Attorney Morris N. Robinson, the Managing Director of M. Robinson Tax Law in Boston, recently published an op-ed titled: Viewpoint: A 15 percent tax rate on business would maximize economic growth (Boston Business Journal, May 5, 2017, subscription required).
Attorney Robinson suggests that a 15 percent business tax rate balances two competing objectives.
- “Due to international competition, businesses generally cannot recover from their customers a tax above 15 percent of business income.”
- “A tax below 15 percent of business income represents a subsidy to the business, since the business is not paying the full cost of the services it receives from government.”
Therefore, Attorney Robinson supports this aspect of the White House proposal to reduce corporate income tax rates.
The remainder of this blog post will review other aspects of federal tax reform legislation in 2017. The White House published a one-page memorandum of its goals for tax reform on April 26, 2017.
Alan Rappeport of The New York Times summarized the proposal in an article titled: The 7 Key Elements of the White House Tax Plan (April 26, 2017). The 7 key elements are as follows, with my own comments and opinions:
- Three tax brackets for individual income taxpayers, with marginal tax rates of 10%, 25% and 35%. The cutoff for each tax bracket is not yet known.
- Double the standard deduction, which is $6,350 for single individuals and $12,700 for married couple filing a joint return for tax year 2017. By doubling the standard deduction to about $12,500 for single taxpayers and $25,000 for married couples, many taxpayers will benefit from the simplification of claiming the standard deduction instead of needing to itemize tax-deductible expenses to claim the maximum deduction.
- Repeal the Alternative Minimum Tax (AMT). The AMT is a parallel tax structure intended to require high-income taxpayers to pay a minimum tax rate even if they would otherwise be able to deduct most or all of their taxable income. Its complexity and adverse effect on middle-income taxpayers has elicited numerous proposals for reform or repeal.
- Repealing the Net Investment Income Tax (NIIT), which is often a surtax of 3.8 percent in addition to the usual rate of 15 or 20 percent for long-term capital gains. The Obama Administration enacted the NIIT to pay for health care under the Affordable Care Act.
- Repeal the Estate Tax, also known by its opponents as the “death tax.” After a lifetime exclusion that currently stands at about $5.5 million for individuals and $11 million for married couples, the remaining assets in the gross estate are taxed at a marginal rate of 40 percent. The legislation currently under consideration would leave in place the other wealth transfer taxes, namely, the gift tax and generation-skipping tax.
- Mortgage and Charitable Deductions Preserved. These popular tax deductions would remain in place for those who itemize despite the proposed increase in the standard deduction (see item 2, above).
- Cut the Corporate Rate to 15 percent. See the comments of Attorney Robinson, above. See also: How Best to Tax Business by N. Gregory Mankiw (The New York Times, April 21, 2017).
The Trump tax plan thus reaches all major elements of the U.S. federal tax system, including:
- Individual income tax rates and the Alternative Minimum Tax;
- Corporate tax rates;
- Wealth transfer taxes, and
- The Net Investment Income Tax.
The rate reduction or repeal, as the case may be, of these taxes will likely result in significant reductions to federal tax revenue in the short term. It may be necessary for the Trump Administration to make difficult choices on which types of tax cuts to prioritize.
We will continue to monitor the progress of the federal tax reform legislation so that we can help our clients plan for an uncertain future.