President Donald J. Trump and the "Big Six"—House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, White House adviser Gary Cohn, House Ways & Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Chairman Orrin Hatch (R-UT)—released a "unified framework" for tax reform on September 27. The framework leaves many details unknown, and instead contains directives for Congressional tax writing committees about points to consider in drafting the legislation. It is effectively a starting point to begin negotiations on tax reform.

The framework may be viewed as somewhat similar to contemporary visual art—it is light on details, and presents content susceptible to multiple interpretations.

Business Taxpayers

The framework proposes to reduce the corporate income tax rate from 35 percent to 20 percent, which is below the 22.5 percent average of the industrialized world, and eliminate the corporate alternative minimum tax. It also calls for a maximum tax rate of 25 percent on business income of "small and family-owned" businesses conducted by individuals and pass-through entities, though there is no definition of "small and family-owned." Further, it calls for adoption of measures to prevent taxpayers from converting "personal income" (presumably wages, that are taxed at higher rates) to business income, through the use of a pass-through entity.

Businesses would be allowed to immediately expense investments in depreciable assets (which do not include land) other than "structures" for at least five years for investments made after September 27, 2017. The framework also would limit the deduction for net interest expense incurred by C corporations but does not provide any specifics on what percentage of the net interest deduction would be disallowed.

The framework would eliminate the Section 199 domestic production deduction but would preserve the research and development and low-income housing tax credits. The retention of other business credits is left open and will be dependent on "budgetary limitations."

The framework purports to transition from the current worldwide tax system to a territorial system, with 100 percent exemption for dividends received by a U.S. parent corporation from a foreign subsidiary in which the U.S. parent owns at least 10 percent.

That being said, the proposed system does not appear to be a pure territorial system in that it suggests that a reduced tax rate (presumably below 20 percent) will continue to apply to the foreign profits of U.S. multinational corporations prior to the repatriation of the earnings. In regards to the 100 percent exemption for dividends, the framework suggests a transition rule, under which a one-time tax would apply to existing accumulated untaxed foreign earnings. Such earnings would be treated as repatriated, with one tax rate applying to cash and cash equivalents, and a higher rate applying to illiquid assets in which the earnings have been invested. Specific tax rates are not provided. Payment of the tax liability on the deemed repatriated existing untaxed foreign earnings would be spread out over several years, although the exact time period is not provided.

Individual Taxpayers

The framework would consolidate the current seven individual tax brackets into three brackets of 12 percent, 25 percent, and 35 percent (under current law, the lowest bracket is 10 percent and the highest is 39.6 percent) but it does not provide the income thresholds for each bracket. The framework also notes the possibility of an additional bracket with a top rate above 35 percent (possibly above the current top rate of 39.6 percent). The standard deduction would increase to $24,000 for married taxpayers filing jointly and to $12,000 for single filers; however, the $4,050 personal exemption would be eliminated—so that most of the benefit of doubling the standard deduction would be lost. A larger child tax credit and "additional tax relief" are promised to "typical families." Most itemized deductions would be eliminated, including the state and local tax deduction; however, the home mortgage interest and charitable contribution deductions would be retained. Elimination of the state and local tax deduction would prove to be expensive for residents of high tax states, including New York, California, Maryland and New Jersey. The framework would also eliminate the alternative minimum tax and the estate tax.

Notable Omissions

The capital gains tax rates are not mentioned by the framework at all. The net investment income tax of 3.8 percent that was enacted as a part of the Affordable Care Act is not targeted for elimination. The taxation of carried interests is not mentioned (though President Trump said his goal was to tax carried interests as ordinary income during the campaign). The framework also does not mention infrastructure at all. While the framework eliminates the estate tax, the gift tax is not mentioned. Finally, while not surprising given earlier acknowledgements by Trump and GOP leaders, the controversial "border adjustment tax" is not a part of the framework.

Next Steps

The next step is for Congress to collaborate to draft and pass legislation, which could take months. If the budget reconciliation process, as opposed to a bipartisan process, is used to pass tax reform, then while only 50 Senate votes rather than 60 would be needed, the resulting tax cuts would not be permanent and would expire at the end of 10 years. In order for the budget reconciliation process to be used, a budget resolution would first have to be passed by the House and Senate. Given that 2018 is an election year, as a practical matter, Senate Republicans likely will want to complete tax reform before the intense campaigning begins for the 2018 elections. If this is correct, we would expect Congress to move in the next few months.