Will Trump’s Proposed Tax Cuts Stick?

The Trump administration’s proposed tax reforms were unveiled today, a major overhaul that simplifies the country’s tax system and would lower the corporate tax rate to 20 percent from the current 35, but just how likely the proposed measures are to become law is still very much up in the air.

Ernst & Young Americas Tax Policy Leader Cathy Koch told Chief Executive that there is a lot of work to be done in Congress before the plans announced today are cast in stone.

“Proposals like this, plans and big announcements often represent the first step in the negotiation,” Koch says. “As such, I always caution clients to pay attention to the policies that are implied in a document like this and to pay attention to the provisions that are included, but also expect that during a negotiation there will be some changes, there will be some movement among the parts. And there always are, you never go out with your bottom line.”

As the back-and-forth on tax policy begins, the plan presented today isn’t likely to unify politicians on either side of the aisle.

“I don’t think this is a slam dunk, by any means,” Eric Toder, institute fellow and codirector with the Urban-Brookings Tax Policy Center told Chief Executive. “There are a lot of details still to be worked out and I think a lot of differences among the parties. I don’t think they will get bipartisan support, so they will have to come to terms within the Republican party, which is a little hard when particular interests are effected one way or another.”

So what things should CEOs be keeping a close eye on as negotiations on the tax proposal proceed in the coming months? A good place to start is the federal budget process, which could serve as a barometer on how things are moving along.

“The smoother the budget negotiations go, the smoother this will go.” Koch says.

Keeping an ear out for talk about scoring could also help shed some light on which elements of the proposal are being scrutinized by elected officials.

“If we hear things about deficit neutrality and revenue neutrality, you want to listen for those things because the tighter the restrictions around the revenue, the harder it is going to be to make a bill that pleases everyone,” Koch says. “I think the arithmetic is one of the most difficult parts of tax reform—even more so than the politics, though they interact.”

The pass-through business tax rate, for those who own their own businesses, would be 25 percent under Trump’s proposal, as opposed to being taxed an individual rate. However, some limits in this area may need to be negotiated in order to close potential loopholes for wealthier business owners.

“Congressional tax-writing committees are aware of the need to put guardrails around provisions like this,” Koch says. “We’ve known about the need for guardrails around this kind of proposal for a long time. You already have some provisions and law designed to make sure that you pay yourself fair wages, that you’re paying all of your payroll taxes, etc., and this kind of doubles down on that. This makes it even more important to put guardrails around what you say is your wage and what you say is your return on your business.”

Koch says that talk about items such as tax rates for small businesses and a new international tax system have been going on for years, though today’s announcement will put these topics in new focus.

“While the details are going to determine the impact on any given business—and there are not details in this document on those things—the main concepts are things that we have been talking about for a long time,” Koch says. “So, in essence, I find this a very believable document.”