President Trump and Republican leaders in Congress unveiled a framework for tax reform on September 27. The nine-page framework broadly describes tax proposals ranging from lower rates for individuals and businesses to repeal of certain tax preferences, but it leaves actual legislative language to congressional taxwriting committees. Democrats, who were not involved in the release of the proposals, expressed support for middle-class tax relief but cautioned 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. The Trump/GOP plan does not 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.” No mention was made within the framework of the fate of the current zero, 15 and 20 percent capital gains rates.
The Trump/GOP plan would increase the standard deduction for individuals to $24,000 for married taxpayers filing jointly and $12,000 for single filers. The framework, however, would repeal the personal exemption for dependents but “significantly” increase the child tax credit. A new non-refundable credit for non-child dependents would also be created. The Trump/GOP plan points out 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.”
As with the rate cuts, the proposals for individual tax preferences leave many details to the House and Senate taxwriting committees. Popular individual tax preferences, such as the deduction for charitable giving and the home mortgage interest deduction, would apparently be unchanged. However, the Trump/GOP plan calls for eliminating “most itemized deductions.” Within that possible category, no specific 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 pass-through businesses 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 taxwriters. 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 apparently be retained and others eliminated. The Trump/GOP plan calls for keeping the research tax credit and tax incentives for low income housing. The Code Section 199 deduction, however, would be eliminated.
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.”
The taxwriting 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.
President Trump discussed his administration and top congressional leaders’ joint framework on September 27 during a speech in Indiana. “For several months, my administration has been working closely with Congress to development a framework for tax reform—over the next few months the House and Senate will build on this framework…,” Trump said. According to Trump, the framework shows commitment that tax reform will benefit low-to-middle income households, not the wealthy.
Trump also discussed the importance of having a bipartisan approach to tax reform. “Tax reform, historically, has not been a partisan issue, and it does not have to be a partisan issue today,” Trump said.
SFC Chair Orrin G Hatch, R-Utah, indicated that tax reform would need a bipartisan approach. “We’re so equally divided that it’s going to be almost impossible to do without some Democratic help and I’m hopeful that we can do that,” Hatch said.
Initial comments from House and Senate Democrats generally criticized the framework for being partisan and geared more toward helping the wealthy. “Senate Democrats remain steadfast in calling on Republicans to drop their failed partisan process and work together on a tax bill…,” SFC ranking member Ron Wyden, D-Ore., said in a September 27 statement. House Ways and Means ranking member Richard Neal, D-Mass., criticized the framework for benefiting the wealthy, commenting that “[t]his tax plan would give big tax cuts to the wealthiest Americans, helping the rich get richer while leaving behind working families and middle-class Americans.”