Tax Reform Watch: The First Official Look into the President’s Tax Plan – April 28, 2017 by Tracy Monroe

On Wednesday, April 26, 2017, Treasury Secretary Steven Mnuchin and Director of the National Economic Council Gary Cohn presented a high-level view of what the President’s tax reform plan would include. The press conference was filled with information, much of which focused on two core concepts: simplifying tax compliance for individuals and making U.S. businesses more competitive in a global market. The press conference was the first official look into what some of the details may be.
 
Cohn opened the press conference outlining “a once-in-a-generation opportunity to do something really big.” He focused on aspects of individual tax reform and the goal to get most people’s tax filing return to a simple page. Proposed provisions include: 

  • Changing the current seven income tax brackets, ranging from 10% to 39.6%, to three: 10%, 25% and 35%.
  • Nearly doubling the standard deduction to $24,000 from the 2016 amount of $12,600. Increasing the standard deduction is significant to simplification as it would reduce the need for itemizing deductions.
  • Providing tax relief to help families with child and dependent care expenses.
  • Eliminating the Alternative Minimum Tax (AMT).
  • Eliminating itemized deductions, other than charitable contributions and mortgage interest. This point on itemized deductions could be significant. Under this plan, state and local taxes, miscellaneous itemized deductions and medical expenses would no longer be deductible. Essentially with the elimination of these deductions, the proposed regular income tax calculation is similar to the current AMT calculation, only with a 35% maximum rate rather than the current 28%.
  • Returning the top capital gain and dividend rates to 20%.
  • Eliminating the Affordable Care Act’s 3.8% net investment income tax.
  • Eliminating the estate tax. 

Cohn stated the reason for the repeal of the estate tax was that “the threat of being hit by the death tax leaves small business owners and farmers in this country to waste countless hours and resources on complicated estate planning to make sure their children aren’t hit with a huge tax when they die. No one wants to see their children have to sell the family business to pay an unfair tax.”
 
Mnuchin followed up focusing on the objective of the President’s tax reform plan as it relates to businesses and the goal to make U.S. businesses the most competitive in the world. He stated the current 35% top U.S. corporate rate on worldwide income is perhaps the most complicated and uncompetitive business rate in the world — and as a result, it is not a surprise that companies leave trillions of dollars offshore. Under the Trump plan Mnuchin stressed that “we will have a massive tax cut for businesses and massive tax reform and simplification.”
 
For businesses, the Trump tax plan includes: 

  • Lowering the corporate tax rate to 15%.
  • Making the U.S. tax system a territorial system.
  • Implementing a one-time tax on overseas profits, aimed at bringing back trillions of dollars that are offshore so they can be invested in the U.S. “to purchase capital and to create jobs.” 

Mnuchin’s statement addressed some very important aspects of corporate tax reform. The reduction in the corporate tax rate from 35% to 15% is incredibly significant and would make the U.S. tax rate much lower than that of the rest of the world, which generally comes in around 23 to 28%. Important to many privately owned companies, the 15% corporate rate arguably would apply to flow-through entities as well. While details were not given, Mnuchin stated that rules would be put in place so that wealthy Americans cannot create flow-through entities as a way to avoid paying tax at the individual rate.
 
Switching to a territorial tax system from a worldwide tax system is significant in that companies would only be taxed on the profit earned within the U.S. Under our current worldwide tax system, a U.S. company is taxed on profits earned in the U.S. and on profits earned outside the U.S. when that income is repatriated to the U.S. The company then must consider if they are entitled to any foreign tax credits to help alleviate the burden. Mnuchin pointed out that there would be a special reduced tax rate to repatriate foreign income, although that rate has not yet been determined.
 
Both speakers were very clear that the objective of this plan is to create economic growth, create more jobs and help low-income and the middle class — with the ultimate goal of getting the country back to a sustainable, 3% or higher GDP. A lot of the specifics are being worked out and Cohn and Mnuchin are working very closely with both the House and Senate to develop those details, promising reform within the year. The hope is that with a much-reduced corporate tax rate, many global companies will open plants and add high-paying jobs for American families.   
 
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