ElectroFile Income Tax Service   Income Tax Service
5200 W Market St
Greensboro, NC 27409
336-852-9505 		  Terry Hough, President Terry Hough
President
See our other newsletters at ElectroFile Income Tax Service Newsletters

October 11, 2017

More on the propoased Tax Plan.

On September 27, 2017, the Trump administration released The Unified Tax Reform Framework plan. It seeks to The Tax Reform Framework is based on two previous Trump tax proposals. The first was the "Five-Part Tax Plan" presented during the 2016 presidential campaign. Second was a preliminary tax reform outline released during the president's first 100 days. Here's a summary of how Trump's tax plan would change income taxes, deductions for child and elder care and business taxes.

Income Tax Brackets

The Framework would reduce the current seven tax brackets to three. It lowers income tax rates. The lowest tax bracket would be 12 percent, down from 15 percent. The middle rate would be 25 percent, down from 28 percent. The top bracket would be taxed 35 percent, down from 39.6 percent. It would add more revenue and deter accusations that the plan is a boon to the wealthy. The Framework didn't specify the income ranges for those tax brackets. But it would probably be similar to the Five-Part Plan released during the 2016 campaign.

If so, that would create the following tax chart.
Current Law The Framework Income Levels for Those
Filing As:
Income
Tax Rate 		Income
Tax Rate 		Capital Gains
Tax Rate 		Single Married-Joint
10 - 15% 12% 0% $0-$37,500 $0 - $75,000
25 - 28% 25% 15% $37,500 - $112,500 $75,000 - $225,000
28 - 39.6% 35% 20% $112,500 + $225,000 +

The Framework eliminates itemized deductions except for those on mortgage interest and charitable contributions. Trump's earlier plans also retained deductions for retirement savings. This plan asks Congressional committees to simplify retirement benefits to raise participation in workers' retirement plans.

The Framework eliminates the deduction for state and local taxes. That would tax money away from 40 million people. It would especially hurt residents in high-tax states like California and New York. But it would add $1.3 trillion to federal revenues. As of October 3, 2017, Republicans from high-tax states would vote "no" on a plan that eliminates the deduction. Instead, the plan may allow taxpayers to choose between that and the mortgage interest deduction.

The Framework doubles the standard deduction for everyone. The deduction for Married and Joint Filers would rise from $12,700 to $24,000. Single filers' deduction would increase from $6,300 to $12,000.
Filing Status Current Law The Framework
Single $6,300 $12,000
Married-Joint $12,700 $24,000

The Framework eliminates personal exemptions. The exemption allows taxpayers to subtract $4,050 from income for each person claimed on the tax return. That means families with many children would pay higher taxes despite the increased standard deductions. For example, a married couple making $56,000 a year would pay $68 a year more without the exemption, despite the increased deduction.

The Framework plan eliminates the estate tax and the generation-skipping transfer tax. That would help the top 1 percent of the population who pay it. That's 4,918 tax returns, but they contribute $17 billion in taxes.

The Framework eliminates the Alternative Minimum Tax. That helps those who make enough to be subject to it. In 2017, the AMT could affect those with incomes above $54,300 (single) or $84,500 (married filing jointly).

The Framework would keep the inheritance tax for capital gains. But even that would be excluded if the heirs never sold the property. For example, children who inherit their father's real estate holdings wouldn't be taxed as long as they never sold them. They could still extract the value by borrowing against the holdings.

Child and Elder Care Deductions The Framework increases the Child Tax Credit to an unspecified amount. It increases the income level so more middle-income families can take advantage of the credit.

The Framework eliminates the marriage penalty as it relates to the Child Tax Credit. The penalty means two single parents can get the full credit if they earn $150,000 combined. If they are married, the credit shrinks after they earn $110,000. This is much less specific that Trump's 2016 proposal. It allowed parents to deduct the average cost of child care and eldercare expenses. The deduction was not available for those earning over $250,000 Single/$500,000 Married-Joint. To qualify for the deduction, children had to be under age 13. The tax cut was limited to four children. The deduction included expenses of paid and unpaid caregivers.

The Framework allows a $500 credit for non-child dependents. That's much less than the $5,000 deduction for elder care in Trump's 2016 plan.

Business Taxes

The Framework would lower the maximum corporate tax rate from 35 percent to 20 percent. The United States has one of the highest corporate tax rates in the world. But that doesn't hurt large corporations. Most of them don't pay more than 15 percent. That's because they can afford tax attorneys who help them avoid paying higher taxes. Almost half of corporations pay no taxes since they pass them onto their shareholders.

The Framework lowers the maximum tax rate for small businesses to 25 percent. That includes sole proprietorships, partnerships and S corporations. Many of those are real estate companies, hedge funds and private equity funds. As a result, 85 percent of the tax cut benefits the top 1 percent of earners. That's because most mom-and-pop small business don't earn enough to qualify for the top tax rate. That means they won't benefit from the cut.

