President Trump and the Republican-controlled Congress managed to make tax reform a reality in passing the Tax Cuts and Jobs Act late last year. The law combined some structural changes to elements like deductions and credits with reductions in tax rates for individuals and corporations. Proponents saw the passage of the bill as a victory for the American people, while opponents argued that the law's provisions were skewed toward corporate benefits with less dramatic impacts on individual taxpayers.
Yet less than three months after tax reform became law, its provisions are already under attack. In their proposal to fund $1 trillion in infrastructure investments, Senate Democrats released a plan earlier this month that sought to reverse many of the key provisions in the Republican tax reform package. In particular, the following five tax cuts would be watered down or eliminated in the Democratic proposal.
1. Eliminate the reduction in the top individual tax rate
Democrats have generally supported increasing the tax burden that wealthier taxpayers bear, and even after the restoration during the Obama administration of the Clinton-era 39.6% top tax bracket, some lawmakers have sought more. The new tax laws cut the 39.6% rate to 37% and boosted the income thresholds above which the top rate applied. Under the Democratic proposal, the top rate would return to 39.6%, but the new higher thresholds would remain in place. That would let upper-income taxpayers keep the benefit of having more of their income taxed at the lower 35% rate.
2. Take away new AMT exemptions and phaseouts
The Republican tax plan made changes to the alternative minimum tax that dramatically reduced its impact. The new laws boosted the exemptions from the AMT, but more importantly, they prevented those exemptions from phasing out for a much wider swath of AMT taxpayers than under previous law. Under the new law, exemption phaseouts don't begin until income reaches $500,000 for singles or $1 million for joint filers.
The Democratic proposal would cut the AMT exemption and phaseout levels back to their 2017 limits. That would potentially leave more people subject to AMT, because the reduction in conventional tax rates will have dropped more taxpayers below what the AMT would charge them. This provision would be the biggest revenue-provider of the five, with Democrats estimating $429 billion in increased revenue over the next 10 years.
3. Roll back the doubling of the lifetime estate tax exemption
Tax reform doubled the amount of money that can go to heirs after death without incurring estate tax, setting the 2018 amount at $11.18 million per person. Democrats characterized that move as a "giveaway to the billionaire class" and would return that to the 2017 levels, which was $5.5 million per person. It's not entirely clearly whether the proposal would apply retroactively to those who passed away earlier in 2018.
4. Eliminate lower tax rates on carried interest
The new tax laws didn't actually create the carried interest tax break, but Democrats argue that President Trump had campaigned on eliminating it but failed to do so. Opponents of the provision have long argued that allowing investment management professionals to have some of their income treated as capital gains is inappropriate because it's essentially compensation for services, but those who favor the break note that carried interest represents money at risk. In any event, the provision wouldn't be a huge revenue-raiser, with just $12 billion in increases over the next 10 years.
5. Taking away part of the corporate tax cut
Finally, Democrats argue that the tax reform package went too far in cutting corporate taxes. They would have preferred rates in a range of 24% to 28%, citing past negotiations between the two major parties. The proposal sets a 25% corporate tax rate, which would once again lead to another round of one-time charges for companies if passed.
A sign of things to come
In a Republican-controlled Congress and with a Republican president, there's no chance that the Democratic tax proposal will get implemented in the near future. In the long run, though, it could signal the tax strategy that Democrats will follow if they successfully dislodge their Republican rivals in future elections.