Yesterday, on April 26, Trump Administration officials unveiled their core principles for tax reform. The one-page proposal offers broad goals and provides continued insight into what we can expect to see in the months ahead. The goals and proposals mirror much of what we saw and heard from President Trump and his team during the presidential campaign last year.
Though the outline does not offer much beyond broad principles, the release indicates that throughout the month of May, the Trump Administration will hold listening sessions with stakeholders and work with the House and Senate to develop the details of overall tax reform. Officials have stated that the goal is to move quickly on this effort so that a more formal proposal can be developed and released by late summer.
The Administration’s overarching goals for tax reform are to grow the economy and create jobs, simplify the tax code, provide tax relief to American families (especially middle-income families), and lower the business tax rate. Officials intend to achieve these goals with the principles as laid out in the outline.
The business reform proposals set forth in the outline include:
• Lower the Business Tax Rate: During his campaign, President Trump proposed to lower the corporate income tax rate from 35% to 15%. The outline released by the Administration provides the same. Officials have reiterated that the proposed lower tax rate of 15% would apply on pass-through income (income from certain partnerships, S corporations, etc.).
• Territorial Tax System: The tax outline calls for a territorial tax system “to level the playing field for American companies.” Transitioning to a territorial tax system would mean that domestic multinational companies would only be taxed on U.S. income, not worldwide income.
• Repatriation Tax: The outline proposes a one-time repatriation tax on untaxed earnings held overseas. The plan does not indicate what the proposed tax rate would be; however, officials have indicated that the rate would likely be competitive.
• Eliminate Tax Breaks for Special Interests: The outline does not provide any additional details beyond the general proposal to eliminate tax breaks for special interests.
The individual reform proposals set forth in the outline include:
• Compress the Tax Brackets: While on the campaign trail, President Trump proposed to compress the seven tax brackets into three tax brackets – 12%, 25%, and 33%. The recently released outline continues with the notion of compressing the existing tax brackets into three brackets, but changes the rates slightly to 10%, 25%, and 35%.
• Double the Standard Deduction: The outline calls for a doubling of the standard deduction. Officials predict that this will simplify tax filing for many Americans.
• Tax Relief for Families with Child and Dependent Care Expenses: Without going into any detail, the tax reform outline proposes to provide tax relief for those incurring child and dependent care expenses. During his campaign, President Trump proposed to create new childcare tax benefits in the form of deductions. It seems that the Administration intends to continue its efforts of providing assistance to families incurring such costs.
• Eliminate Tax Breaks Benefiting the Wealthiest Taxpayers: The outline provides the general principle of eliminating “targeted tax breaks that mainly benefit the wealthiest taxpayers.” Though the plan does not provide much more insight into what this specifically means, officials have stated that though the Administration intends to eliminate many of the tax breaks available, it plans to keep intact the federal charitable contribution and mortgage interest deductions.
• Repeal the Alternative Minimum Tax, Estate Tax, and 3.8% Net Investment Income Tax: The outline closely resembles the proposals as originally offered by President Trump during his campaign pertaining to the alternative minimum tax, estate tax, and the 3.8% net investment income tax. The outline reiterates the Administration’s intent of proposing to eliminate these taxes.
The outline does not address a border adjustment tax, which Republicans have indicated can be a way to help pay for tax reform, so there remains much uncertainty as to how the Administration plans to offset the cost of these proposals.
So, what can we expect to see? It’s important to keep in mind that these are mere proposals and a lot can change between now and when, if at all, any formal legislative proposal is released. With that being said, there is some inherent value in this release of tax reform principles as it provides us with a more current understanding of the Trump Administration’s vision for tax reform. As stated earlier, the outline indicates that officials will spend the month of May developing the details of these proposals, so that appears to be the next step in the process. The results of those meetings and outcome of those discussions will be a critical indicator of the timeline for tax reform and the path ahead.