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President Trump presented an outline for his tax reform initiative on April 26. The outline was one page and went over some general stated goals for tax reform.
In general, Trump’s plan proposes a corporate tax rate of 15 percent and a similar rate for pass-through businesses (partnerships and S-Corps). He also proposed tax reform that would reduce individual income tax rates, abolish the alternative minimum tax (AMT), the net investment income (NII) tax, and the federal estate tax.
Individual rates under the president’s proposal would be 10, 25 and 35 percent. At the same time, the president proposed to double the standard deduction and protect the home ownership and charitable deductions.
What is not known is, by President Trump wanting to “protect” those two deductions, will he be proposing cuts to other itemized deductions? The president also proposed to provide unspecified tax relief to families with children and dependents. Further, he called for elimination of unspecified tax breaks for special interests.
Interestingly, the president proposed moving to a territorial tax system which would not tax a citizen on their worldwide income, but only the income they make in the United States. The U.S. is an outlier in that it taxes its citizen’s worldwide income. Additionally, the president’s plan calls for an unspecified one-time tax on earnings repatriated to the U.S. from American businesses holding money offshore.
President Trump says that he is going to eliminate tax benefits that are lobbied for by special interest groups. However, special interest groups represent segments of society that Congress may not have considered during their drafting of the law. That is why Congress always tweaks the tax code every year to meet the needs of these groups.
Two special interest groups that may have a problem with the current proposed tax reform initiative are the medical field and plaintiff’s lawyers. Currently, taxpayers are able to deduct a large portion of their out-of-pocket medical expense costs and their legal fees. If President Trump cuts those deductions, people who have major out-of-pocket medical expenses may choose to then not have certain medical procedures. Likewise, if taxpayers are not able to deduct the legal fees they are awarded in certain lawsuits, plaintiff’s attorneys will bear some of those tax costs by way of lower fees, or defendants will have to cover those fees by way of larger settlements.
The main players in the tax reform process are, of course, the White House and Congress. However, other important organizations will try to get their hands in the tax reform as well. This is because the guidance from the president thus far does not give any details about tax procedures and administration. The last major tax procedure reform occurred in 1998 and groups such as the Taxpayer’s Advocate Office and the Treasury Inspector General for Tax Administration (TIGTA) have both voiced concerns about the way the IRS conducts business. The true reform will happen when economists begin to develop the revenue/growth projections and Congress starts to see what the real numbers look like.
The democrats will of course fight any tax cuts for the wealthy and have an uphill battle due to the fact they are the minority in both the House and the Senate. They can filibuster tax legislation, because Senate rules generally require 60-votes for legislation.
However, the republicans may use the reconciliation process, which would require only 50 votes. The problem with reconciliation is that it can be used only for bills that don’t increase the deficit beyond 10 years. The George W. Bush tax cuts in 2001 and 2003 used the reconciliation process and those changes had to be voted on again after they lapsed.
Influential members of Congress have said that they want a rewrite of the Internal Revenue Code that is “built to last,” rather than just tax cuts. Trump’s tax plan is just the starting point for discussions and some Republicans on the Ways and Means Committee are taking reform seriously.
The tax reform fight has only just begun and it will likely be a recurring topic of the news for the remainder of the year. We will keep you informed as the negotiations progress.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of taxation, real estate transactions, corporate, partnership and limited liability company law matters. He is a certified specialist in taxation. He may be reached at (209) 952-4545 or [email protected]