The Tax Foundation has joined the hordes of pundits and crystal-ball viewers with a report on what the election of Donald Trump means for tax policies and, apropos of his campaign promises, tax reform.
The report notes the differences in tax plans discussed in the House and Senate, and those by the president-elect. It parses the talk into these five categories:
1. Estate Tax Repeal
Quick summary: Likely.
Trump and House Republicans favor repeal of the estate tax, and it has popular support, according to the report. It also comprises less than 1 percent of federal revenue, which cuts concerns about a repeal contributing to a federal deficit. Key questions focus on changes to the stepped-up basis and whether there’s enough support in the Senate.
2. Foreign Profits of US Multinational Companies
Quick summary: Uncertain.
The current tax system applies a 35 percent corporate income tax to worldwide profits of US multinationals. And because it allows a partial tax deferral until profits are brought back to the United States, it discourages companies to do just that, the report states.
Some Democrats would eliminate the deferral. Most GOP lawmakers and some Dems would instead move to a territorial tax system that exempts foreign profits from additional US tax, which is more in line with what other countries do.
The GOP-laden Congress generally looks to the territorial system, but it’s unclear if that’s where tax reform is headed because of at least two different proposals out there. And Trump’s original tax plan of September 2015 would eliminate the deferral, but his September 2016 tax plan was silent on international taxation, the report states.
3. Pass-Through Businesses
Quick summary: A quandary of politics and policy.
Traditional C corporations are taxed twice – at the entity level and when shareholders pay taxes on dividends and capital gains. Pass-through businesses don’t pay taxes at the entity level, and their profits are passed to owners and are subject to the individual income tax.
That’s the challenge for tax reform, the report states. There’s general agreement that the marginal tax rate on C corporations is too high, but if that’s cut, pass-throughs wouldn’t get a cut and may even face a tax increase. Some proposals consider cutting the ordinary income tax rate, but that gets expensive, the report states.
One alternative is to give pass-throughs a reduced rate compared to wage income, which has been proposed by Trump (a 15 percent rate cap) and the House GOP (a 25 percent rate cap). Both plans have a top ordinary rate of 33 percent, the report states.
But creating a special rate for pass-throughs can encourage gaming, according to the Tax Foundation, because business owners would have an incentive to recategorize their wage income to business income.
“There is no strong theoretical case that pass-through business income should be taxed at a lower rate than wage income,” the report states. “It would also increase the tax differential between corporate investment and pass-through investment.”
4. Federal Revenues
Quick summary: Another quandary.
Trump has talked of increasing infrastructure spending – which already has boosted equities in that category – more military spending and leaving entitlements alone. But his tax plan cuts federal revenues by about $6 trillion over the next 10 years, according to the report. So, unless something gets adjusted, the plan would inflate the federal deficit. Citing information from the Committee for a Responsible Federal Budget, the Tax Foundation’s report indicates that Trump’s fiscal plan would increase the federal debt by $5.3 trillion within 10 years.
The House GOP plan affects the federal budget less and could be matched with spending cuts. The Tax Foundation estimates that the plan could reduce federal revenue by $2.4 trillion in the next decade. But the cost is about $200 billion when economic growth is factored in – and perhaps more if taxes related to the Affordable Care Act are eliminated.
According to the Tax Foundation, the House GOP plan “maintains a relatively small impact on the deficit compared to Trump’s plan by significantly broadening the individual and business tax bases. It limits itemized deductions for individuals, eliminates the net interest expense deduction for businesses, and border-adjusts the corporate income tax.”
5. Corporate Tax Rate Reduction
Quick summary: Probably, but which plan?
Trump and House Republicans want to cut the corporate tax rate from its current top rate of 35 percent (the highest worldwide) to 15 percent and 20 percent, respectively. The Trump plan “would be a bold step that leapfrogs the United States all the way to having one of the lowest rates in the developed world,” the report states. The plan from House Republicans, on the other hand, is more moderate.
The House GOP plan also includes “base broadeners” to counter monies lost from the rate drop. Trump’s plan doesn’t have those. As a result, under Trump’s proposal, the corporate income tax raises less revenue than the House GOP’s plan does.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.