On September 27, 2017, the Trump Administration and Congressional Republican leaders released their Unified Framework for Fixing Our Broken Tax Code. This Unified Framework, developed by the working group known as the “Big Six,” is intended to deliver “a 21st century tax code that is built for growth, supports middle-class families, defends our workers, protects our jobs, and puts America first.”
Since mid-summer, the Big Six — Treasury Secretary Steven Mnuchin, White House National Economic Council Director Gary Cohn, House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Finance Committee Chairman Orrin Hatch (R-UT) — and their respective staff have met regularly. The Unified Framework reflects their shared goals and the commitment on the part of the Administration and Republican Congressional leaders to the enactment of tax reform legislation that achieves these goals.
The Unified Framework will serve as a template for the Congressional tax-writing committees in developing the legislation necessary to implement its proposals. Much of the detail will be up to the committees. The Bix Six intend tax reform legislation to proceed under regular order, through “a transparent and inclusive committee process.”
Tax Relief for Individuals
The seven current tax brackets for individuals would be consolidated into three brackets with rates of 12%, 25% and 35%, with the potential for an additional top rate that may apply to the highest-income earners. (The current top rate is 39.6%.) The income thresholds for each of these brackets are not specified, so it is unclear how taxpayers would fare under the framework compared to current law. The standard deduction would roughly double, to $12,000 for single filers and $24,000 for joint filers. The calculation of indexing the brackets for inflation would be modified.
The framework would repeal the alternative minimum tax, the estate tax, and the generation-skipping transfer tax and would eliminate various unnamed exemptions, deductions and credits. Some form of mortgage interest deduction would be retained, along with the charitable deduction. The child tax credit would be increased.
The framework would retain tax benefits that encourage work, higher education and retirement security, with details left to the tax-writing committees. The goal for retirement provisions would be to maintain or raise plan participation and resources available for retirement.
The framework is silent on such matters as the rates applicable to long-term capital gains and qualifying dividends from C corporations. The framework also is silent concerning the fate of the 3.8% tax on net investment income, which House Republicans sought to repeal in connection with their various attempts to repeal and replace the Affordable Care Act.
Rate for Pass-Through Entities
The framework would limit the maximum tax rate at 25% for business income of “small and family-owned businesses” conducted as sole proprietorships, partnerships and S corporations, a significant reduction from current law. The framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
The taxation of carried interest is not mentioned in the framework, but President Trump remains committed to ending its preferential treatment.
Corporate Tax Changes
Rates. The framework would drop the corporate tax rate from 35% to 20% and “aims to eliminate” the corporate alternative minimum tax. Senate Finance Committee Chairman Orrin Hatch and his staff have spent considerable time studying approaches to corporate integration (i.e., one level of tax on corporate earnings), most recently through a dividends paid deduction, and the framework clearly provides for committee consideration of methods to reduce the double taxation of corporate earnings as part of the process.
Cost Recovery. For at least five years, the framework would allow immediate expensing for the cost of new investments in depreciable assets, other than structures such as buildings and land. This rule would apply to investments made after September 27, 2017 (i.e., the date the framework was released), and is intended to avoid creating a disincentive for investment while tax reform is being considered.
Section 199 Deduction, Other Deductions and Credits. Although the framework would eliminate the current-law domestic production deduction and certain other unspecified business credits, it would retain the research and development credit and low-income housing credit.
Interest Expense. The deduction for net interest expense “incurred by C corporations” will be partially limited, with the tax-writing committees instructed to consider “the appropriate treatment” of interest paid by non-corporate taxpayers.
Industry-Specific Provisions. The framework provides that tax regimes specific to certain industries and sectors will be “modernized” to ensure that the tax code better reflects economic reality and provides little opportunity for tax avoidance.
Treatment of International Businesses
The framework would provide territorial taxation of global American companies through a 100% exemption for dividends from foreign subsidiaries (where the U.S. parent owns at least a 10% stake). To transition to the new territorial system, the framework would treat foreign earnings that have accumulated overseas under the current system as repatriated. Accumulated foreign earnings held in illiquid assets would be subject to a lower rate than foreign earnings held in cash or cash equivalents, but the rates are not specified in the framework. Payment of the tax liability will be spread out over “several” years.
To prevent base-erosion through the shifting of profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing the foreign profits of U.S. multinational corporations at a reduced rate on a global basis. The tax-writing committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.
Outlook & Next Steps
Republican Congressional leaders plan to take up tax legislation under budget reconciliation rules, which provide procedural protections for the bill, particularly in the Senate. There rules are triggered once the House and Senate agree to a joint budget resolution that contains reconciliation instructions. The release of the Unified Framework provided enough details on tax reform legislation to allow members of the House Republican Freedom Caucus to remove their objections to adoption in the House of a budget resolution for Fiscal Year 2018.
Votes on a budget resolution could occur in the House and Senate as early as the week of October 2. Any differences between the two versions would have to be resolved before final adoption. Once the House and Senate have adopted the budget resolution for Fiscal Year 2018 with reconciliation instructions to the tax-writing committees, the committees will proceed “under regular order” to develop the actual legislation. The reconciliation instructions proposed on September 29 by the chairman of the Senate Budget Committee would set a deadline of November 13, 2017, for each tax-writing committee to submit proposed tax reform legislation under this process.
Once the budget resolution has been adopted, House Ways and Means Committee Chairman Kevin Brady plans to release his detailed tax reform proposals, either as descriptive language in a document called a Chairman’s mark, or as legislative text. At that point, his committee will proceed to mark up the bill, which could take several weeks at a minimum. House floor consideration would follow.
Upon House passage, the bill would proceed to the Senate, where the tax reform measures would be referred to the Finance Committee for consideration. Once that committee completes its work, the legislation proceeds to the Senate floor for debate. As a reconciliation bill, a simple majority vote in the Senate would be sufficient to pass it.
After Senate passage, the legislation would go to a House-Senate conference to resolve any differences between the two versions. This process can take an extended period of time. After final House and Senate passage of the conference report, the bill goes to the President for his signature. Even with the enthusiasm and show of unity among Republicans that has accompanied the release of the Unified Framework, many observers believe enactment of tax reform legislation by the end of 2017 will be very difficult.