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Trump’s Tax Plan: Cut Corporate Taxes, Three Brackets for Income Taxes

Trump’s Tax Plan: Cut Corporate Taxes, Three Brackets for Income Taxes

The administration has not endorsed the House’s border adjustment tax.

https://www.youtube.com/watch?v=TTlkX41zuhQ

Secretary of Treasury Steven Mnuchin and National Economic Council Director Gary Cohn spoke to the press at the White House today about President Donald Trump’s tax reform plan. Trump wants to slash the corporate tax rate to 15%, which I covered yesterday. But he also wants to place income taxes for us regular Americans into three brackets. From The Wall Street Journal:

“Clearly we have a unique opportunity to do something major here,” Mr. Cohn told a small group of reporters in the White House on Wednesday morning. “It’s our intention to create a huge tax cut and equally as important, a huge simplification of the tax system in America.”

Individual Reform

America currently has seven income tax brackets for us citizens, but Trump wants to reduce that to only three: “10 percent, 25 percent, and 35 percent, based on someone’s income.”

Mnuchin and Cohn did not specify which incomes will hit the higher bracket “as they see that as part of ongoing discussions with Capitol Hill.”

A married couple’s deduction will rise to $24,000 from $12,600 while a single person will move to $12,600 from $6,300. WaPo reported that this move will “incentivize people not to itemize their tax returns and instead use the standard deduction.” This will help them to simplify “the process and potentially saving taxpayers thousands of dollars each year.”

More than likely the Republicans in Congress will welcome the plan’s suggestion to repeal the alternative-minimum tax and the estate tax (AMT). Cohn argued against the AMT because “we don’t think that people should have to do their taxes twice. Plus the AMT “unfairly prevented farmers and others from passing along their businesses to the next generation.”

The plan also includes eliminating deductions at the local level. WSJ continued:

Among the biggest changes is the repeal of the state and local tax deduction; the effect of that would be to shift the tax burden from low-tax states such as Texas and Florida to high-tax states such as New York and New Jersey. Eliminating the deduction could raise more than $1 trillion over a decade, and it brings Mr. Trump’s plan closer to a plan advanced in the House.

“It’s not the federal government’s job to be subsidizing the states,” Mr. Mnuchin said. “We’re not looking to necessarily raise taxes on the top 1% but we want to get the federal government out of the business of what’s the state’s business.”

Corporate Reform

Cutting the corporate tax rate to 15% is by far the biggest part of Trump’s plan. From WaPo:

For businesses, Trump’s proposal would lower the corporate tax rate from 35 percent to 15 percent, and it would also allow smaller businesses, structured in such a way that they are affected by the individual tax rate, to also use the 15 percent threshold. There are millions of these businesses, known as “S Corporations,” and they are often small, family-owned firms.

But they can also include large law firms and lobbying shops. Mnuchin said special protections would be put in place to ensure that the 15 percent rate isn’t taken advantage of by the wealthiest earners, though he didn’t say how the White House would do this.

Trump has proposed a “holiday,” which is a one-time tax. WaPo continued:

The White House is also proposing a one-time tax “holiday” to incentivize companies to bring several trillion dollars currently being held in other countries back into the United States. They didn’t specify what that tax rate would be, saying its currently part of negotiations on Capitol Hill, but they believed providing this incentive would bring money back for investment and hiring.

“We expect that trillions of dollars will come back on shore and will be reinvested here in the United States, for capital goods and job creation,” Mnuchin said.

This process is called “repatriation.” It’s controversial, because critics allege the money is brought back and then paid out in dividends to shareholders, not used for hiring. But Democrats and Republicans have both been open to the idea of a tax holiday. The Obama administration proposed using one to bring money back into the United States that could be used for new infrastructure projects, for example.

Border Tax Adjustment

Mnuchin also made it clear that Trump will not support the border tax adjustment that the House GOP has included in its plan. WSJ reported:

The provision attempts to raise revenue by taxing imports, but not exports. Mr. Mnuchin said the administration wasn’t opposed to the provision in concept and that he liked aspects of it. But he said, “We don’t think it works in its current form.”

Mr. Ryan hasn’t backed down on the border-adjustment idea, but he said Wednesday that he knows the proposal needs modifications in response to criticism from retailers and others. “We don’t want to have severe disruptions,” Mr. Ryan said.

Those others include Republicans in Congress. In February, I blogged about the pushback Ryan received when he showed a plan to his colleagues. From Politico:

The next day, Sen. Tom Cotton took to the Senate floor to slam Ryan’s so-called border adjustment tax, saying “some ideas are so stupid only an intellectual could believe them.”

“Many other senators share these concerns and we most certainly will not ‘keep our powder dry,’” Cotton went on, without naming the speaker in his speech.

Senate Finance Chairman Orrin Hatch (R-Utah), sources said, has warned Trump and Ryan that border adjustment won’t likely have the support needed to clear the Senate.

Hatch, in an interview after Ryan’s presentation, said the speaker “didn’t cover [the border adjustment proposal] as specifically as I would have liked.” And Sen. Roy Blunt of Missouri, the fifth-ranking GOP senator, said the Finance Committee will likely go a “different way.”

Others were more unequivocal.

“It’s beyond a complication. It’s a bad economic proposition,” said Sen. David Perdue (R-Ga.).

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Comments

2nd Ammendment Mother | April 26, 2017 at 5:47 pm

so…. for all the teeth gnashing on the 24 hour nets – 8 of the items listed on that 1 pager would positively improve my tax situation, let me keep a little more of my income as well as reduce the number of hours I spend on tax related tasks.

