On September 27, the White House released a document called the “Unified Framework for Fixing Our Broken Tax Code,” containing an outline prepared by the administration plus the senior Republican members of the tax-writing committees of Congress. The Framework is far less detailed than previous proposals for structural tax reform, but is instead described as a “template” which the authors intend for Congress to use to prepare actual legislation. This template calls for new tax rates for individuals and businesses and would create a territorial international tax system. Some key headlines:
Estate Tax. The Framework calls for a repeal of the estate tax. In announcing the tax plan, the President said that repeal would overwhelmingly help farmers and small business owners. However, most farm families are not actually affected by the estate tax, which only applies to estates valued at over $5.49 million. The nonpartisan Tax Policy Center projects that estate tax of $19.95 billion will arise from Americans dying in 2017, of which about $30 million, or 00.15%, will be paid by the estates of farmers and small business owners.
The Framework would also repeal the generation skipping transfer tax. The proposal is silent on the gift tax.
Individual Income Tax Rates. The current maximum federal rate is 39.6% for taxable income over $470,000. The Framework would lower this maximum rate paid by high-income individuals to 35% as the highest of just three brackets (although it also provides the tax-writing committees discretion to add a fourth bracket for those top earners).
Alternative Minimum Tax. The Framework calls for the complete repeal of the alternative minimum tax. Elimination of the AMT would significantly simplify the tax code.
Other Provisions Affecting Individuals. The Framework would eliminate most itemized deductions other than those for home mortgage interest and charitable contributions, including the deduction for taxes paid to state and local governments. However, Republican members of the House Ways and Means Committee suggested – the day after the Framework was released – that the deduction for state and local taxes will need to be revisited following pushback by Republican Congressmen from high-tax states including New York and New Jersey. Other provisions affecting individuals would:
- Double the standard deduction to $24,000 for married taxpayers filing jointly.
- Repeal the personal exemptions for dependents and increase the child tax credit.
- Repeal unspecified exemptions, deductions and credits that “riddle the tax code.”
Corporate Tax Rates. The current maximum corporate tax rate of 35% would be lowered to 20% under the proposal, which would also aim for repeal of the corporate AMT.
Flow-Through Entities. Many businesses are conducted through flow-through entities, such as partnerships, limited liability companies and S corporations, the income of which is taxed at the owner, rather than the entity, level at the tax rates paid by those owners (currently as high as 39.6%). The Framework would limit the maximum rate paid by the owners to 25%. The Framework leaves it to the tax-writing committees to figure out how to prevent the inevitable abuse of re-characterizing personal income into business income by wealthy individuals seeking to avoid the top personal income tax rate.
Other Business Provisions. The deduction for interest paid by corporations would be partially limited, although no specifics are provided, and the tax-writing committees are expected to consider “appropriate treatment of interest paid by non-corporate taxpayers.” The Framework would allow business to immediately write off the cost of new investments in depreciable assets other than structures. While the proposal envisions the repeal of most business tax credits, the credits for research and development, and for low-income housing, would be preserved.
International Business. The Framework would replace the existing worldwide system for taxing corporations with a territorial system coupled with a 100% exemption for dividends received by US corporations from their foreign subsidiaries. To transition to this new system, the framework would treat the trillions of dollars in foreign earnings that have accumulated overseas under the current system as repatriated, with the resulting tax liability spread out over several years. In an effort to prevent companies from shifting profits to tax havens, the proposal would tax at a reduced rate the foreign profits of US multinational corporations. It is not clear how this provision would interact with the proposed new territorial system of taxation of international business operations.
Beyond laying out these broad tax policy concepts, there is very little detail in the Framework, which instead anticipates that most of the details will be undertaken in legislation drafted in the tax-writing committees of Congress.