The goal of a simpler, flatter tax code is sometimes voiced by politicians but reaching that point is hard, as unfolding developments in Washington are likely to prove.

US lawmakers are starting to consider a bill that could cut taxes by a total of $1.4 trillion over a decade but the passage of such measures looks to be anything but guaranteed, and prospects for a flatter, simpler tax code remain a way off, media reports said. 

Republicans in the House of Representatives disagree on planned eliminations of state and local tax rates, while GOP members in the Senate also dispute areas such as child tax credits (source: Wall Street Journal, Nov. 6, 2017). 

A key reform proposal on the corporate side, meanwhile, is around the proposal to slash the existing corporate tax rate – one of the highest in the developed world – to 20 per cent from 35 per cent (on some measures, the corporate rate can be as high as 40 per cent). The idea is seen as encouraging US firms to repatriate overseas earnings often parked in low-tax jurisdictions, thereby boosting the domestic US economy. 

Existing tax reliefs on mortgage interest, state, local taxes and medical costs are, so reports say, popular, but the House plan will affect them all. For example, property tax deductions will be capped at $10,000; mortgage-interest deductions no longer applies on debt over $500,000. Some commentators have suggested the proposals work at the expense of “blue”, Democrat-leaning states and in favor of “red”, Republican-voting ones. 

Reports said changes to state and local tax breaks will hit Republicans in New York and New Jersey, producing potential trouble in the House. 

It is argued that relatively wealthy citizens will benefit from the repeal of the alternative minimum tax and phase-out of the estate tax. The proposals have been criticised by Democrats for widening wealth inequality, the very issue, ironically, that is seen as a fuel for political populism in the US and abroad. A recent 156-page Citigroup report, entitled Inequality And Prosperity In The industrialized World, said that inequality in the US widened between 1980 and 2013/14, but has contracted across the world as a whole amid globalization and greater trade. The US has one of the highest inequality levels, as measured by the Gini Coefficient (a high number show wide inequality, and vice versa), among members of the OECD industrialized nations (source: Citigroup.)

A recent Family Wealth Report conference on impact investing heard contrasting views on whether cuts or abolition of the estate tax will blunt incentives among high net worth Americans to give to charity. At present, philanthropic gifts can, up to certain limits, exempt a person from estate taxes. Susan Winer, founder and chief operating officer of Strategic Philanthropy, has written about these issues and potential threats to philanthropy here.

Among other details, proposals leave alone the current ability of citizens to put up to $18,000 into 401(k) retirement accounts tax-deferred.