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Trump Talks Taxes, Announces Tax Plan

On April 26, President Trump has announced his proposed tax plan, calling for a series of reductions to both individual and corporate taxes. Gary Cohn, the President’s economic advisor and the director of the National Economic Council, stated that Trump’s administration intends to institute both large cuts and tax code simplification measures.The plan features an across the board reduction of individual income tax, bringing the top tax bracket’s rate from 39.6 percent to 35 percent.

For businesses, the cuts are much larger. The corporate tax rate will be reduced from 35 percent, the highest among Organization for Economic Cooperation and Development nations, to 15 percent. Businesses operating abroad will also benefit from a reduced tax rate for repatriated earnings, income businesses earn abroad and move to the U.S., in an effort to bring back at least some of the $2.6 billion dollars held outside the U.S. by firms wishing to avoid double taxation. Doing so would result in a large one-time boost to government revenue and likely incentivize businesses to return more of their profits to the U.S. in the future.

Interestingly, the administration plans to extend the 15 percent tax rate to pass-through businesses as well, where owners’ sole proprietorships, partnerships, and some LLCs report their businesses’ income in their individual tax filings. Companies in this category range from small businesses to doctors’ private practices to hedge funds. The consequences of such a proposal vary based on its implementation. Dramatically reducing the effective pass-through tax rate would be a boon for small businesses and promote an important job-creating sector of the economy. Yet, critics note that the law could create an “LLC loophole” leading to more individuals and businesses reclassifying themselves to pay a reduced tax rate. The size of this loophole will depend on the bill’s framework and the level of auditing.

The Trump administration plans to finance the proposed tax changes through a reduction of state tax exemptions and economic growth. The plan calls for a repeal of an exemption that allows taxpayers to deduct state and local taxes from their incomes, which can raise $1 trillion over the next ten years. Since states such as California and New York have higher taxes, this change will increase their residents’ tax burdens as well as those of many other historically blue states. Treasury Secretary Steve Mnuchin believes the plan will help the economy generate three percent growth, increasing the amount of taxable revenue. Despite these revenue sources, the plan is likely to increase the national debt. According to the Committee for a Responsible Federal Budget, President Trump’s proposal will cost $5.5 trillion in lost revenue over the next decade. Some Republicans will be unable to support a bill that adds to the debt burden within the next three years.

For consumers, a reduction in income tax, especially for those who operate pass-through businesses will be welcome. They will likely see some companies seek to classify themselves as LLCs or partnerships to avoid higher taxes and potentially more neighbors starting small-scale proprietorships, however legitimate they may be. As it currently stands, the increase of the national debt burden could put pressure on interest rates over time making loans more expensive. Additionally, the tax cuts offered to individuals and corporations especially will likely boost economic growth whether or not it reaches the three percent target. The administration’s proposal will still need to make its way through congress and many elements of the bill have yet to be clarified, so consumers have yet to see what impact these changes bring.

For more, visit The Wall Street Journal, Bloomberg, and Reuters.

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