Over the course of the past several weeks, President Trump has consistently called for tax reform, and the Senate Finance Committee has scheduled hearings on both business and individual tax reform. Last week, key officials in the Trump administration, including Treasury Secretary Steven Mnuchin and top economic adviser Gary Cohn, held meetings with Senate Majority Leader Mitch McConnell and members of relevant congressional committees in order to discuss reform.
Tax reform is an important pillar of Trump’s overall economic agenda, but the administration has faced a number of different obstacles in trying to move it forward. Lawmakers are now promising to have put together at least a framework for the proposed overhaul by the end of September, and Speaker Paul Ryan explained that an outline of the legislation for tax reform legislation would be available next week at some point. Republicans are reportedly planning to work on the legislation throughout the fall, and the administration reportedly hopes that tax reform can be wrapped up by the end of 2017.
What exactly will this proposed tax reform mean? The specifics of the plan aren’t yet available, so it is too early to say with certainty. But here are five likely consequences of the latest tax reform effort.
1) A Simpler Tax Code with Fewer Income Brackets
It is expected that one of the main outcomes of tax reform will be a simplified tax code with far fewer income brackets. Trump has repeatedly referred to the current US tax code as ridiculously complex, including at a recent speech at the Mandan Refinery in North Dakota, pointing out that Americans spend billions of hours annually navigating the archaic and awkward tax code in order to file returns. It is uncertain how, exactly, the tax code will be simplified, but it is likely that things will be streamlined and easier to follow.
2) Lower Individual Tax Rates for the Middle Class
In early September, Trump promised a crowd of supporters the biggest tax cuts since Ronald Regan. Initially, it seemed these cuts would be across the board for people of all income levels. An outline of proposed tax reform from July proposed reducing the top income tax rate to 35 percent.
However, Trump seems to have back peddled on this. “The rich will not be gaining at all with this plan,” he told reporters while meeting with the Congressional Problem Solvers Caucus, a bipartisan group, at the White House. “We are looking for the middle class and we are looking for jobs – jobs being the economy. So we’re looking at middle class and we’re looking at jobs,” Trump said.
3) Lower Business Tax Rates
Analysts and political commentators generally agree that the US is likely to see lower business tax rates as part of the overall tax reform package. Trump has previously called for tax cuts for middle-class families, small business owners, and larger corporations in order to restore America’s competitive advantage and stimulate needed job growth.
However, it’s unclear how such tax cuts would be funded. Republicans have suggested they could be funded by the increases in economic activity they would generate – but that could be a tough sell. “There’s no way you’re going to be able to do tax cuts that pay for themselves,” Louisiana Senator John Kennedy said earlier this week. “But I think most people would concede that cutting taxes does stimulate the economy.”
4) Restrictions on Deductions
To offset lower tax rates, some analysts have speculated that reform may pose restrictions on deductions. Specifically, deductions for mortgage interest, deductions for state and local taxes, and the ability to make pre-tax 401(k) retirement contributions may either be eliminated or capped as a part of the reform.
“If you save for retirement or itemize your tax deductions, you could end up paying thousands of dollars more after tax reform than you do now. To help pay for promised cuts, President Donald Trump and Republicans in Congress are trying to raise revenue elsewhere,” Suzanne Woolley explained in Bloomberg. “And the best place to get this money may be the millions of Americans who use deductions and other such strategies to lower their tax bills.”
In conclusion, it is still too early to tell the shape tax reform efforts will take and what the consequences of reform may be. However, it does seem certain that changes are in the pipeline – as long as the Trump administration can ensure it has enough political capital to get these changes through.
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