposal also reins in companies’ ability to deduct debt interest payments from their tax bills, a break that is vital to sectors including real estate and private equity, but seeks to maintain the benefit for small companies.
The Build Coalition, which represents businesses that rely on the debt interest tax break, said the proposal “would harm the global competitiveness of businesses across all sectors of the US economy”.
Grover Norquist, an influential conservative advocate for lower taxes, said: “The tax reform bill is a tax cut and a jobs bill. Growth. Growth. Growth. Long overdue. Great news for taxpayers and those left behind by eight years of slow growth under Obama.”
- Copyright The Financial Times Limited 2017
