Tax Reform UpdateMarch 2, 2017
On Feb. 28, in his first address to a joint session of Congress, President Donald Trump called for action on tax reform in order to “restart the engine of the American economy – making it easier for companies to do business in the United States and much harder for companies to leave.” Although, he did not provide many details, he did say that his team is “developing historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive anywhere and with anyone.” President Trump also said that his plan “will provide massive tax relief for the middle class.”
Further, his speech was similar to comments made by House Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee Chairman Kevin Brady (R-Texas) regarding a destination-based cash flow tax. He said, “When we ship products out of America, many other countries make us pay very high tariffs and taxes but when foreign companies ship their products into America, we charge them nothing or almost nothing.”
Meanwhile, House Republican leaders have been working to build support for the tax reform “Blueprint” that they released in June 2016. Chairman Brady and his staff have been working on drafting statutory tax reform legislation based on the Blueprint.
Specifically, the Blueprint proposes to lower corporate and pass-through business tax rates, reduce individual tax rates, and provide full expensing for business costs (with no deduction for net business interest expense) under a border-adjustable destination-based cash-flow business tax system. In addition, the Blueprint would move the U.S. from a worldwide international tax system to a “territorial” dividend-exemption system, and impose a mandatory “deemed” repatriation tax (8.75 percent for cash or cash equivalents and 3.5 percent for other accumulated foreign earnings).
Under the Blueprint, the top U.S. corporate income tax rate would be reduced from 35 percent to 20 percent. A new pass-through business income tax system with a top rate of 25 percent would apply for owners of C corporation business entities, including S corporations, limited liability companies, partnerships, and sole proprietorships.
The Blueprint generally proposes eliminating all business tax expenditures except for the research credit. The Blueprint envisions a 14-line “postcard” size tax return for most individuals, but leaves to the Ways and Means Committee the task of simplifying the tax code sufficiently to achieve that goal. The current top individual tax rate would be reduced from 39.6 percent to 33 percent. The current seven individual tax brackets would be replaced with three rates set at 12 percent, 25 percent, and 33 percent (identical to the three brackets proposed by President Trump).
Qualified individual capital gain, dividend, and interest income would be subject to a 50-percent exclusion, with the remainder taxed as ordinary income (resulting in a top effective tax rate of 16.5 percent on such income). This exclusion system would replace current tax rules for investment income, which now include a top rate of 20 percent for capital gains and qualified dividend income.
In mid-February, Speaker Ryan met with the Senate Republican Conference to address questions over the border adjustment tax system, which is projected by some economists to offset more than half of the projected cost of lowering the corporate tax rate to 20 percent. After the meeting, some Republican Senators said they remain undecided and need additional information, while others expressed opposition to the border adjustment tax proposal.
President Trump did not comment directly on the House Republican tax reform plan in his address to Congress, but he did say “we must create a level playing field for American companies and workers.” He cited specifically “very high tariffs and taxes” imposed on U.S. exports by other countries while “we charge them nothing or almost nothing.” Administration officials have suggested that President Trump’s updated tax plan—which may be released in the coming weeks—may call for some type of “reciprocal” tax treatment for U.S. exports and imports.
NSBA strongly believes that allowing the smallest businesses to pay a much higher tax on their business income than a multinational, multi-billion dollar corporation undercuts any semblance to fairness. To promote economic growth, job creation, capital formation, and international competitiveness, fundamental tax reform is required. However, unless and until Congress agrees upon a replacement, NSBA believes that we must fix tax problems with the current tax code by developing simplification measures that are fair and fiscally responsible.
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