Options to Help Pay For the Trump Tax Plan

President Trump's tax reform proposal could cost $5.5 trillion over 10 years, but many of the details that might bring the price tag down have not been released yet. Any tax reform lawmakers enact should at the very least not worsen our fiscal situation. Achieving this goal will likely require scaling back or qualifying the extent of some of the tax cuts in the President’s current plan. However, the President could significantly reduce the cost of his plan by identifying additional base-broadening measures, raising revenues outside the income tax code, or both. In this piece, we offer a number of options to help offset the cost of the Trump  tax plan.

The President's Tax Plan

So far, President Trump has put forward a single-page tax framework that we estimated could cost between $3 and $7 trillion ($5.5 trillion under our central estimate). The plan is relatively specific on the elements which would cost money—lowering corporate and pass-through business taxes to 15 percent, lowering individual tax rates across the board, doubling the standard deduction, and repealing the AMT, NIIT, and estate tax. It also appears that the plan would repeal most tax deductions other than those for mortgage interest, charity, and savings, though the framework is less specific here. Finally, the framework calls for eliminating "targeted tax breaks" with no detail at all.

Cost of Known Provisions of the Trump Tax Plan

Policy 10-Year Cost
Change rate structure to 10%, 25%, 35% $1.5 trillion
Repeal individual AMT $0.4 trillion
Repeal most deductions except for mortgages, charitable giving, and retirement -$2.0 trillion

(-$0.5 to -$4.5 trillion)*
Double the standard deduction $1.5 trillion
Repeal estate tax $0.2 trillion
Reduce corporate tax rate to 15% $2.2 trillion
Reduce pass-through business tax rate to 15% $1.5 trillion
Move to territorial system with one-time tax on overseas profits $0**
Repeal the net investment income surtax $0.2 trillion
Subtotal, Rough Cost of Specific Policies $5.5 trillion

($3 to $7 trillion)

Source: CRFB calculations based on estimates of similar policies by the Tax Policy Center and the Tax Foundation. Our estimate is very rough, as the plan lacks some details that could change the score significantly. We did not model this plan, but compiled estimates of the component pieces from various similar estimates, notably the 2016 version of Trump's campaign plan and the House GOP "Better Way." For instance, we assumed the rate structure of 10/25/35 is intended to be the same size change as the campaign proposal of 12/25/33, but the actual cost depends on the income breakpoints between brackets. Our number could be a significant understatement. Numbers may not add due to rounding.

*Range represents previous Trump proposal to limit itemized deductions, which would save $500 billion, and an aggressive approach that would eliminate most tax preferences, including exclusions and credits, would save $4.5 trillion. The base case assumes the elimination of nearly all individual deductions not related to mortgage interest, charitable giving, or savings.

**Estimate would differ based on details, but these two proposals are likely to largely offset each other.

The lack of specificity when it comes to pay-fors is highly disappointing, but it also offers an opportunity for improvement. Below, we have compiled a list of illustrative revenue options that could be used to help offset the cost of the Trump plan through base-broadening and raising excise and other taxes. All of these options work within the plan's published framework and can be consistent with the Administration's stated principles.

Importantly, these provisions have not been modeled and our estimates are extremely roughthey are intended to convey the magnitude of potential savings rather than precise scores. For most of the options, we provide a current law estimate and a revenue estimate relative to Trump's plan (lower rates would reduce the value of most deductions and other preferences). Our estimates are based on our central $5.5 trillion estimate of the Administration's tax framework, which assumes the elimination of all itemized deductions other than those related to charitable giving and mortgage interest.

Business Base-Broadening

Most of the revenue loss from President Trump's plan comes from the business side, where the President would reduce the corporate rate from 35 percent to 15 percent and limit the rate on pass-through income to 15 percent. Without restricting the lower pass-through rate, we estimate these two changes would cost $3.7 trillion. Some of this cost could be offset with business base-broadening.

Under current law, businesses benefit from a number of deductions, credits, and other preferences. Roughly speaking, we estimate repealing all "non-structural" business tax expenditures (those unrelated to cost-recovery or international taxation) could raise $895 billion under current law and about $485 billion under Trump's plan. The two largest of these tax breaks are the Research & Experimentation tax credit and the domestic production activities deduction (section 199), which could raise $110 billion and $75 billion, respectively, if repealed under Trump's plan. Other major tax breaks include the low-income housing credit, the credit for employer-paid payroll taxes on tips, and the Employee Stock Ownership Plan (ESOP) dividend deduction.

