Benjamin Franklin is frequently credited with saying that there's nothing certain in life except death and taxes. I would suggest an addendum to this adage for 2017: another certainty is the steady drumbeat of news stories claiming that tax reform is imperative and imminent. Years of hearings, commissions, white papers, and press releases have educated Americans about the reasons for tax reform, but careful observers still question the methods and timing for it.
There has been no shortage of proposals in recent years, at least some of which have been turned into legislative text. Moreover, the White House and Congressional Republicans have set an ambitious goal to pass comprehensive tax reform by the end of 2017. They've formed a group--the Big Six--to focus on reaching agreement on the parameters for tax reform.
This article will describe the current tax reform proposals, what needs to happen legislatively for tax reform to occur, the proposed timing for tax reform, and what companies can do to participate in the process.
Who Are the "Big Six"?
Several months ago, the Trump administration and Congressional Republicans formed a group to reach consensus on what should be included in tax reform as part of an effort to streamline the legislative process and to avoid the pitfalls that plagued the attempt to repeal and replace the Affordable Care Act. Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Majority Leader Mitch McConnell (R-Kentucky), Senate Finance Committee Chair Orrin Hatch (R-Utah), Speaker of the House Paul Ryan (R-Wisconsin), and Ways and Means Committee Chair Kevin Brady (R-Texas)--known inside the Beltway as "the Big Six"--began meeting on a regular basis to discuss tax reform.
What Have the Big Six Proposed?
On September 27, the Big Six released a Unified Framework for Fixing Our Broken Tax Code ("the framework"), which provides a high-level overview of the items they would like to include in tax reform. The framework contains sections on individuals, businesses, and the international tax system. In many respects, the framework is "all dessert, no vegetables," because it describes all the goodies that taxpayers will like (lower rates! immediate expensing!) but is silent or vague about what taxpayers will have to give up in return (which deductions and credits will be eliminated? how much will the interest deduction for C corporations be limited?).
Proposals for Individuals
The framework says its "focus" is on hardworking Americans and its goal is to strengthen and increase the middle class. It proposes to:
* double the existing standard deduction (to $12,000 for single filers and $24,000 for married couples filing jointly);
* condense the seven existing tax brackets into three brackets of twelve, twenty-five, and thirty-five percent (although the tax-writing committees may impose an additional top rate on the highest-income taxpayers to satisfy President Donald Trump's promise that the wealthy will not get an absolute tax cut);
* eliminate itemized deductions other than the mortgage interest and charitable contribution deductions;
* retain the tax benefits that encourage work, higher education, and retirement security (while still encouraging the tax-writing committees to simplify those benefits);
* repeal the personal exemption for dependents and "significantly" increase the Child Tax Credit;
* introduce a $500 nonrefundable credit for non-child dependents;
* repeal the individual alternative minimum tax (AMT); and
* repeal the estate and generation-skipping transfer taxes.
In addition, the framework "envisions the repeal" of "numerous other exemptions, deductions and credits for individuals [that] riddle the tax code." (1)
Proposals for Businesses
The framework provides a twenty-five percent income tax rate for the business income of "small and family-owned businesses" that are organized as pass-through entities. The Big Six seem to have learned the lesson taught by Kansas' experiment with drastically reducing the rate on pass-through businesses, because the framework charges the tax-writing committees with developing measures to prevent wealthy individuals from converting personal income into...