President's tax plan promises sweeping changes to federal tax code
President Trump's long-discussed changes to the federal tax code have now become a congressional priority.
The administration's Unified Tax Reform Framework (the "Tax plan"), announced in late September, generally tracks both President Trump's campaign promises on the topic (his "Five-Part Tax Plan" from 2016) and the administration's preliminary tax reform outline released during Trump's first 100 days in office.
If the tax plan is passed in a form resembling its initial proposal, it will almost surely result in the most sweeping federal tax code overhaul since the passage of the Internal Revenue Code of 1986, still the basis of our current tax laws.
The tax plan would enact sweeping changes to both individual and business taxation. On the individual side, the tax plan reduces the number of tax brackets from seven to three, and reduces the highest and lowest marginal rates to 35 percent and 12 percent, respectively.
Congressional republicans such as House Speaker Paul Ryan have proposed adding back a fourth bracket for "high-income" earners. The Plan would eliminate, among other things, (1) all itemized deductions except for mortgage interest and charitable contributions, (2) the personal exemption, and the (3) Alternative Minimum Tax. All applicable standard deductions would be doubled.
The Obamacare tax on individual "Net Investment Income," a target of Trump's previous tax plans, has been retained under the latest proposal.
The tax plan also seeks to eliminate entirely the federal estate, gift and generation-skipping tax systems, a cut clearly aimed as a benefit to wealthier taxpayers and families. Under current law (and with proper planning), a married couple can already shield nearly $11 million dollars from the federal wealth transfer taxes. On the business side, the maximum corporate rate (for those taxed as Subchapter C corporations) would be reduced from 35 percent to 20 percent (earlier proposals had it at 15 percent).
While it is true on paper that the United States currently has one of the highest corporate tax rates in the world, corporations are rarely paying the 35 percent rate given various currently available deductions and credits.
With many of those tax expenditures eliminated under the tax plan, but the rates being lowered as well, the actual effective tax rate of many corporate entities may not see significant change.
For non-corporate or pass-through entities (i.e., S corporations, partnerships, LLCs and sole-proprietorships) the highest proposed rate would be reduced to 25 percent.
Lest this be seen as a great boon to small businesses, note that most do not make enough to be taxed at that rate, and that real tax savings would likely flow disproportionately, for example, to hedge funds and private equity firms.
Other business-related changes include (1) the ability to expense immediately the cost of depreciable assets, (2) the elimination of the interest expense deductions, and (3) a one-time tax holiday on repatriated business earnings from overseas.
The tax plan is consistent with Congressional republicans' long-desired simplification of the tax code, generally focused on the twin aims of lowering overall tax rates while broadening the tax base by cutting various tax credit programs and other tax expenditures. While the administration claims the tax plan would reduce taxes for all, boost economic growth, and create jobs, the Congressional Budget Office projects that the tax plan would add more than a trillion dollars to the national debt, slowing growth in the long term. Political critics of the plan decry it as a return to discredited Regan-era, supply-side economics, disproportionately benefitting wealthier taxpayers.
The tax plan, in whatever form, could be passed as early as January, and could be made retroactive to the 2017 tax year.
Whatever its overall economic effect, the Tax plan will likely result in significant upcoming changes to business, individual and estate tax planning strategies. Major changes are afoot.
D. Adam Anderson is a business law