The Trump Tax Plan

Today (April 26, 2017), Steve Mnuchin released the White House’s long-awaited tax plan. It contains goodies for just about everyone, but the biggest winners are the working poor and the very wealthy.

Currently all that is available from the White House is a short memo.

Corporate tax

The stock market should be happy. The plan lowers the business rate to 15 per cent. Currently, corporate rates are graduated, but most businesses are paying statutory tax rates of 34-35 per cent. It’s important to remember most states also have their own taxes, going up to 10 per cent.

This 15 per cent rate will apply to pass-throughs (partnerships, S-corporations, LLCs) as well. This would significantly lower the taxation of many small business-people’s income.

Part of how these cuts will be paid for is with a deemed repatriation of overseas profits. The rate was not specified (previous report indicated a 10 percent rate). Companies with retained earnings held in subsidiaries offshore will be happy to get the money “on shore” at the lower rate, but where the assets are non-liquid, they may be a struggle to pay the tax.

This “low-tax” repatriation was done in 2004, but it had a 5.25 per cent rate, and it was voluntary. The 2017 is mandatory version - it would force would force companies to pay the tax as though they had brought back the money, even if they don’t.

On the flip side, U.S. multinationals will be happy with a conversion to a territorial system where their foreign subsidiaries’ income will be permanently excluded. This is the ultimate weapon against tax-motivated inversions.

Good news for Canada: There is no border adjustment tax. This is something the House Republicans favour, but Trump has opposed it because it’s complicated. It also happens to be economically inefficient, because it discriminates against imports in favour of exports. For this reason, it’s also against WTO international trading rules

Personal tax

Trump plans to reduce the current seven tax brackets to just three: 10 per cent, 25 per cent and 35 per cent. This proposal is close to Republican Congressional’s one of 12 per cent, 25 per cent and 33 per cent. By comparison, the current top tax rate is 39.6 per cent.

For those at the bottom end of the income scale, the plan is to eliminate income tax altogether. For a couple, the standard deduction would be $24,000, roughly double the current $12,600.

The plan would repeal the alternative minimum tax, the estate tax, and the net investment income tax (the last was part of Obamacare). These taxes are not large revenue raisers, and they are objectionable simply because they are inefficient add-ons.

To pay for some of these changes, Trump would eliminate most itemized deductions, keeping mortgage interest and charitable contributions. It is unclear whether medical expenses and investment interest would be eliminated, but state and local taxes are definitely on the chopping block.

What happens now?

The U.S. budget process is quite a bit different than the Canadian one. In Canada, the Finance Minister rises in the house on budget day, introduces legislation, and six months it passes substantially in that form. It’s almost always effective as of budget day.

In the United States, it’s a lot like making sausages – what goes in the front end looks a lot different coming out the back end, and you don’t enjoy watching the process.

Basically, this is a wish list. Budgets can only be introduced in Congress. Once passed, they come to the president for signature (or veto). So this is what he’s asking Congress to do.

Obama’s budgets got ignored. This one is close enough to the Republican Congressional leadership’s plans that it’s likely to make serious progress.

There’s a lot in this tax plan to like. Of course, it’s easy to like lower taxes, but somebody’s got to pay for the hole in the budget.

Trump’s original plan (and this is quite close to it) was costed at $2 trillion over 10 years. The Brookings Institute’s Tax Policy Center said the number was $10 trillion. Another authoritative figure is $600 billion per year, less the impact of economic growth of 3 per cent, up from 1.6 per cent (which is what Steve Mnuchin thinks will be the impact of the lower taxes).

In this budget, high-income taxpayers benefit the most. But if 84 per cent of tax is paid by the top 20 per cent, any reduction in tax is going to benefit them disproportionately. The math simply requires that. Still, that means few Democrats will vote for it. That means the Republicans will use the reconciliation process if they want to pass this.

It may be hard even to get some fiscally-responsible Republicans to vote for it. Deficits are a hard swallow. Lower taxes do inspire greater economic growth, but tax cuts don’t pay for themselves, at least at current rates. We’re still on the front half of the Laffer Curve.

And the prospect of reducing spending? As we’ve seen from the failure to repeal Obamacare, even Republican majorities are loathe to take away a benefit from large numbers of voters.

The reason the plan is short on details is that the White House doesn’t want a repeat of the last failure to get its legislation through. They’ve made it clear they will “continue working with the House and Senate to develop the details of a plan that provides massive tax relief, creates jobs, and makes America more competitive — and can pass both chambers.”

For more information, contact Kevyn Nightingale, CPA, CA, CPA (ILL), TEP at 416.596.1711 or [email protected].