Tax Reform: the President’s plan

Tax Reform: the President’s plan

With a one-page “core principal” document the Trump Administration officially kicked off its idea of tax reform with a first-draft overview of its framework for tax cuts.

Certainly business-centric in its approach, of particular interest is the baseline idea of reconciling corporate tax rates with the small business tax rates on “pass-through” income paid by individuals, and discontinuing both the alternative minimum tax and estate tax.

Business tax cuts

• 5% business tax rate: It would cut from 35% to 15%, the top marginal rate of C corporations.

1. The top tax rate for pass-through business income to individuals from partnerships, S corporations and sole proprietorships would be reduced from 39.6% to 15%.
2. There would be a one-time repatriation tax on offshore earnings. Prior discussions have indicated the tax to be in the 10% range although that number will surely be debated vigorously. 
3. There would be a shift from a worldwide system of taxation (under which a U.S. taxpayer is generally taxed on its worldwide income regardless of where earned) to a territorial system (under which income would generally be taxed in the country where it is earned).

Individual tax cuts

• Tax Brackets: Reduce the current seven individual income tax rates to three, 10%, 25%, and 35%.
• Standard Deduction: The standard deduction, currently $6,350 for single people and $12,700 for married couples, would double
• Alternative Minimum Tax (AMT): Repeal the Alternative Minimum Tax which generally hits households with incomes of at least several hundred thousand dollars – would be repealed. The current rate is 28% for income that qualifies, and it hits individuals who otherwise would benefit from a sharply lower effective tax rate because of deductions.
• Death Tax: Repeal the 40% tax that currently applies to estates having a gross estate value over $5.5 million for individuals and $11 million for married couples.
• Revamp the child and dependent care expenses.
• Place a cap on the capital gains tax at 20%.
• Repeal the 3.8% tax on the interest, dividends and capital gains of higher income households that helps fund the Affordable Care Act.

Tax Breaks

There has been a consistent message of discontinuing certain tax breaks for “special interests, and the White House memo didn’t shy away from that position when it included this talking point about “simplification, eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers. But, which special interests?

Although one can draw some conclusions by looking at both the President’s initial tax plan ideas and the Ways & Means plan for reform, these specifics will become more evident as the reconciliation process begins, but this much is certain, certain tax breaks will be spared involving home ownership (mortgage interest, charitable giving, and retirement savings)

Several observations and questions.

What about the Border Adjustment tax? There was no mention of this item as it has been a source of much debate in the business community, and the White House is on record as opposing it in its current state.

What about revenue offsets? While none were presented this will clearly be a point of severe negotiation between the White House and Congress for the impact on the deficit.

What’s next? For starters, a reconciliation of President Trump’s tax plan with the business community as well as the House Ways & Means “blueprint” published last year that included a lengthy, detailed idea for tax reform.