Another pain point is the Senate Republican plan to cut the corporate rate to 20 percent from 35 percent but delay implementation until 2019. Such a move would help Republicans stay within the cost confines of the bill but could mute the economic growth projections that the White House and lawmakers have been counting on to avoid adding to the federal deficit.
The Senate bill maintains a 10 percent bottom tax bracket for individuals — the House bill had raised it to 12 percent — and, like the House bill, would nearly double the standard deduction for individual filers. The Senate version includes seven income brackets, scuttling some of the simplicity that House drafters used to sell their bill, which reduced the number of brackets to four.
High earners would pay a top tax rate of 38.5 percent in the Senate plan, down from 39.6 percent, a rate that was maintained in the House bill.
Meanwhile, in another dramatic departure from the House bill, the Senate would not create a special, lower top rate for so-called pass-through entities, which are businesses whose profits are distributed to their owners and taxed as individual income. Instead, the Senate would create a deduction for pass-through owners of all income levels, effectively lowering taxes both on rich owners and on middle-class small business owners who would not have benefited from the House’s original lower pass-through rate.
Senate staff members said the bill will meet Republicans’ target of not losing more than $1.5 trillion in tax revenue over the course of a decade. But they suggested changes would be needed to be made by the Finance Committee in order to ensure it does not lose revenues after 10 years, and thus stays in compliance with the procedural rules that would allow the bill to pass on a party-line vote
Those changes could include setting some of the tax cuts to expire after a period of years.
The details emerged as Republican Senators planned to release their long-awaited tax bill, which lawmakers hope to send to Mr. Trump’s desk by Christmas.
On Thursday, amid pushback from fellow Republican lawmakers, small businesses and other industry groups, Representative Kevin Brady, who chairs the Ways and Means Committee, unveiled a 29-page amendment making further revisions to the House’s tax plan. The amendment restores the adoption tax credit, which the House tax plan had planned to repeal. It also creates a new, lower tax rate for certain small business owners, a provision small business trade groups had been pushing for.
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Under the new provision, the first $37,500 of business income would be taxed at 9 percent, rather than 12 percent, for an unmarried individual earning less than $75,000 through a pass-through business. For a married couple, the dollar amounts would be double.
The Senate is also including a provision to prevent large multinational corporations from stashing profits overseas. The bill will propose a new business tax on American and foreign companies — effectively a minimum tax on their income earned in the United States — while also levying a 12.5 percent tax on income American companies receive overseas from their intellectual property. .
The minimum tax included in the Senate bill is a critical component of Republicans’ plans to overhaul how the tax code treats corporations, using both carrots and sticks. The plan will encourage domestic investment by lowering the corporate tax rate to 20 percent from 35 percent and will discourage companies from shifting money abroad by imposing the new tax. However, it remains to be seen whether the plan will have its intended effect: The Senate is expected to delay the corporate tax cut until 2019, according to a Republican senator and a lobbyist familiar with the plan who requested anonymity to discuss a plan that has not yet been released.
Republicans in the finance committee have been meeting with staff members for weeks to craft the Senate bill. Democrats criticized their process even before the bill was released on Thursday.
“Not a single Democrat has had any input into this bill,” the Senate minority leader, Chuck Schumer of New York, said on the Senate floor. “It was constructed entirely behind closed doors by the majority party, who have no intention of negotiating with Democrats because they’ve locked themselves into a partisan process that only requires a majority vote. And they’re going to try to rush it through this chamber with reckless speed.”
The Senate plan will impose a tax on American and foreign companies that shift money earned in the United States offshore but will do it in a simpler way than a complex plan outlined in the House version, the aides said. “It levels the playing field” between domestic and multinational companies competing in the same markets, a committee aide said.
Preliminary estimates indicate it would raise more than $130 billion in tax revenue over 10 years to help offset revenues lost from rate cuts, committee staff members said. The original House approach, which would have levied a 20 percent “excise tax” on payments between American and foreign companies that are affiliated with each other, would have raised an estimated $155 billion in revenue.
The Senate approach would impose a minimum tax, of sorts, on the profits earned in the United States by multinational companies.
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Under current law, companies can avoid taxation on those profits by shuttling them to affiliated companies abroad, in countries where the corporate income tax rate is lower than it is in the United States. For example, the American subsidiary of a country based in Ireland, where the corporate tax rate is well below the American rate, could make payments to the Irish company for the use of its intellectual property. Those payments would be deducted from the American subsidiary’s profits, for tax purposes in the United States.
The new approach would apply only to large multinationals that make a significant amount of payments to foreign affiliates. It would levy a 10 percent tax on the difference between a company’s actual tax liability and the liability it would have faced for the profits it instead moved offshore.
So, for example, if a company made $100 million in American profits, but paid $80 million to a foreign affiliate for intellectual property rights, it would start with a tax liability of $4 million. (That’s from paying the bill’s proposed corporate tax rate, 20 percent, on an overall profit of $20 million.) It would then face an additional $4 million tax on the profits it shifted offshore. (The $80 million in payments would be subject to a 10 percent rate, which equals $8 million. Subtract the $4 million already paid, and you get the extra $4 million liability.)
Senate Finance Committee staff called that approach “more surgical” than the House bill.
The House watered down its excise tax proposal this week after it came under fire from a host of business and conservative groups, including the American Forest and Paper Association and Americans for Prosperity, an arm of the Koch political network.
In the House, Republicans were still wrestling with a critical math problem on Thursday over a sizable revenue hole to fill. To avoid a Democratic filibuster, the tax legislation can add no more than $1.5 trillion to federal budget deficit over a decade, and the House bill appeared to exceed that limit because it cut federal revenue by about $1.57 trillion over a decade, according to an estimate earlier this week by the Joint Committee on Taxation.
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