By Ryan Ellis
President Trump revealed his first full budget Wednesday morning, and most of the attention rightly focuses on the very large spending restraint proposals.
Dig deeply, though, and there’s a lot to chew on when it gets down to taxes. Here are three items that come to mind:
Tax reform is on track. For all the Beltway chatter about tax reform fights on this or that policy plank, it’s important to remember that the White House, the U.S. House of Representatives, and the U.S. Senate are all basically on the same page when it comes to what kind of tax reform they want. This was reinforced in today’s budget.
The president’s budget calls for:
- revenue neutral tax reform, increasing the likelihood that changes will be permanent
- lower individual income tax rates than today (the top rate is 39.6 percent)
- lower business tax rates than today (the corporate rate is 35 percent and the pass-through rate is over 39.6 percent, the highest globally)
- moving from a worldwide to a territorial tax regime, with a repatriation of foreign earnings as a transition
- killing the death tax
- ending the alternative minimum tax (AMT)
- expanding the standard deduction and child tax provisions to simplify the code for middle class families
- putting all tax loopholes on the table while protecting home ownership, charitable giving, and retirement savings
These basic building blocks of tax reform should not be discounted as dicta or superficial. Rather, they serve as valuable guardrails as Congress works to put meat on the tax reform bones. They are a kind of mission statement for tax reform against which tax reform will be judged.
Obamacare repeal is assumed. The Trump budget assumes Obamacare repeal. On the tax side of this, it particularly assumes repeal of the 3.8 percentage point surtax on capital gains, dividends, and other savings (known as the “net investment income tax,” or NIIT). There are approximately 20 other new or higher taxes in Obamacare that also will be repealed. Tax reform assumes they are gone before starting on a new system. These include:
- Zeroing out the taxes associated with the individual and employer mandates
- Striking out a hike in the Medicare payroll tax
- Doing away with a host of tax increases on health savings accounts (HSAs) and flexible spending accounts (FSAs), the “medicine cabinet tax,” the “catastrophic medical bills” tax, and many others
- Rolling back taxes on medical devices, pharmaceuticals, and health insurance plans that make them more expensive
- Ending the “Cadillac plan tax” on high cost health insurance
Good idea on refundable credits, bad idea on tax preparers. There are two cost savings mechanisms in the budget related to taxes–one good, and one not so good.
The good idea is to require Social Security numbers (SSNs) for taxpayers claiming the Earned Income Tax Credit (EITC) and the child tax credit (CTC). Given that the watchdog, non-partisan Government Accountability Office has said these tax credits have a 20-25 percent error rate, such tightening up is long overdue and a necessary step in sound tax administration.
The bad idea is the call in the Trump budget for the Treasury secretary to become a regulator of all tax preparers. No one defends fraud or incompetence, but the answer is not for the federal government to become the regulator of every unenrolled tax preparer. There’s a reason why Beltway trade associations like the National Association of Enrolled Agents (NAEA) and the American Institute of Certified Public Accountants (AICPA) supports this type of regulation (or support being their own industry guild masters)–it would drive non-member tax preparers out the business, allowing EAs and CPAs to raise their fees. In other words, it’s pure rent seeking (full disclosure: I am an Enrolled Agent, ironically).