Big Six Unveil Tax Reform Framework

September 27, 2017

On Sept. 27, leaders in both chambers of Congress and the administration released the Unified Framework for Fixing Our Broken Tax Code. The framework created by the so-called Big Six provides guidelines for the congressional tax-writing committees as they craft legislation. The group is composed of Speaker Paul Ryan (R-Wis.), Senate Majority Leader Mitch McConnell (R-Ky.), House Ways and Means Committee Chairman Kevin Brady (R-Texas), Senate Finance Committee Chairman Orrin Hatch (R-Utah), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn.

The centerpiece of the plan calls for lowering the corporate tax rate from 35 percent to 20 percent. That target is above President Trump’s long-stated goal of 15 percent but below the average for developed nations, and near the limit of what experts think is possible as part of a package that doesn’t cut overall tax revenues. For businesses that file through the individual side of the code, such as S-Corporations and partnerships, Republicans aim to create a special new top rate of 25 percent, as opposed to today’s top rate of 39.6 percent.

The framework will call for allowing businesses to immediately deduct the cost of new investments in equipment and machinery for at least five years, a major part of a policy long sought by House Speaker Paul Ryan.

Specifically, the framework:

Tax brackets
Consolidates the current seven tax brackets into three brackets, with rates of 12 percent, 25 percent, and 35 percent. It leaves room for lawmakers to add a higher fourth bracket rate, to apply to high-income taxpayers. It also suggests that brackets should be indexed to “a more accurate measure of inflation,” which may refer to chained CPI.

Standard deduction
Increases the standard deduction to $12,000 for single filers and $24,000 for married filers (currently: $6,350 for single filers and $12,700 for married filers). It eliminates the additional standard deduction and the personal exemption for filers.

Itemized deductions
Calls for the elimination of several itemized deductions, without identifying specific provisions and calls for preserving the mortgage interest deduction and charitable deduction.

Family tax credits
Replaces the personal exemption for dependents with an expanded nonrefundable portion of the child tax credit (amount not specified) and a new $500 nonrefundable credit for non-child dependents, while it increases the phaseout thresholds for the child tax credit.

Capital gains and dividends
No proposal regarding the tax treatment of capital gains and dividends. Calls for preserving tax benefits for “retirement security,” which probably refers to the current tax treatment of 401(k), IRA, and defined benefit plans.

Alternative minimum tax
The framework eliminates the alternative minimum tax.

Corporate tax rate
It lowers the corporate income tax rate from 35 percent to 20 percent, as well as eliminates the corporate alternative minimum tax.

Pass-through tax rate
Creates a new maximum tax rate on pass-through business income, of 25 percent. Calls for, but does not specify, rules for combating abuse of a top tax rate on pass-through business income that is lower than the top tax rate on wage income.

Capital investment
The framework allows for full expensing for capital investment for at least five years.

Tax treatment of interest
Calls for a partial limitation of the interest deduction for C corporations, with no additional details. Provides no details about the treatment of interest paid by pass-through businesses.

Business credits and deductions
Eliminates the section 199 manufacturing deduction. It calls for the elimination of other business credits and deductions, without identifying specific provisions. Additionally, includes preserving the research and development credit and the low-income housing tax credit.

International income
Moves to a territorial tax system, in which foreign-source profits of U.S. companies are not generally subject to U.S. tax upon repatriation. Calls for, but does not specify, a global minimum tax intended to protect the U.S. tax base from cross-border income shifting.

Deemed repatriation
It enacts a one-time tax on previously accumulated foreign-source earnings. Calls for a lower tax rate on liquid foreign assets and a higher tax rate on illiquid foreign assets, but does not specify either rate.

Estate tax
The framework eliminates the estate tax and generation-skipping taxes.

NSBA supports a broad bipartisan overhaul of the tax system by dramatically broadening the base—cutting the breaks that litter the tax code—and lowering rates while maintaining revenue neutrality. As Congress debates what tax system should replace the current one, NSBA believes it is imperative that the U.S. moves towards a simpler, fairer tax system that does not attempt to only tweak one piece of the puzzle but instead is a permanent solution.

Please click here to view NSBA’s Tax Reform Recommendation letter to the Senate Finance Committee.

The full framework can be found HERE, and a one page overview can be found HERE.