The Framework does not mention increasing the tax on some profits, called carried interest. That's taxed at 15 percent instead of the income rate. It benefits private equity funds. Trump campaigned on making them pay their fair share.

The Framework allows all businesses to expense the cost of depreciable assets instead of writing them off over years. It does not apply to structures. Trump promised U.S.-based manufacturers they could deduct all expenses for new plants and equipment. The write-off would encourage more investment.

The Framework eliminates the C corporation's ability to deduct interest expense. That would make it more expensive for financial firms to borrow money to lend and invest. Companies would be less likely to issue bonds and buy back their stock. That could cause stock prices to fall.

The Framework retains deductions for research and development and for low-income housing.

The Framework advocates a "territorial" tax system. It would not tax income that businesses earn overseas. It would allow a one-time tax holiday on past income earned overseas. The territorial system would get corporations to bring money back into the United States. It might also keep companies from moving their headquarters overseas. The only downside is that companies could no longer use losses generated overseas to offset U.S.-based income. Many banks have overseas deferred tax assets generated during the financial crisis. They could no longer use those to offset income. But the lower tax rate would make up for that in a few years.

Promises Not in the Plan

Trump's 2016 plan allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account. That allows earnings to grow tax-free to pay for the child's education at age 18. Taxpayers who were eligible for the Earned Income Tax Credit would receive a rebate. They could use that rebate for the DCSA.

Trump also promised to end the Obamacare tax on investment income.

How It Affects You

The Tax Policy Center says that the Framework would increase the $20 trillion national debt by $7 trillion over the next 10 years. That takes into account any boost in growth. It also folds in the cumulative interest that would accrue from the debt.

The level of debt increase would dampen economic growth in the long run. A larger debt weakens the dollar and increases interest rates. That's because the debt is already more than the nation's annual economic output. To find out why this is important, see debt-to-GDP-ratio.

The Tax Policy Center did not analyze the Framework's impact on growth. But the Framework is very similar to Trump's Five-Part Tax Plan. The Tax Policy Center said Trump's Five-Part plan would boost the economy over the next two to three years. That's because tax cuts put more money into people's pockets.

Specifically, it will add 1.7 percent to growth in 2017, 1.1 percent in 2018 and 0.5 percent in 2019. That growth will add $53.1 billion in revenue in 2017. After that, it will add $34.9 billion in 2018 and $17.5 billion in 2019. But that's not enough to offset the revenue losses incurred by the cuts.

The Tax Policy Center added that Trump's 2017 plan would reduce GDP after 2024. That's because the interest payment on the debt would consume such a large portion of the federal budget. That money would no longer be used to build infrastructure or other job-creation uses.

The Framework helps the wealthy more than the middle class. Once all the deductions and exemptions are factored in, the poorest fifth of the population receive a tax break of 0.5 percent to 0.2 percent. They were better off under Trump's Five-Part Plan, where they receive a 0.6 percent boost.

More than a third of taxpayers already have incomes that fall below their standard deduction and personal exemptions. They won't benefit at all from The Framework plan, according to New York University law professor Lily Batchelder.

The tax break improves for each income level. The top 1 percent would get an 8.5 percent break. That's better for them than Trump's Five-Part plan, which gave a 6.5 percent break.

This favoritism to the wealthy is why it increases the debt so much. The wealthiest Americans contribute the lion's share to total tax revenues. Trump says he would offset the tax cuts by eliminating loopholes, but he isn't specific.

The Framework hurts parents of school-age children because they lose the personal exemption for each child. That means almost 10 million parents will see their taxes increase.

The Framework doesn't mention the head of household filing status. But. Trump's earlier plan eliminated it. That would hurt single-parent families.

Will Trump's Tax Cuts Work?

The administration is relying on supply-side economics. That theory advocates giving tax cuts to businesses so they can create jobs. It worked during the Reagan Administration because the highest tax rate was 70 percent. According to the Laffer Curve, that's in the prohibitive range. That's when taxes are high enough that cuts can boost the economy out of debt. But today's tax rates are half that. That's why trickle-down economics no longer works.

Corporations won't add jobs to build products until they see demand for them. That's why it makes economic sense to give the biggest tax cuts to the poor and middle class. They are more likely to spend every dollar they get. The wealthy use tax cuts to save or invest. That helps the stock market, but doesn't drive demand. Once demand is there, then businesses create jobs to meet it. That's how tax cuts create jobs.

Will It Pass?

The Framework must prove it won't increase the deficit beyond what's in the budget. Republican senators agreed to add $1.5 trillion over the next 10 years to the FY 2018 budget to pay for the tax reform plan. The House Freedom Caucus endorsed the plan. Budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some even threatened to default on the debt rather than keep adding to it.

But lawmakers must still find ways to offset the $5 trillion in tax cuts. If they do, then the bill could pass with a 51-vote majority, including Vice-President Mike Pence's tie-breaking vote.

If they are unsuccessful, and the measure does increase the debt, it would require a 60-vote majority to pass. Then the plan is dead. Democrats wouldn't support a plan that benefits the rich