Policy

GOP Tax Framework: 20 Percent Corporate, 35 Percent Top Individual Rates

Nine-page document provides few new details

House Speaker Paul D. Ryan and Senate Majority Leader Mitch McConnell are part of the Big Six group that unveiled a tax overhaul framework. (Bill Clark/CQ Roll Call File Photo)

The Republican tax overhaul framework calls for cutting tax rates to 20 percent for corporations, 25 percent for small businesses and 35 percent for high-income individuals. 

The nine-page document provides only a few other new details about GOP plans for rewriting the tax code. Many of the policies outlined in the framework are ones included in the House Republicans’ “A Better Way” plan released last year. 

This framework is a product of the so-called Big Six tax negotiators: House Speaker Paul D. Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Chairman Kevin Brady, Senate Finance Chairman Orrin G. Hatch, Treasury Secretary Steven Mnuchin and White House chief economic adviser Gary Cohn.

The 20 percent corporate rate and 25 percent small-business rate were part of the House plan; President Donald Trump had been pushing for a 15 percent corporate rate.

On the individual side, the framework calls for collapsing the existing seven tax brackets into three with rates of 12, 25, and 35 percent. The document does not specify the income thresholds at which the brackets will be set.

The House plan had called for a top individual rate of 33 percent but the other rates remain the same under the unified framework. 

The current top individual rate is 39.6 percent, which means high-income earners will see a statutory tax rate cut. Republicans say that by eliminating most itemized deductions, the wealthy will not be paying less in taxes overall, but Democrats are skeptical. 

Republicans have included a backstop. “An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers,” the framework reads. 

Like the House GOP plan, the framework also calls for roughly doubling the standard deduction to $12,000 for individual filers and $24,000 for those filing jointly. This creates an effective zero percent tax bracket for anyone who earns less than those amounts.

One detail missing from the framework is the rate at which the plan would tax foreign earnings kept overseas by U.S. corporations.

Under the current tax system, companies must pay the full 35 percent corporate rate to repatriate money to the United States, after already paying foreign taxes on profits earned overseas. The GOP plan would move to a territorial system of taxation so companies would no longer be taxed for repatriating foreign profits. 

To transition to that system, Republicans want to tax foreign earnings that have already accumulated overseas, which various estimates show to be anywhere from $2 trillion to $4 trillion.

The framework says those profits would automatically be considered repatriated and taxed at unspecified bifurcated rates for illiquid assets and cash assets. The repatriation rate is one detail members had hoped the framework would provide.

In an effort to prevent companies from shifting profits to tax havens, the framework calls for a global minimum tax on foreign profits of multinational corporations but it does not specify a rate.

Next steps

GOP leaders have said the goal is to have the House and Senate tax-writing committees use the framework to develop legislation they hope will be signed into law by the end of the year.

The committees are not planning to release their tax bills, however, until both chambers pass a budget, which is needed to allow them to move the tax bill through reconciliation and pass it with a simple-majority vote in the Senate. 

Several rank-and-file members have said they wanted to see more details about the tax plan before agreeing to vote for a budget resolution. 

The document does provide a few answers — albeit some of them vague — to questions members have raised, such as how the tax bill would deal with business expensing and interest deductibility. 

The framework implements full, immediate expensing of certain investments that House Republicans had called for in their plan, but only temporarily. It says businesses, for at least five years, will be able to immediately write off the cost of new investments in depreciable assets other than structures, made after Sept. 27, 2017.

The provision is expected to be costly, so limiting full expensing to five years would allow tax writers to limit revenue losses in later years. Under the reconciliation rules, parts of the tax bill that cost money outside the 10-year budget window cannot be made permanent policy.

Curbing deductions and credits

In a step away from the House plan, the framework does not fully repeal the net interest expense deduction. Instead, the document says it will be “partially limited,” but does not elaborate on what that would look like.

The only business deduction the framework specifically calls for eliminating is the Section 199 domestic manufacturing deduction, which provides a tax break for qualified production activities such as constructing property or producing electricity, natural gas or water. 

The document’s creators say the deduction will no longer be needed because domestic manufacturers will see their lowest marginal rates in almost 80 years. 

“Numerous other special exclusions and deductions will be repealed or restricted,” the framework says, but does not elaborate. 

Two business incentives that the tax plan will keep are the research and development tax credit and the low-income housing tax credit. 

On the individual side, Republicans plan to eliminate most itemized deductions but keep the two most popular ones: the mortgage interest and charitable deductions. 

Proponents of those tax breaks say their effectiveness would be limited with the increase of the standard deduction since most taxpayers won’t itemize.

One option would be to make the incentives above-the-line deductions that can be claimed regardless of how a taxpayer chooses to file. The framework does not specify in what form the mortgage interest and charitable deductions would be retained. 

The framework also calls for keeping but simplifying tax benefits that encourage work, higher education and retirement security and expanding the child tax credit. 

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