Trump Administration Announces President’s Outline for Tax Reform
On April 26, 2017, Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn announced President Donald Trump’s outline for individual and business tax reform, which includes new federal income tax rates and repeal of the estate tax.
Director Cohn discussed the Administration’s proposal to reduce the current seven graduated tiers of marginal rates (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) down to three: 10%, 25%, and 35%—slightly broader than the 12%, 25%, and 33% that was proposed last fall. The income levels at which these rates would apply have not yet been determined. Relief for child and dependent care expenses would be included, although no specifics were provided as to how that might differ from the current tax credit for child and dependent care expenses.
The standard deduction would be doubled, with the intended result that fewer taxpayers would itemize. Most tax deductions would be eliminated, except for those related to mortgage interest or charitable contributions.
The 3.8% net investment income tax, which was enacted as part of the Affordable Care Act, would be repealed along with the estate tax and the alternative minimum tax.
Secretary Mnuchin described the proposed business tax reform provisions, which would decrease the corporate or “business” tax rate from 35% to 15%. The plan does not specifically mention pass-through entities, but when asked if this would provide an incentive to individuals to form pass-through entities to avoid the higher individual tax rates, Secretary Mnuchin answered that, “We will make sure that there are rules in place to make sure wealthy people can’t create pass-throughs” to lower their taxes. It is believed that this means the top tax rate for the pass-through businesses (e.g., partnerships, sole proprietorships, S corporations) would be reduced from 39.6% to 15%.
There would be a one-time repatriation tax on offshore earnings. Previous reports, as well as President Trump’s proposal on the campaign, had indicated a 10% tax was being considered.
In addition, the United States would move from its worldwide tax system (under which a U.S. taxpayer is generally taxed on its worldwide income regardless of where earned) to a territorials system (under which income would generally be taxed in the country where it is earned).
Absent from the proposal was any mention of a border-adjustment, or destination-based cash flows tax, which has been a key feature of the congressional Republican “blueprint” for tax reform. A border-adjustment tax would fundamentally alter how imports and exports are taxed. Under the House plan, companies could no longer deduct the cost of their imported goods, and sales of their exports would no longer be subject to U.S. tax. Such a provision could raise more than $1 trillion over a decade, which House Republicans are counting on to help offset the cost of their proposed rate cuts.
We will continue to keep you updated on these developments. Please contact us with any questions.