The Trump Tax Cut: How Much, How Soon, How Certain
WHY YOU SHOULD CARE
Because tax cuts are coming, and fast.
The author is the founder and president of Americans for Tax Reform.
During the 2016 Republican primaries, then-candidate Trump unveiled an outline for a huge tax cut. It was a grab bag of popular measures: Kill the Death Tax, repeal the Alternative Minimum Tax (AMT) and cut individual tax rates. All these have been Republican talking points for the last 20 years. The centerpiece of Trump’s plan? To push the boundaries of a growing consensus that America’s 35 percent corporate income tax rate is too high. (The European average is about 25 percent.) The tax plan being constructed by the Republican-led House of Representatives at the time aimed to bring it down to 25 percent.
Trump saw and raised the stakes for opponents by laying a new marker, of just 15 percent — which would make the United States a tax haven for companies worldwide and a magnet for investment and talent. While many refused to take Trump’s tax plans seriously, the notion of a 15 percent rate was seen as an intriguing and potentially powerful driver for economic growth. Businessmen who had not yet begun to take Trump seriously wished a “real” candidate would move into that zone.
House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady were listening: They dropped their plan’s proposed corporate rate from 25 down to 20 percent. Trump reciprocated, making two significant changes to his proposal that brought it more in line with the House Republican plan and made it more pro-growth: He accepted the House Republican proposed tax rates for individuals of 33, 25 and 12 percent, depending upon income, with capital gains taxed at half those rates.
Trump also adopted as his own the proposal in all the other Republican presidential hopefuls’ plans to accept full and immediate expensing for all business investment. Today, business investment is assigned a presumed “useful life” and depreciates over that period, but a bureaucrat’s guess as to the “useful life” of new software, computers or even buildings is just that: a bureaucrat’s guess. Given inflation and the varying value of money, allowing immediate expensing dramatically reduces the cost of capital investment. So Trump’s plan took two steps toward the House Republicans, and they took a giant step toward Trump.
Brady promises to have a consensus plan unveiled within the first 100 days of Trump’s administration. It will almost certainly be in sync with White House thinking, and the Senate is not working on a competing or complementary proposal; most assume they will accept the Brady/Trump consensus. So what can we reasonably anticipate in a new tax plan? And what remains in contention?
1. Abolition of the Death Tax. While the Bush/Obama years saw the number of Americans subjected to the Death Tax shrink — a couple can pass on up to $10 million without incurring a gift or inheritance tax, and the top rate fell to 40 percent — there remains strong support for killing this tax altogether to ensure it does not grow back to confiscatory rates.
2. Repeal of the Alternative Minimum Tax. This tax was created originally to solve the problem of some 155 Americans who invested only in tax-free municipal bonds and therefore paid no income tax. Over time it grew to hit several million Americans, particularly targeting those with expensive houses in states with high property and personal income taxes. The corporate AMT will also be abolished.
3. Tax cuts for individuals. The top individual income tax rate will fall from 39.6 percent to 33 percent. Lower rates will be consolidated into two rates: 25 and 12 percent. The 3.8 percent tax on capital gains enacted as part of Obamacare will end, and the 0.9 percent payroll tax hike on income over $250,000 — also part of the Affordable Care Act — ends.
4. Tax cuts for corporations. The corporate income tax will fall from 35 to 25 percent. And for those businesses that pay taxes through the individual income tax returns of owners, subchapter S corporations, the tax rate will fall from 39.6 to 25 percent. Both C corp and S corp tax rates will fall by about 42 percent. This was an equality demanded by the National Federation of Independent Business.
5. Business investment will be fully and immediately expensed.
6. The U.S. will move from a worldwide system of taxation to a territorial system, where American companies earning abroad may be repatriated without penalty. (There will be a one-time hit on corporate earnings now overseas of roughly 3 percent for fixed investment and 8 percent for cash. This will allow more than $2 trillion to return to the U.S. in a tsunami of domestic investment.
Up for Debate:
1. Removal of the border adjustable tax. This is the value of exports applied to a company’s taxable income, in effect “subsidizing” exports, and the value of foreign imports added to companies’ taxable incomes. Most nations do this through a VAT. Importers don’t like this tax, but it could raise $1 trillion over a decade. One could remove or limit this section by replacing it with a different tax increase elsewhere or a $1 trillion spending reduction over 10 years. Importers will become the leading advocates of entitlement reform or live with this tax.
2. Elimination of interest-payment deductions. This would cause challenges for regulated industries like power plants. Watch for exceptions.
3. Deferral of capital gains taxes for “like-kind” exchanges. That’s Section 1031, which may or may not continue. If your firm sells a small truck and buys a bigger one, the capital gains is deferred until you cash out of all trucks. This would be a powerful tool for growing firms to husband cash.
The Trump tax plan has been a communal effort, borrowing from other candidates and House Republicans who point out that they, in turn, have borrowed heavily from Senate ideas. All concerned are committed to a bill that will be simpler, more fair and improve our international competitive position permanently by boosting growth. The tax cut will be a Republican-only affair — just like Obamacare, Dodd-Frank and the “stimulus” were for Democrats.
This tax bill does not need and will probably not receive any votes from Democrats because the tax bill will be passed within “reconciliation,” allowing it to avoid filibuster. It needs only 50 Republican votes in the Senate, with the vice president casting the tie-breaking vote — and it should drop within the next three months.