Last week, U.S. National Economic Director Gary Cohn and Treasury Secretary Steven Mnuchin, on behalf of the Trump administration, revealed "core principles" of the president's tax reform plan.
Many of the proposals were similar to those he made on the campaign trail, including a cut in the tax rate for businesses to 15%.
Director Cohn and Secretary Mnuchin emphasized throughout the briefing that many details were still to be negotiated.
For business taxpayers:
- The business tax rate would decrease from 35% to 15% for corporations, and the top tax rate for pass-through businesses (e.g., partnerships, sole proprietorships) would be reduced from 39.6% to 15%.
- There would be a one-time repatriation tax on offshore earnings. The exact percentage of the tax rate is still being negotiated.
Observation: Previous reports, as well as Trump’s proposal on the campaign trail, had indicated a 10% tax was being considered.
- There would be a shift from a worldwide system of taxation (under which a U.S. taxpayer is generally taxed on its worldwide income regardless of where earned) to a territorial system (under which income would generally be taxed in the country where it is earned).
Observation: Noticeably absent from the plan was a border adjustment tax, which several House Republicans favor as a way to offset revenue losses resulting from tax cuts.
For individual taxpayers:
- The current seven individual income tax rates would be reduced to three: 10%, 25% and 35%. Tax brackets (i.e., income levels at which these rates would apply) have not yet been determined.
- The standard deduction would be doubled, with the intended result that fewer taxpayers would itemize.
- The alternative minimum tax would be repealed.
- There would be some sort of tax relief for child and dependent care expenses, although no specifics were provided.
- The 3.8% net investment income tax (which was enacted as part of the Affordable Care Act, or Obamacare) would be repealed.
- The estate tax would be repealed.
- Most tax breaks would be repealed. Exceptions would be made for certain provisions involving home ownership, charitable giving and retirement savings. In taking questions from the press, Secretary Mnuchin said specifically that the mortgage interest deduction would be retained.
What about revenue neutrality?
The plan did not include any proposals for raising new revenue to offset that lost by the tax cuts, which, if enacted, could significantly increase the federal deficit. Secretary Mnuchin has said the cuts will pay for themselves by generating more economic growth but fiscal hawks, potentially some in Trump’s own Republican Party, along with Democrats, are certain to question these claims.
Secretary Mnuchin, consistent with recent statements, said they were determined to “get this done this year.”
View this piece as it originally appeared on Accounting Today.
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