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Editorial 7 MIN READ

The Big Six unified framework, first read

A nine-page outline, a 20 percent corporate rate, a 25 percent pass-through rate, and a budget resolution now clearing the way

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 5 sections
  1. What the framework actually says
  2. What the early scoring says
  3. Second-order effects to watch in markup
  4. What remains unclear
  5. Sources

he framework that six Republican principals released on September 27 runs about nine pages and proposes to cut the corporate rate from 35 percent to 20 percent, tax pass-through business income at a top rate of 25 percent, collapse the seven individual brackets to three at 12, 25, and 35 percent, and roughly double the standard deduction to $12,000 and $24,000. It is a skeleton, not a bill. Last week the Senate passed the budget resolution that lets a bill built on it move on a simple majority.

The document is titled "Unified Framework for Fixing Our Broken Tax Code." The "Big Six" authors are Speaker Paul Ryan, Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Ways and Means Chairman Kevin Brady, and Senate Finance Chairman Orrin Hatch. It is a framework of the sort Washington has seen before — the Camp draft in 2014, the 2005 Bush panel, the 1986 Reagan-Rostenkowski exchange — and, like those, it leaves almost every operative number for the tax-writing committees to fill in. It names rates but not brackets. It names a pass-through rate but not the anti-abuse rule. It promises expensing, but only "for at least five years."

What is different this time is the procedural runway. The House passed H. Con. Res. 71, the Fiscal Year 2018 budget resolution, on October 5 by a vote of 219-206. The Senate passed its amended version on October 19 by 51-49, with Rand Paul the sole Republican no. Once the two chambers reconcile — expected within the next two weeks — the reconciliation instructions to Ways and Means and to Finance will permit a tax bill that adds up to $1.5 trillion to the deficit over ten years to pass the Senate with 50 votes plus the Vice President. The framework is what the committees are drafting against. The Ways and Means markup has not begun.

What the framework actually says

On the individual side, the seven brackets collapse to three: 12 percent, 25 percent, and 35 percent. The document leaves open that "an additional top rate may apply to the highest-income taxpayers" — in other words, the current 39.6 percent bracket could survive under a different number, or a fourth bracket could appear in markup. The standard deduction goes to $12,000 for single filers and $24,000 for joint filers, with a head-of-household figure to be set by the committees. Personal exemptions are eliminated. The child tax credit is increased (amount unspecified), and a new $500 credit is added for non-child dependents. The individual AMT is repealed. The estate tax and generation-skipping transfer tax are repealed.

Most itemized deductions are eliminated. Two are preserved by name: the home mortgage interest deduction and the deduction for charitable contributions. Everything else in Schedule A is on the table — state and local taxes most notably, but also medical expenses, casualty losses, and the miscellaneous 2 percent-floor deductions. The retirement savings and work incentives (the framework specifically lists "the Earned Income Tax Credit") are described as retained, though the tax-writing committees are invited to "simplify these benefits to improve their efficiency and effectiveness."

On the business side, the C-corporation rate is 20 percent, a flat rate, down from a 35 percent top statutory rate. The corporate AMT is repealed. Pass-through business income — from sole proprietorships, partnerships, and S corporations — is capped at a 25 percent rate, with the committees directed to write "measures to prevent the recharacterization of personal income into business income." That sentence is the framework's entire anti-abuse regime; the hardest drafting problem in the bill is one line long here.

Businesses get immediate expensing of new investment in depreciable assets other than structures, effective for assets placed in service after September 27, 2017, for "at least five years." The deduction for net interest expense of C corporations will be "partially" limited (the percentage is left blank). The section 199 domestic production deduction is repealed. Specific industry preferences, including the research credit and "an incentive for low-income housing," are retained.

Internationally, the United States moves to a territorial system with a 100 percent exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10 percent stake. Accumulated foreign earnings held abroad are subject to a one-time deemed repatriation, at two rates — a higher rate for cash and cash equivalents, a lower rate for illiquid assets — payable over several years (numbers unspecified). A global minimum tax on the foreign profits of U.S. multinationals is promised, with the design left to the committees.

What the early scoring says

The Tax Policy Center released a preliminary analysis on September 29, two days after the framework dropped. Working from the stated rates and the handful of specified parameters, and filling in the blanks with plausible assumptions, TPC estimated that the framework would reduce federal revenue by $2.4 trillion over the 2018-2027 window and $3.2 trillion over the following decade, before any dynamic feedback. Its distributional tables found that in 2027, after the phase-out of some individual provisions is assumed, about 80 percent of the net tax cut would accrue to the top 1 percent of households (those with incomes above roughly $912,100), whose after-tax incomes would rise about 8.7 percent. In the same year, TPC found that taxpayers in the 80th to 95th percentiles would, on average, see a small tax increase.

Republican leadership called the estimate premature, and it is premature in the narrow sense that no bill exists. What TPC did was quantify what the framework implies if its silences break in the most straightforward way. The committees may, of course, break them differently.

The Joint Committee on Taxation has not yet released a framework score. Once a chairman's mark appears, JCT's numbers will matter more than TPC's, because JCT is the scorekeeper the reconciliation instruction is measured against.

Second-order effects to watch in markup

The 25 percent pass-through rate is the provision most likely to be redrawn in committee. As written, it invites any highly compensated professional to reorganize as an S corporation and convert wages taxed at up to 35 percent (plus any fourth-bracket surcharge) into distributions taxed at 25 percent. The framework's one-sentence instruction to the committees — prevent recharacterization of personal income as business income — is the entire load-bearing wall. The choice of mechanism (a reasonable-compensation rule, a wage-based cap, a services-business exclusion) will determine how many law firms, medical practices, and consulting LLCs get the preferential rate.

The repeal of the state-and-local tax deduction is the other live political problem. Republican members from New York, New Jersey, and California have already started objecting; the Senate resolution's non-binding language invited committees to find compromise. Whether that compromise is a SALT cap (at some dollar amount) or full preservation for property taxes is one of the few fights likely to reshape the score.

On the international side, the framework's territorial move and its deemed-repatriation provision are the parts drafted most concretely in the Camp and Ryan "Better Way" precedents, and the committee drafters have real text to lean on. The anti-base-erosion backstop, by contrast, is a paragraph of intention. Expect that to grow into several sections of actual code.

What remains unclear

The rate brackets for each of the three individual tiers are unspecified. The head-of-household standard deduction is unspecified. The child tax credit amount is unspecified. The expensing period is floored at five years but not capped. The interest-deduction limitation for C corporations is partial but unquantified. The deemed-repatriation rates and payment schedule are unspecified. The anti-abuse rule for the 25 percent pass-through rate is unspecified. The fourth bracket is neither confirmed nor ruled out. Every one of those blanks is the kind that changes a score by hundreds of billions of dollars.

The useful posture between now and the Ways and Means mark is to treat the framework as a set of directional bets, not a bill to plan around. A client who is asking today whether to convert a C corporation to an S corporation, or the reverse, is asking too early. A client who is accelerating 2018 income into 2017 is betting on a bill that has not been drafted and a score that has not been run. The framework tells you which direction the pressure is coming from; it does not yet tell you where any one taxpayer lands.

Sources

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