There are two major sources of non-partisan information on the financial effects of US tax legislation. The first is the Congressional Budget Office. The second is the Committee for a Responsible Federal Budget. The Congressional Budget Office only deals with legislation. Proposals and campaign promises are handled by the Committee for a Responsible Federal Budget.
In this issue, we look at two recent commentaries by the Committee for a Responsible Federal Budget. The first is on the revised healthcare bill known as the American Health Care Act, which has recently been passed through the US House of Representatives. The second is on the White House release on a framework for tax reform, released on 26th April 2017.
Savings necessary to allow corporate tax cuts might be found in two areas. The first is the repeal of Obamacare. The second is the repeal of corporate tax deductions.
The American Health Care Act (AHCA), to repeal and replace the Affordable Care Act (ACA or Obamacare) was passed by the United States House of Representatives on 4th May 2017. A previous version of this bill was thought to provide budget savings of between US$400 billion and US$900 billion over a 10-year period. However, this bill failed to pass the House of Representatives.
The second bill, passed on 4th May contained additional funding measures to support High-Risk Pools. These High-Risk Pools would support insurance for Americans with pre-existing health conditions. These additional funding measures and others have dramatically reduced the savings available to the budget from the American Health Care Act. In a publication on 3rd May the Committee for a Responsible Federal Budget estimated that the budget savings would only be US$155 billion over a 10-year period. This provides support to the budget of only US$0.15 trillion over 10 years.
This reduction in savings means that almost all of the savings required to support corporate tax cuts must come from the repeal of corporate tax deductions.
Trumps Tax Plan
The tax plan provided by President Trump on 26th April provides a much broader range of tax cuts than were costed in an earlier plan by Speaker of the House Paul Ryan, prior to the November 2016 Election. Paul Ryan's program was firstly individual tax cuts. This was brought about by reducing the number of tax brackets that individuals would need to pay from five, to only three. These were tax brackets were 10%, 25% and 35%.
Secondly, the corporate tax rate was to be reduced to 20%. These tax cuts were funded with the repeal of a number of corporate tax deductions (the repeal of the corporate tax deduction on imports is known as the Border Adjustment Tax). Speaker of the House Paul Ryan said that these tax cuts could be provided in a way that was fully funded by the repeal of corporate tax deductions. This meant that there would be no effect on the budget deficit. The result was that such a law could be passed through the US Senate with a simple majority of votes. The Republicans with 52 US Senators would be able to pass this into law.
Paul Ryan's tax plan might be referred to as the Basic Model tax plan. It is a Ford, not a Lincoln. Donald Trump's plan has all the optional extras. It is a Lincoln, not a Ford. Based on the work of the Committee for a Responsible Federal Budget, we estimate the cost of the Paul Ryan plan was US$1.5 trillion for the reduction in Personal Tax Rates, plus US$1.7 trillion for the reduction of the Corporate Tax Rate to 20%. This is a total cost of US$3.2 trillion including the savings from the American Health Care Act, this legislation would require US$3.05 trillion of repeals in corporate tax deductions. We believe this would be achievable.
President Trump's plan with all the optional extras is much more expensive and hence, much less achievable.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.
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