“We have what it takes to take what you have.”
In Brief:
- The current bullish case for a Trump presidency is that corporate tax cuts will unleash animal spirits and spur investment in equipment, buildings, and labor. Investors are drawing parallels with Reagan’s “trickle-down economics.”
- Trump wants to collapse 7 tax brackets to 3 brackets. The tax brackets are similar to those in the House GOP tax blueprint.
- Repeal of the death tax: Trump has stated that he wants to repeal the estate tax. It’s not clear whether he would also propose to repeal the gift and generation-skipping transfer tax.
The markets have experienced a euphoric rally and are currently betting that fiscal conservatives will set aside their principles and give Trump what he wants when it comes to tax cuts. The collision of hope and reality is likely to happen as soon as March, when the suspension of the ceiling on the federal debt ends. Republicans in Congress who used the debt ceiling as a weapon against Obama are unlikely to rollover.
President Trump’s vision, according to his website, is to “reduce taxes across-the-board, especially for working and middle-income Americans who will receive a massive tax reduction.”
Here is a list of the key provisions of the Trump tax plan that, if enacted, will have the greatest impact on individual taxpayers:
Brackets & Rates For Married-Joint Filers: 12, 25, 33%
Less than $75,000: 12%
More than $75,000 but less than $225,000: 25%
More than $225,000: 33%
*Brackets for single filers are one-half of these amounts
Capital Gains:
No change: 0,15, and 20% rates
The Trump plan will retain the existing capital gains rate structure (maximum rate of 20%). Carried interest will be taxed as ordinary income.
The 3.8% Affordable Care tax on net investment income will be repealed, as will the alternative minimum tax under Trump’s tax plan. The House Republicans’ plan proposes lowering the effective top tax rate applicable to capital gains, interest and dividends to 16.5%
Deductions:
Standard deduction for joint filers moves to $30,000 from $12,600; $15,000 from $7,500 for single filers. The personal exemptions will be eliminated
Itemized deductions capped at $200,000 for married-joint filers; $100,000 cap for single filers. Most taxpayers will have no need to itemize, simplifying their tax returns and making it easier to file. This limitation would impose a significant restriction on the use of the charitable deduction. The House Republicans’ proposal eliminates all itemized deductions other than the deduction for home mortgage interest and charitable gifts.
Business Income Tax:
Trump’s plan cuts the corporate tax rate from 35% to 15% and eliminates the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.
- It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.
- Enhanced expensing for manufactures: Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense.
- Small businesses would also have the option of continuing to pay their taxes through the individual side of the code, as they do today, or elect to file their taxes as if they were incorporated, whichever is more advantageous for them. The House Republican’s current plan proposes the top rate applicable to the business income of individuals who earn this income directly or receive it from pass-through entities to 25%.
Our view is that Trump, the deal maker, will ask Congress to meet him half-way and split the difference between his plan's corporate tax rate of 15% and the current 35% tax rate. Subsequently, we think that the market, being a forward-looking discounting mechanism, has already priced in a 25% tax rate which equates to an 8 -10% increase in corporate America's 2017 earnings. Only time will tell if markets have become overly optimistic about anticipated tax cuts.
The Bottom Line:
Fundamental tax reform is needed to promote economic growth, job creation, and international competitiveness. Our corporate tax rates are 10 points higher than the global average. The business and investment income of individuals is now subject to a tax rate as high as 43.4% versus the corporate tax rate of 35%! Simply put, our tax code is unfair and penalizes the small business owners in America — the backbone of our economy. The Trump Tax Plan would lower that top tax rate to 33%.
While we don’t yet have yet have a clear understanding of the details of his proposals, it is very likely that some combination of the Trump Tax Plan and the House Republicans’ Plan will become part of our tax law sometime this year. We will keep you informed of material changes to our tax laws as we journey through the uncharted territory of a Trump Presidency.
Sources: Donald J. Trump.com, The Wall Street Journal Online; Bloomberg News; Forbes.com; CNBC News; Reuters News.
The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.
The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.