With the recent U.S. Presidential election, and other global events in the past year, we are facing some of the most profound political and economic challenges in our history. The impact of the incoming administration will be far-reaching on business worldwide, and is of particular significance to mobility professionals and employers recruiting and managing mobile workforces.
We want to be well-prepared for issues that affect our industry – such as changes to public policy, global trade and immigration, and the confidence level of CEOs to expand their workforces and grow their companies – and are developing analysis and webinar briefings to keep you apprised of the new administration’s plans and actions.
With the election of Donald Trump as President, and retention by Republicans of control of both houses of Congress, it is very likely that comprehensive tax reform will occur during 2017. Ways and Means Chair Kevin Brady (R-Texas) said on November 9 that tax legislation would be introduced during the first 100 days of the new Congress. Senior Trump campaign officials have also stated that tax reform is a first 100 days priority. What might that look like, and what might be its effects on worker mobility?
House Republicans in June of 2016 produced a “Better Way for Tax Reform” Blueprint that includes both individual and business tax reform. And President-elect Trump announced/revised tax plans at various stages of the campaign. Here are the basics.
The Trump tax proposals, like many other directions toward tax reform, begin with fewer individual tax brackets and reduced rates. Trump would have three: 12%, 25%, and a top rate of 33%. The top rate would kick in at $112,500 of adjusted gross income for singles, and $225,000 for married couples. Capital gains and dividends would continue to be taxed at 20%, but the 3.8% net investment income tax would be eliminated. Personal exemptions would be eliminated, and consolidated into a new standard deduction of $15,000 for singles and $30,000 for married couples.
New provisions would allow deductions for child and dependent care expenses, increase the earned income tax credit, provide for tax-favored child care savings accounts, and expand the credit for employer-provided child care.
Itemized deductions would still be permitted, and the plan is silent as to which (if any) would be eliminated. However, the amount of total itemized deductions that could be claimed would be limited to $100,000 for singles and $200,000 for married couples. Because of the larger standard deduction, some analysts estimate that the number of filers who itemize would be reduced by up to 60%.
The Alternative Minimum Tax would be repealed, as well as the estate and gift taxes. However, capital gains on property held at death would be taxed, with exemptions $5 million for singles and $10 million for married couples.
For businesses, the top corporate rate would be cut from 35% to 15%. Among the most significant changes is a proposal to tax income from pass-through business entities such as partnerships and S-corporations, and business income of sole proprietors, at 15% rather than at the individual tax rates of the recipients, although it is not clear whether such income would have to remain invested in the business to benefit from the favorable tax rate. All businesses would be allowed to elect to immediately deduct capital investments (equipment, buildings, etc.), but would forgo deductions for interest if they elected expensing.
Companies with existing earnings held overseas and never taxed in the U.S. would pay a one-time tax of 10% on those earnings held in cash, and 4% on earnings held in other forms, but the tax could be paid over 10 years.
Trump does not specify whether he would change the international tax system. And indeed, much of his plan is very unclear in terms of details, which as with most presidential campaign policy platforms is without any legislative language providing much of the specifics.
Since tax legislation must originate in the House, the “Better Way” Blueprint put forward by House Republicans is a likely starting point for tax reform. Like Trump’s proposals, there is no legislative language, and many details are left unspecified.
Like Trump, the House plan reduces tax brackets to the same three rates, 12%, 25%, and 33%. Although the income levels at which these rates would apply are not specified, those filers currently in the 15% bracket would pay 12%; those in the 25% and 28% brackets would pay 25%; and those in the 33%, 35%, and 39.6% brackets would all pay 33%. Like Trump, personal exemptions would be eliminated, and the standard deduction would be increased, but to a smaller amount than Trump: $12,000 for singles and $24,000 for married couples.
Unlike the Trump plan, the Blueprint retains only the deductions for mortgage interest and charitable contributions, eliminating all other deductions for individuals. The authors state that “numerous other exemptions, deductions, and credits for individuals riddle the tax code,” and that “this Blueprint will repeal these special interest provisions.” No such provisions are specifically identified, however. The plan also states that “all” compensation is included in income, leaving some uncertainty as to the status of currently excludable fringe benefits like moving expenses, education benefits, and others. However, it does specify that exclusions will remain for employer-provided health insurance, and retirement savings. The Blueprint also suggests that modifications to the mortgage interest deduction will be made, but specifies that such changes will not affect existing mortgages, nor refinancing of such mortgages.
