President Trump has stated that comprehensive tax reform to lower business taxes will be one of his top priorities. Trump’s goal of reforming the tax code will be made easier by the fact that Republicans will control the House of Representatives and the Senate in 2017. The changes he has proposed largely reflect the Republican Party orthodoxy of lowering tax rates while simultaneously broadening the base through limiting or in some cases eliminating deductions and credits.

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Outlook on Potential US Tax Reform

In addition to the Trump tax proposals, House Republicans unveiled a tax reform “blueprint” in June of 2016, which they intend to develop into a formal legislative proposal in 2017. It is likely the Trump proposals and the House blueprint will be the starting points for any negotiations over changes to the current US tax law.

Trump’s Tax Proposals

During his campaign, Trump proposed the following major changes to business income taxes.

Reduce the corporate income tax rate from 35 % to 15 %.
Eliminate the corporate alternative minimum tax.
Allow companies engaged in manufacturing in the US to choose between the full expensing of capital investment and the deductibility of interest paid.
Eliminate most deductions and business credits, except the research and development credit.
Enact a deemed repatriation of currently deferred foreign profits at a tax rate of 10 %.

House Tax Reform Blueprint

Under the House blueprint, the corporate tax rate would be reduced to 20 percent and like the Trump proposal, would eliminate the corporate alternative minimum tax. Under the House blueprint, interest expense could be offset against interest income, but there would be no current deduction for net interest expense. The Trump proposal to provide full expensing of capital investments in year one is narrower than the House blueprint which does not limit the proposal only to companies engaged in US manufacturing. Similar to Trump, the House blueprint calls for eliminating most current law business deductions, credits, and incentives, but not the research and development credit.

The Senate has not as of yet put forth any specific tax reform proposals, however Senate Majority Leader Mitch McConnell has said any tax changes should not add debt to the federal deficit. He did leave some wiggle room by noting that such revenue neutrality should factor in the broader economic effects of tax changes.

Taxation of Foreign Income of US Companies

Trump’s tax proposals do not address the broader issue of how to tax active foreign source income of US multinationals. Unlike most other developed nations, the US taxes companies on worldwide income, but it generally allows companies to defer paying taxes on offshore earnings until those earning are repatriated to the US. As a result, US companies have avoided current taxes by keeping roughly $2.5 trillion in profits offshore which can be used to support foreign operations.

Trump’s discussion of international tax issues has focused largely on a call for a one-time deemed repatriation of accumulated deferred foreign income at a rate of 10 %. The Republican blueprint has a similar proposal with an 8.75 % tax rate but would go further and move the US from an international tax system which imposes tax on worldwide income to a territorial system which only imposes taxes on income earned in the US.

The Takeaway

The results of the 2016 US elections for control of the White House and Congress will have a significant impact on the direction of tax reform over the next few years. President Trump and the Republican controlled Congress are expected to push for large corporate tax cuts intended to promote economic growth and domestic investment. Still, prospects for the enactment of such legislation remains in question given the concern among some Republicans about increasing the federal debt and the belief of many Democrats that corporations, in particular multinational companies, pay too little taxes. Furthermore, unlike the House where Republicans hold a large majority, Republicans in the Senate only hold a slight majority making passage of any tax legislation more problematic and subject to compromise.

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