Responsible Tax Reform Requires Reasonable Forecasting

Finally, Congress has decided to target US law which both sides agree needs changing. Far from agreeing on a broad set of those changes, there is ample room for compromise and hope. This will be the first and likely only 1 of 2 areas where if an agreement can’t be reached, there will be no agreement across party lines for the rest of this administration. I’m talking about tax reform and here is the highest of high-level frameworks for changing the US tax code. Keep in mind, the public debt of the US on September 26, 2017, was $14,632,474,734,832.72 ($14.6 Trillion) and a total debt of over $20 trillion.

The tax reform plan outlined today includes these proposals:

Consolidating and reducing individual income tax rates to 12, 25, and 35 percent (suggestions there may be one bracket higher than 35%)
 Eliminating the Alternative Minimum Tax (AMT) for both corporations and individuals
 Nearly doubling the standard deduction to $12,000 for individual and $24,000 for families
 Establishing a $500 non-child dependent credit and larger child credit
 Repealing the personal and dependent exemptions, and deductions for the blind and elderly in light of the larger standard deduction and credits.
 Repealing most itemized deductions, leaving those for mortgage interest and charitable giving
 Repealing the estate tax
 Reducing the corporate tax rate to 20 percent
 Establishing a maximum “pass-through” rate of 25 percent with unspecified protections against gaming
 Enacting full expensing for at least five years
 Moving to a territorial system for overseas earnings and imposing a one-time tax on past earnings held by U.S. businesses
 Indexing tax brackets to a more accurate measure of inflation, likely the Chained CPI
 Limiting the amount of business interest that can be deducted by C-corporations
 Repealing the deduction for domestic manufacturing (Section 199)

While no detailed cost can be determined without a lot more detail, the Committee for a Responsible Federal Budget estimates the increase to the federal debt will increase by $2.2 trillion over the next ten years and it will likely be higher as some of the cuts are set for only 5 years (as a gimmick to lower the projected impact), but would likely be extended.

There are a number of good things included in this plan and both parties have suggested they are important for American businesses and employees. Some of these include cutting the corporate tax rate and corporate tax expenditures. Providing a mechanism for repatriation of offshore profits and moving to a territorial system for overseas earnings. Simplifying the tax code is also a good thing.

Cutting the tax rate on pass-through organizations will benefit small mom and pop companies, but most of this benefit will be to the wealthy Americans and not likely to boost capital investment. Real estate and other professional firms are likely the biggest winners. Similarly, the removal of the AMT will likely help those with large investment income, but the total impact can’t be known until the income levels and rates associated with them are known. There is no mention of carried interest, so it appears the campaign promised to change how carried interest is taxed was left on the tax reform cutting room floor.


Originally published at Dwayne Nesmith.