A Look at President Trump’s Latest Tax Plan
by Jeramie J. Fortenberry, JD, LLM, and Jennifer L. Villier, JD
WealthCounsel, Legal Education Faculty
President Donald Trump released a one-page memo that outlined his latest proposed tax plan (the New Tax Plan). The New Tax Plan largely tracks the proposals made in President Trump’s campaign tax plan (the Campaign Tax Plan), which was removed from his website post-election. Like the Campaign Tax Plan, the New Tax Plan is short on details and provides only a high-level overview of the tax proposals. This paper compares the New Tax Plan to the Campaign Tax Plan.
Overview of the Campaign Tax Plan
The Campaign Tax Plan promised to simplify the Internal Revenue Code and provide tax relief for middle-class Americans. The Campaign Tax Plan would have made several changes that affect personal income taxes by:
- Reducing the current seven tax brackets to three brackets with tax rates of 12 percent, 25 percent, and 33 percent;
- Eliminating personal exemptions and increasing the standard deduction to $30,000 for joint filers and $15,000 for single filers;
- Capping itemized deductions at $200,000 for married/joint filers or $100,000 for single filers;
- Eliminating the 3.8 percent Obamacare tax on net investment income;
- Capping the capital gains tax rates at 20 percent with a lower rate for individuals who are not in top brackets;
- Taxing carried interest as ordinary income;
- Eliminating “special interest tax breaks” and capping deductions at $100,000 for single filers and $200,000 for married filers;
- Eliminating the alternative minimum tax;
- Creating new dependent-care savings accounts to be used for child and elder-care;
- Repealing the estate tax and replacing it with a tax on capital gains held at death that exceed $10 million, with no deduction for contributions to private charities established by the decedent or relatives of the decedent.
The Campaign Tax Plan would also have made changes affecting the business tax system by:
- Reducing the business tax rate from 35 percent to 15 percent;
- Eliminating the corporate alternative minimum tax; and
- Providing a deemed repatriation of corporate profits held offshore at a one-time rate of 10 percent.
Overview of New Tax Plan – Individual Taxation
The New Tax Plan promises to provide individual income tax benefits in the form of “tax relief for American families, especially middle-income families.” It does so by making several changes, most of which are largely aligned with the Campaign Tax Plan.
- Like the Campaign Tax Plan, the New Tax Plan would reduce the current tax brackets to three. But where the Campaign Tax Plan capped the highest rate at 33 percent, the New Tax Plan calls for a maximum of 35 percent.
- The Campaign Tax Plan proposed to increase the standard deduction to $15,000 for single filers and $30,000 for joint filers. The New Tax Plan is slightly less aggressive, proposing only to double the current standard deduction. This would effectively increase the standard deduction to $12,700 for single filers and $25,400 for joint filers.
- The New Tax Plan also promises to provide “tax relief for families with child and dependent care expenses.” This language is similar to the Campaign Tax Plan’s proposal to create new dependent-care savings accounts to be used for child and elder-care.
- The New Tax Plan proposes to eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers. It is unclear which targeted tax breaks would be eliminated, but it would presumably include eliminating the “special interest tax breaks” referenced in the Campaign Tax Plan. It could also include taxing carried interest as ordinary income as proposed in the Campaign Tax Plan.
- The New Tax Plan would “protect the home ownership and charitable gift tax deductions.” It is not clear what threats this proposal is concerned with.
- Like the Campaign Tax Plan, the New Tax Plan would repeal the alternative minimum tax.
- The New Tax Plan also promises to “repeal the death tax,” but with no mention of the new capital gains tax or elimination of certain charitable deductions referenced in the Campaign Tax Plan. But given that this is only a four-word proposal, maybe the capital gains tax and curtailed charitable deduction will be included in the more detailed version of the plan.
- The New Tax Plan would also repeal the 3.8 percent net investment income tax introduced by Obamacare. This has remained a consistent proposal of President Trump and House Republicans.
Overview of New Tax Plan – Business Taxation
The New Tax Plan also makes several key changes that affect business taxation.
- Like the Campaign Tax Plan, the New Tax Plan would reduce the top tax rate on business income from 35 percent (for corporations) and 39.6 percent (for pass-through entities) to a flat 15 percent tax rate for all businesses. As a result, highly paid professionals working in partnerships, S corporations, LLCs or sole proprietorships would experience a nearly 25 percent tax cut on income passed through from their businesses.
- The New Tax Plan would implement a territorial tax system to level the playing field for American companies by exempting foreign source income generated by U.S. from U.S. income tax.
- The New Tax Plan would subject the existing accumulated earnings of U.S. companies overseas to a one-time tax. Under the Campaign Tax Plan, the one-time tax would be at 10 percent; the one-time tax rate was not specified in the New Tax Plan.
At this stage, the New Tax Plan is more of a policy statement than an actual tax plan. It can accurately be described as a “plan to have a plan.” The New Tax Plan states that the Trump administration will work with Congress throughout the month of May to “develop the details” of the plan in a way that “can pass both chambers.” Given President Trump’s recent inability to successfully repeal Obamacare, it is likely that these details will include concessions to Democrats to help ensure that the New Tax Plan receives broader support. It remains to be seen whether the New Tax Plan will have more success than the Campaign Tax Plan. Both plans were largely aligned with the House Republicans’ Tax Reform Task Force Blueprint, which itself is on shaky ground.
Although the New Tax Plan is short on detail, its release has prompted much discussion. Some commentators have criticized the New Tax Plan, which they perceive to benefit only high net worth taxpayers. Others have praised it as the most significant tax reform legislation since 1986. Most everyone agrees that tax reform is on the horizon.