Recently, the Trump administration unveiled its self-imposed 100-day deadline broad tax cut plan. In doing so, Mr. Trump appeared to be thumbing his nose at the two states that overwhelmingly rejected him in the November election – California and New York. To wit, eliminating the federal deduction for state and local taxes, including property taxes. Because California and New York are among the highest tax states, the pain of this $100 Billion revenue grab will be disproportionally felt by New Yorkers and Californians relative to the rest of the nation. Meanwhile they propose retaining the mortgage interest deduction on mortgages up to $1 Million. Repealing this would most surely upset his political support base.
What is interesting is that it remains a well-guarded secret as to where Mr. Trump calls his home state for tax filing purposes. What do you want to bet that it is Florida and not New York? Florida has no state income tax. Get the picture?
Then there is the plan to roll back corporate taxes from their current rate of 35% to 15%. This is not as big a deal as it seems. Corporate income taxes only account for around 11% of federal revenue. Contrast that to 80% from individual and payroll taxes. Now here’s the rub. Besides reducing the rate on top earners from 39.6% to 35%, the administration is proposing a pass-through provision. Currently big law firms and hedge funds organized as Limited Liability Companies pass their income through to the individual partners where they pay taxes at their individual income brackets. Now under the new tax cut plan, those partners will pay taxes at the same corporate rate of 15%. So, is it fair for this select group of highly paid individuals to be taxed at 15%, well below the rate of their lower paid employees?
Americans are very resourceful when it comes to avoiding higher taxes. An unintended consequence of this pass-through rule would be for employees in the middle to higher tax brackets to request reclassification to independent contractor status and thereby qualify for the 15% tax rate.
The elephant in the room with respect to corporate taxation is how to deal with the $2.5 Trillion in cash currently parked overseas by U.S. companies led by the likes of Apple, Google, and Microsoft. There has been no clarity provided on this issue. What must be avoided is a repeat of the tax holiday mistake of 2004 when $300 Billion was repatriated from overseas only to be returned to stockholders in the form of dividends and share buy backs. The goal should be to bring this money home for the purposes of growth and expansion to benefit the overall economy such as rebuilding our decaying infrastructure and not just for the benefit of a few elite stockholders.
To the administration’s credit, doubling the standard deduction from $12,700 to $25,400 for joint married filers is probably a good thing for many filers as it relieves them of the arduous task of itemizing. But, it will likely come at the cost of eliminating the personal exemption of $4,050 for individuals and their dependents which would hurt larger families. The jury is still out on this.
Much remains to be done before this hastily prepared proposal becomes an actual viable plan.