The world of taxation both at the personal and corporate level are about to go through a radical overhaul.
For the most part, the forthcoming changes will be positive in my view for the greater good. Trump promised to re-work the tax system and, with a Republican House and Senate, he has a good shot at having a good number of tax reform changes enacted.
Some of his tax proposals are fairly radical. But that doesn’t mean they won’t be enacted, because the Republicans will control both the House and the Senate.
I find it entirely hypocritical that House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell seem to be totally catering to Trump now, after deserting him during the campaign along with Sens. John McCain and Lindsey Graham, as well as Reps. Reid Ribble, Scott Rigell and Mark Sanford, among many others.
Under Trump’s proposed new tax structure for individuals, there will fewer tax brackets and lower top rates: 12%, 25% and 33%, versus the current rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%. The new proposed plan would eliminate head of household filing status. Head of household filing status is for unmarried individuals who have dependents, such as single parents. It has more favorable rate brackets than single filing status, so head of household filing status is more advantageous and thus will likely run into stiff resistance from both Republicans and Democrats.
Fact checking shows about half of single parents with one child would see a bump in their tax rate. Thus, expect a firefight on this issue.
The new plan would abolish the alternative minimum tax (AMT) on individual taxpayers. This is a major positive if AMT is eliminated. In addition to radical changes, Trump wants to relinquish estate taxes altogether. Trump’s plan also would subject accrued capital gains that are outstanding at death to capital gains tax, but there would be a $10 million exemption. In addition, the plan would cap itemized deductions at $200,000 for married joint-filing couples and $100,000 for unmarried folks. The standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried folks, the standard deduction would be increased to $15,000 (up from $6,350). The personal and dependent exemption deductions would be eliminated.
Another mammoth change involves corporate income taxes. Under Trump’s plan, corporate tax rate would be cut from the current 35% to 15%, but eliminate tax deferral on overseas profits. A one-time 10% tax rate for repatriation of corporate cash that is held overseas would be on the table. There’s a tremendous amount of support for this change, but will surely run into opposition from Democrats who will see any cuts in corporate taxes as unacceptable.
In what I think would spark rapid hiring by small businesses, the new tax proposal would apply the same 15% tax rate to business income from sole proprietorship and business income passed through to individuals from S corporations, LLCs and partnerships. The change of radically lowering this rate would unleash a wave of criticism by economists that federal tax revenues would severely suffer. In the short-term, that might be true, adding to the budget deficit, but with two-thirds of new hires attributed to small business, the longer-term structural gains might be worth it.
One area that gets approval from both sides of the aisle is the elimination of most corporate tax breaks, such as unlimited deductions for interest expense, and many of the write-offs and credits that have been loudly criticized as being corporate welfare. Rest assured, the special interest lobbyists up and down K Street in downtown Washington, D.C., are already working overtime to protect these corporate goodies and “the establishment” will not bend easily.
As to health care, expect some degree of overhaul and some aspects of the existing program to remain in place. I believe the 3.8% Medicare surtax on net investment income will be the first line item to be cut out of Obamacare. I think the recent spike in premium rates announced just before the election had a lot of undecided voters pulling the lever for Donald Trump and his vice presidential running mate Mike Pence. House Speaker Paul Ryan and his team have a modified bill drawn up that could become law, assuming they can outlast a Democratic filibuster.
The degree to which that these grand changes take effect will depend largely on how fast the Republicans can assemble legislation to go to a vote. In the first 100 days, presidents that have had wide opposition from within their own party, such as we’ve seen, can repair lots of ill will and mend many fences with unified thinking. Simplifying and lowering taxes on individuals, families and businesses, while reducing the size of federal government by sending more power back to the states and slashing pet projects that fleece American taxpayers, will help offset the initial short fall in federal tax receipts.
The perceived big-picture payoff from this overhaul is crystal clear. Wide-ranging changes in the tax code should fuel economic expansion in the private sector, where gross domestic product (GDP) has a realistic chance of growing at a 3.5%-4.0% rate on an annual basis. If so, not only will there be enough money to balance the budget, strengthen the military, maintain entitlements and offset increases in the cost of living, but there might be large residual funds to start paying down the $20 trillion in debt our grandkids are facing. What a novel idea.
In case you missed it, I encourage you to read my e-letter column from last week for an in-depth analysis of the top favorable companies based on the most recent earnings reports.