Republicans will impose a steeper-than-expected levy on the trillions of dollars of earnings held by US companies overseas as Donald Trump’s party raises money to pay for the biggest tax overhaul in a generation.
Senate and House leaders unveiled the final version of their tax reform legislation on Friday, putting the Republicans on the cusp of delivering tax cuts of close to $1.5tn. As part of the package they will impose a 15.5 percent one-off tax on offshore cash, coupled with an 8 per cent levy on less liquid assets, a Republican aide said.
That is a stiffer “deemed repatriation” charge than earlier proposals from both chambers, underscoring the late scramble for revenue as lawmakers ensure their package does not bust deficit ceilings agreed to during the negotiations.
The one-off tax rates represent a saving, however, compared to what companies would have paid if they repatriated their earnings under current law at a 35 per cent rate.
The measure forms part of a broad agreement that sets Republicans up for the biggest set of tax reforms since president Ronald Reagan’s overhaul in 1986. Passage of the bill would mark the first major legislative victory of the Trump presidency, after a year in which healthcare legislation floundered and the president has openly attacked members of his own party amid congressional disappointments.
The centrepiece of the reforms is a sharp cut in the corporate tax rate, which will drop to 21 per cent next year, not the previous 20 per cent the president targeted. Republicans claim the measure will galvanise investment and deliver a step-change in US growth, but outside economists are expecting more modest benefits: Janet Yellen, the Fed chair, this week predicted “some modest uplift” to growth from the reforms.
As details of the final package emerged it became clear that, despite intensive lobbying, not all businesses had clinched their demands. Multinationals will benefit from a notional end to the US’s taxation of future foreign earnings, but that change is tempered by the introduction of new mechanisms to tax intellectual property and ensure large companies pay something on foreign earnings.
Accumulated overseas earnings, which amount to at least $2tn, will be subject to a higher levy than in any of the earlier House and Senate proposals. Foreign banks also lost out in the final bill, as tax writers brushed off concerns about provisions bankers said would effectively impose a tax penalty on cross-border payments between affiliates of the same institution. A Republican aide on Friday said the final package had adopted the Senate’s proposed treatment of the payments.
Among the other changes, the “alternative minimum tax” on companies will be abolished following intense last-minute protests by companies.
Republicans are operating on razor-thin margins in the Senate as they attempt to radically reshape the tax code with no support from the Democrats. But momentum behind the legislation grew on Friday afternoon as two previously wavering senators — Marco Rubio and Bob Corker — said they would back the bill.
Mr Rubio, a Florida senator and former presidential contender, had wanted to improve the package’s support for poorer families, and in the end he won concessions to make the child tax credit more generous. The decision of Mr Corker of Tennessee to swing behind the bill was a major relief to GOP leaders, given that the deficit hawk had previously declined to support the legislation because of its implications for public borrowing.
Party whips preparing to usher the bill through were on Friday still monitoring the health of Arizona senator John McCain, who is being treated for side-effects from brain cancer treatment. Lawmakers said they hoped Mr McCain would be able to return for a vote next week. A second Republican senator, Thad Cochran, is separately recovering from a skin cancer scare, but is expected to be back on Capitol Hill by next week.
Paul Ryan, the House speaker, gave a bullish update on Friday evening, declaring: “We’re in the final stretch — and we’re ready to get this done for the American people by Christmas.”
In a statement greeting the release of the final version of the proposals, the White House said: “By lowering tax rates, simplifying the rigged and burdensome tax code, and repealing the failed tax on lower- and middle-income households known as the Obamacare individual mandate, this legislation will grow our economy, raise wages, and promote economic competitiveness.”
Under the deal, the top rate of income tax will drop to 37 per cent from 39.6 per cent, in a move that will heighten criticism of the proposals as overly generous to the rich and big business.
The bill also repeals a central pillar of Obamacare, adopting a Senate idea that will allow Mr Trump to claim he has struck a blow against Barack Obama’s reforms after failing to scrap them in full earlier this year. It will scrap Obamacare’s requirement for everyone to have health insurance or pay a penalty, a mandate that many conservatives view as an infringement on individual freedom.
Others, including some moderate Republicans, say the requirement is necessary to keep insurance markets functioning in the absence of other reforms.
Party leaders won the provisional support of moderates for the measure by pledging to advance healthcare legislation in parallel with the tax changes, but on Friday there was no sign of movement on a health bill.