Capital gains and dividends would remain taxable, but the recipient would be allowed a deduction of 50% of the amount received, in effect resulting in taxation of those items at rates of 6%, 12.5%, or 15.5%. But unlike Trump, interest income would also be allowed the 50% deduction. And also unlike Trump, it appears that the special 3.8% tax on net investment income for high income taxpayers would remain, as well as the so-called “Pease” limitation on deductions for those taxpayers.
Like Trump, the Alternative Minimum Tax would be repealed, as well as the estate and gift taxes.
For businesses, the corporate rate would be cut from 35% to 20%. And like Trump, the House Republicans propose a system under which the business income of sole proprietors and pass-through entities will be taxed at one rate, rather than at the individual rate of the owners. However, that rate would be 25%, not 15%. Such businesses would be treated as first paying their owners reasonable compensation, which would be taxed at the owners’ individual rates, with any excess subject to the 25% tax rate. A benefit of this treatment is that the first dollars of the reasonable compensation portion might be taxed at the lower 12% individual rate.
Like Trump, businesses would be allowed an immediate write-off for business investment. However, they would also be allowed a limited deduction for interest, but only against interest income.
And, like Trump, companies would be encouraged to repatriate earnings held overseas. There would be a 100% exemption for dividends to domestic corporations from overseas subsidiaries. And existing earnings will be taxed. The tax will be 8.75% for cash equivalents, and 3.5% for assets in other forms, payable over an eight year period.
Finally, the House Republican plan addresses international and corporate taxation by proposing a switch to a territorial tax system, and a “business cash flow” tax with border adjustments. Under such a system, unlike the present, products, services, and intangibles produced in the U.S. but exported for use in another country will not be taxed in the U.S., and conversely, imports will be taxed upon entry into the U.S. This system will mimic the result of Value Added Tax regimes utilized by most other countries.
What Happens Next?
As can be seen from the foregoing, there are many similarities between the approaches of the President-elect and House Republicans. Although details vary, Trump has signaled that he is content to let Congress work through the details, and is satisfied with the general direction of the House Republican Blueprint. The President-elect has no personal prior significant involvement in tax policy, nor does anyone on the team of economic advisors he announced earlier in the campaign. Consequently, many believe that Vice-President elect Pence, who does have significant prior tax policy involvement at both the federal and state levels, is likely to be the new Administration’s point man in this arena. Whatever approach the new administration chooses to take, it is likely that initial tax reform efforts will build from the House Republican plan.
One significant difference in the Trump and House Republican plans is Trump’s focus on provisions benefitting parents. Some of these ideas are also favorites of Democrats, and might be used to attract bipartisan support for tax reform.
It also is not clear how tax reform will proceed. Much more work has been done on reforming the international tax system, and the corporate/business tax system, than has been done on individual taxes. Further, there is a good deal of bi-partisan agreement on the business tax side, unlike the individual side. For example, House Minority Leader Nancy Pelosi (D-Calif) has said Congress should come together on tax reform, and that there is general agreement about lowering the corporate tax rate and closing loopholes, and Brady has said that even the republicans are still grappling with which individual tax preferences to eliminate. Consequently, it is likely that business tax reform could move faster. However, there are many members of Congress who believe that tax reform should be one complete package, not unlike the last comprehensive tax reform effort in 1986. Until the new Congress convenes and gets to work, it is not clear which view will prevail. And no matter which view prevails, there remain significant differences about how to deal with potentially very large revenue losses. But as noted earlier, it is very clear that both the administration and the Republican Congress consider tax reform a high priority, and will seek to enact legislation in 2017.
Until actual legislation is introduced, it is difficult to predict how this process might affect provisions important to worker mobility, such as the moving expense deduction, the home sale capital gain exclusion, mortgage interest deductibility, and others. Work has already begun to protect those provisions, and that work will accelerate.
Tax reform will also affect the taxes of businesses engaged in the mobility industry, many of which are organized as pass-throughs and could see lower taxes, others of which are corporations and could also see a lower tax bill as the corporate rate is changed, and some of which are engaged in international activities the taxation of which could change for the better.
Worldwide ERC® is directly engaged in the tax reform process, and will keep its members fully informed as that process proceeds.
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