Later today President Trump will unveil his proposed tax reform blueprint, which includes a tax cut for the middle class and a reduction in the corporate tax rate to 20 percent.
The tax proposal will be released jointly by the Trump administration, the House Ways and Means Committee, and the Senate Finance Committee.
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"It is a relatively rare event to have these three groups working so well together before their legislative text and this says a lot about presidential leadership and the desire to get this done," said a senior administration official. "Having these groups working so well together is a significant step forward towards our goal."
The tax plan is based on the following principles: cutting taxes for middle-class Americans; making the tax code simple, fair, and easy to understand; cutting taxes on businesses to restore America's competitive advantage; creating more jobs and higher wages for American workers; and encouraging companies to bring back trillions in wealth from overseas to the United States.
The plan will lower the corporate tax rate to 20 percent, which is below the 22.5 percent average for the industrialized world. The corporate alternative minimum tax will also be eliminated. In addition, corporations will be allowed to immediately write off or expense the cost of new investment, which will last for five years.
"The focus is very much on growth, so that we can keep more jobs in the U.S., bring more jobs back to the U.S., and see an increase in wages and create a level playing field for U.S. companies compared with competitors around the world," the senior administration official said. "On the small business side we are going to limit the maximum tax rate applied to small businesses to 25 percent."
The official said the tax package is designed with the middle class in mind.
"On the individual side, the first thing we're doing is we're creating a larger zero tax bracket," the official said. "Thirty percent of taxpayers itemize, the other 70 percent claim a standard deduction, and that standard deduction is going to nearly double in size to 12,000 for individuals and 24,000 for married taxpayers."
The seven tax brackets that are currently in place today are going to be reduced to three brackets: 12, 25, and 35 percent. The committees will be given flexibility to add a fourth rate above the 35 percent if they need to on the wealthiest taxpayers.
"The reason they would do that is to make sure that we achieve our goals of making this a middle class tax cut that is at least as progressive as the current system and that doesn't shift the tax burden from higher income to lower income households," the official explained.
The tax plan will also offer a larger child tax credit—up to $1,000 per child under 17—increasing income limits so more families will be eligible for the child tax credit, and the marriage tax penalty will be eliminated. There will also be a $500 tax credit implemented for families with non-child dependents such as an elderly relative.
The proposal will eliminate most itemized deductions and repeal the individual alternative minimum tax because it adds to the complexity of the code. The plan would keep tax incentives for mortgage interest and charitable contributions in place and would eliminate the death tax.
In order to prevent companies from keeping their wealth overseas, the proposal would move to a territorial system.
"American companies that are competing overseas are competing against foreign companies that have territorial systems so this is a really big way that we're leveling the playing field for American companies, shifting from a worldwide system to a territorial system," the official said. "So once we do that, once a company earns profits overseas, they can bring those profits back to the U.S. without incurring additional taxes."
"We think that is going to help bring more investment and more income back to the U.S. rather than keeping it offshore, and it will help level the playing field for our companies so they can better compete with foreign companies that already have that kind of tax treatment," the official said.
As part of the transition to this territorial system, profits already overseas will have a onetime tax on those profits.
According to the official, the plan is not projected to add to the deficit, after accounting for the elimination of tax breaks, the base broadening, and increase in economic growth.