Tax Reform

The Basics of the White House’s Proposed Tax Reform

Posted on October 19, 2017 · Posted in Breaking News, Industry News, Latest Updates, Legislative Updates

By Rico Delodovici, EA

 

10/19/17 — On September 27 of this year, the White House and its allies, the so called “Big Six,” released an outline for federal tax reform. The brief, nine-page outline is titled “Unified Framework for Fixing Our Broken Tax Code.” Short on detail, it answered some questions, but raised as many more.

Fundamentally, there are five stated goals of the framework, paraphrased here:

  1. Tax relief for the middle class.
  2. Tax simplification, with a “postcard-style” reporting for most families.
  3. Tax relief for business, especially small business.
  4. Ending incentives for business to ship jobs, capital, and tax revenue overseas.
  5. The closure of special interest tax breaks and loopholes, thus broadening the tax base.

The White House’s plan for achieving these stated goals includes:

  1. Eliminating most itemized deductions. Exceptions are the mortgage-interest deduction and charitable contributions. At the same time, doubling the standard deduction to $12,000 for singles, and $24,000 for marrieds is planned.
  2. Consolidation of the current seven tax brackets to three. A 12, 25, and 35 percent schema is proposed.
  3. Repeal of personal exemptions for dependents and an enhanced Child Tax-Credit. Caution, phaseouts and limitations for the CTC, not currently in the law, will apply under the proposal.
  4. Repeal of the Estate and Generation-Skipping Tax.
  5. Reduction of tax rates on business. This includes a proposed 25 percent rate on business such as sole proprietorships, and pass-through entities like partnerships and S Corporations. In addition, the tax rate for corporations is intended at 20 percent. Other corporate tax reform includes a measure to eliminate the corporate Alternative Minimum Tax.
  6. The establishment of a territorial taxation system for global American companies. Briefly, a territorial system taxes domestic income, but not foreign income of a domestic company. Off course, this system would also include regulations and exceptions to this elementary definition. Territorial tax regimes are found in Hong Kong, France, Belgium, and the Netherlands. In addition, this proposal will exempt foreign profits, sitting offshore, by exempting them from tax when they are brought back into the US.

It is crucial to understand that many of these proposals are more complicated than a sound bite might suggest, and their eventual effects on the economy, and society in general, can only be judged based on what side of the ideological spectrum one may stand. The overall effect of this proposed legislation will undoubtedly beget winners and losers. Opposition is expected by the Democrats, and possibly even some Republicans. (The battle lines may turn out to be similar to those engendered by the debate surrounding The Affordable Care Act. Divisions are already beginning to emerge).

Democrats frequently site statistics published by the non-partisan Tax Policy Center (TPC), which suggests that the White House proposal is expected to reduce federal revenues by 2.4 trillion dollars over the first ten years, and 3.2 trillion over the next 10 years. Republicans call into question the non-partisan character of the TPC. Essentially, the current proposed framework has not built in to it a methodology for paying for tax cuts or managing budget deficits. Regardless of one’s political leanings, this fact is difficult to dispute.