So what do we know about the Administration’s tax announcement scheduled for tomorrow? First, we expect the announcement will be limited to principles and a couple key proposals – not a full blown tax reform plan.
Second, the emphasis appears to be on cutting tax rates. We expect something similar to the Trump campaign’s proposal setting the top rates at 33 percent for families and 15 percent for businesses.
Finally, there is likely to be a call for territorial tax treatment coupled with some commentary on the need for leveling the international tax playing field. We could see the term “reciprocal taxes” used again but, as in the past, it’s unlikely to be fully spelled-out what that means – some sort of tariff or the border adjustment provision the House is pushing.
For S corporations and the pass through business community, the good news, as reported in the Wall Street Journal, is that S corporations should be eligible for the lower 15 percent rate:
President Donald Trump on Wednesday is planning to unveil a proposal to slash the top tax rate on so-called pass-through businesses, including many owner-operated companies, to 15% from 39.6%, said White House officials familiar with the planning.
We’ve been advocating “rate parity” for pass through businesses for seven years now, so assuming the Wall Street Journal is correct, it is gratifying to see the White House embrace our message.
Exactly how to enforce the new lower rate will be a hot topic. As the Wall Street Journal notes:
Lawmakers will struggle to fit the 15% tax rate inside budgetary and procedural constraints and it will be hard for Congress to write rules that prevent people from converting higher-taxed wages into lower-taxed business profits.
Both are good points that will have to be addressed, but for now we will focus on the positive, as it appears all three of the players in tax reform – the House, Senate and White House – support the general concept of taxing all business income at the same top rate. That’s a vast improvement compared to where we were just a couple years ago, and should be cause for optimism in the Main Street business community.
So what does it all mean for the prospects of tax reform? It should increase the likelihood that any tax plan passed this year would be more narrowly crafted and focus on cutting tax rates as opposed to a full-blown reform. It has been obvious since the election that President Trump prefers a straightforward rate cut approach over comprehensive reform, and we expect tomorrow’s announcement to reflect that preference.
And it signals that reform efforts may take longer than we thought earlier this year. The case for quick action on tax policy was predicated on the White House, the House, and the Senate coming together on the broad outlines of a plan and then working that plan through the legislative process. With the White House reverting to something resembling their campaign proposal, we are moving away from a general agreement, not towards it.
That said, both the Congress and the White House continue to work hard on tax reform, meeting on a regular basis and raising these issues consistently. President Trump has talked about taxes more in the last few months than his predecessor did in eight years, so it’s obviously a priority. With everything else going on, that may be tomorrow’s most important takeaway. Where there’s a will….