President Donald Trump and GOP lawmakers are rolling out a plan today to overhaul the tax code for the first time in decades. The unveiling of the framework for Tax Reform is just that, a framework. Much must take place before any of the tax proposals are debated in Congress.
First, the budget must be approved by the Senate, and once again Republicans can only lose two votes if all Democrats oppose the plan. Then both the House and the Senate must agree on the terms of the budget. A very tricky task, as the Senate’s proposal could add $1.5 trillion to the deficit before considering the benefits of economic growth, while the House is calling for $200 billion in reductions to the deficit. There are rumblings that the Senate may try to add healthcare to the plan, and the House has voiced that they do not want the inclusion. These are just a few of the of roadblocks in the way of the GOP and Trump Administration getting a major legislative victory.
KEY COMPONENTS OF TAX REFORM FRAMEWORK
The key elements of the proposed tax reform framework are:
- Simplify the tax code,
- Cut taxes for the middle class,
- Level the playing field for businesses by lowering the corporate tax resulting in speeding up economic growth and offering a more competitive structure that would lure jobs to the U.S.
- Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.
Axios published a summary of the plan which shows a cut to the corporate tax rate, lowering it from 35% to 20%, and a reduction in the number of tax brackets from seven to three with a surcharge on the wealthiest Americans.
The new brackets will be 12% for the lowest income Americans, 25% for those in the middle, and 35% for the richest. There is also the possibility of a fourth bracket for the highest-income taxpayers, who would be required to pay an additional top rate. The plan almost doubles the standard deduction for married taxpayers filing jointly to $24,000 and $12,000 for individuals. Households in the (current) 10% bracket are expected to be better off under the proposed 12% rate due to the larger standard deduction and more generous child tax credit. The framework also leaves intact the deduction for mortgage interest and charitable deductions, while repealing the estate tax and the alternative minimum tax.
TAX REFORM DONE RIGHT INCREASES GDP
Secretary of Commerce Wilbur Ross told CNBC’s Squawk Box “Getting U.S. tax reform right is important because it will increase the gross domestic product growth by one percentage point, so 100 basis points. Over ten years that would amount to $10 trillion more GDP, $3 trillion more revenues to the federal government.”
Democrats and tax experts will no doubt continue to scour the proposed framework and be critical about whether the plan will primarily benefit the wealthy households and large corporations. After the repeal of Obamacare was put on ice earlier this week, it is crucial for the GOP and Trump Administration to get a base hit by passing this promised tax reform for the American people.