With Trump as President and with a Republican House and Senate, there is likely going to be broad agreement on tax reform.
Here is what appears to be likely, though proposals are somewhat fluid:
- The corporate tax rate will be lowered to as low as 15%. If this happens, expect a large part of the $2.4 trillion in corporate profits to be brought home. The tax windfall would pay for a lot of pet projects in Congress and would likely be a way to garner some Democrat support. (I think there should be some way of assuring that much of that goes to capital development in the US and not into stock repurchase plans.)
- Lowering top tax rate to 33 percent from 39.5% (not counting Medicare surtax) and lowering number of brackets from 7 to 3. New brackets would be 12%, 25% and 33%.
- Capping the capital gains tax at 20 percent.
- Eliminating the estate tax (never could figure out why the government thought they owned half of what a private individual accumulated upon their death-I guess rationale is to prevent accumulation of too much wealth in a family but it just makes trust lawyers richer as the rich find ways to avoid the tax)
- Presumably the penalty or tax or whatever on your health plan will be eliminated as part of the repeal of Obamacare.
Pass through entities, partnerships and S Corps, will be very favorably impacted here which will be a big plus for small business which creates 2/3 of the jobs in the country.
The aforementioned changes are those that seem to align with the Republican plans. Other changes that might be put forth:
- Trump also discussed eliminating the “net investment income tax” which was part of Obamacare.
- Capping itemized deductions at $100,000 for single filers and $200,000 for married filers
- Eliminating the head of household filing status
- Make the standard deduction $15,000 for single individuals and $30,000 for married couples.
- An “above the line” child care deduction for children up to 13 years of age for average child care expenses. This deduction would be phased out for higher income earners.
- Adds credits of up to $1200 a year for child care costs as “spending rebates” for low-income taxpayers. These may be aligned in some manner with the earned income tax credit.
- Carried interest would be taxed at ordinary income rates instead of the current capital gains rates that currently aids Wall Street professionals. This proposal aligns with those of Warren and Sanders.
- The individual alternative income tax would be eliminated.
Those are the most recent proposals we have seen as of today. Their projected effect on the Treasury depends a lot on whether or not they are scored dynamically or via static models. I think the goal will be to try and break even when scored dynamically so there will be some bargaining that goes on with heavy input from all the usual sources but the end result will be the same.
My prediction will be some significant tax cuts passed by Congress within the first few months of the next session. This combined with cuts in regulations should cause a pretty good boost in the economy. If corporate profits also come back to US shores, that will be icing on the cake.
As proposals solidify, we will keep you try and keep you informed at to the effect on tax payers.
Questions or comments? Shoot us an email. What do you think of these proposals? What would you add? What are your concerns?