The Trump Administration recently released is Tax Reform plan titled "Unified Framework For Fixing Our Broken Tax Code". It's a 9-page document that touts "More jobs", "Fairer taxes", and "Bigger paychecks". Overall, the plan achieves just one of its goals, and does so by ignoring or going against the other goals...
The plan starts off with a set of goals:
Tax relief for middle-class families
The simplicity of "postcard" tax filing for the vast majority of Americans
Tax relief for businesses, especially small businesses
Ending incentives to ship jobs, capital, and tax revenue overseas
Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes
The goals sound great, but are they met in the rest of the plan? Let's take a closer look...
Individual tax provisions first:
The first proposal made in the document is a "Zero Tax Bracket" for individuals making $12,000 or less per year, and married couples making $24,000 or less per year. This is done by doubling the standard deduction. Sounds great, until you read further to realize that the personal exemption (worth around $4,050 per person on your return) is eliminated. This means that a single individual with just one dependent, or a married couple with one dependent, will see a tax INCREASE right away. The more dependents (i.e., children, disabled siblings, elderly parents, etc.) that you have on your return, the higher your INCREASE will be.
The next section is on the individual tax rate structure. The proposal is to reduce the number of tax brackets from 7 to 3. While this does seem easier, it's not really that difficult to find your income in a bracket and do the math, so reducing the number of tax brackets only really does one thing... forces people to fit into fewer categories based on their income, which will be great for those on the higher end, and not so great for those on the lower end. Most will see an INCREASE in taxes, some will remain neutral, and some will get a break. The taxpayers who will benefit the most from this change are taxpayers with over $450k in taxable income, getting a reduction from 39.5% down to 35%. Lower income families who currently have a 0% tax rate due to deductions, exemptions, and credits, will move up to a 12% rate.
Next on the list is the Child Tax Credit, a credit of $1,000 per child age 17 or younger, given to families with income up to $110k for married couples, $75k for single individuals. The proposed change would increase the income limits so that higher earning families will be able to claim the credit. The document proposes an increase to the credit, but doesn't specify an amount. It also gives an additional $500 credit to non-child dependents; however, because of the elimination of the personal exemption, this is still a tax INCREASE overall. The document goes on to say that they will continue to work on measures to meaningfully reduce the tax burden on the middle-class... which seems doubtful considering all of the increases already made so far in the document.
AMT, which typically applies to higher earning individuals and families, will be eliminated under this plan. Great for those with higher incomes... does nothing for lower and middle-class taxpayers.
Itemized Deductions... have all been eliminated under this plan, with the exception of home mortgage interest and charitable contributions. This means that there will no longer be a deduction for those with high out-of-pocket medical expenses (hope you have a great health plan!), state or local income taxes and property taxes, property & casualty losses (better hope for no more hurricanes, wild fires, tornadoes, or crime), and employee business expenses (if you're not reimbursed by your employer, too bad). Most of these deductions are typically limited for higher earning taxpayers, so they don't really matter that much anyways, but they are important to the middle-class. This is another INCREASE to the middle-class with no real benefit other than to be able to say that by eliminating one schedule on the personal return, the tax code was somehow made "simpler".
Work, Education and Retirement are encouraged in this plan, which is good for all. There are no specifics in the plan, but says that they will make changes to encourage workers to save for retirement and for individuals to invest in education. We are hoping this means that credits for retirement saving and tuition will be increased, but we suspect this may be more of a business benefit for employers who offer benefits to employees. More specifics are needed to determine whether this is a benefit or not.
Other credits, exemptions and deductions will be eliminated by this plan in an effort to make the tax law "simpler and fairer for all families and individuals". We aren't sure how this benefits "all families and individuals", but it definitely brings lower and middle-class families higher up on the tax scale, closer to higher-income taxpayers while remaining neutral to most higher-income earners who probably didn't qualify due to income limitations on various credits, exemptions and deductions.
Death tax and generation-skipping transfer tax has been eliminated by this plan. Most families would have never paid this tax anyways. This really only applies to individuals and families with higher incomes and estates worth millions of dollars. It does nothing for lower or middle-class families.
