Ahead of today’s unveiling of the GOP tax plan by the House of Representatives at 11:15 ET, a key issue is whether corporate tax cuts to 20% will be temporary, either phased in or out, or permanent. And according to a Bloomberg report this morning, Republican leaders have decided to cut the corporate tax rate to 20 percent and leave it there permanently, abandoning an earlier plan to phase out the rate cut over time.
Still there remains some confusion, as Politico said the fate of corporate tax cuts remains unknown: when asked if the corporate tax cut would be permanent Wednesday evening, Brady said: “That’s our goal and I think it’s going to take several steps through the process to achieve that,” he said, referring to “awfully funny” Senate procedural rules requiring any permanent tax changes to be paid for.
What has also been reported is that the bill would impose a tax of as much as 12% on multinational companies’ accumulated offshore earnings, a rate that’s higher than either President Donald Trump or House Speaker Paul Ryan have proposed. It would phase out the estate tax over years, more slowly than either of them would prefer. Specifically, the estate tax is now expected to be repealed on January 1, 2024.
Meanwhile, the bill is not expected to decrease the pretax contribution levels to popular 401(k) retirement plans, or to repeal the Obamacare individual mandate as Trump proposed yesterday. It would also cut individual tax rates for millions of Americans, but not for earners at the very top of the scale, those making over $1 million, who would pay the old 39.6% tax rate.
The child tax credit would be increased to $1,600 from $1,000 per child under 17, with an additional $300 credit for each parent as part of a consolidated family tax credit, according to a person familiar with the committee’s deliberations. The credit had been a priority for Ivanka Trump, who had met with lawmakers in recent weeks to discuss it.
Another open issue: limits on tax cuts for businesses organized as partnerships, limited liability companies and other pass-throughs. Currently, such companies pass their earnings through to their owners, who are taxed at their individual income rates, as high as 39.6%. The bill would reduce the top rate to 25%, but place limits on the kind of income that would qualify. According to Bloomberg, “professional services”, including doctors, lawyers, accountants and others, wouldn’t qualify for the rate.
Other business owners could chose one of two options: 1. Categorize 70 percent of their income as wages — and pay their individual tax rate on it — and 30 percent as business income, taxable at the 25 percent rate. Or 2. Set the ratio of their wage income to business income based on the level of their capital investment.
The guidelines are aimed at preventing abuse of the 25 percent rate – such as high-earning individuals forming themselves into corporations to get a tax cut.
Trump and others have pitched the pass-through plan as a boon for small businesses — but pass-throughs can be very large businesses in addition to mom-and-pop shops. Trump himself owns hundreds of limited liability companies, according to his federal financial disclosure. Setting limits on the pass-through rate is a touchy issue for a number of lawmakers.
It also remained unclear how many lawmakers were swayed by Brady’s offer to preserve an individual deduction for state and local property taxes. “They’re working over concerned lawmakers one-by-one at this point,” Representative Tom MacArthur, a New Jersey Republican, said of GOP leaders. The deduction would be capped — House leaders were considering a $10,000 cap on Wednesday, according to a Republican lawmaker and a person briefed on the discussions. Both asked not to be named because the talks were private. “We are close,” said Representative Tom Reed of New York Wednesday evening. “We are going to be able to solve that problem.”
As Bloomberg notes, “the legislation won’t satisfy everyone, but it represents Trump’s last chance for a major legislative victory in his first year. To pass it by Christmas, as the president has called on Congress to do, lawmakers must prevail over a series of challenges with no real margin for error.“
As a reminder, the 2018 budget resolution approved by the House and Senate allows for tax legislation that would increase the federal deficit by $1.5 trillion over 10 years, before accounting for any growth that might result from the changes. Figuring out how to achieve the deep rate cuts that Trump, Ryan and others want while staying within that bright line has complicated the bill drafters’ task. Earlier this week, House officials postponed the legislation’s planned release by one day.
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In any case, passage is not assured: Earlier Wednesday, Meadows predicted a bumpy ride for the House bill, saying it would unleash dissent “like you’ve never seen.” Still, that doesn’t mean the effort will fail, he said. “It may be a little messy, it may not be as fun as we would all have liked to have seen it be over the past few weeks,” Meadows told reporters. “But we’re going to get it done, and failure is not an option.” The first test comes Monday, as the House Ways and Means Committee is scheduled to take up the bill.
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