Trump Tax Ideas – Real Reform?

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April 27, 2017 2:07 PM

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We finally have an outline of President Trump’s tax proposals, but not the gritty details.  From what we can glean so far, the president wants to lower rates for everyone, including corporation.

He wants to enact a big increase in the standard deduction up to $24,000 for married couples, gutting personal deductions other than home mortgage interest and charitable contributions.  Personal tax rates would be reduced to three brackets – 10%, 25% & 35%.  Corporate tax rates would go down big-time, from 35% to 15%.

The White House plan would eliminate three tax provisions that mainly impact the very wealthy – the Estate Tax, Alternative Minimum Tax and the Net Investment Income Tax (a 3.8% levy enacted to help pay for the Affordable Care Act).  There is a provision calling for a one-time tax that would hopefully incentivize firms from parking cash outside the United States.

There are a number of unanswered questions, including how big a hole this will blow in the federal budget.  Since there are few details, congressional bean counters cannot estimate the actual amount.  However, reporter Damian Paletta of the Washington Post did contact some people in the know, and reported the following:

“Many budget experts say they believe the White House’s plan would reduce federal revenue by so much that it would grow the debt by trillions of dollars in the next decade, growing interest costs and slowing the economy.”

There are some creative ideas in this proposal that should be debated.  But it does skew toward giving the wealthiest families in America the largest tax breaks by far.  So, if you like tax cuts that largely go to the highest incomes, this is your plan.

One part of this outline would not only reduce income tax rates for regular corporations, the low 15% rate would also go to what tax geeks call “flow-through entities.”  These are business operations that do not pay taxes at the business level, but “flow-through” taxation to the individual owners, such as S Corporations, Partnerships and Limited Liability Companies.

This has the potential for abuse, with lots of so-called “businesses” possibly springing up to use this new low rate, when, in fact, there is no real business at all.  IRS would have to police that, and the agency’s budget has been slashed for years, limiting the ability to audit enough of these operations to keep them honest.

Once congress gets hold of any tax bill, it begins to morph into something quite different, so I will be watching where this all goes from here.  We need tax reform, but whether this is worse or better than the current system will be up for national debate.

There is one other aspect of this that should lower our expectations of anything passing Capitol Hill soon.  Democrats have made it clear they will not even begin to consider any Trump tax proposal until the president releases his tax returns.  I don’t see that happening.  Tax reform looks a long way off.

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