On April 26, 2017 the White House released an overview of their tax reform proposal entitled The 2017 Tax Reform for Economic Growth and American Jobs: The Biggest Individual and Business Tax Cut in American History, which outlines President Donald J. Trump’s proposal for significant tax reform. While the proposal is largely consistent with President Trump’s conceptual framework during his presidential campaign pledges of dramatically reducing tax rates with the expectation of growing the economy and creating jobs within America much more deliberation needs to occur to properly examine and reconcile this proposal.
Lower Individual Effective Tax Rates, but Only for Select Individuals
President Trump calls for the immediate middle-income tax relief through reducing the current graduated seven income tax bracket system with a graduated three income tax bracket system at 10%, 25%, and 35%; doubling the standard deduction; while still affording relief for taxpayers with tax deductions for home ownership and charitable gifts. President Trump has also renewed calls to repeal both the individual-level Alternative Minimum Tax and the Estate Tax. In addition, the 3.8% Net Investment Income Tax would be repealed which was implemented during the Affordable Care Act era.
However, just one of the many deeply troubling problems with President Trump’s proposal is the elimination of the deduction for State and Local Income Taxes and Real Property Taxes. This elimination of deductions for State and Local Income Taxes amongst other deductions means that higher income taxpayers, particularly residents of excessively high income tax states such as New York and California will experience a significant tax increase rather than a tax cut under the current proposal.
Lower Business Entity Effective Tax Rates
President Trump’s proposal would lower the U.S. Effective Tax Rate for business entity income from currently one of the highest Effective Tax Rates around the world to one of the lowest Effective Tax Rates around the world at a mere 15%. President Trump repeated his call to apply the 15% Effective Tax Rate to all business entity income, whether earned at the corporate level (e.g., C-Corp Structure) or at the pass-through entity level (e.g., S-Corp Structure; Partnership Structure; etc.). Compensation of individuals would be subject to the top 35% individual Effective Tax Rate. However, as a caveat, possible divergence of the top Effective Tax Rates applicable to business-level income, individual-level income, and capital gains may create potential for abuse and once again much more deliberation needs to occur to properly vet and reconcile this proposal.
Next Action Steps on the Hill
Throughout the upcoming months, the Trump Administration will likely hold listening sessions with stakeholders to receive their feedback and will continue working with the House of Representatives and the Senate to hopefully and judiciously draft, reconcile and ultimately pass a unified tax reform bill that will be fair to all and sent before President Trump’s desk for his review and possible signature into law.
Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC, a member of The Prager Metis International Group. Peter is a BIG Four Alumni Tax Practice Leader and has approximately 25 years of progressive CPA Firm experience developing, managing and leading multimillion dollar tax advisory practices on a regional, national, and global level. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (ASTP) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable and The Washington National Tax Roundtable, both operating divisions of ASTP.