Unveiling of Tax Reform "Plan" Generates More Questions Than Answers

April 26, 2017 | Kristine A. Tidgren

As President Trump’s first 100 days were winding down, his Administration unveiled a purported tax reform proposal designed to stimulate “economic growth” and increase “American jobs.” The proposal was unveiled during a press conference April 26. It was accompanied by a one-page list of bullet points. The headline from the media event was that President Trump is seeking to implement a “massive tax cut,” reducing corporate taxes from 35% to 15%. The reality of the announcement is that we really have no more detail about Trump’s proposed tax reform. The April 26 announcement was essentially a rehash of the broad, high level proposals discussed by the President during his campaign.

The announcement was made by Gary Cohn, Director of the National Economic Council, and Steven Mnuchin, the new Treasury Secretary. The plan was billed as “one of the biggest tax cuts in American history.” The short presentation was made in two parts. First, Cohn outlined the rough principles associated with proposed individual income tax reform and Mnuchin walked through the outline of business tax proposals.

Personal Tax Reform

The details of the personal tax reform plan were very sketchy, filling in even fewer gaps than the campaign proposals had. Cohn stated that the President’s plan would reduce the current number of tax brackets from seven to three. The new brackets would be set at 10%, 25%, and 35%. No details were given as to the all-important income cutoffs accompanying this new schedule. As such, it’s impossible to predict how this change would impact any taxpayers, except for those in the current 39.6% bracket, which would be eliminated.

The plan would also repeal the 3.8% net investment income tax, a provision also included in proposed legislation for replacing the Affordable Care Act. Specifically, this repeal eliminates the 3.8% tax on net investment income (ie. interest, dividends, capital gains, rental and royalty income, and non-qualified annuities) for taxpayers with modified adjusted gross income above $125,000 for single filers and $250,000 for married filing jointly.

As was part of the President’s campaign proposal, the touted plan would double the standard deduction to $24,000 for those who are married filing jointly. Absent from the discussion was the plan for personal exemptions. The campaign proposal had sought to eliminate the personal exemption, along with doubling the standard deduction. This would largely offset any benefit from the increased standard deduction for many families and increase taxable income for larger families. The 2017 personal exemption is $4,050 per person.

The plan proposed April 26 would eliminate all itemized deductions except for the mortgage interest deduction and the deduction for charitable giving. A deduction for state and local taxes (including property taxes) would no longer be allowed. Although this plan was billed on Wednesday as benefitting “especially middle income families,” it is difficult to assess its true impact on middle income Americans without more information about the tax bracket cutoffs and the plan for personal exemptions. It appears likely that many middle income Americans could face more tax liability under this plan, and that the most significant tax breaks would flow to the highest income earners. Although these taxpayers would see a decrease in allowable itemized deductions, the tax rate would be lowered both for standard income and for investment income (with the repeal of the 3.8% NIIT). The proposed tax plan would also eliminate the AMT, which tends to impact higher income earners.

Cohn did state that the plan would retain tax-preferred retirement accounts.

Repeal of the Estate Tax

Also discussed on Wednesday was the President’s plan to eliminate the estate tax. No details were given for this proposal beyond the statement that the tax would be “phased out” “immediately.” No mention was made of the impact of this proposal on the current step-up in basis, a provision impacting many more asset owners than the estate tax. The primary reason cited for eliminating the estate tax was to reduce the many resources currently devoted to estate tax planning.

Business Tax Reform

Mnuchin spoke for a few minutes to lay out the general framework for the business tax proposals. Again, too many details were missing to assess any actual impact. The highest tax rate for business income would be slashed from 35% to 15%. Small and medium-sized businesses would apparently share in this reduction because the tax rate decrease would also apply to flow-through income. The plan would include a one-time tax on “overseas profits.” It would also include a “territorial tax system” to “level the playing field” for American businesses. This appears to be different from the border adjustment tax proposal offered by the House tax plan of 2016.

Again, this discussion did not include enough detail to really be called a tax plan. There was no information given as to allowable tax deductions for businesses that would accompany these new rates. There was also no information given as to any restrictions that would prevent taxpayers from shifting personal income to business income.

The real takeaway from Wednesday is that President Trump began the discussion for 2017 tax reform during his first 100 days. Any actual substance must wait for the details.

We will watch for the first legislative proposal.