Republicans unveiled a framework for their long-awaited tax reform plan Wednesday, listing a series of tax cuts but with few details on how to raise revenue to pay for the cuts.
The nine-page framework shrinks the current seven tax brackets into three—12, 25 and 35 percent—with the potential for an additional top rate for the highest-income taxpayers. The framework approximately doubles the standard deduction and significantly increases the Child Tax Credit.
The framework promises to eliminate unspecified itemized deductions primarily used by the wealthy, but retains tax incentives for home mortgage interest and charitable contributions, along with tax incentives for work, higher education and retirement security.
The framework would also repeal the estate tax and the alternative minimum tax.
It would limit the maximum tax rate for small and family-owned businesses to 25 percent. The framework would also reduce the corporate tax rate to 20 percent, below the 22.5 percent average of the industrialized world.
The framework allows, for at least five years, businesses to immediately write off or expense the cost of new investments. The framework also promises to end incentives to move jobs offshore and keep foreign profits overseas. It aims to bring foreign profits home by imposing a one-time, low tax rate on wealth that has already accumulated overseas to get rid of tax incentives for keeping the money offshore.
“Today, we move one step closer to fixing our broken tax code so that it puts Americans first,” said House Speaker Paul Ryan in a statement. “This is our best opportunity in a generation to deliver real middle-class tax relief, create jobs here at home, and fuel unprecedented economic growth. It has been 31 years since we last got this done, and hardworking families and small businesses cannot afford to wait any longer.”
President Trump delivered a speech in Indianapolis to promote the tax plan. "This is a revolutionary change, and the biggest winners will be the everyday American workers as jobs start pouring into our country," he said (see Trump pitches tax plan as historic cut to boost hiring).
“This unified framework is 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,” said Treasury Secretary Steven T. Mnuchin in a statement. “President Trump will continue his leadership in support of achieving the goals of this framework by traveling around the country speaking directly to the American people.”
The plan was negotiated by the so-called "Big Six," Republican leaders from Congress's tax-writing committees, along with officials from the Trump administration.
"This is an exciting day for the millions of Americans who are tired of today’s broken tax code and have waited for years for better job opportunities, more take-home pay, and a stronger economy,” said House Ways and Means Committee Chairman Kevin Brady, R-Texas. “Today, House Republicans joined President Trump and our Senate colleagues in letting the American people know: we’re taking action."
In terms of corporate tax reform, the framework would replace the existing, worldwide tax system with a 100 percent exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10 percent stake. To transition to the new system, the framework would treat foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets would be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability would then be spread out over several years.
To keep companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. Congress’s tax-writing committees plan to develop rules to level the playing field between
U.S.-based parent companies and foreign-headquartered parent companies.
Congressional Democrats panned the plan and its lack of clear details. “It’s clear from this plan that when it comes to tax reform, Republicans will always put the wealthy first,” said House Ways and Means Committee ranking member Richard Neal, D-Mass. “After more than a year of work, Republicans have only managed to produce a nine-page document without any of the significant details the American people deserve to know."
Neal pointed to a meeting Tuesday at the White House with Ways and Means Committee members, but accused Republicans of quickly breaking Trump's pledge Tuesday that under his tax plan, the rich would not benefit."
“If this framework is all about the middle class, then Trump Tower is middle-class housing,” said Senate Finance Committee ranking member Ron Wyden, D-Ore., in a statement. “It violates Trump’s tax pledge that the rich would not gain at all under his plan by offering sweetheart deals for powerful CEOs, giveaways for campaign coffers and a new way to cheat taxes for Mar-a-Lago’s loyal members. This continued lack of detail for the middle-class guarantees that average Americans will be the ones hit with shrinking paychecks and higher tax bills.”
Tax Experts React
Tax experts at the accounting firm KPMG quickly weighed in on the plan. Jeffrey C. LeSage, vice chairman-tax at KPMG LLP, said, “Business leaders have been waiting a long time for some clearer signals on the future of the U.S. corporate tax code. Based on what we’ve seen today, they’re going to need to devote more attention to evaluating and modeling how these potential tax reform scenarios would impact their organizations, and then keep a dialogue going with their legislators as the process moves forward.”
"Today’s release is progress towards tax reform, but the hardest part lies ahead.” said John Gimigliano, principal-in-charge of federal tax legislative and regulatory services at KPMG LLP. “Congress still needs to figure out how to make the math work, both politically and procedurally, and then needs to convert that to legislation. And if Congress is serious about using ‘regular order’ to move a bill, it could take months, not weeks for legislation to get to the President’s desk. “
A tax expert at Deloitte also offered his assessment. “Today’s framework sets the stage for a robust debate this fall about how to fill in the blanks on a sweeping tax code overhaul that is long overdue and deeply desired by corporate executives longing for some certainty around our tax system," said Jon Traub, managing principal, tax policy, Deloitte Tax LLP. "The challenge facing policymakers in the weeks and months to come in crafting legislation that meets these metrics cannot be underestimated.”
Crowe Horwath national tax services managing director Howard Wagner saw few surprises in the plan. “Although it is pretty much as expected, there are some significant changes surrounding international tax, immediate expensing, limitations on interest expense, etc.,” he said. He also emphasized that the framework still needs to be translated to legislation, and details of the final legislation could differ significantly from the framework.
Under the framework, the deduction for net interest expense incurred by C corporations would be partially limited, and Congress’s tax committees will consider the appropriate treatment of interest paid by non-corporate taxpayers. “Losing this interest expense deduction will be a stealth tax increase,” said Wagner.
“The framework released today is a welcome advance in the debate about how to reform our tax code,” said Michael Mundaca, co-director of the National Tax Department of Ernst & Young LLP. “There are obviously a lot of details to be worked out in the legislative process but we now know the broad outlines of the reform package: lower rates, a broader base, and incentives for work, education, saving, and investment.”
Mundaca noted that for corporations specifically, the framework provides for a significantly lower statutory rate of 20 percent, an immediately effective 100 percent deduction of capital investments, and a so-called “territorial” system that provides a 100 percent tax exemption for dividends from foreign subsidiaries along with what appears to be an anti-tax haven provision that could subject some foreign earnings to immediate US tax but at a reduced rate. It also includes a partial limitation on interest deductions for C corporations only (although it notes that the appropriate treatment of interest by non-corporates will be considered), and seems to rule out special tax breaks and incentives for U.S. manufacturing. For small and family-owned businesses, the framework limits the maximum rate on business income to 25 percent.
“Easily the most difficult policy development and drafting exercise continues to be how to prevent pass-through owners from recharacterizing personal income into business income that would be eligible for the new reduced rate on such income, an issue the Framework recognizes,” said Mundaca.
The framework would roughly double the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers. To simplify the tax rules, the additional standard deduction and personal exemptions for the taxpayer and spouse are consolidated into this larger standard deduction. In combination, these changes simplify tax filing and effectively create a larger “zero tax bracket” by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.
The framework does not specifically mention the state and local tax deduction, but Republicans are reportedly targeting that deduction for elimination because it mostly benefits states that favor Democrats. “So the game of words has started,” said tax practitioner Fred Slater, a CPA at MS1040 LLC in New York. “For instance: you are raising the standard deduction $12000 for married but you are removing the personal exemption of $4,000. For a married couple no kids, you gain $4000; with one kid—breakeven; with two kids you just lost $4,000. Losing the state and local taxes for the high income states is an attack on the Democratic Party. Or in the war of words will there be a complete denial that all the high state tax states vote Democratic. So that is setting up a purely political fight. The taxes paid by a married couple in those states are on average far higher than the increase in the standard deduction.”
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