The GOP tax framework: What would change?

Published
  • September 28 2017, 3:49pm EDT
Experts at Bloomberg BNA highlight the most important changes the Republican leaders’ nine-page proposal could lead to.

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On Sept. 27, Republican leaders in Congress and the Trump administration released a much-anticipated “Unified Framework” for tax reform. The nine-page document lists a set of priorities for legislators to follow, and is meant to be the “the foundation Congress will use to craft legislation around middle-income tax cuts, a simpler and fairer tax code, and the most competitive business tax rates, so American companies of all sizes can create jobs, give their workers a pay raise, and grow the economy,” Treasury Secretary Steven Mnuchin said in a statement announcing the framework.

As part of their comprehensive resources on tax reform, the tax experts at Bloomberg BNA have released a special report on the framework — “Tax Reform 2017: How the ‘Unified Framework’ Would Change Current Law” — that includes the following list of the most important ways the framework would change current law, as well as how it wouldn’t.

Lower corporate tax rate

The top corporate tax rate would drop from 35 percent to 20 percent.

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Tax rate for pass-throughs

There would be a maximum tax rate of 25 percent for the business income of small and family-owned businesses conducted as sole proprietorships, partnerships, and S corporations. The proposal says measures would be adopted to prevent wealthy individuals from using this to avoid the top personal income tax rate.

Shift to territorial system

The United States would shift from a worldwide to a territorial system. As part of that transition, the proposal would impose a repatriation tax on foreign profits stockpiled overseas, although the framework did not specify the exact rates.

Allowance of full expensing

Businesses would be permitted to fully and immediately write off (“expense”) the cost of new investments in depreciable assets other than structures made after Sept. 27, 2017 — for at least five years.

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Estate tax repeal

The estate tax and generation-skipping transfer tax would be repealed. The proposal does not mention the gift tax or income tax basis at death.

Reduction in individual tax rates and brackets

The number of individual ordinary income tax rates would be cut from seven to three, and the top ordinary income tax rate would drop from 39.6 percent to 35 percent. However, the framework notes that an “additional top rate” might be added for the highest-income taxpayers.

Fewer itemized deductions

All but two itemized deductions would be eliminated — leaving only those for charitable contributions and home mortgage interest. The standard deduction would roughly double, further reducing the incentive for most taxpayers to itemize. One of the chief casualties for itemizers may be the deduction for state and local taxes, which is not mentioned in the framework.

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Wait – there’s more!

The framework lists some other objectives — such as encouraging work, higher education, and retirement security, as well as modernizing the rules that govern the tax treatment of certain industries and sectors — but does not specify exactly how those goals would be achieved.

What would stay the same

These are some of the significant reform ideas that were widely discussed earlier this year, but ultimately not included in the unified framework:
Border-adjustment tax. The framework does not include a BAT or any other provision specifically addressing the taxation of imports and exports.
Corporate integration. There is no mention of corporate integration, an idea that had been supported by Senate Finance Committee Chairman Orrin Hatch, although the framework notes that the committees “may consider methods to reduce the double taxation of corporate earnings.”
Carried interest. There is no proposal regarding the treatment of carried interest, which Treasury Secretary Mnuchin had previously said would be included in tax reform.
Net investment income tax. It appears that the 3.8 percent net investment income tax may remain in the code. The tax was enacted as part of the Affordable Care Act and would have been eliminated by the ACA-repeal bill passed by the House earlier this year. However, that bill stalled in the Senate and did not become law.