With the surprising election of Donald Trump, and Republicans in control of both the House and Senate, the prospects for a major U.S. tax overhaul took a giant step forward recently. Or did they?
An interesting procedural anomaly may slow the pace of the aggressive strategy endorsed by the new President. Tax legislation starts in Congress, not with the President (who certainly has influence). The House Republicans have had a tax plan on the shelf waiting for just this moment. It provides tax simplification, lower individual and corporate tax rates, and a full repeal of estate taxes. But when the plan hits the Senate, the Republicans do not control enough of the chamber to pass the package without Democratic support. And Democratic support will be tough to find without changes that the House Republicans won’t accept.
There is one procedural tactic that allows highly partisan measures to pass. The Congress can pass an identical bill in both the Senate and the House under a provision called “budget reconciliation.” The Affordable Care Act (“Obamacare”) passed under this very provision, exclusively by Democrats. One major restriction on budget reconciliation is that it may be used only once each fiscal year.
Republicans are planning to use budget reconciliation as the vehicle to pass reforms to repeal and replace Obamacare early in 2017. This means that virtually the entire Republican body needs to agree on the reforms necessary, and it can pass without any Democratic support. Even this near-universal Republican goal breaks down at the detail level, because any large legislative undertakings will leave problems and uncertainty for many citizens.
Since the Obamacare legislation is going to be using the budget reconciliation bill this year, major tax reform is unlikely to be introduced early in 2017. If budget reconciliation is the vehicle of choice for tax reform (to avoid compromise with Democrats), the earliest such a bill would be voted on would be after September 30, 2017. As such, it’s likely not going to be effective for 2017, but more likely for 2018.
Tax reform provisions that are contemplated under the tax plans would likely include these provisions:
|Item||Current||House Republicans||President Trump|
|Ordinary tax rates||10-39.6%||0-$75,000 = 12%
$75,000-$225,000 = 25%
$225,000 and above=33%
|Capital gains||0-20%||50% excluded||0-20%|
|Alternative Minimum Tax||26-28%||Repealed||Repealed|
|Net investment income tax||3.8%||Repealed||Repealed|
|Itemized deductions||• Medical
• Mortgage Interest
• Investment fees
• Gambling (limited)
• Employee Business
|• Mortgage Interest
• Charitable Contributions
|Cap at $100,000/$200,000
|Step up in basis on death||Permitted||Unknown||Taxed over $10m
(exemption for small businesses and family farms)
|Business Income (flow through)||Ordinary Rates||25%||15%|
|Corporate Income Tax||35%||20%||15%|
From an international perspective, the provisions that will most affect global trade include the proposal to permit immediate expensing of capital investments. In addition, the plan adopts a “territorial” approach for foreign business income to make the United States a more attractive place to headquarter multinational corporations. When combined with the lower corporate tax rate, the proposal would likely generate a large inflow of real investment, rather than repelling it as our current system does.
Your Bowman team is eager to assist with inquiries concerning U.S. taxes. You can contact us at firstname.lastname@example.org for further advice on tax planning and strategy.