The year 2016 was a momentous one in politics, with the election of President-elect Donald Trump taking center stage in what resulted in complete control of Congress and the White House by the Republican Party. Many tax-policy experts predict that sweeping tax reform is now likely, but the exact shape it will take isn't entirely clear. Below, we'll go through some of the ideas on tax reform that members of Congress have proposed and compare them to the Trump tax policies from the President-elect's campaign.
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Image source: Architect of the Capitol.
Congressional tax proposals
One of the clearest indications of the direction that Congress might want to go with tax reform is in a document that the House Republicans Tax Reform Task Force created in June. That group's Tax Reform Task Force Blueprint includes many proposals that closely mirror what the President-elect proposed during the campaign.
For instance, the Blueprint proposes to reduce the number of tax brackets from seven to three. Rates of 12%, 25%, and 33% would apply, with larger standard deductions ranging from $12,000 to $24,000 depending on family status. The brackets that match up with those tax rates would be modified to eliminate any marriage penalty. Personal exemptions would be eliminated in favor of an expanded child tax credit.
To simplify taxes, most itemized deductions and individual tax-credit provisions would disappear, but deductions for mortgage interest and charitable contributions would still be available for taxpayers to take instead of the standard deduction. The earned income tax credit and various education-related tax incentives would be retained, but potentially with some modifications.
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Another aspect of the Blueprint is its effect on estate taxes. Congressional Republicans would like to eliminate the estate tax entirely, and it goes even further than the President-elect's plan in that it wouldn't require payment of capital-gains tax on appreciated assets at death.
Corporate tax reform is also a key provision of the Congressional proposal. For large businesses, a reduction in the corporate tax rate from 35% to 20% would make the U.S. more competitive with corporate tax rates in other countries. Meanwhile, small business taxation of pass-through entities like partnerships and sole proprietorships would see reductions in tax rates, as well, with a top 25% rate giving those business owners an advantage over the new top 33% rate for individual income, generally. In line with the plan's general goal of simplification, many business credits and deductions would be eliminated, although things like the research and development credit that are seen as stimulating business activity generally would be modified rather than axed entirely.
Finally, the Blueprint addresses international tax issues by changing fundamentally the way that businesses get taxed. Rather than taxing worldwide income, the proposal would instead introduce a territorial tax system, which is similar to what many countries around the world use. This would have the effect of exempting foreign income from tax, making repatriation essentially free and potentially making new capital available for U.S. businesses to use domestically. Existing pent-up earnings would be deemed as repatriated, subject to a tax of 8.75% or less.
Where Congress hasn't reached consensus
One area in which even Republicans differ is in structuring the final version of what a tax-reform package would look like. Senate Majority Leader Mitch McConnell (R-Ky.) has said that he would prefer to propose a package that would be revenue neutral, avoiding any need for spending adjustments or expansion of the budget deficit. Yet others, such as Sen. Rand Paul (R-Ky.), have said that tax cuts should specifically shrink the size of the federal budget rather than keeping overall tax revenues at a steady state.
In addition, not all of the details in the Blueprint match up with the President-elect's proposals. The brackets are essentially the same, although the Trump plan would tax dividend and long-term capital gain income at current rates of 0% to 20% rather than the 6% to 16.5% rates in the Blueprint. However, deductions are handled much differently. The Trump plan keeps itemized deductions, but caps them at high levels that would typically only affect high-income taxpayers, and it provides a higher standard deduction than the House plan.
In the end, a lot will depend on how much resolve Congress has to insist on its way, and how much tenacity the President-elect will have in pushing back on differences of opinion. If Congress and the White House can't come to an agreement, however, it's possible that no tax reform at all will happen in 2017.
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