After much talk about tax reform during his Presidential campaign, the President’s proposed tax plan is out. Although the White House has not released many details – the proposed tax plan is less than 250 words – the law would change the way individuals and businesses pay taxes. The stated goals of the tax plan are to grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families and lower the business tax rate.
For individuals, the plan would:
- Reduce the current seven income tax brackets to three of 10%, 25% and 35% and cut the top rate from 39.6% to 35%;
- Double the standard deduction while eliminating most itemized deductions except for the mortgage interest deduction and charitable deduction; and
- Repeal the Alternative Minimum Tax (“AMT”), the estate tax and the Obamacare tax on investment income.
For businesses, the plan would:
- Reduce the corporate tax rate from 35% to 15%;
- Tax the income of small business owners at the 15% corporate rate rather than at individual rates; and
- Move to a territorial tax system in which businesses would only pay tax on income earned in the United States rather than paying tax on their worldwide income.
For individuals, the income tax brackets are condensed, rates are lowered, and the standard deduction is increased and offset by the elimination of certain itemized deductions. The plan makes the tax code simpler by eliminating the AMT, the estate tax and the Obamacare tax and would allow for many middle and lower income households to reduce their tax burden.
The United States currently has one of the highest marginal corporate income tax rates in the world. The plan would take the United States from having one of the highest rates to having one of the lowest. This should attract more investment in the United States, help to keep current companies in the United States and discourage multinational companies from shifting their income around the world to avoid taxes.
For small business owners, the plan would reduce the tax burden of many small business owners who currently pay tax at individual rates, most of which are higher than 15%. This too should encourage more investment by small business owners in the United States.
This plan is in its infancy and does not yet have much meat to it. It will be interesting to see how it progresses through Congress over the next few months. Stay tuned.