So far on the goals mentioned above, it doesn't seem that the first goal of providing tax relief to middle-class families has been accomplished. Let's see how businesses do...
For most small business owners with sole proprietorships, partnerships and S corporations, their tax rate is determined based on both their business net income, and their personal taxable income. Their tax rate is determined by their overall income on their personal tax return. Based on the individual tax provisions above... the smallest business owners would likely see a large INCREASE in their taxes. However, this plan goes even further to set a tax rate of 25% on all of these business owners... meaning that even if they would normally qualify for the lower 12% tax bracket on their personal return, they will now have to pay 25% on their business income rather than 12%. If they were already forced into the 25% bracket on their individual return, this will not make a difference since they'll already have a tax increase because of the individual provisions above. For those small businesses that have higher net incomes and higher personal incomes, they will get a break in taxes on their business incomes.
Corporations will see a similar change in their tax rates, although the larger corporations will have the biggest benefit by far. Rather than a 15% to 39% range in tax rates for corporations, a flat rate of 20% has been proposed in this plan. That means that smaller corporations will have a tax INCREASE while larger corporations, especially those with taxable income of $75k or more, will see a significant DECREASE in taxes. The corporate AMT has also been eliminated in this plan, which again is a huge benefit to larger corporations.
Another benefit given to businesses is the ability to write off the cost of large asset purchases in the year of purchase, rather than having to depreciate them over 3-7 years on average, sometimes longer, depending on the asset. It will mean that corporations can receive a tax benefit by making large equipment purchases for the next 5 years. Of course the limitation here is having the cash or credit available to make these large purchases in the first place... and it's not a dollar for dollar tax benefit since you'll only save 20% of the original purchase on your taxes.
An interesting proposal in this plan is a limitation of interest expense for C corporations. There is also mention of a potential limitation of interest expense deductions for other businesses and individuals. No details were given on what the limitations would be and whether they would apply to anyone other than C corporations.
There is also an elimination of the domestic production activities deduction, known as DPAD. This deduction benefits manufacturers who hire U.S. workers. For larger corporations already getting a huge benefit on tax rates, this won't matter as much, but it will be a big hit to smaller manufacturers who will already be facing a higher tax rate.
No details were given on tax rules regarding specific industries.... just that they will work on modernizing "these rules to ensure that the tax code better reflects economic reality".
The global taxation plan, focused on keeping jobs in the U.S., provides a 100% tax exemption for dividends earned by corporations who have investments in foreign companies. This seems counter-intuitive to give a tax break for companies investing in foreign businesses if their goal is to create incentives for employers to keep jobs in the U.S. In addition to the tax break, corporations will be able to spread out their payments of any tax they may owe on their foreign investments over several years, thus keeping cash in their hands for investing in foreign business.
The last provision, which is titled "Stopping Corporations from Shipping Jobs and Capital Overseas" actually reduces the tax rate that would be applied to foreign companies who conduct business in the U.S. While this is great for foreign-owned companies and may encourage them to bring more business to the U.S., it doesn't seem to do much to stop corporations from sending jobs overseas, especially when they will get a 100% exemption in their foreign investments, as detailed above. The plan says it will incorporate other rules for U.S. companies, but doesn't go into any specifics.
Overall, the goal of helping small businesses doesn't seem to have been met with the above provisions.
So how did the plan do in meeting it's goals?
There was no mention of the "postcard" filing - NEUTRAL
Taxes are going to increase for middle-class families and small businesses - FAILED & FAILED
There were greater incentives for foreign investments and foreign owned businesses to bring their business to the U.S. - FAILED
The broader tax base was achieved by reducing the number of tax brackets and applying more tax on taxpayers who may not have paid tax under the current system because of personal exemptions, deductions and other credits that they would qualify for with lower income - ACHIEVED, AT THE EXPENSE OF THE OTHER GOALS
The plan essentially achieved one goal, but did it by completely ignoring or even going against the other goals.