For tax attorneys, tax reform is always a hot topic. President Trump was elected with GOP majorities in both chambers of Congress, which would normally make the forecast for tax reform actually being enacted favorable. While the early conventional wisdom suggested comprehensive tax reform was possible by Labor Day; the political reality makes 2018 more likely to see the light of tax reform.
What will tax reform look like? The answer is we do not really know because the details have been incredibly light. The Trump Administration has released a “framework” for tax reform, but did not take the usual step of releasing a “Green Book”. The Green Book provides a detailed discussion of tax policy proposals, including an explanation of each changes and the reason for the policy changes.
To analyze tax reform, it may be appropriate to consider the typical tax policy mantra: “broaden the base, lower the rates.” The concept is quite simple -- aim for revenue neutral law changes by eliminating numerous deductions and lower the marginal tax rates. Sounds familiar? The following is a summary of the Trump Administration’s tax reform framework:
- Reduce the corporate tax rate to 15%, from the current highest rate of 35%.
- Offer taxpayers a one-time opportunity to repatriate foreign earnings at no or a low tax cost.
- Eliminate the world-wide tax philosophy of the Internal Revenue Code of 1986 and replace it with a territorial tax approach -- meaning only U.S. activities would be reached by the Code.
- Reduce the individual tax rates to 3 brackets at yet-to-be determined rates.
- Broaden the base by eliminating many existing tax deductions. From public comments, we know that the Trump Administration has backed away from eliminating the interest exclusion for state and local bonds, eliminating the home interest deduction, and eliminating the charitable contribution deduction.
While the framework is light on details, the scope of reform embedded in the framework suggests a comprehensive, wide-ranging tax reform effort. There is also a strong desire to make any tax reform permanent, which means lost revenue will ultimately need to be offset by savings. All these signs point to a long, protracted policy debate. In turn, the political realities call into question whether meaningful tax reform can be enacted by the end of 2018.