The Trump Tax Proposal: What You Need to Know
Last week, the White House unveiled its tax plan, proposing to cut taxes across the board, relieve millions of people from paying income taxes, and streamline filing—all while keeping the budget in balance (or at least not making the situation worse). But are the plan’s promises possible to fulfill, and does it stand a chance of passing?
Potential benefits for taxpayers
For individuals and families, the plan would reduce the number of tax brackets (the highest of which is currently 39.6 percent) from seven to three, at 10 percent, 25 percent, and 35 percent. It would also double the standard deduction, to $12,000, so married couples making less than $24,000 would not pay income taxes at all. Finally, it would repeal the Alternative Minimum Tax (AMT), which was designed to ensure that higher earners pay a minimum level of taxes, and do away with the estate tax levied on inheritances.
From a business perspective, the proposal also offers benefits. Under the plan, the maximum corporate tax rate would drop from 35 percent to 15 percent, a clear potential savings. The border adjustment tax, which would have raised taxes for importers, is nowhere to be seen—another advantage for many businesses. Finally, pass-through businesses, including many small companies, would get a 15-percent tax rate.
All in all, for many taxpayers, the plan looks like a real win.
Don’t forget the potential costs
It would also come with substantial costs, however. To pay for the cuts, the administration would eliminate all tax deductions, except the mortgage, charitable giving, and retirement savings deductions. Notably, residents of states with high taxes would not be able to deduct those taxes. Depending on where you live, and how many deductions you take, you might end up paying more.
The costs at the federal level could be significant as well. Independent experts report that the plan would raise much less revenue for the country than the current tax laws do. The administration expects lower taxes to spur faster growth, making up for the shortfall, but if that doesn’t happen, the deficit would rise substantially. The numbers here are uncertain, as the plan includes few details so far. But it does seem reasonable to conclude that, without additional growth, the deficit would indeed rise, perhaps by a great deal.
But first things first: can it get through Congress?
As presented, the plan allocates much of the tax relief to the wealthy, which means it will be difficult to get support from Democrats. Eliminating the estate tax and the AMT, in particular, will make it a hard sell. On the Republican side, the possibility that the deficit could rise substantially may not sit well with the Freedom Caucus and other factions focused on fiscal responsibility. The internal Republican debate is likely to be lively, and the path to passage is not clear at all.
At the end of the day, the current tax plan is perhaps best described as an opening bid, laying out themes and priorities but leaving it up to Congress to fill in the details. And that is how it should be. President Trump has presented a road map for where he wants to go. Congress now has to decide how best to get there.
Although it’s worth reviewing the proposal as is, it is premature to get too involved at this point. After all, what emerges as law (if anything) is likely to be quite different.
Authored by Brad McMillan, CFA®, CAIA, MAI, chief investment officer at Commonwealth Financial Network. © 2017 Commonwealth Financial Network®