United States

Election impact on tax policy

3 things to know about tax reform in 2017

INSIGHT ARTICLE  | 

1.       Expect tax reform to be a high priority in 2017

With Republicans controlling both houses of Congress and the White House, the likelihood that tax reform will be a high priority in 2017 is virtually assured. Both President-elect Trump and the House Republicans have put out fairly detailed blueprints of how they would like to reform the nation’s tax laws. Although there are differences, their proposals are more alike than they are different. Even though the Senate Republicans have not put out a proposal of their own, there is widespread support for tax reform in the Senate as well. The clear belief on the part of President-elect Trump and the House Republicans, in particular, is that tax reform is critical if the economy is to grow at a faster rate than it has in recent years, so expect to see action, probably significant action, early next year.

2.      Individual tax reform will focus on lower rates but expect to lose some deductions and credits

President-elect Trump and the House Republicans have identical proposals when it comes to individual tax rates: 12 percent, 25 percent and 33 percent. Under both proposals, one price for the lower rates would be the loss of certain itemized deductions and credits. President-elect Trump has proposed a $200,000 cap on itemized deductions for married couples and the House Republicans have proposed only allowing deductions for charitable contributions and mortgage interest expense. One way or another, expect itemized deductions as well as certain other tax benefits to be pared back in exchange for lower tax rates.

With respect to capital gains, President-elect Trump would eliminate the 3.8 percent tax on net investment income while the House Republicans would not only do that but would reduce capital gains rates to 6 percent, 12.5 percent and 16.5 percent. Both would repeal the alternative minimum tax. Finally, with respect to the estate tax, President-elect Trump and the House Republicans would eliminate the estate tax but, interestingly, President-elect Trump would tax the value of appreciated property above $10 million in an estate at death, which would be a substantial change from current law.

3.      Business tax reform will focus on rates, depreciation and international taxes

President-elect Trump and the House Republicans also have very similar proposals for business tax reform. The House Republicans have set forth a comprehensive business tax proposal that would

  • Reduce the rate of tax for corporations (20 percent) and pass-through entities (25 percent)
  • Allow for full and immediate expensing of capital purchases
  • Eliminate interest expense deductions for most businesses
  • Completely reform the way in which foreign earnings of US businesses are taxed  

President-elect Trump’s proposals are similar but differ from the House Republicans with respect to the rate of tax for corporations (15 percent) and pass-through entities (15 percent) and how he would implement full and immediate expensing for capital purchases. The biggest area of disagreement, however, is with respect to the taxation of foreign earnings of U.S. global multi-nationals. Trump would retain the current system of taxing the worldwide earnings of a U.S. multi-national and would eliminate deferral of taxation on foreign earnings. The House Republican proposal is just the opposite which would be to exempt foreign earnings permanently from U.S. taxation.

The future

Both President-elect Trump and the House Republicans believe that tax reform is essential if the U.S. economy is to increase its rate of growth. Expect tax reform to be a central focus of the new Congress and new Administration in early 2017.  


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