Trump Administration Releases Outline of Tax Reform Plan

(Parker Tax Publishing May 2017)

Last week, the Trump administration released a one-page outline of a tax reform plan which includes, among other things, a large reduction in corporate taxes, a reduction in the number of individual tax brackets and individual tax rates, the elimination of the estate tax, the repeal of the 3.8 percent net investment income tax and the alternative minimum tax, and the imposition of a territorial tax system to level the playing field for American companies. A detailed blueprint of the plan is expected by early summer. Trump Tax Outline (4/26/17).

Calling the plan the "biggest individual and business tax cut in American history," Treasury Secretary Mnuchin said the reduction in taxes called for in the package would not make the deficit worse and tax reform would pay for itself with growth, the reduction of various deductions, and the closing of loopholes. According to Mnuchin, the Treasury Department and the White House will be working closely with the House and Senate to turn the one-page plan into a bill that Congress can pass and that President Trump can sign. Mnuchin acknowledged that there were "lots of details" that have yet to be worked out.

Business Tax Reform

The outline calls for slashing corporate taxes from 35 percent to 15 percent, setting up a territorial tax system to level the playing field for American companies, imposing a one-time tax on "trillions of dollars held overseas," and eliminating tax breaks for special interests. Although the one-pager is silent on whether the reduced rate would apply to pass-through entities, as proposed in Trump's campaign tax plan, administration officials have confirmed that it would, but provided no details on how it would work.

Notably missing from the outline was any mention of the border-adjusted corporate tax that is the centerpiece of the "Better Way" tax blueprint supported by House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady ("Ryan-Brady plan"). The omission has been widely interpreted as signaling that the administration will not support the controversial proposal.

Individual Tax Reform

The outline calls for reducing the individual tax brackets from seven to three. Those three tax brackets would have rates of 10 percent, 25 percent, and 35 percent. The rates are the same as the ones proposed by the Trump campaign last September, except for an increase in the highest rate from 33 percent to 35 percent. Taking a step back from the campaign tax plan, the outline does not indicate the thresholds for the brackets.

In addition, the outline calls for nearly doubling the standard deduction to $12,000 for single taxpayers and $24,000 for married filing jointly. The amounts match the ones in the Ryan/Brady plan, reflecting significant reductions from the $15,000/$30,000 amounts proposed by Trump during the campaign. The outline doesn't indicate if the enhanced standard deduction would be coupled with the elimination of personal and dependency exemptions, as was proposed in the campaign tax plan.

The plan would eliminate all itemized deductions other than those for home mortgage interest and charitable contributions. The language in the outline is somewhat cryptic on this point, stating that the intent is to "Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers ..." and "Protect the home ownership and charitable gift tax deductions." But the administration has confirmed that this means repealing all itemized deductions other than the two being protected.

Finally, the outline calls for providing unspecified tax relief to families with child and dependent care expenses, repealing the alternative minimum tax, repealing the estate tax, and repealing the 3.8 percent net investment income tax.

Effect on the Deficit

Responding to questions from CNBC reporters as to how much the Administration's tax reform plan would affect the deficit, OMB Director Mick Mulvaney said "there is no way to score what we put out" because the plan was purposefully light on details. According to Mulvaney, this wasn't done to hide the numbers; instead the blueprint is an opening start for discussions with all the various parties that need to be involved in tax reform. It was meant as a guideline for a future tax reform bill, he said.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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