Given the current rancor on Capitol Hill, there have been many campaign pledges that have been put somewhat on hold and/or slow to navigate Washington’s ways. As has been discussed before, the market has priced in many of the initiatives: health care reform, infrastructure spending, tax reform and so on. Tax policy reform is of particular interest and in case you missed it, the “Trump Plan” proposal was released with much fanfare. There are some potentially significant changes in the proposal. Whether or not some or any of the changes are passed into law is a separate issue. There are competing proposals in the House that may strengthen or weaken aspects of the plan and external shocks may even sideline tax reform as a priority. Nonetheless, we provide an overview of the proposal below as a means to be informed and to start to think about potential impact on your investment strategies. We do not make any value judgements with respect to the merits, economic impact or potential benefits of any of the proposed changes.
As mentioned, the proposal includes quite a few proposed changes at the individual level that are listed below.
- Condense tax rate buckets from 7 to 3: max rate of 35%
- Eliminate the 3.8% tax on net investment income
- Eliminate the Alternative Minimum Tax (AMT)
- Eliminate itemized deductions except for home mortgage interest and charitable contributions
- Double the standard deduction
- Repeal the estate tax
This section has received tremendous attention from both sides of the aisle as the tension is between one camp that is calling for significant corporate tax relief whereas the other side is clamoring for the opposite: increasing the corporate tax obligations. The Trump plan provisions are shown below.
- Lowers top tax rate from 35% to 15%
- Significantly reduces allowable credits and deductions
- Eliminate the corporate AMT
While the actual proposed plan was only one page in total, the brevity belies the complexity involved in actually implementing the provisions and in constructing the needed mechanisms to allow for implementation. Some of the other areas covered (and some left out) are included below.
- Adoption of a territorial tax system: the concept here is that income (corporate) is taxed in the country in which it is earned and not taxed in the U.S. as well when profits are repatriated
- Deferred foreign profits: in conjunction with the above, a mechanism is to be determined to allow for existing/legacy foreign profits to be repatriated as well as those going forward
- Pass through entities: partnerships, LLCs, S-Corps, etc. would be taxed at a 15% rate
- No border adjustability: this would have imposed taxes on all imports and profits from exports would be tax-free
Some added details of the plan components are posted below in order to give a sense of the proposed changes.
|TAX BRACKET||SINGLE||HEAD OF HOUSEHOLD||MARRIED FILING JOINTLY|
|12%||$0 – 37,500||N/A (single-filer rates)||$0 – 75,000|
|25%||$37,500 – 112,500||N/A (single-filer rates)||$75,000 – 225,000|
|33%||$112,500+||N/A (single-filer rates)||$225,000+|
Source: The Tax Policy Center
A visual representation can be found here (original article: https://howmuch.net/articles/trump-tax-changes)
Again, we do not undertake an analysis of how much this plan will impact GDP, the budget deficit, revenue receipts and many other factors. There is a plethora of analysis from many sources and we will revisit the cost/impact analysis in a future article as tax reform becomes more likely and as the analysis becomes more settled in terms of reliable data.