The Trump administration and Congressional GOP leadership have unveiled a tax reform outline, the “Unified Framework for Fixing Our Broken Tax Code.” The framework calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, nearly doubling the standard deduction, and a significant reduction in the corporate tax rate; along with changing the tax treatment of pass-throughs, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. According to the proposal, the framework is designed to serve as a template for Congress to develop legislation through the committee process. This Briefing presents a high-level overview of the GOP’s proposals.
At this time, the framework is just a proposal. No legislative language has been revealed. The framework builds on a broader “outline” the Trump administration released in April 2017. Both the April outline and the new framework bear similarities to the House GOP “blueprint” released in July 2016. Regarding a timeline, Administration officials predicted at the time of the release of the first proposal that tax reform “will not slide into 2018,” and many members of Congress have echoed that sentiment in the intervening months.
If a tax reform package moves in Congress under the reconciliation rules, which require only a Senate majority, the tax cuts would likely have to sunset after 10 years. Treasury Secretary Steven Mnuchin said that the White House would prefer permanent tax reforms but “if we have it for 10 years, that’s better than nothing.”
Tax Rates The framework calls for replacing and lowering the current individual tax rates with a new, three-bracket structure: 12, 25, and 35 percent. Under current law, individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.
The framework also calls for the use of a new, more accurate measure of inflation to be used for determining annual increases in bracket ranges, in addition to other tax code amounts.
The President’s plan calls for a near doubling of the standard deduction to $24,000 for married filing jointly and $12,000 for single filers. The 2017 standard deduction amounts under current law are $12,700 and $6,350, respectively, as adjusted for inflation.
The framework would appear to eliminate all individual itemized tax deductions except for the mortgage interest deduction and the charitable contribution deduction. The framework would also eliminate “numerous other exemptions, deductions, and credits,” including the deduction for personal and dependency exemptions (discussed below) with an eye towards using the repeal of these tax breaks to make a simpler system and lowering rates overall.
Despite this proposal to eliminate many deductions and credits, the framework does indicate that unspecified benefits meant to encourage work, higher education, and retirement would be retained.
As noted above, the framework would eliminate the deductions for personal and dependency exemptions. This could lead some taxpayers to have higher taxable income even with the doubled standard deduction.
The framework indicates that the child tax credit would be “significantly” increased to help alleviate the discrepancy, though the amount of that increase is not specified. As under current law, the first $1,000 of the child tax credit (the so-called “additional child tax credit) would be a refundable credit. Also, income limitations on the child tax credit (currently $110,000 married filing jointly, $75,000 single, and $55,000 married filing separately) are also proposed to increase. The framework also provides for a $500 credit for the care of non-child dependents.
The President’s proposal calls for the elimination of the federal estate tax and the generation-skipping transfer tax. The current maximum federal estate tax rate is 40 percent with an inflation-adjusted $5 million exclusion ($5.49 million in 2017).
Tax The framework calls for abolishing the AMT, calling it a complicated addition to the tax system that no longer serves its intended purpose. A parallel tax structure, the AMT, has existed for the stated purpose of ensuring that individuals, corporations, estates, and trusts with substantial income do not avoid tax liability. Despite exemptions, it has captured an increasing number of taxpayers to the extent that it forces many individuals “to do their taxes twice to see which is higher,” according to the administration.
The framework calls for a 20-percent corporate tax rate. The maximum corporate tax rate currently tops out at 35 percent. The framework also calls for the elimination of the corporate alternative minimum tax.
Business Tax Benefits
A number of changes to various business incentives are proposed in the framework. Chief among them is effectively allowing 100 percent bonus depreciation for investments for a five-year period beginning in 2017. Currently, the first year “expensing” of capital investments is limited to 50 percent of the cost, gradually stepping down to 30 percent for investments made in 2021.
Additionally, the framework calls for the elimination of the domestic production activities deduction, indicating that manufacturers will no longer need the advantage of this deduction due to the substantial reduction in the corporate tax rate. The framework also calls for a partial limitation of the deduction for net interest expense for corporations, as well as consideration of the appropriate treatment of interest paid by non-corporate taxpayers.
The framework leaves both the low-income housing credit and the research and development credit untouched while leaving open the door for tax-writing committees to retain other business credits. The framework also indicates that certain “special tax regimes” that apply to certain industries should be modernized to reflect economic reality and to prevent the use of these regimes to avoid tax.
Currently, owners of partnerships, S corporations, and sole proprietorships pay tax at the individual rates, with the highest rate at 39.6 percent. The framework proposes a 25-percent tax rate for pass-through income.
The framework calls for a one-time tax on repatriated profits at a yet-unspecified tax rate. The blueprint stated that “trillions of dollars” are being held overseas and potential targets for repatriation.
Territorial Tax Regime
The framework’s repatriation plan is a transitional step to allow movement to a territorial tax regime instead of a worldwide tax regime. Under this territorial tax regime, domestic parent corporations would be entitled to a 100 percent “exemption” of dividends received from 10 percent-owned foreign subsidiaries.