Tuesday, October 3, 2017

Administration and Congressional Leadership Release Tax Reform Plan

On Sept. 27, 2017, the Trump administration—in conjunction with Congressional leadership—released a tax reform plan designed to make significant changes to the federal tax code. This plan is intended to serve as a template for the Congressional tax writing committees that will develop tax reform legislation.
This tax reform plan was collectively developed by the Trump administration, the U.S. House of Representatives Committee on Ways and Means, and the U.S. Senate Committee on Finance. It includes only broad policy directives, with the expectation that Congress will provide more detail when drafting its tax reform legislation.
The tax reform plan would make significant changes for businesses and employees. For example, the tax plan would:
  • Create a new lower tax rate structure for small businesses—The plan would limit the maximum tax rate for small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25% from 40%. It also directs committees to adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
  • Lower the corporate tax rate—The plan would reduce the corporate tax rate from 35% to 20%, and would eliminate the corporate Alternative Minimum Tax (AMT), in an effort to make American corporations more competitive globally.
  • Allow “expensing” of capital investments—The plan would allow businesses to immediately write off (or “expense”) the cost of new investments for at least five years.
  • Repeal or restrict many existing business deductions and credits—Because the plan would substantially reduce the tax rate for all businesses, it would eliminate the existing domestic production (Section 199) deduction, and would repeal or restrict numerous other special exclusions and deductions. However, the plan explicitly preserves business credits related to research and development and low-income housing.  
The elimination of certain deductions — in favor of doubling the standard deduction (below) — could eventually cause taxes for many people to increase.  "By 2027, taxes would rise for roughly one-quarter of taxpayers, including nearly 30 percent of those with incomes between about $50,000 and $150,000 and 60 percent of those making between about $150,000 and $300,000," said a Tax Policy Center report.
  • End “offshoring” incentives—The plan would end the incentive to offshore jobs and keep foreign profits overseas by exempting them when they are repatriated to the United States. It would impose a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keep the money offshore.
  • Repealing the estate or death tax.
  • Simplifying the individual tax rate structure to 12, 25, and 35%.  
  • The other main tax cut in the plan is a doubling of the standard deduction, which would not do much for growth but would simplify the system.  
The tax reform plan provides broad flexibility to Congressional tax writing committees in implementing these changes, as well as establishing additional reforms, when drafting their legislation. As a result, it is unclear whether these reforms will be included in any future tax reform bill.

Two Republican Senators have already expressed negative sentiment over the proposal.  Senator Rand Paul of Kentucky became the second Republican senator to publicly express doubts about the plan. Sen. Bob Corker of Tennessee said Sunday that if it looked like the plan was "adding one penny to the deficit, I am not going to be for it."
We will continue to monitor the tax reform process for any future updates.