President Trump is set to release his much-discussed proposal for tax reform today, Wednesday, April 26, 2017. As has been the case since the start of the 2016 Presidential campaign, Mr. Trump has been long on concepts, but the details of his long-awaited plan are unclear. It remains to be seen whether any clarity will be provided in today’s announcement and release.
With the Republican leadership in the House of Representatives pulling back on their revised healthcare bill last week, the President noted that his focus would turn to tax reform. Though he has offered no insight into the details of the plan, it is likely that it will follow the general concepts set forth in his campaign rhetoric. (See previous posts: “Big League Play” Advocated by President Trump and Comparing Tax Plans from the Presidential Candidates – Focus on the Trump Plan)
The centerpiece of President Trump’s tax plan will be tax cuts for all. From a personal and individual income tax perspective, the President is likely to propose a reduction in the tax brackets from the current seven to just three. This simplification will be supplemented by overall rate reductions with the highest marginal tax rate set at 33%, down from the current highest marginal tax rate of 39.6%. In his earlier plan, the single rates were proposed to be exactly one-half of the marginal tax rates for married-joint filers. Thus, the new structure will eliminate the reviled “marriage penalty.” The President’s plan also proposes to completely eliminate the “Head of Household” tax filing status option.
The President’s plan is also likely to include a significant change in how “taxable income” is calculated for individuals. To simplify returns, the plan proposes to raise the standard deduction allowed to all taxpayers. For taxpayers that do not itemize their deductions, tax law currently allows a reduction for the standard deduction. Earlier information released during the course of the campaign proposed to more than double the current standard deduction to $15,000 (currently $6,350) for individuals and to $30,000 (currently, $12,700) for married couples filing joint returns. A change such as this would serve to significantly reduce the number of taxpayers itemizing deductions and would simplify the tax return filing process considerably.
The President’s earlier plan also supports families, in that he was advocating for a larger allowable deduction for child care expenses, which would be available whether or not a taxpayer itemizes deductions. He also proposed that the child care credit be expanded to allow for four children, up from the current two children allowed under present law.
Another provision advocated by the President on the campaign trail was the abolishment of the estate tax. Long considered an unfair tax (especially among Republicans) the estate tax is assessed on transfers of wealth at the death of the taxpayer. As this wealth has been taxed once when it was earned, there is a common thought that the tax is excessive, even though current law only taxes individual estates in excess of $5.45 million.
On the corporate side, the most significant element of the President’s tax plan is a overall reduction of the corporate top marginal tax rate from its current level of 35% to a top marginal tax rate of 15%. Campaign discussion also included a one-time “tax free” repatriation provision that would enable U.S. companies with substantial sums of cash sitting offshore to bring those funds back into the United States where those monies could be reinvested in domestic activities.
With Republicans controlling both the House and the Senate, it would seem that the time is right for moving the proposed tax reform package through Congress. However, even though the President’s tax plan has evolved over time and been modified to more closely align to an earlier plan, (A Better Way), developed in the House of Representatives, some significant differences remain, and are likely to cause a slowdown in the passage of any tax reform bill. The primary issue is that the House, and Speaker Paul Ryan, as well as Senate Finance Committee Chair Orrin Hatch are looking for any tax legislation to be revenue-neutral.
In particular, the President’s proposed reduction in the corporate income tax rate would serve to generate a significant deficit. Estimates of the cost of the campaign tax proposal by the Committee for a Responsible Budget noted that the President’s campaign proposal would add approximately $5 trillion to the national debt over a 10-year period. The Tax Foundation’s estimate is $10 trillion.
The earlier House plan noted above contains a substantial amount of detail and should serve to provide a platform for any proposed legislation that is passed this summer. Some of the primary aspects of the House’s plan include:
- Elimination of the alternative minimum tax (AMT)
- Elimination of the estate tax
- The same three income tax rates as President Trump’s plan (12%, 25% and 33%)
- Deduction of 50% of capital gains, which leads to effective capital gains and dividend tax rates of 6%, 12.5% and 16.5%
- Elimination of itemized deductions, except mortgage interest and charitable contributions
- Standard deductions of $12,000 for singles, $18,000 for singles with children, and $24,000 for married couples filing jointly
- Elimination of the personal exemption
- An increased child tax credit of $1,500, $1,000 of which is refundable
- Elimination of the marriage penalty
- Continuation of the earned income tax credit (EITC)
- Simplification of higher education tax benefits
- Continued tax incentives for retirement savings
- Flat corporate tax rate of 20% and immediate write-off of business investments
The similarities between President Trump’s plan and the plan put forth by the Republicans in the House seem sufficiently close that negotiation and a successful legislative process should be a given. It is, of course, a great unknown as to exactly what the final bill will look like or when we might expect to see the legislation passed. However, we are confident that tax reform is coming, and that it should be through Congress by fall of 2017 and effective for 2018.
If you have questions or comments, please contact Bob Grossman or Don Johnston at 412-338-9300.
