President-elect Trump has proposed to simplify the tax code after his inauguration in 2017. His tax plan is available on his campaign website, aided by his various statements concerning tax reform which are contained in other press releases.
To reduce complexity, Trump would eliminate the personal exemption and head of household filing status. He also would reduce the number of individual income tax brackets from seven brackets to three brackets. He would cap itemized deductions to $100,000 or $200,000, while increasing the standard deduction. He has not proposed any changes to the current rates on capital gains, but he would repeal the net investment income tax that was enacted under the Affordable Care Act. Additionally, he would repeal the alternative minimum tax.
Reduced complexity often comes at the cost of fairness. To balance these concerns, Trump’s proposal contains additional reforms to resolve popular tax issues that were discussed during his campaign. For example, for high-income taxpayers, Trump proposes to tax the carried interests of fund managers as ordinary income as opposed to tax-preferred capital gain. The changes in itemized and standard deductions can be seen in part as motivated by fairness. Further, for low-income taxpayers, his plan offers a “spending rebate” for child care expenses as well as a child care deduction. However, in a move that may make his tax system less fair, Trump proposes replacing the high-rate estate tax with a lower-rate deemed sale of all assets of the decedent, with the first $10M of gains exempted.
As with the proposed reforms for individuals, Trump intends to reduce complexity by eliminating most corporate tax expenditures. He also wants to reduce the corporate tax rate to 15% (from 35%) and repeal the corporate alternative minimum tax. Trump has also proposed taxing flow-through businesses at an identical rate, although this lower rate appears conditioned on keeping money within the business.
At least for certain electing manufacturing corporations, Trump’s plan provides for electing to immediately expense capital investments at the cost of being unable to deduct interest. This election is the equivalent to exempting the yield of that investment from the corporate income tax. It should be noted that Paul Ryan’s plan would force all businesses onto this instant-expensing, no-interest-deduction regime.
Finally, Trump’s tax plan proposes to tax international corporations that are sheltering income overseas through a deemed repatriation of corporate profits. Moreover, he has suggested a retribution tariff for companies that continue to outsource and move jobs outside of the U.S. Trump appears to prefer a worldwide tax system without deferral, meaning that U.S. multinationals could not avoid taxation by moving income offshore, while other Republicans would only tax U.S. businesses on their U.S.-sourced income.
While it is unclear which of these tax proposals will come to fruition, President-elect Trump’s plan shares many similarities with Paul Ryan’s plan. As speaker of the House, leading a Republican majority, Ryan’s general agreement with the future president will likely lead to many quick and transformative changes to the U.S. tax code this year.