There are also some deductions that are ordinary parts of the tax code (as opposed to special tax preferences), but that could none-the-less be justifiably scaled back or eliminated. Examples of these Non-Tax Expenditure Base Provisions (NTEBPs) include the deductibility of state and local taxes for businesses, the meals and entertainment deduction, the deduction for net operating losses, and the deductibility of interest.

Business Taxes

Option Current Law Trump Plan
Repeal Business Tax Expenditures
Repeal the deduction for domestic production activities $175 billion $75 billion
Modify or repeal the R&E tax credit $70 to $135 billion $60 to $110 billion
Repeal various energy related tax credits $60 billion $50 billion
Repeal low-income housing tax credit $35 billion $30 billion
Eliminate tax preferences for insurance companies $50 billion $20 billion
Limit like-kind exchanges $40 billion $20 billion
Eliminate credit for employer-paid payroll taxes on tips $20 billion $15 billion
Repeal deduction for ESOP dividends $35 billion $15 billion
Repeal rehabilitation tax credits $15 billion $10 billion
Repeal other business tax breaks unrelated to cost-recovery or international taxation $330 billion $140 billion
Eliminate Non-Tax Expenditure Base Provisions (NTEBPs)
Limit or eliminate the deductibility of interest $70 billion to $1.2 trillion $30 to $500 billion
Eliminate the corporate state and local tax deduction $290 billion $125 billion
Repeal deduction for meals and entertainment $140 billion $60 billion
Limit net operating loss deduction to 90% of income $100 billion $40 billion
Modify Accelerated Depreciation (only one of the options below could be adopted)
Eliminate accelerated depreciation $925 billion $400 billion
Eliminate accelerated depreciation, but increase most depreciation allowances with inflation $375 billion $160 billion
Lengthen depreciation schedules for assets with recovery periods of 20 years of life or less $250 billion $110 billion
Other Cost Recovery Options
Amortize 25% of advertising costs $230 billion $100 billon
Repeal expensing for R&E costs $185 billion $80 billion
Repeal "LIFO" and "Lower Cost of Market" accounting methods $100 billion $45 billion
Repeal expensing of exploration & development and use of percentage depletion allowance $25 billion $10 billion

Note: Estimates are rounded and rely on CRFB calculations and multiple sources, including CBO, JCT, Treasury, Tax Policy Center, and Tax Foundation.

Finally, policymakers could modify a number of "cost-recovery" provisions which generally allow purchases to be depreciated more quickly than their useful life. Lengthening these depreciation and amortization schedules would move in the exact opposite direction of the House GOP Plan's adoption of full expensing, under which nearly all business expenses can be written off in the first year, and opponents argue it would slow economic growth. However, it would generate significant revenue to help pay for rate reduction. Repealing accelerated depreciation and moving closer to economic depreciation could raise up $400 billion relative to the Trump plan. Other cost-recovery changes could potentially raise up to $200 or $250 billion more.

Individual Base Broadening

We estimate that on net, the President's individual tax reform provisions would lose $1.8 trillion in revenue over 10 years. While we assume the White House's plan would eliminate almost all itemized deductions, there are still a number of changes to the individual code that could broaden the individual income tax base.

The most obvious place to start would be the person personal and dependent exemption, an NTEBP which was repealed under the Trump's campaign plan in favor of a larger standard deduction, but not mentioned in the President's latest plan. Since President Trump would increase the standard deduction by at least $6,350 per person, most adult taxpayers would be better off even without the $4,050 personal exemption. Repealing it in full would raise about $1.4 trillion under the President's plan. Importantly, this change alone would result in a tax increase for families with children and other dependents, a concern that could be addressed by putting a small portion of the revenue toward increasing the child tax credit (and offering a new dependent tax credit in certain cases).

There are also a number of individual tax preferences that could be repealed or limited under the President's plan. Some of the larger tax preferences (not related to mortgage interest, charitable giving, or savings) that could be limited include the exclusions for fringe benefits such as employer-provided health insurance, cafeteria plans, income-replacement insurance, miscellaneous fringe benefits, or transportation benefits.

