Impact of 2017 Tax Change

President Elect Trump and the Republican Party have outlined their tax change proposals for 2017. Under Trump’s plan, 47% of the tax cuts go to the richest 1% of Americans. If you are single and earn more than $415,050, you’ll save at least $74,000 in taxes. Both proposals also cut the Estate Tax. If you are one of the .2% of people who have more than $5.43 million in assets to pass on, your estate will save a minimum of $2.3 million. 

Unfortunately, these cuts may come at a cost to everyone else. For the middle class, both plans could potentially raise their taxes. The revenue lost from moving the tax burden from the wealthy to the middle class is estimated to fall between $3 to $6 trillion. 

Even with analysts projecting losses like this, reality is that all three branches of government are now controlled by the Republican Party. This means that we can expect to see these proposals take place. Much of the focus in the news has been on Trump’s tax proposals, however, the Republican Blueprint is most likely to be used as the template for your 2017 taxes. 

The list below highlights the tax proposals. While the proposals can always change, there is much overlap between these plans. We can expect to see most of these proposals becoming law. How the changes will impact your situation depends on your income. The summary of the changes outlined below will give you an idea on how the rules are going to impact your wallet. 

Tax Proposals

Trump Campaign

Income Tax – Personal

Income Tax – Business

  • Corporate tax rate reduced from 39% to only 15%
  • Repatriation of previously untaxed foreign earnings taxed at 10%
  • Maximum tax bracket on pass through income is 15%
  • Elimination of corporate AMT

Transfer taxes – Estate and Generation Skipping Transfer tax (GSTT)

  • Repeal of “Death Taxes”
  • Mark to market taxation of inherited assets on assets over $10 million

House Ways & Means Committee

Income Tax – Personal

  • Top individual rate (above $415,050 single or $466,950 joint) reduced from 39.6% to 33%
  • Proposals to provide a 50% exclusion for capital gains, dividends and interest income
  • Elimination of individual AMT
  • Elimination of 3.8% Net Investment Income Tax
  • Limits on itemized deductions other than charitable contributions and home interest mortgage
  • Disallow deduction for interest on new loans

Income Tax – Business

  • Corporate tax rate reduced to 20%
  • Repatriation of previously untaxed foreign earnings taxed at 8.75% if cash, or   3.5% otherwise
  • Maximum 25% tax rate on business pass through income
  • Elimination of the corporate AMT
  • Elimination of net business interest deductions
  • Elimination of special-interest deductions and credits
  •  Lower or no tax on business income generated by sales of U.S. goods overseas

Transfer Taxes – Estate and Generation Skipping Transfer Tax (GSTT)

  • Elimination of Estate Tax and GSTT
  • Carryover basis for assets held in Estate

What Would This Do?

It has only been a few weeks since the election, yet Trump has already reversed course on many of his campaign promises. Should we expect his administration to move ahead with the tax plans made during the campaign? One would have to assume so6-1-16tax-f2

Most of the tax rules will benefit Trump, his family and their businesses. The proposed tax plans call for cuts that will directly benefit to top earners in the country. Those who have amassed large fortunes will be able to ensure their wealth benefits their heirs into perpetuity. Large corporations and their executives will obviously benefit as well.

While basically a hand out to the wealthy, the savings do extend down the food chain. For small business owners, many could see taxes go down. Sole proprietorships, partnerships, LLCs, and S Corporation owners and shareholders currently pay taxes based on their own income tax rate. The proposed 15% – 25% rate would help, though the cuts again go to higher earners.

For low wage earners, not much would change.  ne non-partisan study shows that everyone will see reduced taxes. Unfortunately, with the projected multi trillion dollar revenue shortfall, government funding is going to need to come from somewhere. Both tax plans show where that money is coming from. That shortfall falls on those in the middle class.

 

Middle Class Tax Hike

When you read the fine print, you quickly can spot were the tax hike is hidden. Both Trump and the Republican Blueprint state that they are capping, limiting, or disallowing certain itemized deductions. While the standard deduction may be increased, those who have a lot of itemized deductions will see a higher tax burden.

Itemized deductions reduce your overall taxable income. These deductions include items such as your mortgage interest, student loan interest, medical expenses, work related costs, union dues, business expenses, state and local taxes such as your real estate tax and car registration, as well as losses from nature disasters or theft. The full list can be found here.

By cutting these deductions, families of college educated homeowners will see the highest tax hikes. Trump plans to remove the dependent exemption, which would increase taxable income by as much as $4,100 per child. Larger families will be hit hard. So will single, high earning parents.  The tax proposal removes the head of household status and uses the more expensive individual tax filing status instead. This tax hike is aimed directly at those who contribute the most towards our economy.

 

trump tax plan

End Result

Even if enacted late in the year, you should expect to see these rules set retroactive to the beginning of 2017. The focus of the plans confirm suspicion that these laws primarily to benefit those that are already wealthy. Most American’s are not subject to either the Estate Tax or GSTT. Those who earn more than $400,000 a year are in the top one percent of earners, and they’re exactly who you think they are. The only people who will benefit from the cut to the Net Investment Income (Obamacare) Tax are single earners making over $125,000 or couples making over $250,000.

The plan is a basic bait and switch which we should all be used to at this point. The winners and losers under the plan are obvious. The problem for the middle class isn’t just the possibility of increased taxes. The problem is that these rules are a formula for economic stagnation.

Under President Obama, we’re currently in the second longest Bull Run in history. It doesn’t matter if you agree or disagree with these tax proposals. It doesn’t matter how good or bad the new administration is. The reality is that these market runs have to end at some point. Trump is going to inherit the end of this run.

If these rules are implemented in 2017, three things will happen. The first is that the wealthy will have a disproportionate amount of money. The second is that the middle class will have less to spend. The third is that new businesses will have a harder time succeeding.

The issue with the wealthy hording money is outlined in the economic theories know as  Say’s Law and the Law of Diminishing Returns. Plainly put, there are only so many low risk, high return investments. Once those investments are no longer available, the wealthy are left with two choices.

Their options are investing on high risk ventures or holding on to their money (diminished returns). The rational choice is holding on to your money. Wealthy individuals are prudent to do so in times of economic uncertainty. Since their cash isn’t in circulation, the money isn’t passed down to fund the payrolls of those who would otherwise earn a living off that money. (Say’s Law). This, in turn, causes average people to spend less.

The reduction in spending is made worse by the higher middle class tax rates. The middle class put the majority of their income back into the economy. The tax increase takes money from the people that the economy most needs during a recession. The middle class will also take less risks with their money during a downturn. That means fewer people will chance starting a new business. Considering that small businesses make up over 95% of our nation’s economy, you can see the cascading problem.

Those new businesses that decide to take a chance are going to will increased hurdles under the new tax plan. Most businesses do not make money during the first few years of business. The new tax proposals could limit deductions that these new business owners can use to offset those losses. This adds to risk of entrepreneurship. Many will think twice before taking that chance.

Looking through the Republican blueprint, there is almost no mention of new small business creation. The entire focus is how to cut taxes on those who already have established wealth. The end result is predictable by anyone with economic experience.  A recession is an unfortunate part of any business cycle. The new tax policies are nothing new. The Bush Administration tried the same during the 2000s. Are we about to repeat the same mistake?

It appears so.

 

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