Today, the Trump Administration released its outline for corporate & individual tax reform. While not draft legislation, the announcement serves as the Administration’s “opening offer” in the forthcoming tax debate. Here are some of the highlights:
- 15% Corporate Rate; Also Applied to “Pass Through” Income. The corporate income tax rate would be lowered from 35% to 15%. The 15% rate would also be made available to “pass-through” income; i.e. income from S-corporations and partnerships that is paid to the shareholders/partners.
- “Territorial” International Tax System. The US would no longer tax income on a world-wide basis, instead shifting to a “territorial” system (similar to most of our major trading partners). There would, however, be a one-time tax on all “offshore” income which has not been repatriated.
- Lower Individual Rates. The current seven individual income tax brackets are collapsed – 35%, 25%, and 10%. While it is not clear what income levels will be associated with these brackets, the brackets will likely result in a tax cut for most Americans. The top bracket is reduced from the current 39.6% to 35%.
- Changes to Individual Deductions. The two most significant proposals would be a doubling of the Standard Deduction and the revocation of state & local tax deduction. All individual deductions except for the deduction for mortgage interest and charitable contributions would be eliminated.
- Estate Tax, Alternative Minimum Tax, and “ObamaCare Surcharge” Repeal. The plan eliminates the Estate Tax, the Alternative Minimum Tax, and the 3.8% additional Medicare tax added under the Affordable Care Act, aka the “Obamacare Surcharge.”
This plan outline will no doubt undergo numerous revisions. There are several questions worth pondering:
- Revenue “Offsets”? Or, how is the plan “paid for?”
- Changes to business credits and deductions? No specific ideas were put forward for eliminating any particular business credits or deductions. During the “transition” period, then President-elect Trump put forward a set of tax reform ideas which called for eliminating virtually every “special business deduction and credit” except for the R&D tax credit. Eliminating or reducing these credits is widely expected to help offset the foregone revenues from lower rates.
- “Budget Reconciliation” and prospects for passage? Speaker Ryan and other GOP Congressional leaders have expressed their preference for a plan that can pass through the Senate’s “reconciliation” rules and thereby avoid a filibuster. In short, Reconciliation requires that a spending bill cannot expand the federal deficit after ten years. As a result, any tax reform legislation written to pass via Reconciliation must be revenue-neutral within 10 years or sunset at the end of that period. Of course, as we the battle over an Obamacare replacement earlier this year demonstrated, Republicans in Congress must work out their own internal differences if there is any hope of passage in either the House or Senate.
- What happens to the House Ways & Means Committee plan? The House Ways and Means Committee has formulated a very detailed tax reform plan. Most notably, the plan included a “Border Adjustment Tax” to generate sufficient revenues to offset a big reduction in the corporate rate. Treasury Secretary Steven Mnuchin and Council of Economic Advisors Chairman Gary Cohn, who are leading the White House’s tax reform efforts, said today that they do not necessarily oppose “Border Adjustment”, but don’t think it can work in its current form. Since Congress ultimately writes legislation, and Speaker Ryan and Ways & Means Committee Chairman Kevin Brady still express support for the Border Adjustment Tax, it will be interesting to see what Congress proposes in its initial legislative package.
TRCG Advisors will keep our clients and associates apprised as tax reform events unfold. In the meantime, should you have any questions, please contact us.