Tax Reform Proposal Released

On September 27, 2017, the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a tax proposal entitled “The Unified Framework for Fixing Our Broken Tax Code.” For individuals, the proposal aims to:

  • Reduce the number of tax brackets from seven to three (maybe), with rates of 12, 25, and 35 percent. It does not specify where the brackets start and end. It also says that “an additional top rate may apply.” So there may be four tax brackets.
  • Almost double the standard deduction from its current amount to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
  • Repeal personal exemptions for dependents and increase the child tax credit to an unspecified amount and increase the income levels at which the child tax credit begins to phase out.
  • Expand the child tax credit concept to give a $500 credit to anyone caring for a family member who isn’t a child, regardless of age.  
  • Repeal the individual alternative minimum tax.
  • Eliminate most itemized deductions (including deductions for state and local income taxes), but retain tax incentives for home mortgage interest and charitable contributions.
  • Repeal the estate and generation-skipping transfer taxes. There is no mention of the gift tax. It also does not specify whether the plan would maintain stepped-up basis, which lets heirs revalue assets they get by bequest, minimizing or avoiding capital gains taxes. Some past proposals to eliminate the estate tax include provisions for carry-over basis, where heirs would owe capital gains taxes on inherited assets.
  • Eliminate the deduction for state and local taxes.

There are also several changes for businesses. Most of the businesses that we represent are either pass-through or disregarded entities, so I won’t go through many of these. However, here are some highlights:

  • The corporate tax rate would be lowered from 35 percent to 20 percent.
  • The corporate alternative minimum tax would be eliminated.  
  • The maximum tax rate for pass-through businesses—like partnerships, LLCs taxed as partnerships, and subchapter S corporations— would be limited to 25 percent instead of the individual tax rates that currently apply.

The Unified Framework is low on details. But the different interest groups have responded as expected. Conservative groups and politicians are hailing this as a historic opportunity. President Trump called it a revolutionary change and a “middle class miracle.” Speaker of the House Paul Ryan said that “[t]his is our best opportunity in a generation to deliver real middle-class tax relief, create jobs here at home, and fuel unprecedented economic growth.” However, progressive groups and Democrats are criticizing the proposal as benefiting the wealthy to the detriment of the lower classes. Senator Charles Schumer said it should be called “wealth-fare.” One commentator called the proposal a “$5 trillion love note to the wealthy.” Another said it is a solution looking for a problem.

There is no explanation of how to pay for the proposed tax cuts. Republicans say economic growth will compensate for lost revenue. Senator Patrick Toomey, who sits on the Finance Committee, said he was confident that a growing economy would pay for the tax cuts. This assumption is likely to be challenged.