The Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance, have announced that they have developed a unified ‘framework‘ to achieve, what they call a “pro-American, fiscally responsible tax reform”. The document is called a “Unified Framework for Fixing our [America’s] Tax Code“.
This is the first emanation of President Trump’s quite dramatic tax campaign reform proposals, which fired economic expectations in America on their stock exchanges and elsewhere. Those expectations were beginning to wane as the Trump administration seemed to be achieving little, so this announcement is being poured over.
In reading the headline tax rates, and the claimed economic impact (see below), Australian readers should bear in mind that America has State income taxes, at varying rates, which the Federal Government can’t control. But, to muddy the waters, you can’t just add the State tax rates, to the Federal tax rates, as there is a Federal deduction for State income taxes.
[White House website: Announcement; One Page Summary; Full Document; FJM; LTN 186, 28/9/17; TM Sept 2017]
One Page Summary Document
Lowers Rates for Individuals and Families – the framework shrinks the current seven tax brackets into three – 12%, 25% and 35% – with the potential for an additional top rate for the highest-income taxpayers to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.
Doubles the Standard Deduction and Enhances the Child Tax Credit – the framework roughly doubles the standard deduction so that typical middle-class families will keep more of their paycheck. It also signi cantly increases the Child Tax Credit.
Eliminates Loopholes for the Wealthy, Protects Bedrock Provisions for Middle Class – To provide simplicity and fairness the framework eliminates many itemized deductions that are primarily used by the wealthy, but retains tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education, and retirement security.
Repeals the Death Tax and Alternative Minimum Tax (AMT) – the framework repeals the unfair Death Tax and substantially simpli es the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.
Creates a New Lower Tax Rate and Structure for Small Businesses – the framework limits the maximum tax rate for small and family-owned businesses to 25% – signi cantly lower than the top rate that these businesses pay today.
To Create Jobs and Promote Competitiveness, Lowers the Corporate Tax Rate – So that America can compete on level playing field, the framework reduces the corporate tax rate to 20% – below the 22.5% average of the industrialized world.
To Boost the Economy, Allows “Expensing” of Capital Investments – the framework allows, for at least ve years, businesses to immediately write off (or “expense”) the cost of new investments, giving a much-needed lift to the [American] economy.
Moves to an American Model for Competitiveness – the framework ends the perverse incentive to offshore jobs and keep foreign profits overseas. It levels the playing field for American companies and workers.
Brings Profits Back Home – the framework brings home profits by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.
Extract from the full ‘Framework’ document
COMPETITIVENESS AND GROWTH FOR ALL JOB CREATORS
Small businesses drive our economy and our communities, and they deserve a signi cant tax cut. is framework creates a new tax structure for small businesses so they can better compete. Furthermore, America’s outdated tax code has fallen behind the rest of the world – costing U.S. workers both jobs and higher wages. In response, the framework puts America’s corporate tax rate below the average of other industrialized countries and promotes greater investment in American manufacturing.
TAX RATE STRUCTURE FOR SMALL BUSINESSES – the framework limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and ‘S’ corporations to 25%. The framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
TAX RATE STRUCTURE FOR CORPORATIONS – the framework reduces the corporate tax rate to 20% – which is below the 22.5% average of the industrialized world. In addition, it aims to eliminate the corporate AMT [Alternative Minimum Tax], as recommended by the non-partisan JCT. The committees also may consider methods to reduce the double taxation of corporate earnings [an ‘imputation’ or ‘franking’ system like Australia’s? This is ironic given this ‘anti-double taxing’ system has come under some political pressure during tax reform discussions in Australia].
“EXPENSING” OF CAPITAL INVESTMENTS – the framework allows businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets. The committees may continue to work to enhance unprecedented expensing for business investments, especially to provide relief for small businesses.
INTEREST EXPENSE – the deduction for net interest expense incurred by ‘C’ corporations will be partially limited. The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.
OTHER BUSINESS DEDUCTIONS AND CREDITS – Because of the framework’s substantial rate reduction for all businesses, the current-law domestic production (“section 199”) deduction will no longer be necessary. Domestic manufacturers will see the lowest marginal rates in almost 80 years. In addition, numerous other special exclusions and deductions will be repealed or restricted.
The framework explicitly preserves business credits in two areas where tax incentives have proven to be ffective in promoting policy goals important in the American economy: research and development (R&D) and low-income housing. While the framework envisions repeal of other business credits, the committees may decide to retain some other business credits to the extent budgetary limitations allow.
TAX RULES AFFECTING SPECIFIC INDUSTRIES – Special tax regimes exist to govern the tax treatment of certain industries and sectors. The framework will modernize these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.
THE AMERICAN MODEL FOR GLOBAL COMPETITIVENESS
The Framework puts America on a level international playing field and puts an end to the incentives for shipping jobs overseas.
TERRITORIAL TAXATION OF GLOBAL AMERICAN COMPANIES – The framework transforms our existing “off shoring” model to an American model. It ends the perverse incentive to keep foreign profits off shore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system, with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).
To transition to this new system, the framework treats foreign earnings that have accumulated overseas, under the old system, as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.
STOPPING CORPORATIONS FROM SHIPPING JOBS AND CAPITAL OVERSEAS – To prevent companies from shipping profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing, at a reduced rate, and on a global basis, the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.