    2nd Ammendment Mother in reply to 2nd Ammendment Mother. | April 26, 2017 at 5:48 pm

    and it seems like the biggest criticism is that Trump might have a better tax outcome because of the changes. His divestments will kill him for 2017 and then being President with a significantly lowered income will obviously change his 2018 return….. duhhh

DOA.

Yes simplify the tax system! Make it easy and straight forward for people to pay the right amount of tax! Make it so simple and straight forward you don’t need an entire industry of tax specialists to fill out a tax return form!

Mailman

No good idea survives contact with the Republican Congress.

Whether this is good for me depends upon how Social Security is treated. Will some of it be non-taxable as it is now, or will they tax all of it?

    healthguyfsu in reply to snopercod. | April 26, 2017 at 7:29 pm

    Sorry, I don’t want to get into generational warfare with you, but I really won’t weep for anyone taking SS that has to pay tax on it. It’s not even due to principle (because obviously taxation on previously confiscated money is bunk), but the system is effed and busted.

    I will pay for you as you paid for your ancestors, and I will pay more and get less. If some “take back” is needed to preserve my lousy deal, then I’ll take it. I know this won’t be popular, and I don’t expect you to agree with me. This could have all been fixed if it had been privatized with the money being untouchable by the political robber barons and up to individual responsibility.

      snopercod in reply to healthguyfsu. | April 27, 2017 at 7:56 am

      I feel your pain. You younger folks are definitely getting screwed and it’s only going to get worse. Better stock up on K-Y Jelly.

      Social Security is a tax on people for generally not saving for retirement and for not carrying life insurance while they are young AND for not passing wealth on to their heirs.

      It is a feather in a nest of bad behaviors when it comes to social engineering. I see it as a symbol of slavery- whereby we are not an ownership society.

      It has been a great motivator for me to invest enough to stop collecting a W2 income and to also limit the number of years my kids have to collect a W2.

    You are confusing “deductions” from income with “exclusions” from income. Social security will continue to be not-taxed/taxed exactly the same as it is today.

    President Trump has always promised he isn’t cutting social security or medicare. Period. So no changes to how social security income is excluded/not-excluded from taxable income.

    Same for IRA, pension plan, and 401k plan “exclusions” from taxable income.

“Cohn argued against the AMT because “we don’t think that people should have to do their taxes twice. Plus the AMT “unfairly prevented farmers and others from passing along their businesses to the next generation.””

Without clicking through the paywall… pretty sure the second sentence should refer to the estate tax (aka death tax), not the AMT.

Correct me if I’m wrong (which I’m sure you will)

Countries with Value Added Taxes (VAT) reimburse them to the company at the point of export, i.e. if France exports a $20 toaster with $5 VAT included on it, at the point it gets shipped to the US, the company gets that $5 back from the French government, thus making the toaster which would have sold in France for $25 and a $5 profit, able to be sold in the US for $20 with the same $5 profit.

The Border Tax Adjustment (from what little I understand of it) is placing that $5 tax back on the toaster at the point it comes into the country in order to level the playing field, right? (at least in theory)

VAT is added at the time of sale in Europe. There is also no VAT charged on salaries etc.

If France was to pay the toaster maker 5euro for every toaster shipped to America then that becomes a straight out and out subsidy.

    Milhouse in reply to mailman. | April 27, 2017 at 11:07 am

    You seem to have no idea what a VAT is. It’s not a retail sales tax, which is added only on the final sale, it’s a tax on the value added at each stage. VAT is paid every time goods or services are paid for, on the value added by that provider. Suppose the rate is 20%. If the cost of making that toaster was $15 and it sells for $20, the maker has already paid $3 VAT on that $15. The value the maker added was only $5, so that is what will be taxed when it’s sold. The customer will pay $4 VAT on the full $20, but the maker will keep $3 and only send the government $1, which is the difference between what it collected and what it paid. If the customer then sells it on for $25, he will charge $5 VAT, keep the $4 he paid, and send the $1 difference to the government. If the maker exports the toaster it gets the same $3 refund for the VAT it paid that it would have got if it had sold in France.

Three tax brackets instead of five – so what? Once you have your taxable income, it’s either just reading the tax amount from the table, or a simple calculation for those >$100,000

I always tell people that figuring one’s taxes is easy. It’s figuring out the taxable income that’s the hard part.

Cutting the number of tax brackets just means a bigger jump between increases in the marginal rate. And that depends on where they set the brackets.

It’s way too early to get excited about any of this.

How can you tell this is a great tax plan? The democrats are very much against it.

How can you tell voter ID solves a real and serious problem? The democrats are vehemently against it.

How can you tell building the wall is a GREAT idea? The democrats focus all their hate against it.

Elimination of the death tax isn’t actually (for the most part) the elimination of taxing property in people’s estates.

It is merely delaying when those untaxed capital gains get taxed

With the estate tax the built up untaxed capital gains in the decedent’s property are taxed at the time of the decedent’s death. (But without an actual sale for MONEY occurring at the time the tax becomes due and payable, often their is no MONEY from which to pay those taxes, which forces the estate/heirs to immediately sell the property as the only way to raise the cash to pay the taxes).

WithOUT the estate tax those same built up untaxed capital gains in the decedent’s property still get taxed. Its just they don’t get taxed at decedent’s death and instead get taxed when the heirs to that property sell the property they inherited.

Don’t expect any TV or newspaper reporter to EVER get correct what elimination of the estate tax does and does NOT do.

The change to make the USA tax system match that of the rest of the world by making it apply only to income earned in the USA is a YUGE change. That means all foreign earned profits can be brought back to the USA without incurring additional USA taxes (they still get taxed in the foreign jurisdiction where the profits were earned). Yuge. Really Yuge to make USA tax system “territorial”. Anyone saying there isn’t unique and unprecedented stuff in the Trump tax plan to get excited about doesn’t know what they are talking about.

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