The Trump administration announced its tax plan on Wednesday, labeling it the largest corporate tax cut in history. It includes a significant reduction in the corporate tax rate, changes to the standard deduction for individuals, a one-time repatriation of foreign earnings and broad outlines for other changes to the Internal Revenue Code. The announcement can best be described as the core principles the White House is advocating for tax reform; most specifics have not yet been released.
This proposal can be viewed as the opening round in negotiating a tax reform plan in a divided Congress. This is just a starting point as the House is expected to review this in conjunction with its own blueprint for tax reform. Members of the House and Senate, from both sides of the aisle, are already weighing in that the plan would dramatically increase the deficit, so expect a vigorous debate with numerous changes and compromises along the way.
The bottom line is to view the plan as an initial proposal and keep a close eye on the provisions that are most important to you. However, it is far too early in the process to view any of these items as actionable. We believe the earliest something will be enacted would be near the end of the year.
- Reduce the corporate rate to 15 percent
- Make small businesses (presumably pass-through entities and sole proprietorships) eligible for the 15 percent rate
- Repatriate foreign earnings at a one-time rate; negotiations are ongoing with Congress over what that rate would be, and no specific rate was discussed in the announcement
- Change the U.S. tax system from a worldwide system to a territorial system
- Reduce the number of brackets to three from seven: 10 percent, 25 percent and 35 percent
- Double standard deduction so married taxpayers filing jointly would not pay income taxes on the first $24,000 of income
- Repeal the alternative minimum tax (AMT)
- Eliminate all itemized deductions other than mortgage interest and charitable contributions
- Repeal the 3.8 percent Affordable Care Act tax on net investment income that applies to individuals who earn more than $200,000 a year
- Repeal the estate tax, which currently applies only to estates worth more than $5.49 million for individuals and $10.98 million for couples
- Adjust the child and dependent benefit: the administration signaled support for changes to the tax code that would help families with childcare costs, but no specific details were released
Not included in the announcement, however, is a border adjustment tax like the one proposed by House Republicans or other revenue-raising provisions to offset the tax cuts. Treasury Secretary Steven Mnuchin didn’t rule out the border adjustment tax completely, though, saying that while it “doesn’t work in its current form,” the administration will continue discussing revisions with GOP lawmakers. The Treasury secretary also reiterated recent statements that Trump’s tax cuts would be paid for by dramatically increased economic growth and that the administration was expecting sustained annual GDP growth of 3 percent or higher, up from the current 1.8 percent.
As reported by the Bureau of National Affairs (BNA), the tax reform proposal would cost roughly $5.5 trillion, and could cost as much as $7 trillion, according to the nonpartisan Committee for a Responsible Federal Budget. The committee’s report added that the country would need roughly a 4.5 percent sustained growth rate to pay for the entire plan, or nearly two-and-a-half times the 1.8 percent that the Congressional Budget Office (CBO) projects to occur over the next decade. The last time the country achieved 4 percent sustained growth was in the late 1960s and early 1970s.
- If the plan does allow pass-through businesses to utilize the 15 percent tax rate, it could create a powerful incentive to reclassify income. This has already been discussed in preliminary House negotiations, and it is likely that a “reasonable salary” standard will be included in any legislation.
- Repealing all itemized deductions other than charitable donations and home mortgage interest eliminates the deduction for state income taxes. This will likely prove very costly to those living in high-tax states (such as New York, New Jersey and California).
- The plan contrasts starkly with one that has been championed by House Republicans, who had proposed paying for their tax cuts in part with the new tax on imports in an effort to ensure the measure would not swell the deficit.
Getting the plan through the Senate: reconciliation problems
While the CBO will have its own score of this plan, based on the cost estimate described above, a similar score could pose a problem if lawmakers begin advancing legislation using the budget reconciliation process. This process enables the Senate to bypass the filibuster rules and pass tax reform legislation with a simple majority. However, the Senate’s Byrd rule prohibits legislation from increasing deficits in the long-term outside the budget window — typically, 10 years. Consequently, these tax cuts may have to expire at that time, similar to how the Bush tax cuts sunset.
Impact on individuals
We analyzed the president’s proposal to see how it would impact a family of four at three income levels. The first is a family with $50,000 of AGI, the second at $250,000 of AGI, and finally with $1 million of AGI. This analysis assumes itemized deductions and AMT paid based on averages published for those income levels by the IRS. While the elimination of personal exemptions was not mentioned in Wednesday’s announcement, this analysis assumes they will be eliminated as previously proposed by candidate Trump and as included in the House blueprint on tax reform. Every taxpayer’s facts are different and no specific inference should be drawn for your particular tax situation.
|Federal income tax||1,700||2,600||53%|
|Federal income tax||46,700||46,900||.4%|
|Federal income tax||358,200||303,600||-15%|
- The increase of federal taxes at the $50,000 AGI level is due to the increased standard deduction not offsetting the loss of itemized deductions and personal exemptions. However, if personal exemptions remain in place, this would eliminate income taxes for the $50,000 AGI level.
- The elimination of the deduction for state income taxes is the primary reason federal income taxes remain constant at the $250,000 AGI level.
For related insights and in-depth analysis, see our tax reform resource center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.