United States: Trump Outline Seeks To Reclaim Tax Reform Effort

The Trump administration released an outline for tax reform on April 26 that includes the president's bold proposals to slash rates but leaves many of the difficult questions unanswered.

The much-anticipated release could renew momentum for tax reform efforts, but the onepage outline itself is not a fully formed plan and is largely a restatement of campaign goals with a couple of key adjustments. The outline may be a way for President Trump to reassert more control over the direction of tax reform, yet many of the elements would face both political and procedural hurdles as currently envisioned.

Like his campaign platform, the outline calls for cutting the corporate rate to 15%, and administration officials said small- and medium-sized pass-through businesses would qualify for the reduced rate. The administration offered no new information on the size threshold for qualifying for the reduced rate, or how the business income of larger passthroughs would be taxed. Administration officials said they would prevent pass-through owners from enjoying the lower rate on income that is better characterized as investment of compensation income, but offered no details on how those rules would be written.

The plan reiterates several other campaign promises:

  • Repealing the alternative minimum tax
  • Repealing the 3.8% tax on net investment income
  • Doubling the standard deduction
  • Enhancing tax relief for child and dependent care expenses.
  • Leaving the dividend and capital gains rate at 20%

In a break from his campaign, Trump is proposing to lower the top individual rate to just 35%. His tax platform released before the election included a top individual rate of 33%, and earlier proposals included a top rate as low as 25%. In another shift, Trump dropped his proposal to end deferral and impose a global minimum tax of 15%, and instead joined House Republicans in calling for a shift to a territorial tax system that exempts certain foreign income. The outline does not specify the rate of the exemption. Trump still proposes a one-time tax on unrepatriated earnings, also at an unspecified rate. His campaign had called for a 10% rate.

The outline retains the repeal of the estate tax, but does not mention a campaign proposal to impose a capital gains tax on assets in an estate at death. He also dropped any mention of a proposal to allow certain taxpayers to elect full expensing if they forgo their interest deduction. The outline generally calls for eliminating "tax breaks and deductions" for businesses and cutting all individual benefits except those for charitable giving, mortgage interest and retirement.

The descriptions of the proposals in the outline make up less than 125 words total and include almost no detail on how any of the rules would work. Congress will clearly still need to craft the details of any legislation that moves forward, but President Trump appears to be looking for more control over the direction of reform and willing to spend political capital on the effort. It's unclear how much direction Congressional Republicans are willing to take. A joint statement from House Speaker Paul Ryan, R-Wis., Senate Majority Leader Mitch McConnell, R-Kent., House Ways and Means Committee Chair Kevin Brady, R-Texas, and Senate Finance Committee Chair Orrin Hatch, R-Utah, stopped well short of endorsing the outline, saying only that the "principles" would "serve as critical guideposts."

The outline's goals face hurdles. As a whole, it would appear to lose significant revenue even assuming robust economic growth. Under current rules, Republicans cannot pass a permanent tax bill in the Senate without Democratic votes if the legislation loses revenue outside the 10-year budget window. House Republicans released a letter from the Joint Committee on Taxation indicating that even sunsetting corporate tax cuts would violate this rule because of carryover issues if the cuts are in place longer than two years.

The administration could add revenue by endorsing House Republican proposals like border adjustability, but they would still likely face a revenue gap. And Treasury Secretary Steven Mnuchin said the administration doesn't support border adjustability in its current form. Brady is currently working to appease opponents of the border adjustability proposal with modifications, such as a delayed effective date or exemptions for items that can't be sourced from within the U.S.

For now, House Republicans appear committed to continuing to work on a full legislative draft based on their blueprint, but the outline and discussions with the administration will undoubtedly influence the process. A full side-by-side comparison of the Trump plan and the blueprint are provided below. The Trump column is based both on the outline and statements from administration officials during its release. Where noted, it includes information on earlier proposals from the campaign platform.

COMPARISON OF GOP TAX PLANS

Issue House Republican blueprint Trump outline
Individual income
  • Creates three brackets: 12%, 25%, 33%
  • Creates three brackets: 10%, 25%, 35%
Individual tax benefits
  • Repeals itemized deductions other than those for charitable giving and home interest Increases standard deduction but repeals personal exemptions Consolidates dependent and child benefits into single child and dependent tax credit Retains the earned income tax credit
  • Repeals itemized deductions other than those for charitable giving and home interest Doubles standard deduction with no mention of personal exemptions Creates/enhances child and dependent care incentives in unspecified ways Retains retirement plan incentives
Investment income
  • Interest, dividends and long-term capital gains taxed as ordinary income, but with a 50% exclusion for effective top rates of 6% 12.5%, and 16.5%
  • Retains top rate of 20% for long-term capital gains and dividends No special rate for interest income
Estate tax
  • Repeals (does not specify whether it would retain step-up in basis of inherited assets)
  • Repeals, with no mention of campaign proposal to tax capital gain of assets in estate after $10 million exemption
Alternative minimum tax (AMT)
  • Repeals both individual and corporate (but retains 90% limit on net operating losses (NOLs)
  • Repeals individual AMT
Corporate rate
  • 20%
  • 15%
Pass-through tax rate
  • 25% rate on active income from a pass- through business with rules to ensure proper amount of income is characterized as compensation
  • 15% rate for "small and medium sized" pass- throughs with rules to ensure proper amount of income is characterized as compensation No information on threshold for large pass- throughs or how they would be taxed
Business benefits
  • Generally repeals tax benefits but specifically retains an R&D credit and a last in, first out method NOL can be carried forward indefinitely but cannot reduce taxable income below 90% or be carried back
  • Generally repeals tax benefits with no mention of campaign proposal to retain R&D credit
Depreciation
  • 100% expensing for all business equipment, including buildings
  • No mention of campaign proposal for full expensing
Interest deduction
  • Disallows deduction for interest expense in excess of interest income with special rules to retain deduction for banks and other financial companies
  • No mention of campaign proposal to limit interest deductions if claiming full expensing
Incentives for domestic activity
  • Creates full "border adjustability," meaning no deduction for imports while gross receipts from exports are excluded
  • No provision, although administration officials have said border adjustability does not work in current form
International
  • 100% exemption for repatriated dividends Imposes one-time tax on previously unrepatriated earnings of 8.75% for cash and 3.5% for reinvested earnings (with eght-year payment period)
  • Territorial exemptions for offshore income at unspecified rate One-time tax on unrepatriated earnings at unspecified rate (campaign proposed 10%)
Net investment income tax
  • Repeals
  • Repeals

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