Individual Income Tax

Option Current Law Trump Plan
Repeal and Replace the Personal and Dependent Exemption
Eliminate personal exemptions $1.8 trillion $1.4 trillion
Eliminate personal exemptions and introduce a $500 child/dependent credit $1.4 trillion $1.1 trillion
Eliminate personal exemptions and introduce a $1,000 child/dependent credit $1.1 trillion $850 billion
Eliminate personal exemptions, leave the standard deduction at current law levels, and create an $800 per person credit N/A $600 billion
Modify Personal Tax Expenditures
Replace the Cadillac tax with a cap on the exclusion of employer-provided health insurance^ $100 to $300 billion $90 to $265 billion
Reform or eliminate the exclusion of interest for public-purpose municipal bonds $30 to $400 billion $25 to $350 billion
Repeal deduction for "cafeteria plans" $380 billion $330 billion
Include employer-paid premiums for income-replacement insurance in taxable income $335 billion $300 billion
Include investment income from life insurance and annuities in taxable income $240 billion $200 billion
Reform higher-education tax preferences $105 to $195 billion $95 to $170 billion
Repeal foreign earned income and housing exclusions $105 billion $90 billion
Include VA disability benefits in taxable income $90 billion $80 billion
Repeal exclusion for miscellaneous fringe benefits $85 billion $75 billion
Repeal exclusion for employer-provided transportation benefits $60 billion $50 billion
Require EITC and CTC claimants to have a Social Security Number valid for employment* $40 billion $40 billion
Eliminate most nonrefundable personal credits $40 billion $40 billion
Require derivatives to be marked to market $15 billion $15 billion
Repeal the exclusion of allowances for federal employees abroad $15 billion $15 billion

Note: Estimates are rounded and rely on CRFB calculations and multiple sources, including CBO, JCT, Treasury, Tax Policy Center, Tax Foundation, and American Enterprise Institute.

^ = Effect on income tax revenues only.

* = Includes outlay effects.

Policymakers could also consider some type of comprehensive cap on whatever tax preferences remain. The cap could limit total tax expenditure value anyone can collect, as in the Feldstein-MacGuineas-Feenberg plan, or it could simply limit the value of each tax expenditure as a percent of income. For example, if all remained deductions and exclusions (including the standard deduction) were limited to only apply up to the 25 percent tax bracket, it might raise roughly $300 billion or so.

Other Taxes

Finally, the Administration could also help pay for their proposed income and corporate tax cuts by raising or introducing other taxes (these options would generally raise the same amount of revenue under current law or the Trump plan).

For example, equalizing the disparate tax treatment of different alcohol and tobacco products and indexing taxes for inflation could raise $20 billion, while more aggressive changes could raise over $100 billion. Another option might be to introduce some type of tax on financial institutions or financial transactions, which could raise $100 billion and $700 billion, respectively.

One of the largest potential revenue-raisers would be to introduce a value-added tax (VAT), which at a 5 percent rate could raise between $1.8 and $2.7 trillion over a decade, depending on the broadness of the tax base. While traditional VATs often resemble sales taxes, the President could also turn part or all of his 15 percent corporate tax into a VAT by moving to full expensing, eliminating the deductibility of interest and wages, and adding a border adjustment. To prevent this (or any VAT) from being a large middle-class tax increase, other income or payroll tax changes would likely need to accompany this proposal.

Other Taxes

Option 10-Year Revenue
Equalize taxes on alcohol and tobacco products and index with inflation $20 billion
Increase excise tax on cigarettes by 50 cents per pack $35 billion
Increases all taxes on alcohol to $16 per proof $70 billion
Impose an excise tax on overland freight transport $345 billion
Establish a $5 per barrel tax on oil $135 billion
Impose a fee on large financial institutions $100 billion
Enact a 0.1% tax on financial transactions $700 billion
Enact a 5% value-added tax $1.8 to $2.7 trillion
Impose a tax on carbon emissions $975 billion

Source: CBO.

* * * * *

While the President's budget appears to assume revenue neutral tax reform, the President's current tax plan is incredibly far from it. Ultimately, it may not be possible to achieve all of the objectives put forward in the one-page framework released by the White House. But to move in the direction of their proposed plan, they will need to identify a substantial number of tax offsets.

We hope that as the President and his advisors refine the Administration's tax plan, they take the difficult but necessary steps needed to pay for all of the proposed tax cuts and move the plan in a more fiscally responsible direction.