Trump’s Tax Overhaul: What We Know Right Now

National attention turned toward overhaul of the U.S. tax code recently, as Congress released its highly anticipated “Unified Framework for Fixing Our Broken Tax Code.” The motto for the document, inscribed at the top under the bold legend “Tax Reform,” is “More jobs; fairer taxes; bigger paychecks.”

Without doubt, every American would welcome these three results. But does this much-touted framework document actually represent a foundation for delivering on this, one of the major campaign promises of both President Trump and many congressional candidates? It’s fair to say that at this very early stage, it is difficult to tell. In fact, given some of the recent comments of certain influential lawmakers like Sen. Bob Corker (GOP, TN), it is far from certain that Congress will be able to get a bill passed any time soon. For that reason, we don’t believe private or corporate clients should start overhauling their tax or investment strategies just yet. Nevertheless, there are some general outlines discernable in the framework document that bear consideration.

  1. Corporate tax relief: The outline document signals rather clearly that reducing the amount of taxes paid by America’s corporations is a key aim of the current tax reform effort. The document specifically lists “tax relief for businesses, especially small businesses” and “ending incentives to ship jobs, capital, and tax revenue overseas” as principal goals of the overhaul process. Generally, the plan would accomplish this by a combination of lower maximum corporate tax rates (from 35 to 20 percent) and special incentives for multinational companies to keep profits generated by foreign subsidiaries in the US and also bring previously generated profits “back home” to benefit the US economy.
  2. Simplified tax code, especially for middle-income filers: The plan proposes to collapse the current seven tax brackets to just three: a 12-percent bracket (actually an increase from the current 10 percent); a 25-percent bracket, and a top bracket of 35 percent. So far, we don’t know what the income cutoffs for each bracket are, and that will make a lot of difference in how various taxpayers will fare under the new proposal. President Trump has suggested that the 25 percent bracket might start at $75,000 for a couple filing jointly, and that the 35 percent bracket might begin at $225,000 for joint filers. In order to pay for the presumed reduction in tax revenue indicated by this change, the plan would also eliminate many current deductions, such as those for state and local income taxes. Obviously, lawmakers from states with higher state and local income taxes can be expected to contest this provision vigorously. On the other hand, the proposal suggests raising the standard deduction to $12,000 for individuals (from $6,300 currently) and to $24,000 for couples (from $12,700 currently). For many filers, this could effectively increase the “zero bracket” for income not subject to taxation—though probably not doubling it, as one news release recently claimed.
  3. Benefits for the wealthiest taxpayers: Two goals of the proposed overhaul will appeal especially to the top tier of filers: the repeal of the alternative minimum tax (AMT) and the repeal of the estate tax (death tax) and the generation-skipping transfer tax. These provisions are onerous to the wealthiest Americans, and most would be delighted to see them disappear. However, the draft framework also contains a somewhat ambiguous statement that suggests “an additional top rate may apply to the highest-income taxpayers” in order to insure that the nation’s tax burden is not unduly shifted from the wealthiest to the middle- and lower-income taxpayers. So, while some benefits to wealthy filers might accrue in one area, they may not fare so well in others.

As suggested above, at this early stage, it seems best to keep in mind the ancient Greek proverb: “There’s many a slip ‘twixt the cup and the lip.” But the terms outlined above seem likely to form, at the very least, the stage on which this latest tax reform drama will play out.

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