At This Early Juncture, We Honestly Cannot Tell
By Kristina Drzal-Houghton, CPA MST
President Trump’s skeletal outline of a tax package, unveiled at the White House late last month in a single-page statement filled with bullet points, was less a plan than a wish list.
Treasury Secretary Steven Mnuchin and Gary Cohn, the director of Trump’s National Economic Council, laid out the skeleton of a plan to reporters. They pitched his new tax proposal as a cut for the middle class and not the wealthy. However, it appears as if it would undoubtedly mean lower taxes for top earners, while the impact on middle incomes is less clear.
The proposal envisions slashing the tax rate paid by businesses large and small to 15%. Lowering the corporate tax rate from 35% to 15% is one of the most aggressive moves in the plan. The administration says it gets the rate down to where it is for most other industrialized nations.
Additionally, corporations would pay reduced or no taxes on foreign profits brought back to the U.S. It would be a special, one-time opportunity to bring home cash that they are parking overseas. They did not say how low that rate would be or how they would ensure that the money would be invested productively.
Pass-through businesses, such as S corporations and LLCs, would also pay the same 15% tax rate that Trump has proposed for corporations. As the name suggests, pass-through businesses pass their income through to their owners, who pay tax at their individual rates. For high-income earners, the rate could decrease from 39.6% to 15%. Critics have noted that this will not only benefit small family businesses, but also large business empires like Trump’s own.
On the individual tax front, the number of tax brackets for individuals is reduced from seven to three: 10%, 25% and 35%. The Trump administration did not say where those brackets begin and end. Individual tax rates currently have a ceiling of 39.6% and a floor of 10%. That lowers the top rate by nearly five percentage points, easing the tax burdens on most Americans, including, again, the rich.
Under the plan, the top federal capital-gains rate is cut from 23.8% to 20%. This is achieved by eliminating a 3.8% tax that is used to fund the Affordable Care Act. The reduction is meant to create greater incentives for people to invest.
Currently, single individuals have a standard deduction of $6,350, and married couples can deduct $12,700 from their taxable income. The president’s plan would double the standard deduction. That is intended to put more money in the pockets of the average taxpayers who do not itemize their deductions. It has the added benefit of simplifying the preparation of tax returns for more people. Cohn tried to frame this as a benefit to middle- and lower-income people who don’t have deductions, saying some people would pay little or no taxes under Trump’s plan.
The one-page blueprint proposes, without specifics, to “eliminate target tax breaks that mainly benefit the wealthiest taxpayers.” The proposal would scrap most itemized deductions, such as those for state and local tax payments, a valuable break for taxpayers in Massachusetts and Connecticut, which have high income-tax rates as well as real-estate taxes. But the president would leave in place popular breaks for mortgage interest, charitable contributions, and retirement savings.
The plan would eliminate the estate tax and alternative minimum tax, a parallel system that primarily hits wealthier people by effectively limiting the deductions and other benefits available to them — both moves that would richly benefit Trump himself.
In a brief session with reporters, Cohn and Mnuchin said they had been toiling for weeks on the proposal, much of which closely resembles the plan Trump championed as a presidential candidate. They argued that it would spur robust economic growth that would, along with the elimination of deductions, cover the potentially multi-trillion-dollar proposal entirely, a prospect that even many Republicans believe is virtually impossible.
“This will pay for itself with growth and with reduction of different deductions and closing loopholes,” Mnuchin said, repeating his optimistic estimate that the plan would spur the economy to grow at a rate of 3% annually. “The economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.”
The non-partisan Committee for a Responsible Federal Budget has estimated that the Trump outline could cost $5.5 trillion in revenues. The likelihood of our needing to worry about the accuracy of this estimate seems slim given recent developments.
Congressional leaders reached a bipartisan agreement on April 30 to fund the government through September, effectively ending any suspense about the possibility of a government shutdown. The agreement includes increased funding for the military and for border security. But it does not include funding for the wall that President Trump wants to build along the border with Mexico, one of his major campaign promises.
While the agreement avoids the embarrassment of a government shut-down, it also gives a glimpse of the reluctance of lawmakers to bend to Trump’s spending priorities, like his desire for sharp cuts to domestic programs, with the increase in funding for medical research a prime example.
While you may want to consult your tax adviser about the possible benefits the Trump plan would have on your taxes, I would suggest you hold off on changing your withholdings or estimated tax payments for 2017.
Kristina Drzal-Houghton, CPA MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.; (413) 536-8510.