September 27, 2017

Trump Administration and Congress Release Framework for Tax Reform

3 min

On September 26, 2017, the Trump administration, the chairman of the House Committee on Ways and Means, and the chairman of the Senate Finance Committee released their nine-page Unified Framework for Fixing Our Broken Tax Code, along with a one-page overview of the framework. The framework is intended to serve as a template for the tax-writing committees as they proceed on tax reform. The document cites pro-American and fiscally responsible tax reform as the primary objective, and aims to achieve that goal by broadening the tax base, closing loopholes, and growing the economy.

On the business side, the framework lowers the corporate tax rate to 20% and eliminates the corporate alternative minimum tax. A maximum tax rate of 25% would apply to sole proprietorships, partnerships, and S corporations (and measures will be taken to limit the ability to convert wage income into profits). The framework calls for full expensing of the cost of new investments other than structures (made after September 27, 2017) in depreciable assets for five years. The deduction for net interest expense will be partially limited. Section 199 (the manufacturer's deduction) will be repealed, but research and development and low-income housing credits are specifically preserved.

The framework outlines the adoption of a territorial tax model, including a one-time repatriation rate. There will be a lower rate for foreign earnings held in illiquid assets than for earnings held in cash or cash equivalents.

On the individual side, the framework outlines an increase in the standard deduction to $12,000 for individuals and $24,000 for married couples, paired with the elimination of the alternative minimum tax. The framework lists three tax brackets of 12%, 25%, and 35%, with leeway for the committees to apply an additional top rate to the highest-income taxpayers. The framework calls for a significant expansion of the Child Tax Credit and an increase in the income levels at which the credit is phased out. The framework protects the home mortgage interest and charitable contribution deductions, but calls for the elimination of most other itemized deductions. Tax incentives for work, higher education, and retirement security will be maintained and simplified. The framework also calls for the repeal of the federal estate tax and the generation-skipping transfer taxes.

The framework provides a starting point for the tax-writing committees to build upon. However, many details remain unknown, and the tax-writing committees will be tasked with developing these details while keeping the package within the revenue constraints established by the Fiscal Year 2018 Budget Resolution (which is being developed). The Senate Finance and House Ways and Means Committees are expected to begin the committee legislative process as early as next month.