Why Donald Trump's Tax Plan May Blow Up in His Face—and Steve Mnuchin's

Steven Mnuchin is accustomed to criticism. For years, he was known as "the foreclosure king" on Wall Street, where he amassed an estimated $300 million—much of it by profiting from the Great Recession (after the fact). But in August, just days after the deadly rally in Charlottesville, Virginia, Mnuchin—the U.S. Treasury secretary—faced unprecedented pressure from an unlikely source: his alma mater, Yale University. President Donald Trump had equated the racist, tiki torch–wielding extremists at the rally with those who showed up to protest against them. And a group of 300 Yale alumni asked the Treasury secretary, who is Jewish, to resign. "You are better than this," they wrote. For Mnuchin, the former publisher of the Yale Daily News and a member of the famed secret society Skull and Bones, the answer was obvious. He defended Trump in glowing terms and vowed to stay on and "reform taxes."

The fight to change the tax code is the biggest issue facing Congress, and it will likely define the 54-year-old's career in Washington. Mnuchin is the administration's point man on what has become a must-win issue for the president. Trump came into office with a Republican-controlled House and Senate, but he's failed to persuade Congress to pass anything save for an embarrassingly small number of confirmations and stopgap spending measures. So now it falls to Mnuchin, who has been working the Sunday news circuit, not only advocating for the tax plan but—because loyalty is so important to Trump—defending the president's comments about NFL players taking a knee during the national anthem. "It's almost like he's the ventriloquist and the dummy at the same time," chided The Daily Show's Trevor Noah.

Mnuchin has been optimistic about passing the embryonic plan to eliminate deductions and lower tax rates in hopes of stimulating economic growth. But changing the tax code is one of the hardest things to do in Washington—and this administration has failed at much less arduous tasks—such as repealing Obamacare. Changing the tax system involves huge trade-offs, and if you cut deductions to lower rates, you're going to piss off one powerful group or another—from the real estate lobby to retirees.

Consider Tom Reed, a popular Republican congressman from upstate New York. He sits on the powerful House Ways and Means Committee, which writes tax laws. When he spoke to Newsweek in early October, he was enthusiastic about changing the tax code. Reed has met with the Treasury secretary—and he was impressed with his dealmaking chops. But like many lawmakers, the congressman is eager to protect the deductions that are important for his constituents—like the ones for state and local taxes that are slated for elimination in the proposal. So if Mnuchin can't find a way to offset enough of them, Reed and others may balk—and the Treasury secretary will be forced to go back to his impetuous boss and tell him the team has lost again.

There is, however, precedent for him to succeed. In 1986, James Baker, the secretary of the Treasury under Ronald Reagan, guided a massive tax revision through Congress. It not only passed with a wide majority but slashed rates and eliminated deductions. Baker, the famed dealmaker who would later become secretary of State, provided tons of details to Congress about what he wanted in the plan. He was even present as the Ways and Means Committee marked up the bill.

Mnuchin almost certainly won't be involved at that level. "This is a different model [than Baker]," says Dave Camp, a former chairman of the House Ways and Means Committee who is now at senior policy adviser at PwC. "It appears the House and Senate will come up with their own bills."

The Treasury secretary is also starting from a weaker position than Baker. In 1984, Reagan won the most lopsided election in American history. One of his promises was to change the tax code, and it still took Baker and his predecessor, Donald Regan, two years to get the bill they wanted. Trump, won by a narrow margin and remains unpopular. He didn't run on rewriting tax laws, and Mnuchin has been given only a few months to pass something viable.

Another disadvantage for Mnuchin: His tax proposal is a harder sell than Baker's. The 1986 plan cut rates for individuals but largely raised them for businesses. Mnuchin's—at least according to the outline the Trump team and GOP leaders released in September—is brimming with corporate tax cuts. Supporters note that the world economy is far more competitive than it was during the Reagan era, and with the U.S. corporate rate at 35 percent, many companies have relocated abroad or squirreled away money in foreign offices. Lowering corporate rates could help overall economic growth, but it's sure to be less popular. In a recent poll, only 39 percent of respondents said they wanted such a cut. And while Mnuchin's plan does slash individual rates, the biggest breaks go to the very wealthy, while actually raising taxes on the poorest Americans, from 10 to 12 percent. Even Trump was reportedly angry about that, though he later seemed placated when he learned the proposal would double the standard deduction, in part to offset the higher rate.

Either way, Mnuchin has some image problems that aren't helping his tax effort. Over the summer, his wife, the actress Louise Linton, had to apologize for lashing out at an Oregon mom who had criticized her on Instagram for bragging about designer clothes as she stepped off a taxpayer-funded jet. Later, it emerged that a top Mnuchin aide may have violated government ethics rules by accepting a private plane ride from a billionaire investor. And in the wake of Health and Human Services Secretary Tom Price's resignation over his private charter travel, Mnuchin reportedly racked up $800,000 in trips on military aircraft. He had also inquired about using a government jet for his honeymoon (though he ultimately paid his own way). None of this looks good for a man who bought subprime mortgage lender IndyMac for $1.6 billion in 2009 with a group of billionaire investors, then sold it more than double that six years later after profiting from foreclosures and loan modifications.

Private jet travel isn't the Treasury secretary's only optics problem. Mnuchin made boatloads of money in hedge funds, and one question about his tax plan is whether it will repeal the loophole that allows these funds to pay a low 15 percent rate on their massive earnings. During the campaign, Trump said he was for scrapping it— "The hedge fund guys are getting away with murder"—but ending the loophole wasn't mentioned in the outline Mnuchin crafted with GOP leaders.

Democrats will rejoice if the Trump team's idea of "reform" means zillionaires get taxed at lower rates than their secretaries. And Mnuchin's Treasury Department hasn't helped with his image problem. In September, it took a study down from its website showing that much of the corporate tax cut would wind up benefiting the wealthy. Critics immediately pounced.

Because of all the criticism, the bill's chances of passing don't look good. It can make it through the House, where Republicans have their biggest numbers since 1928. But in the Senate, it's going to be harder—as it was with health care. Senator Rand Paul, the Kentucky Republican, has attacked Mnuchin's outline for not cutting taxes enough. GOP Senator Bob Corker of Tennessee is worried it would raise the deficit. And moderate Democrats, like Senator Joe Manchin of West Virginia, say the proposal is tilted too heavily in favor of the wealthy.

Mnuchin may wind up settling for a smaller, more modest plan—one that simply cuts taxes and eliminates deductions. It might not be the "reform" that Trump and his Treasury secretary promised. But at this point, getting anything through Congress would be a win for the White House.