Trump Tax Reform, Doubtful Road Ahead

By Andrew Witzel

The White House released the plans for a “once in a lifetime” opportunity to overhaul the tax code. There isn’t a lot of meat in the plan outline except a series of proclamations that steal from the numerous campaign promises made by Trump and a large number of Republicans. What is being proposed is a revamp of the U.S. tax code. The existing tax code is one of the most complex in the world and anyone on the outside quickly sees its a rigged “make the rich richer” scheme of laws. Anyone not wealthy by the strict standards in the United States is relegated to navigating, to use one of Trump’s words, the swamp. While details were hard to find, there are several cornerstones highlighted in what was released to the public.

Individual Taxes

Out of all the proposed ideas, this is the one that has the greatest impact potential. There are currently 7 tax brackets in the U.S. with codes and laws that make it hard to figure out what bracket you are even in sometimes. For those that itemize, it’s a yearly living nightmare making sure everything is correct. I personally have turned to software and online services to file my taxes because, at the end of the day, it’s easier to get through an audit with a partner. Trump has made the proposal to reduce those 7 individual tax brackets down to just 3: 35%, 25%, and 10%. Income breakdowns were not released so it’s anyone guess as to how those brackets are sliced up.

Here’s a suggestion since it feels like a “throw it against the wall and see what sticks” sort of thing.

  • 10% – Adjusted gross income up to $300k/year
  • 25% – Adjusted gross income $301k – $1m/year
  • 35% – Adjusted gross income greater than $1m/year

There is a raft-sized list of deductions that will be tossed out the window. The two most popular, mortgage-interest deduction and charitable deductions, will remain for now. The standard deduction for families is also being proposed to double to $24,000 of a couples’ income and receive tax relief for childcare. An increase in standard deduction would allow a larger number of Americans to file using the 1040EZ form instead of the standard 1040 which details itemized deductions. Tax time would be made easier for hundreds of thousands of Americans. A quick review of my own taxes last year, if a $24k standard deduction was taken, I could have filed using 1040EZ form. I support this part of the plan.

Corporate Taxes

Perhaps the biggest part of the plan with huge impact to our economy is the reduction of the corporate tax from 35% to just 15%. That is a massive decrease in taxes that could, in theory, boost our sagging corporate sector. The tax decrease is an effort by Trump to repatriate foreign earnings that have so far gone lightly taxed or not at all. The plan mentioned a special one-time tax, amount not listed, for them to bring back those foreign-housed earnings.

Estimated Cost

The Committee for a Responsible Federal Budget has estimated the plan to cost between $3 to $7 trillion. Several base estimates put it in the neighborhood of $5.5 trillion or, to put it another way, 20% of U.S. GDP.

Even if tax cuts could generate more growth than estimated, no plausible amount of economic growth would be able to pay for a substantial portion of the tax plan.

With a plan that is inadequately described as “skeletal”, the Congressional Budget Office can’t even begin to start scoring. Conversations with Capitol Hill Republicans started almost immediately after the announcement though and a more complete plan is expected in the coming weeks. One point made that casts some doubt on the “months of effort” Mnuchin says took place is the fact that the proposal is a carbon copy of the principles Trump articulated on the campaign trail. It’s no surprise that many are skeptical that the tax reform plans will end up any better than the wall, travel ban or the repeal of Obamacare.

Wall Street

No one can question why the plan was welcomed with open arms on Wall Street. Markets have rallied on the possibility of corporate tax relief and repatriation of foreign earnings. In fact, markets have done better this year than in several previous years that is in stark contrast to historically low presidential approval ratings. A huge risk is looming on the horizon if the Trump administration and Congress can’t get on the same page causing tax reform to stall with every other agenda item attempted since January. A stalling of tax reform would most likely send the markets into a tailspin, self-correcting to where they should be when a president is seen unfavorably.

High Earners

Trump can say whatever he wants about how it’s hurting him more than middle and lower-income Americans. Anyone that can read can clearly see the perks that high earners are going to reap with this proposed tax reform. One of the proposals is to repeal the estate tax that currently taxes heavily estate inheritance with values greater than $5.5 million. When the average price of a home in the United States is currently $180k, it’s clear who this repeal is benefitting. The alternative minimum tax is also on the chopping table. One of the more complex tax codes, you can read more about it here (https://en.wikipedia.org/wiki/Alternative_minimum_tax). Trust me, it’s complicated and losing it might not be such a bad thing honestly.

Political Appeal

The proposal is thin on details, that much is for certain. There is a load of political appeal that can only serve to benefit Trump as a diversion of coverage on his previous 9 months in office. The American people love tax breaks and they are unanimously popular. Most are skeptical that the proposed tax-reform package is actually going to be the final tax-reform package once Congress gets their hands on it. We’re going to see a lot of cooperation from both sides of the aisle in that the last tax code reform took place more than 30 years ago. To Republicans heading into the 2018 election cycle, a tax reform win is music to their weary ears. Trump’s party can slash rates, juice the U.S. economy and as a result, get that much needed first win. Americans are, not surprisingly, skeptical and not holding their breath.

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