United States

Trump administration releases tax reform proposal

TAX ALERT  | 

On April 26, 2017, top representatives from the Trump administration announced their long-awaited proposal for tax reform. National Economic Council Director Gary Cohn and Treasury Secretary Steven Mnuchin presented the administration’s broad objectives, laying out target tax rates and a few proposals affecting the tax base, while leaving many details to be worked out in the coming months.

To some observers, the announcement was more important for what it did not say: The administration’s proposal neither endorsed nor completely rejected the House Republican plan for a border adjustment tax to address the nation’s trade imbalance, and did not address or criticize the House Republican plan to allow immediate expensing of depreciable assets to stimulate economic growth. Since the House is expected to act first on any tax measure, and since the House Republicans are still embracing their tax reform ‘blueprint,’ some may view this administration announcement as simply putting the ball back in play, but in the hands of the House.

The details of the proposal are similar to President Trump’s campaign proposals.

On the business side, the administration proposed a 15 percent tax rate on all business income, including income taxable to individuals through pass-through entities. While the House GOP blueprint, which provided a similar special rate for business income taxable to individuals, proposed extending their special rate to sole proprietorships as well as partnerships and S corporations (the entities traditionally described as pass-through entities), the administration’s proposal did not discuss whether this rate would apply to businesses taxed as sole proprietorships.

Also proposed was a move to a territorial system for international taxation, where income earned by U.S. companies outside of the United States would not be subject to U.S. tax. Currently, U.S. companies are taxed on their worldwide income, with opportunities for deferral of certain income earned overseas until repatriated. As indicated previously, the border adjustment tax proposal, found in Speaker Paul Ryan’s House GOP blueprint, was not included in the administration’s proposal, and the presenters indicated their belief that it was ‘unworkable’ in its current form.

Interestingly, with what appears to be a 20 percent tax rate on individual capital gains, but a 15 percent tax rate on the ongoing earnings of corporations or owners of pass-through businesses, the incentive to dispose of a successful business in order to realize tax-favored capital gains may be diminished or eliminated.

On the subject of deferrals and repatriations, the proposal included a one-time deemed repatriation of all deferred earnings held in overseas subsidiaries, at an unspecified tax rate.

Base-broadening through the elimination of unspecified tax breaks for businesses was stated as an objective, but no specifics were discussed during the presentation or contained in the succinct written summary.

On the individual side, the administration proposed a move from the current seven tax brackets to three: 10 percent, 25 percent and 35 percent. The thresholds at which these rates would take effect were not discussed in the announcement.

Other proposed changes to the individual tax system include:

  • Doubling the standard deduction for all taxpayers
  • Repealing the alternative minimum tax
  • Repealing the 3.8 percent net investment income tax (sometimes knows as the Obamacare tax)
  • Expanding (in an unspecified way) tax benefits for child and dependent care
  • Keeping current tax benefits for home mortgage interest, charitable contributions and retirement savings, while eliminating most other itemized deductions, including the deduction for state and local income taxes

The administration also indicated their intent to repeal the estate tax, possibly without any phase-out period as occurred under the Bush-era estate tax repeal (a repeal that was in full effect for only a year). Other aspects of the federal transfer tax system—the gift tax and generation-skipping transfer tax—were not addressed.

The well-worn cliché that the ‘devil is in the details’ certainly applies to tax reform, and most of the details of this proposal are yet to be worked out. RSM will continue to monitor developments in the tax reform arena as they occur. For additional information, visit our tax reform resource center.

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