True Alert: Trump’s Tax Reform Proposal
On April 26, 2017, the Administration released its long-awaited “tax reform” plan. While the President touted it as “the biggest … tax cut in American history” the 2-page document released by the Administration seemed to be little more than a re-packaging of previously-published campaign promises.
The document’s general proposals contain no specific information but the following are the highlights:
- The current seven tax brackets would be reduced to three: 10%, 25% and 35%.
- The standard deduction (currently $6,300 for individuals and $12,600 for married couples filing jointly) would be doubled.
- There would be some unspecified tax relief for families with child and dependent care expenses.
- “Targeted tax breaks” that mainly benefit the wealthiest taxpayers would be eliminated; these tax breaks were not identified but from Treasury Secretary Mnuchin’s comments they apparently include all itemized deductions (including the deduction for state and local taxes) except for mortgage interest expense and charitable contribution deductions.
- The alternative minimum tax, which is meant to ensure that the wealthiest taxpayers pay some income tax, would be repealed.
- The estate tax, which currently applies only to individual estates greater than $5.45 million ($10.9 million for couples), would be repealed.
- The 3.8% net investment income tax that applies to individuals who earn more than $200,000 a year would also be repealed.
- The highest tax rate would fall to 15% from 35% for large corporations.
- Pass-through entities — partnerships and most limited liability companies (including hedge funds, real estate concerns, and law and accounting firms) and S corporations — whose owners currently pay taxes at individual rates (which top off at 39.6%) would be subject to a 15% tax rate (presumably still paid by the owners).
- Most future foreign-source income would be exempt from U.S. income tax (i.e., the U.S. would shift to a “territorial tax system”). Past foreign earnings that have not been returned to the U.S. would be subject to a one-time tax (apparently—but not certainly—at a 10% rate).
- There is no indication of whether the corporate alternative minimum tax would be repealed.
It is not clear whether the proposal would be revenue neutral, although the similar Trump campaign plan was estimated to cost between $4.4 – $6.2 trillion. A revenue-losing plan will be difficult to make it through Congress without either Democratic votes in the Senate or making the tax cuts temporary. The distributional effects of the plan (the benefits appear to be skewed in favor of higher-income taxpayers) could also create political problems for the plan’s success.
The package does not include infrastructure programs, a child care tax credit, and other items, which could be introduced in later months. It also does not include either the border adjustment tax, which is a major feature of the plan advanced by Republican leadership in the House of Representatives, or corporate integration (i.e., elimination of the second-layer of corporate income taxation), which has been advanced by influential Republican members of the Senate Finance Committee. As a result, the plan’s prospects in Congress appear to be uncertain at best.
The tax experts at True Partners Consulting will continue to closely monitor the progress of tax reform in the coming weeks and months and will be providing numerous updates both through our regularly-published Washington Tax Insight and through periodic webinars. As always, we are prepared to discuss the impact of the various tax reform proposals on our clients’ individual situations as requested.