United States: Will Tax Reform Help Your Business?

Prospects for tax reform are significantly greater with the Republican Party taking charge of the White House, but even with GOP majorities in both houses of Congress, reform won't be easy. Significant obstacles include a lack of unity among Republicans and the absence of a veto-proof 60 GOP votes in the Senate. Any tax reform your business will experience depends on an acceptable degree of unity in three areas — who gets to drive reform, reform goals and the cost of change.  

In the recent Grant Thornton LLP Post-election tax legislative outlook webcast, tax reform was understood as lower tax rates and tax cuts. The discussion delivered insights on probabilities and examined the few concrete facts in the proposals that are the closest things Republicans have to a plan.

Who will drive tax reform in 2017 and beyond?

President-elect Donald Trump made efforts during the campaign to move his tax platform closer to the "A Better Way" blueprint put forward by House Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Kevin Brady, R-Tex. But there are still major differences Republicans need to resolve.

"President Obama didn't take a firm interest in tax reform, but President Trump might," says Shamik Trivedi, manager in Grant Thornton's Washington National Tax Office (WNTO). "Will Trump take control, or will he cede that control to Ryan in much the same way an executive might cede responsibility to a junior person?" Whoever is at the helm will have to exercise leadership in bringing unity to the tax reform agenda, Trivedi says. "Important members of the Senate Republican caucus were very openly breaking with Donald Trump on a number of issues. Trump and Ryan will have to win them over to pass comprehensive legislation."

What are the goals of tax reform?

The starting point for negotiations, says WNTO Director Dustin Stamper, are the tax platforms that Republican candidates ran on. The trade will be tax incentives for rate cuts, he explains: "Under both plans, you'll be generally getting rid of all your targeted tax incentives and benefits. But they both keep the R&D credit. That's the price you'd have to pay for the rate cut."

There are questions about how to balance rate cuts for corporations, individuals and pass-through businesses. "Keep in mind," Stamper says, "that just a few years ago we were talking about doing corporate reform and individual reform in lockstep. The Republican-only wish list is getting the individual rate down to 33%. They've essentially given up on the idea that the corporate and individual rates are ever going to be lowered in lockstep. They're left with 'What do you do with pass-through income?'

"The Ryan-Brady plan doesn't go into detail, but says we've got a 25% rate — about halfway between the two rates — and you'll have to carve out some amount of your pass-through income as the equivalent of salary or reasonable compensation. But the rest of the active income can be applied at this low rate," Stamper explains.

The other big objective for House Republicans is shifting away from an income tax-based system toward a more cash flow-consumption system. It would mean giving up interest deductions for business equipment.  

More negotiations will be necessary to gain agreement on beneficiaries. A longtime goal of most Republicans has been cutting the estate tax. Much of the Ryan-Brady blueprint is focused on investment income, large corporations and multinational companies. If Trump's Rust Belt supporters think he is favoring the big multinationals he railed against, Trivedi contends, they'll oppose this portion of tax reform unless legislators include benefits for lower- and middle-income constituents.

In addition, says WNTO Partner Mel Schwarz, "a lot of what we've seen is business tax reform, especially international business. But international business didn't elect President Trump."

Would tax reform costs be too high?

"There are some practical considerations for the cost," says Schwarz, "especially looking at the deficit picture.

"The portion of the federal debt held by the public approaches 75% of our annual gross domestic product. Without making any changes, without a new tax provision, without doing away with sequester on the defense side, without making college free, without dealing with infrastructure, we are already on a path that by 2045 is going to be approaching 150% of annual gross domestic product as our federal debt load," Schwarz says.

"Regardless of where you are on the political spectrum, at some point federal debt becomes so high that you begin to see crowding out of domestic investment and, as a result, domestic private investment."

The cost estimates of both the Trump and Ryan-Brady plans are high, even those scored by Republican-friendly economists (see Republican Sweep Creates Potential for Major Tax Changes). The right-leaning Tax Foundation estimates that on a static basis, the Trump plan would cost more than $4 trillion and the House plan would cost $2.4 trillion. Even if projected revenue increases from economic growth are included, the costs present political problems.With a 60-vote hurdle in the Senate and many fiscally conservative members of Congress, it is not at all certain that Republicans will be able to muster the necessary support for many of their tax reform hopes. The reconciliation budget process may be used to avoid 60-vote obstacles in the Senate, but there are major drawbacks. The biggest is that cuts can't be extended outside the 10-year budget window, so everything would have to be written to expire.

According to Schwarz, there is an alternative — a bipartisan tax reform bill. "Trump is certainly a deal guy," he says. "Let's see what deals can be cut."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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