Obamacare repeal. Tax reform. Obamacare repeal. Now back top tax reform! President Donald Trump’s administration and the GOP in Congress have released a framework for possible tax reform.
The framework somewhat mirrors what Trump released in April: slashed corporate tax rate and three tax brackets. The Republicans hope this plan will finally give them a victory after too many failures to repeal Obamacare.
The framework consists of nine pages, which insist that Trump wants to keep the tax code simple and allow people to keep more of their paycheck (then repeal the 16th amendment!). He also wants a code that will bring companies back to American soil.
This framework comes from the big Six: Treasury Secretary Steven Mnuchin, Economic Adviser Gary Cohn, Senate Majority Leader Mitch McConnell, Senate Finance Chairman Orrin Hatch, House Speaker Paul Ryan, and House Ways and Means Chairman Kevin Brady.
Tax Relief for American Families
First off, the tax code will shrink from seven brackets to three: 12%, 25%, and 35%. However, congressional committees have an option to add a fourth bracket on the high earners. It also doesn’t define what income fits in those brackets.
The framework will double the standard deduction to $24,000 for a married couple and $12,000 for a single person. These changes mean those with less than those amounts will fall into the “zero tax bracket.”
Here’s what the plan says about the Child Tax Credit:
To further simplify tax filing and provide tax relief for middle-income families, the framework repeals the personal exemptions and significantly increases the Child Tax Credit. The first $1,000 of the credit will be refundable as under current law.
In addition, the framework will increase the income levels at which the Child Tax Credit begins to phase out. The modified limits will make the credit available to more middle-income families and eliminate the marriage penalty in the existing credit.
The framework also provides a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents.
The framework includes repealing the alternative minimum tax since “it no longer serves its intended purpose and creates significant complexity.” Those involved decided to eliminate it instead of fix it. The estate tax essentially forces people “to do their taxes twice.” It also “repeals the death tax and the generation-skipping transfer tax.”
It looks like “most itemized deductions” will go away, but the framework “retains tax incentives for home mortgage interest and charitable contributions.”
Without going into detail, the document states that the the framework for tax reform “retains tax benefits that encourage work, higher education and retirement security.” It says that “committees are encouraged to simplify these benefits to improve efficiency and effectiveness.”
Then it mentions that “[T]ax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.” This made me perk up because yesterday I wrote about reports coming out that the government may change the 401(k) by taxing your contributions right away instead of on withdrawal. That statement above seems to contradict the report because taxing contributions could lead to people not putting enough into savings.
Trump has said that he wanted to lower corporate tax rates as a way to bring jobs to America. The documents stated that the framework will limit “the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%.” The writers hope that committees will take choose to “adopt measures to prevent recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
The tax code right now taxes small businesses at the individual level.
They hope the tax rate for corporations will go down to 20% from 35%. Just like with individuals, the framework wants to “eliminate the corporate AMT.” It allows committees to “consider methods to reduce the double taxation of corporate earnings.”
Businesses will have the ability to immediately write off “the cost of new investments in depreciable assets other than structures” for at least five years. The framework will partially limit deductions “for net interest expense incurred by C corporations.”
All of these deductions have led to the writers to decide that “the current-law domestic production (“section 199”) deduction will no longer be necessary. Section 199 is “for businesses that perform domestic manufacturing and certain other production activities.” The framework claims that these domestic manufacturers will enjoy “the lowest marginal rates in almost 80 years” and “numerous other special exclusions and deductions will be repealed or restricted.”
The framework will preserve business credits in research and development and low-income housing. It explained that these two areas “have proven to be effective in promoting policy goals important in the American economy.”
But the framework will also allow committees “to retain some other business credits to the extent budgetary limitations allow.”
For specific industries, there are special tax regimes. The framework promises to “modernize these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.”
Some Republicans have come out for the plan or said that the details have given them some hope. From The Daily Signal:
“Tax reform that follows the outline we heard today will deliver significant benefits for all Americans,” Adam Michel, a tax policy analyst at The Heritage Foundation, said in an email to The Daily Signal, adding:
The outlined tax reform will raise wages, increase job creation, and create untold additional opportunities. The plan goes a long way toward fixing our business tax system that makes it hard for businesses to invest in America.
President and CEO of the Job Creators Network Ortiz told The Daily Signal that “the plan shows promise” while David McIntosh, president of the Club for Growth, thinks “the plan will foster economic development.”
Even Sen. Ted Cruz (R-TX) liked what he’s seen so far:
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