Image Credits: Alex Brandon/AP Photo
A fundamental agenda item for Republicans in Congress this term has been tax reform. Aside from repealing Obamacare, it has been perhaps one of the most hotly debated item. Today, we finally got a glimpse at how Republicans propose we change our tax system for the first time in nearly three decades. Tax reform can be a sticky subject, so let’s break it down.
For individuals, our conservative members of Congress propose ditching the current seven tier system for a simple three tier system. The tax rates would be 12%, 25%, and 35%, with the possibility of adding a fourth level in the future for the households with the highest income to ensure “the wealthy do not contribute a lower share of taxes paid than they do today.”
Along with altering the marginal tax rates, the proposal includes an increased standard deduction, nearly doubling the rates from 2016. For single filers the deduction jumps from $6,300 to $12,000, and couples married filing jointly go from $12,600 to $24,000.
Republicans have done away with many of the itemized deductions in favor of using the standard deduction. They claim this is an attempt to level the playing field so that higher-income earning households are not able to take advantage of “tax breaks” that others cannot. However, they retained the deductions for home mortgage interest and charitable contributions.
Ever heard of the Death Tax? This plan eliminates the 40% tax on the gross taxable estate of decedents who transfer more than $5,490,000 in their lifetime. The proposal also eliminates the generation-skipping transfer tax.
The proposal includes a corporate tax rate of 20%: a 15% decrease. This means any incorporated business would have a “maximum tax rate” of 20%, which is 2.5% lower than the industrialized world average. What about businesses that operate with “flow-through” taxation such as an LLC or LLP? They get a top rate of 25%. While the President has previously discussed reducing the corporate tax rate to 15%, he has emphasized that his ultimate goal is tax cuts for the middle class and believes this is the best way to achieve equality and economic success.
The current plan does not propose changes for capital gains and dividends, which will remain at a 23.8% tax rate.
Republicans have long called for decreased income tax on the wealthy and investors ascertaining that when they have more capital at their disposal, they will filter it into the economy. However, the President’s plan cuts taxes for the middle class, as promised, and corporations, hoping this will result in an increasingly successful economy.
This overhaul is an effort to simplify a system that is confusing and burdensome to many. With seven tiers maxing out at a 39.6% marginal tax rate for individuals and eight tiers maxing out at 35% for corporations, this proposed change will bring much needed relief to the American people’s patience and pocketbooks.
In a statement released from the White House today, the Trump Administration is calling the change a “unified framework to achieve pro-American, fiscally responsible tax reform.” Gary Cohn, Director of the National Economic Council said the following:
“We have a once-in-a generation opportunity to give American workers and businesses the level playing field they deserve and make us competitive once again on the world stage. The Administration and Congress have worked together to develop this unified framework for tax reform, which will grow our economy, create jobs, and provide relief for working families. This framework will deliver on the President’s promise to end the rigged system that has kept our workers and businesses down for too long.”