5 Frequently Asked Questions About Tax Reform

Tax Reform FAQs

• What Does the Time Table for Reform Look Like?
• What Would a New Tax Program Look Like?
• Are Reforming Tax Programs and Cutting Them the Same Thing?
• How Would Tax Reform Affect my Education Costs?
• What are the Obstacles to Passing a Tax Reform Bill?

With 2017 winding down and little progress made on the promised reform, you may wonder what the proposed tax program looks like and if it will ever happen. If so, you are not alone. The GOP election sweep makes passing a reform package more probable, but there are divisions not only between parties but in the Republican party itself that make passing legislation more difficult. Here are often-asked questions and answers about tax changes.

What Does the Time Table for Reform Look Like?

Since 2017 is nearly finished, we can surmise that any new tax benefits or exclusions will not take effect until 2019, which is the 2018 tax year. There may be an exception or two to this in narrow provisions, but a general program will probably not be in place until later in 2018 and would not have retroactive provisions.

What Would a New Tax Program Look Like?

The answer depends upon whether the House program or President Trump’s program is accepted. The GOP House package includes a top individual tax rate of 33 percent. Corporations would be taxed at 20 percent, except for a special pass-through rate for active businesses of 25 percent. These businesses are companies managed as sole proprietorships or partnerships in which the tax is paid on a personal tax return. Except for research and development credits, mortgage interest and donations to charities, the plan eliminates business and individual tax benefits. Corporations would be limited in the amount of business interest they can deduct, but will be able to deduct full expenses for business equipment. Business taxes would also be border-adjustable, which means that things manufactured in the U.S. and exported to other countries would not be taxed. Companies that do business in other countries would not pay U.S. tax on their earnings until they are repatriated. At that point, there would be a tax of just under nine percent for cash and three-and-a-half percent on other things. President Trump’s program differs in some of the tax rates.

Are Reforming Tax Programs and Cutting Them the Same Thing?

They are not. The government could cut tax rates much easier than it can enact reform. The idea behind tax programs is that the tax code would be simplified so that it would be clearer and loopholes harder to find. The problem is that each of the tax provisions that make the code so bulky were added to satisfy special-interest groups, and those same groups would fight to keep them. The trick is to cut tax rates and then balance those cuts by eliminating enough deductions to pay for them.

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How Would Tax Reform Affect my Education Costs?

Both the President’s program and the program offered by the House retain educational tax benefits. Besides the Pell Grant and federal work-study programs, there are 14 educational credits, deductions, exclusions and incentives. Those provisions alone amount to $165 billion. One of the areas in consideration is the education loan interest exclusion. That amount, which is $2,500, has not been changed since 2001, but the amount of student debt has increased 100 percent. Aside from that, the reform program focuses on simplifying the educational benefits and eliminating overlaps.

What are the Obstacles to Passing a Tax Reform Bill?

The first obstacle is the so-called Obama Care. Whether you favor the law or not, it is the center of debate and a logjam to discussion of other items. The second obstacle is the cost of the program. Unless the GOP can figure out how to pay for reduced rates, the nation stands to lose a lot of revenue. In addition, the issue is not debatable on party lines alone. Republicans are deeply divided on how to proceed. Even if the GOP agreed, Democrats are pushing back on the focus of the reform. It is largely aimed at making the U.S. more competitive on the global marketplace. Business incentives, though, may take away from benefits meant to help the middle and lower classes.

Author Herman Wouk said that “income tax returns are the most imaginative fiction being written today.” That is because people will always try to invent ways to keep more of what they earn while asking the government to pay more of what they want. The biggest obstacle to a sweeping tax reform change is trying to convince the public that the system needs to be reformed and that someone must pay to do it.