President Trump and Republican leaders in Congress unveiled a framework for tax reform on September 27, 2017. The nine-page framework broadly describes tax proposals including lower rates for individuals and businesses and repeal of certain tax preferences, but it leaves actual legislative language to congressional tax writing committees. Democrats, who were not involved in the release of the proposals, expressed support for middle-class tax relief but said they would work to defeat proposals that cut taxes for higher-income taxpayers. The proposal may also hit a roadblock from lawmakers who want deficit-neutral tax reform.
Individuals. The current seven tax rates for individuals would be consolidated into three: 12, 25 and 35 percent but they have yet to describe the income levels for the proposed rates. The framework also calls for an unspecified “additional top rate, which may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” There was no mention of the fate of the current zero, 15 and 20 percent capital gains rates.
The Trump/GOP plan would double the standard deduction and eliminate the personal exemption. A new non-refundable credit for non-child dependents would also be created. The Trump/GOP plan states that “the typical family” now in the current 10-percent bracket that would be subject to the 12-percent rate would be better off due to the larger standard deduction, child tax credit and “additional tax relief that will be included during the committee process.” This is yet to be seen.
Popular individual tax preferences, such as the deduction for charitable contributions and the home mortgage interest deduction, would be unchanged. However, the Trump/GOP plan calls for eliminating “most itemized deductions.” Within that possible category, no mention was made of the controversial proposal that has been circulating to eliminate the itemized deduction for state and local taxes.
Also slated for elimination are the federal estate tax, the generation-skipping transfer tax, and the Alternative Minimum Tax (AMT). The AMT generates significant revenues, and some lawmakers may work to retain it.
Businesses. The corporate income tax rate would fall from 35 percent to 20 percent under the proposal. Special rules would give S-Corps and Partnerships a top tax rate of 25 percent. Administration officials have said that legislation would be put in place to prevent abuse. The framework also “aims to eliminate the corporate AMT.”
Expensing would be enhanced under the Trump/GOP plan. However, the deduction for net interest expense incurred by C corporations would be limited and those for other businesses examined. Again, details appear to be left to congressional tax writers. Note that except for the start date of September 27, 2017, the framework does not designate any definite effective date for any other provision, apparently leaving January 1, 2018 effective date for other aspects of tax reform open to negotiation.
Some tax preferences for businesses would be retained and others eliminated. The Trump/GOP plan calls for keeping the research tax credit and tax incentives for low income housing.
International. The Trump/GOP plan calls for a “100-percent exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10-percent stake).” Further, “to transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated.”
Long Road Ahead
The tax writing committees—the House Ways and Means Committee and the Senate Finance Committee (SFC)—are tasked with writing tax reform legislation. Both committees have held tax reform hearings over the past few years. Republicans on the SFC have a slim majority, so tax reform legislation may not only move more slowly in the SFC, it may also take a different path from the Trump/GOP framework.
There are some important points to remember. Even before we can get to tax reform, the issue of the Budget must be addressed. There will have to be several drafts and negotiations before a final bill is voted on by the House. It will then go to the senate for changes and a vote. If and that is a BIG IF, it is passed by the Senate the bill returns to the House where the bill will be reconciled before it is passed onto the President for his signature.
Stay tuned for much more discussion as the details become available on the Trump Tax Reform Plan.