Trump’s Tax Plan: The Good and the Bad

Tax reform — it’s something that President Trump has been talking about on and off almost since the beginning of his run for President, and finally, it looks like Congress may be on the verge of getting around to actually making it happen — at least in one form or another. Late last week, the Trump administration revealed the outlines of its tax plans in a White House press conference led by Treasury Secretary Steve Mnuchin and White House National Economic Council (WHNEC) Director Gary Cohn.

Both Mnuchin and Cohn trumpeted what the administration has called “the biggest tax cut” in American history. But as with health care and other significantly heavy legislative lifts, the devil, as they say, is in the details.

With taxes, it’s no different — both political parties and their various factions have strong opinions of Trump’s tax proposals, and to be sure, there’s already been a lot of criticism. But first, let’s take a look at what the reforms entail for taxpayers:

  1. Seven Tax Brackets Will Become Three

For many people this is good news — it’s a massive simplification of a system that used to create much more work for accountants (who still will have many reasons to remain employed under Trump’s plans). People in the lowest bracket will now pay only a 10-percent federal tax, while people in the middle bracket will pay 25 percent and people at the top will pay 35 percent.

Mnuchin and Cohn did not yet specify the income levels at which the brackets would take effect. In theory, however, this simplification will encourage workers to be more productive and earn more because the government will take less of their earnings.

  1. The Standard Individual Deduction Will Be Doubled

The standard individual tax deduction will be doubled, so a married couple won’t have to pay taxes on the first $24,000 of their income. This will make a substantial impact for many lower and middle-income workers.

  1. Taxpayers Will Not Be Able to Deduct State and Local Taxes

State and local taxes will not be able to be deducted from federal taxes anymore. For lower and middle-income workers, this won’t have much of an effect, but once incomes hit seven figures and above (particularly above $2 million), this could start to be very painful, especially in states that have high state and local tax rates such as New York, Connecticut and New Jersey.

These states have only increased their bite on the rich in recent years. For really big earners such as hedge-fund managers and CEO’s in those states, this could be a giant issue that could end up derailing or altering the administration’s overall plans. In New Jersey, one hedge-funder already left for Florida, which has no state income tax. The state projected a loss of $200 million annually from just that individual alone.

  1. The Only Itemized Deductions Allowed Would Be Charitable Contributions and Home Mortgage Interest

Once again, for lower and middle-income earners, who don’t tend to take many deductions, this isn’t a big deal. But for upper-tier earners and businesses, this could inflict more pain. But there will be ways to alleviate this pain (see below).

  1. Certain Types of Taxes Would Be Repealed

The Alternative Minimum Tax, the Estate Tax and the current 3.8 percent tax on income from investments related to Obamacare would be repealed. For lower and middle-income earners, this isn’t a big deal, but for upper-income people, small-business people and farmers, this is huge. In fact, it’s safe to say that some millionaires may be switching their votes to Trump in 2020 if these items become law.

  1. Some Tax Loopholes Will Be Closed

Mnuchin and Cohn did not detail which ones would be eliminated; if they had, no doubt there would be far more uproar about the plans than there has been already. And this is likely to be what much of the Congressional fighting in the upcoming weeks and months will be about, particularly from special interests.

  1. Business Tax Rates Will Drop from 35 Percent to 15 Percent

Small business and large business owners alike are likely quite happy about this point, even if some of the loopholes they currently take advantage of end up getting closed. Currently America’s business tax rates are some of the highest in the world, coming in at 35 percent, but many companies (such as General Electric) get around the issue using loopholes and by taking profits overseas, which brings us to the following point:

  1. There Will Be a One-Time Repatriation Tax for Companies That Have Been Keeping Profits Offshore

Big companies like Apple and Google have been keeping their profits (roughly $2.6 trillion in total) overseas for years in order to avoid paying excessively high U.S. business tax rates. Now, with a vast decrease in the tax rate and a one-time tax — 10 percent — on repatriating such profits, these companies will have a huge incentive to keep their money in the U.S., which can be used to make new investments in business infrastructure, technology and job creation — all of which will fuel profitability.

  1. Individuals Will Be Allowed to Create “Pass-Through” Businesses to Take Advantage of the 15-Percent Tax Rate

This last point is controversial because many experts claim it will be wildly abused — despite Mnuchin and Cohn insisting the opposite. “It would tremendously help high earners,” asserted Brian Thompson, an accountant in Chicago.

But here again, the devil is in the details because there was no word on how exactly the Trump administration plans to prevent abuse other than via “new rules” issued by the Treasury Department. Already, some tax experts are saying that will be impossible.

“Good luck with that,” stated Mark Mazur, the director of the Tax Policy Center, a nonpartisan organization. “The tax agencies tend to be at least a couple steps behind the businesses.”

The above are the major selling points of the plan. But equally interesting is what’s not included — a tax on imports, which Speaker of the House Paul Ryan claimed could rake in as much as $1 trillion for the government.

Critics say that revenue shortfalls for the government from all of the above will be significant — as much as $5.5 trillion over 10 years. However, Trump has said that the federal deficit wouldn’t be affected because economic growth created by the lowered taxes across the board would result in more revenue for the government, not less (some conservatives would like to hold Trump to that pledge in writing).

As with many of the other points above, it depends on who one talks to about how rosy (or not) the Trump administration’s projections are.

Right now, economic growth for the country is sorely needed, and for 2017, it’s been projected that GDP may fall below 2 percent, mostly due to the persistence of Obama-era regulations and federal planning. Mnuchin and Cohn are aiming to get the GDP number back above three percent, where every American postwar administration has consistently had it except for Obama.

“We’ve been hearing from the last administration that 3 percent [economic growth] is hard to get to, and they couldn’t get there,” said Mnuchin. “That’s why we got a new president.” The Trump administration is also hoping that a juiced economy will result in more jobs and higher wages for average Americans.

For the Republicans, House Speaker Ryan says that lawmakers in his party are “in agreement on 80 percent [on the proposed tax package], and then with that other 20 percent, we’re in the same ballpark.”

But among the Democrats, there are many who are saying Trump’s package amounts to a massive giveaway to the rich by a president who is already fabulously wealthy himself. For starters, they say the 15-percent business tax rate won’t cut it as far as government revenue. And some Democrats have been saying they won’t support any Trump tax plan until the president releases his personal tax returns, which Mnuchin denied President Trump will do.

“I think a reasonable first step is for the president to do what every other president since Ford has done and disclose his tax forms for review by the American people so we can determine what conflicts of interest may potentially exist and how his proposed plan may benefit him, as opposed to benefiting the people of the United States of America,” said Democratic Representative Hakeem Jeffries of New York, just one of many Democratic lawmakers insisting on this action.

There have also been criticisms that Trump releasing this proposal just three days before his 100th day in office was something of a publicity stunt.

In the meantime, markets have had a lukewarm response to the announcements, with bond prices rising, which equates to a market belief that the plan will ultimately get watered down by Congress. Some economists worry that if the government’s deficit balloons, interest rates will rise and cancel out the benefits that the proposal was expected to bring.

But critics of the Trump tax plan may be forgetting that when former President Ronald Reagan gave tax cuts to the wealthy, the economy zoomed, allowing lower and middle-income earners to reap some of the same benefits (and see higher incomes) that the upper-tier citizens realized. It’s likely that the Trump administration will need to spread that message far and wide in order to sell voters on its proposals.


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