Trump Plans to Seek 10% Tax on Offshore Earnings, Official Says

• President said to call for taxing pass-throughs at 15%
• Pass-throughs are currently taxed at higher individual rates

President Donald Trump plans to propose a 10 percent tax on more than $2.6 trillion in earnings that U.S. companies have stockpiled offshore, said a White House official familiar with the president’s tax plans.

Proceeds from the so-called “repatriation tax” would represent a one-time source of sorely needed revenue, which could offset some of the deep tax cuts Trump has proposed for businesses — or could be devoted toward popular, bipartisan initiatives, like infrastructure spending.

Trump’s chief economic adviser, Gary Cohn, and Treasury Secretary Steven Mnuchin met with congressional leaders Tuesday evening to preview the broad tax proposal Trump plans to reveal Wednesday. It will include a call for cutting the top income tax rate on pass-through businesses — a category that includes mom-and-pop grocers, hedge funds and Trump’s own business empire — to 15 percent, down from 39.6 percent, said the official, who asked not to be identified because the discussions are private.

After the Tuesday evening session, “everybody is on the same page” about Trump’s announcement, the official said — though not necessarily in complete agreement about its contents. The plan is expected to also include a 15 percent tax rate for corporations, but not the border-adjusted tax proposal that House Speaker Paul Ryan has championed.

“The House has not given up on that but they do acknowledge that it needs some work,” said Senator Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, who attended the meeting with Cohn and Mnuchin. He called it “a good meeting,” but not one that produced an agreed-upon path forward.

“It’s too early,” Hatch said. “We’re just getting into it.”

Tax Quirk

As with other portions of his tax plan that have leaked, Trump’s plan to call for a 10 percent tax on companies’ repatriated earnings is one that he first floated during his campaign. The tax represents an attempt to reconcile a quirk of the U.S. tax system. Unlike most developed nations, the U.S. applies its 35 percent corporate income tax to companies on their global earnings, not just their U.S. income. But companies can defer taxes on their overseas profits until they decide to return those earnings to the U.S., or “repatriate” them.

In their eagerness to defer the tax bills, companies have stockpiled an estimated $2.6 trillion offshore — though Trump has said repeatedly he believes the number is far higher. Economists say that removing the tax-related disincentive to repatriation would stimulate the U.S. economy by encouraging domestic investment — though it’s also possible that much of the cash would be plowed into stock buy-backs or shareholder dividends.

Ryan and House leaders have their own version of a repatriation tax also — they’d impose an 8.75 percent rate on earnings held offshore as cash or cash equivalents and a 3.5 percent rate on earnings that have been invested otherwise.

Pass-Through Challenges

Imposing lower taxes on pass-throughs, which Trump also proposed during his campaign, would present federal officials with at least two challenges: First, they’ll have to find a way to deter regular wage-earners from turning themselves into pass-through businesses to qualify for the lower rate. Second, a cut of that size would make it harder to achieve revenue-neutral tax legislation. Under Senate rules, revenue neutrality would be necessary for making the cuts permanent — assuming they get no Democratic senators’ votes.

Roberton Williams, a tax expert at the Urban-Brookings Tax Policy Center, said employees could re-establish themselves as small businesses, for tax purposes, to reduce their tax bills. “Tax lawyers are very good about finding ways to do that,” he said, adding that the provision could increase the deficit by hundreds of billions of dollars.

Trump administration officials say the president will release several principles surrounding his plans for cutting taxes on Wednesday. The details that have surfaced so far closely resemble the plan he set out during his campaign — and several observers have questioned their effect on deficits.

Trump’s campaign plan included calls for taxing corporations and pass-throughs at the same 15 percent rate. The federal corporate income tax rate is currently 35 percent. Pass-throughs, as the name suggests, pay no income tax, but pass their income and deductions through to their owners, who then pay taxes at their individual income-tax rates.

Growing Category

Pass-throughs are a large and growing business category that includes small businesses, but also large law firms, investment companies and Trump’s own real estate and licensing businesses. The question of whether individuals might turn themselves into small businesses to qualify for a lower tax rate first surfaced during Trump’s campaign. His advisers said at the time that they’d work with Congress to iron out details.

Representative Kevin Brady, the chairman of the tax-writing House Ways & Means Committee, said Tuesday that he welcomes Trump’s leadership on tax issues — including his 15 percent rate proposals for corporations and pass-throughs.

“I think the bolder the better,” Brady said.

Brady has been a leading supporter of Ryan’s House GOP blueprint for taxes, which calls for replacing the 35 percent rate with a 20 percent rate applied to companies’ domestic sales and imported goods. Their exports would be exempted. Ryan has questioned whether a 15 percent rate can realistically be paid for, and he and Brady have said they’re committed to revenue neutrality.

A letter to Ryan dated April 25 from the Joint Committee on Taxation, Congress’s nonpartisan scorekeeper, hinted at trouble for a corporate tax cut if it’s not paid for. It found that even a three-year temporary corporate tax cut to 20 percent would increase the deficit after the 10-year window, which means it would run afoul of Senate rules allowing passage of a tax bill with fewer than 60 votes.