On September 27, 2017, the Secretary of the Treasury, the Director of the National Economic Council, the Chair of the U.S. House Ways and Means Committee, the Chair of the U.S. Senate Finance Committee, the Speaker of the U.S. House of Representatives, and the Majority Leader of the U.S. Senate released the “Unified Framework for Fixing Our Broken Tax Code” (hereinafter referred to as the “Current Proposal”). The Current Proposal is a successor to the April 26, 2017 proposal by the Secretary of the Treasury and the Director of the National Economic Council entitled “2017 Tax Reform for Economic Growth and American Jobs” (hereinafter referred to as the “Treasury Proposal”).
This article will review and comment on a number of items in the Current Proposal as compared to the Treasury Proposal. For prior coverage of the Treasury Proposal, see my earlier article “The Evolving Blueprint for Tax Reform: Candidate Trump vs. President Trump.”
A general theme in the two proposals is the lack of details. Presumably, this lack of details provides more flexibility in Congressional negotiations on tax reform. As described herein, the Current Proposal contains a number of directives to the applicable tax-writing committees to develop anti-abuse rules or adopt additional measures to “effectuate the goals of the framework.”
Interestingly, the Current Proposal emphasizes individual income tax reform rather than the Treasury Proposal’s emphasis on corporate tax reform. This article will follow the Current Proposal and begin the review of the individual tax reform items.
Both the Current Proposal and the Treasury Proposal reduce the number of tax brackets from seven to three. The Current Proposal contains the following tax rates: 12%, 25%, and 35%. In contrast, the Treasury Proposal held the following tax rates: 10%, 25%, and 35%. While both proposals are silent on the range of the tax brackets, the Current Proposal reflects a higher beginning tax rate. The Current Proposal also retains the possibility that an additional top rate (presumably some form of surtax) may be added to ensure the reformed tax code “does not shift the burden from high-income to lower- and middle-income taxpayers.”
Likewise, the Current Proposal is slightly less favorable in its treatment of the standard deduction. The Current Proposal roughly doubles the standard deduction (from $12,700 to $24,000 in 2017 for married joint filers and from $6,350 to $12,000 for all others). All the while, the Treasury Proposal provided a slightly more significant increase in the standard deduction ($1,500 more for married joint filers and $700 more for all others in 2017). The Current Proposal clarifies personal exemptions will be eliminated via their consolidation into the larger standard deduction, while the Treasury Proposal was silent on personal exemptions.
Both proposals retain the deductions for mortgage interest and charitable contributions, and the deductions for state and local taxes are not kept under either of the proposals. Also, both proposals (1) provide enhanced tax relief for families with child and dependent care; and (2) eliminate the individual alternative minimum tax.
Further, the Current Proposal states “the committees will work on additional measures to meaningfully reduce the tax burdens on the middle class.” Finally, the Current Proposal contains language on retaining tax benefits to encourage work, higher education and retirement security, and repealing other provisions to make the tax system simpler and fairer for all families.
In the estate and gift tax area, both proposals eliminate the estate tax. While the Treasury Proposal was silent on the generation-skipping transfer tax, the Current Proposal repeals that tax. Both proposals are silent as to any changes to the gift tax.
In the corporate tax area, the Current Proposal reduces the maximum corporate tax rate from 35% to 20%. This rate is not as favorable as the 15% maximum corporate tax rate in the Treasury Proposal. Likewise, the Current Proposal extends a lower 25% tax rate to sole proprietorships, partnerships, and S corporations. The Treasury Proposal included a 15% maximum tax rate for such “pass-thru entities.” To combat abusive tax planning, the Current Proposal states “the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
Both proposals eliminate the corporate alternative minimum tax. Likewise, both proposals retain the research and development tax credit. However, the Current Proposal eliminates the current law domestic production deduction and references the repeal or restriction of “numerous other special exclusions and deductions.”
The Current Proposal allows expensing “the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years.” However, the Current Proposal also includes a limitation on the deduction of interest by C corporations. The Treasury Proposal was silent on both of these items; but please refer to President Trump’s campaign proposals discussed in my prior article.
Both proposals provide for “territorial taxation” rather than the current worldwide taxation of multi-national corporations and a “deemed” repatriation of accumulated foreign earnings at lower rates. However, the Current Proposal also includes a 100% exemption for dividends received from “foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).” Finally, the Current Proposal states the “committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.”
With the release of the Current Proposal, the Chair of the House Ways and Means Committee (Kevin Brady) has indicated that he plans to adopt legislation enacting the Current Proposal by year end. Given the Current Proposal’s lack of details, however, and numerous items that will need to be resolved by the tax-writing committees (as referenced above), the Current Proposal is likely the first step in a long and drawn-out legislative process.
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