After several years of stalled bipartisan efforts to reform the United States tax code, in December Republicans in Congress managed to push through many of their preferred tax measures in the Tax Cuts and Jobs Act (TCJA) despite strong opposition from Democrats due to their legislative majority and a supportive President.
However, with November’s mid-term elections looming large on the horizon, and with the Democrats possibly poised, according to some political pundits, to win back at least one chamber of Congress, could many key tax changes be undone in the space of a year?
This question cannot be answered with any degree of certainty at this juncture. But according to the Senate Democrats’ infrastructure plan, released in March, the “repurposing” of tax revenues spent on providing tax cuts under the TCJA is a priority. Just what exactly that means is outlined below.
The Democrat Infrastructure Plan
The Senate Democrats' “Jobs and Infrastructure Plan for America's Workers” would make a USD1 trillion federal investment in US infrastructure and create, it is claimed, 15 million jobs. A substantial chunk of this money would come from scaling back tax cuts included in the TCJA, including the following:
The TCJA has reduced the top rate of personal income tax from 39.6 to 37%. This measure, Democrats argue, unfairly benefited the wealthy. Therefore, the plan restores the top rate at its former level to raise USD139bn over ten years.
Under the TCJA, federal corporate tax was slashed from 35 to 21%. The Democrats would increase the current rate to 25%, a policy they claim most corporations would accept to raise an additional USD359bn.
Estate and Gift Taxes
The TCJA doubled estate tax exemption levels to USD11 million for individuals and to USD22 million for married couples. The Democrat plan would restore these thresholds to their prior levels, a move the party claims would raise USD83bn in revenue.
Alternative Minimum Tax (AMT)
The US AMT regime is intended to prevent predominately wealthy taxpayers from using deductions and tax breaks to substantially reduce their liability to tax. The TCJA increased AMT thresholds so that far fewer taxpayers would fall into this alternative tax system. The Democrat plan would restore the AMT to pre-2018 law to raise USD429bn over 10 years.
The Democrat plan would change tax law to characterise investment managers’ “carried interest” as income for tax purposes. Carried interests are ownership interests in a partnership that share in the partnership's net profits and are currently taxed as capital gains at lower rates of tax than ordinary income. This would raise an additional USD12bn a year in revenue, according to the Democrats.
What's The Chances?
Of course, these proposals only stand a chance of being legislated for if the Democrats score a victory in the mid-term elections. And they are hoping that targeting tax cuts which benefit high-income individuals and large corporations will be a popular policy with voters. Still, they would almost certainly have to win both chambers of Congress back with a comfortable enough majority to overcome any procedural hurdles thrown their way by Republicans.
As mentioned, it is currently impossible to predict accurately the outcome of the election. Yet, as taxpayers continue to get to grips with the wide-ranging changes in the TCJA, there is an outside chance that tax rules could change yet again, and, unhelpfully, this merely increases uncertainty for taxpayers coming to terms with their new obligations.