2017 Tax Reform: What Trump and Congress Are Now Considering

Posted on Tue, Aug 15, 2017 ©2021 Drucker & Scaccetti

By: Eric R. Elmore

 

Earlier this year, a brief memo was released by the White House titled, “The Biggest Individual and Business Tax Cut in American History.” It had little detail and left many wondering about the possibility of tax reform this year.   Now, Reuters reports President Donald Trump and congressional Republicans are tackling tax reform to be unveiled as soon as next month. Tax staffers are meeting in the House of Representatives and the Senate through the August break to work on legislation. Here are some areas that are likely to be addressed.

 

Cutting and Simplifying Individual Taxes

The top individual tax rate paid by high-income earning Americans is 39.6%. Trump wants to cut that top rate to 35% while House Republican leaders have proposed cutting it to 33%.

 

In proposals to simplify taxes, Trump wants to shrink the number of tax brackets to three from seven and double the standard deduction. The latter move, analysts say, would sharply reduce the number of taxpayers who can claim certain deductions, such as the ones for mortgage interest and charitable donations because their standard deduction would be higher than their itemized deduction.

 

Trump has also promised, without providing much detail, more help for families with child and dependent care expenses and to eliminate targeted tax breaks that benefit wealthy people.

 

Estate Taxes and AMT

In two proposals that would reduce the tax burden of many high-income and wealthy taxpayers, Trump and congressional Republicans want to repeal the estate tax and the alternative minimum tax (AMT). The estate tax currently applies to individual estates exceeding $5.49 million, while it has been projected by the tax policy center that by 2017 close to 30% of households with income between $200,000 and $500,000 will be affected by the AMT.

 

Obamacare, the NIIT and Additional Medicare Tax

 An effort by Trump and Congressional Republicans to repeal the Affordable Care Act (Obamacare) and the taxes that support it failed in July 2017. Those taxes, including a 3.8% surtax on net investment income (NIIT) and a 0.9% additional Medicare payroll tax, remain on the books, for now.

 

State and Local Income Tax Deductions

Americans can take a deduction for taxes paid to state and local governments if they itemize their deductions and are not in AMT. Trump and House Republican leaders want to end this. The proposal would most hurt states where Democrats dominate because those states have higher state and local income tax rates, thus their residents take larger federal deductions. But the proposal is opposed by at least 20 House Republicans, reducing its chances of enactment.

 

Mortgage and Charity Deductions

Tax deductions for interest paid on mortgages and donations to charities are probably safe. Trump has promised to protect them.  Yet, there has been discussion of lowering the cap on the mortgage interest deduction to $500,000 from $1 million. Analysts say that would generate enough revenue to cut the corporate tax rate by three percentage points, but such a move would pit upper-middle class and wealthy homeowners against multinational corporations.

 

Lobbyists for real estate businesses and philanthropies say that, if the standard deduction is doubled as proposed, fewer taxpayers could claim the mortgage interest and charitable giving deductions, which could undermine home-buying and donations.

 

Corporate Taxes

Corporations pay 35% of their profits in taxes, at least on paper. Trump wants to slash that to 15%; House Republicans want 20%; some lawmakers say 25% might be achievable. No consensus on the rate has been reached.

 

Pass-through Businesses

Trump wants a special, low tax rate for pass-through businesses.  American pass-through businesses range from family-run shops to large businesses. A special tax rate for them raises the prospect of a new wave of tax avoidance schemes with wage earners funneling income into pass-through structures.  Supposedly the new law would address and reduce possible tax loopholes this change would create.

 

Repatriation and Territorial Taxes

Under Republicans' plans, about $2.6 trillion in corporate profits now parked abroad would be repatriated, or brought into the United States, and taxed at 3.5% to 8.75% payable over eight years.   Some indications are that these profits would not need to be repatriated to be taxed as part of this change.  The rate these foreign profits would be taxed at is significantly less than the 35% tax currently owed on those profits when they enter the country, but higher than the 0% they are taxed at if the profits are not repatriated and kept abroad.

 

Republicans also want to change the corporate income tax so companies are no longer taxed on foreign profits, by adopting a so-called "territorial" system that would replace the "worldwide" system in which U.S. companies are taxed on profits globally.  Additionally, a House Republican "border adjustment" tax proposal is meant to discourage imports and encourage exports has been dropped.

 

This section of the proposed law will have a significant effect on major companies, so we expect a lot of lobbying to mitigate changes in this area of the law.

 

Effect of Tax Reform on the Budget Deficit

Tax cuts generally reduce federal revenue and raise the budget deficit. The deficit is estimated in fiscal 2017 to hit $693 billion, or 3.6% of U.S. gross domestic product (GDP), up from 3.1% in 2016.

With that in mind, Republican deficit hawks could make it hard for Trump to push through any deficit-expanding tax measures.  Some Republicans want Congress's nonpartisan, professional tax and budget analysts to use "dynamic scoring" in estimating the impact of tax changes on the budget. The approach assumes an increased economic stimulus effect from tax cuts, resulting in smaller projected increases to the deficit.

 

President to Reveal a Framework For Overhauling the Code

The White House plans to release another “brief” document by mid-September outlining a framework for overhauling the Code. The three-to-five-page document would not be accompanied by tax legislation. The framework would come from the "Big Six" congressional and administration leaders on tax reform, the same group that released a joint statement on taxes in July 2017, after months of closed-door talks.

 

An overhaul of the Tax Code was a key component of the Trump campaign lexicon. A tax bill’s release could come just in time for the mid-term election races in 2018, giving candidates an actual policy issue to debate.  You can count on The Tax Warriors to keep a hawk’s eye on legislative developments and to keep you informed on how it may affect you, your family, or your business.

 

Click here to read a summary of the memo released by the White House in April 2017 from our colleagues at the TaxProfBlog.

Topics: congress, Tax reform, Allowable deductions, NIIT, Estate Taxes, Obamacare, Trump, 2017, Individuals, Tax plan, biggest tax cut in american history, Charitable giving, Pass-through entities, repatriation taxes, Corporate

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