The White House unveiled in broad strokes its priorities for tax reform on Wednesday, taking a first step in delivering to investors the corporate tax cuts they've been banking on for months, even if there's still a long way to go before the proposals become law.
President Trump proposed slashing the corporate tax rate to 15% from 35%, as anticipated, and instituting a one-time repatriation tax without specifying the amount. He proposed taxing pass-through businesses at the corporate rate instead of the individual as a measure to help small businesses and called for the individual tax code to be cut down from seven brackets to three.
"We have a once-in-a-generation opportunity to do something really big," said National Economic Council director Gary Cohn in a briefing announcing the proposal, which he said would be the most significant tax legislation since 1986.
Markets initially rallied on the highly anticipated announcement. The Dow, S&P 500 and Nasdaq rose about 0.30% for the day when the announcement was made, later coming back down and ending the day with modest declines.
Treasury Secretary Steven Mnuchin said the Trump administration is seeking to make the U.S. corporate tax system the most competitive in the world.
"We will have a massive tax cut for businesses and massive tax reform and simplification," he said, adding the White House believes it can boost the GDP to 3% or higher.
But a 15% corporate tax rate is likely to be hard to sell on Capitol Hill. Such a rate would strip away trillions of dollars in federal revenue and blow an enormous hole in the deficit, analysts say.
Most observers agree that a corporate rate of between 22% and 28% is ultimately what will end up in any legislation. But even so, it would be a major win for investors. An analysis from S&P Global Market Intelligence determined even a 10% decrease in the corporate tax rate could drive the S&P 500 up by 15% over the course of the year.
"Nobody thinks 15% will be the number, but they think it won't be 35% either," said Michael Mussio, president at wealth management firm FBB Capital Partners, which has $1 billion in assets under management. "Twenty-two to 28 is materially better than 35, particularly for small businesses and smaller U.S. companies."
While Trump campaigned on a plan to enact a 10% repatriation holiday for companies hoarding trillions of dollars in profits abroad, Wednesday's outline made no mention of a rate. When asked, Cohn declined to comment on the number. "We're working with the House and Senate on that," he said.
The Trump plan seeks to reduce the individual tax code to three brackets of 10%, 25% and 35% rates. It will double the standard deduction and eliminate deductions except for mortgages and charitable gifts.
It also repeals the 3.8% Obamacare tax and eliminates the estate tax and alternative minimum tax.
Trump's big Wednesday unveil is just a first step in what will be a long road ahead on actually getting anything passed. Tax legislation has yet to be written, and many of the administration positions that would normally be charged with drafting a tax law remain unfilled. Moreover, a number of major issues -- including interest deductibility and the border adjustment tax -- were left out of the Trump proposal altogether.
Mark Hamrick, senior economic analyst at Bankrate.com, pointed to the GOP's struggles on health care reform as proof taxes will be easier said than done.
"The challenge in pushing through a tax reform package of substance might well be even tougher," he said. "When discussing health care, we're talking about a segment of the U.S. economy. When discussing individual and corporate tax reform, we're basically talking about the entire economy. The split within the GOP over taxes might well be just as difficult to overcome."
"We are in agreement on 80% and on the other 20% we're in the same ballpark," Speaker of the House Paul Ryan (R-WI) said of Congressional Republicans' take on the proposal at a breakfast earlier in the day.
Mnuchin touted the tax plan as a historic development while speaking at an event sponsored by the American Bankers Association on Wednesday morning. "This is going to be the biggest tax cut and the largest tax reform in the history of our country," he said.