I have gotten several questions from my clients in regards to the possible impacts of Trump’s tax plan. All we have to go on right now is speculation, but I thought I would go through some of the better known highlights.
Right now, the Senate has 54 Republicans, 44 Democrats, and 2 Independents. The House has 247 Republicans and 187 Democrats. The Republican majority pretty much assures some form of tax reform is going to take place during the 4 year term of our new President with very little Democratic support needed. The basis of Trump’s tax plan is basically that we need to cut corporate taxes, lower personal tax rates, and everyone will magically have more money and our US deficit will go down because more people will be working, paying taxes, and buying things. However, who this really benefits may surprise you…
The major highlights I want to discuss are:
1. Reducing the corporate tax rate from 35% to 15%
2. Some form of border adjustment taxes
3. Consolidate the current seven tax brackets down to three. The new brackets would be 12%, 25% and 33%
The thought is that reducing corporate tax rates will mean that US corporations will have more money to hire people, put into R&D, improve profitability, and hopefully raise incomes of workers. More people will have jobs, which means more people buying things and paying taxes. This has been hotly debated as to whether or not it will work and the jury is still out. If you look at the last two times the government slashed tax rates (1981 and 2001), tax revenue did not keep pace with federal spending and deficits continued to rise.
Another aspect of his tax plan is to impose some kind of ‘border adjustment tax’ that will make foreign goods more expensive, reduce our trade deficit, and increase tax revenue. One of the largest problems with this strategy is currency exchange rates. If Trump’s measures are all approved, the dollar would most likely appreciate against foreign currencies. This would make our goods and services more expensive overseas and reduce the competitive gains. The only way to stop this would be if the Federal Reserve prevented the dollar from appreciating by lowering interest rates. Considering the Federal Reserve is most concerned with keeping inflation in check, they will most likely raise interest rates in the future versus lower them. So this new tax will most likely not achieve the desired result.
Next, the discussion around bringing down the number of tax brackets from seven to three and how Trump wants to do it is also very contentious. If you look at the chart below, you can see how you will be affected and what tax bracket you would fall into going forward if approved.
Based on this raw data, it appears that the upper middle class Trump said he would help is really getting hurt. In fact, if you run the numbers, it appears that individuals earning $112,500 to $190,150 and married families earning $225,000 to $231,450 will see a 2% – 5% increase in their taxes. This will affect the majority of small business owners in the US because they are not setup as C corporations, but rather as sole proprietors, partnerships, S Corps, and LLC’s. I find it worrisome that the small business owner, the ‘bread and butter’ of our economy, is going to get hurt by this tax plan. Another one of the most interesting aspect of the tax plan, that I have not seen mentioned often, is getting rid of being able to file “Head of Household”. Eliminating that would substantially hurt single parent families and they would see their taxes jump tremendously. Eliminating “Head of Household” is under debate, so I hope it stays in! So really, the new tax plan mainly benefits the wealthy as they get the largest tax cut and in reality could hurt small business owners and single parents.
As you can see, the biggest parts of Trump’s tax plan could end up benefitting corporate America and the wealthiest Americans the most and hurting the majority of small business owners and single parents with higher taxes. What I find fascinating is that no one is talking about Social Security, Medicaid reform, and our rising cost of paying our national debt. I read in the January 4, 2017 issue of the Columbus Dispatch that “The Committee for a Responsible Federal Budget said the government spends more today on interest payments than on education, housing and transportation combined, and that by 2023, interest payments will exceed the federal cost of Medicaid, which provides health coverage for the poor.” I hope the new Congress and President begin to address serious government reform versus instead focusing on ‘trickle down’ economic theories that have been pretty much been proven at this point not to work (read this link if you want to learn about the history of how trickle down economics has failed).
This will truly be an interesting four years…