The Tax Plan the Trump Administration and Congressional tax committees issued yesterday is designed to be a more developed and unifying conceptual framework for tax reform. It remains short on specifics and is short on time, facing long and in some ways impossible political odds. The chart below compares yesterday’s Tax Plan announcement with President Trump’s prior proposal.
From here on out, we expect a lot of conversation and news along two essential lines of tax policy and politics:
1. Individual top effective brackets (rates and what really happens, including AMT, deductions, and phase-outs).
We expect the President and the Republicans in Congress to attempt to use top effective rate optics to bring in some Democrats. We expect Democrats to try to pay attention to the big picture, including the overall effect of all proposed changes on top bracket taxpayers.
2. Corporate and Business effective tax rates.
We expect that the headline corporate tax rate of 20% will look like the current effective rate for some, so the details will really matter and there will be winners and losers at the margin.
At a more detailed level:
- The Tax Plan is not specific about when its provisions would become effective, other than to place a stake in the sand that immediate expensing, designed to be an immediate economic shot in the arm, should be permitted starting today. Look for that provision to remain retroactive.
- If we do end up with a top marginal tax rate on corporate earnings significantly lower than on individual income, there may be significant effects on incorporation and business structures going forward.
- If net corporate interest expensing remains a part of the plan, capitalization choices may be drastically impacted while the Treasury works to unwind quantitative easing.
- The very important, very complex proposals of the Tax Plan to prevent corporate inversions, offshore earnings accumulation, and US anti-competitiveness would subject offshore accumulated income to immediate taxation (the liability spread over several years). We are watching the proposals on international business earnings, and how they will fit together with existing treaty networks and the EU’s own anti-profit shifting CFC rule proposals.
- On the state tax front, states that begin the calculation of state taxable income with federal taxable income will need to make decisions about whether to continue to conform to the Internal Revenue Code after the tax provisions are enacted, especially if, as is suggested, state and local taxes cease to be deductible for federal income tax purposes. States will consider whether to decouple from the Internal Revenue Code entirely, or embrace/reject specific components of the package depending on their own revenue and reform agendas. Any federal tax revisions can be expected to cause significant ripples through state legislatures.
Click here to view table.