The framework also gives Congress the option of creating a higher, fourth, rate above 35 percent to ensure that the rich are paying their fair share. But it does not specify what income levels would be associated with the higher rate, what that new rate might be or explicitly direct Congress to implement a fourth bracket.
The plan aims to simplify and cut taxes for the middle class by doubling the standard deduction to $12,000 for individuals and to $24,000 for married couples. That would allow people to avoid a complicated process of itemizing their taxes to claim various credits and deductions. It would also increase the child tax credit from $1,000 to an unspecified amount and create a new $500 tax credit for dependents, such as the elderly, who are not children.
Provisions such as the alternative minimum tax and the estate tax, a tax on inherited wealth which Mr. Trump has derided over the years, would be gone under the Republican proposal. Most itemized deductions, including those widely used for state and local tax expenses, would also be eliminated. However, the plan would preserve the deductions for mortgage interest expenses and charitable giving and keep incentives for education and retirement savings plans.
The New York Times on Wednesday obtained the Trump administration’s proposed tax framework that includes what would be the most sweeping changes to the tax code in decades.
The changes to taxation for companies would be equally dramatic. The proposal calls for reducing the corporate tax rate to 20 percent from 35 percent, a shift that is intended to make American companies more competitive with their counterparts around the world.
A new tax rate would be created for so-called pass-through businesses. These businesses, partnerships and sole proprietorships whose profits “pass through” to their owners, would be taxed at a rate of 25 percent, not the individual rate of their owners, like under the current law. About 95 percent of businesses in the United States are structured as pass-throughs and they generate a majority of the government’s corporate tax revenue.
As with the individual side, some of the thornier business tax issues remain unaddressed. It will be left to Congress to create safeguards that prevent wealthy individuals from incorporating as pass-through businesses, which would tax their income at a lower rate. Another administration official insisted that measures would be put in place so that there are not “games played” in this regard.
Another big change for companies would be a limitation of the deductibility for corporate interest expenses in exchange for the opportunity to immediately expense business investments. The ability to write these expenses off immediately would last only five years, and the limitations for deducting interest have yet to be determined. This is expected to set off a fight among business groups, many seeking either full deductibility or permanent immediate expensing.
The plan also calls on the tax committees to eliminate most of the tax credits that businesses currently use. Among those that would remain are the prized tax credit for research and development and the low-income-housing credit, which many Democrats support.
Perhaps the most major yet murky shift on the business side is the move from a worldwide tax system to a territorial tax system. In theory this means that companies would not be taxed on their overseas earnings, but to prevent erosion of the tax base, Republicans plan to impose some form of tax on foreign profits at a rate that has yet to be determined.
The transition to the new system would also include a one-time repatriation tax to encourage companies to bring offshore profits back to the United States. There would be different repatriation rates for different types of assets, but as with many parts of the proposal, the rates would be up to Congress to decide.
Members of the Senate Budget Committee have agreed on a budget resolution that would allow for a $1.5 trillion tax cut over 10 years. Studies of similar plans produced by Mr. Trump and House Republicans have been projected to cost $3 trillion to $7 trillion over a decade.
The Republicans pitching the plan say economic growth will compensate for compensate for lost revenue. During the campaign, Mr. Trump said overhauling the tax code would raise economic growth to 4 percent.
Source: New York Times