With all that has been happening, both within the US and internationally, Tax Reform legislation seems to have faded somewhat into the background. While it is still alive and well, the prospects for passage of major tax reform in 2017 have dimmed a bit. Most analysts are predicting passage of a modest tax reform measure in 2017, without the dramatic changes the Trump administration has proposed.
A major hurdle beyond the obvious political issues, is balancing the many budgetary constraints. The potential loss of tax revenue from the Trump proposed tax rate reductions is forecasted to be offset largely by:
1. repeal and replacement of Obamacare including reductions in Medicaid,
2. broadening of the tax base by reducing currently allowed deductions and
3. use of dynamic scoring which takes into account the predicted indirect effects of tax rate reduction (the “trickle down” theory), which is largely based on forecasted real growth in the gross domestic product (GDP) by 3% by the year 2021.
All three of these revenue offsets have their own political shortcomings. Whether we will see the passage of major healthcare legislation this year is anyone’s guess. While the House has passed its version of healthcare reform, many have said this legislative package is “dead on arrival”. The Senate has stated it will “start over” but has yet to propose its own version of healthcare reform. Once the Senate passes its own version of healthcare reform, the two houses will need to work out a compromise legislative solution, a process that does not currently look promising.
The broadening of the tax base by disallowing some currently deductible items will be met with opposition as many “sacred cows” will need to be addressed in the process. How this debate proceeds is uncertain. Finally, many are skeptics of dynamic scoring and the ability to accurately predict the increase in tax revenues from the indirect effects of tax rate changes, including the growth in GDP.
Having said that, we have included a summary of the Trump proposed tax plan below, as revealed in his concise one-page announcement on April 26, 2017. The proposal, according to top White House officials, would be the “biggest tax cut” in U.S. history.
Since Trump’s tax reform plan is only a proposal, it should be viewed as a starting point for discussion. If Republicans are willing to use the budget reconciliation process to push it, or some version of it, through Congress, they technically wouldn’t need Democrats to sign off on the plan. This reconciliation process requires only a simple majority; 51 Senate votes instead of 60.
Key Points for Individual Tax Filers
• Seven individual tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) would be reduced to three: 10%, 25% and 35%
• Standard deduction for single filers would double from $6,300 to $12,600
• Standard deduction for married couples would double from $12,600 to $25,200
• Most individual tax deductions would be eliminated, except for charitable contributions and mortgage interest
• Estate tax would be eliminated
• The 3.8% investment income tax under the Affordable Care Act would be repealed
• Alternative minimum tax would be repealed
Key Points for the Corporate Tax Structure
• The corporate tax rate would be reduced to 15% from the current 35%
• New one-time repatriation tax of US corporate profits held overseas (rate TBD), and a move to a territorial tax system
• Pass-through entities and sole proprietorship’s tax rate would be reduced to a 15% corporate tax rate from the current 39.6% maximum individual tax rate
Tax reform will create much debate in the months ahead but will likely have to follow the passage of major healthcare legislation. How this plays out is very difficult to predict. We will be monitoring key developments in tax legislation as they occur and will continue to provide updates. If you have any questions regarding how these proposed changes may affect you or your business, please feel free to contact us.