Trump Tax Reform - What does it mean for you? (Hint: Homeowners in high real estate tax zones, brace
An initial analysis of today's tax proposal (fasten your seat belts...dissecting tax proposals is riveting stuff):
Today's White House tax proposal likely only slightly resembles what will eventually pass into law...it is being presented by a negotiator who always starts with an extreme. The premise of this tax reform is economic stimulation, job creation and simplification. A main issue that the administration has to this point refused to acknowledge, and makes no effort to do so in the tax proposal, is the robotic replacement of human labor. This is the most pressing issue when considering job creation. Of course, it would have helped if the WH gave us more than a one-pager on the 'sweeping reform' they're proposing, but why nitpick?
The proposal contains a handful of positives for most economic classes, the largest benefits being realized by large corporations and the wealthy. However, the plan lacks any sound method of paying for these cuts (or any method at all, for that matter). In this respect, the proposal is not unlike the failed 'repeal and replacement' of the Affordable Care Act. How do we pay for this stuff???
Let's start with the reduction in the number of personal tax brackets from 7 to 3. The highest tax bracket will be reduced from 39.6% to 35%. The 2 remaining brackets will be 25% and 10%. As of now, we don't know the income thresholds for each bracket making any thorough analysis impossible (as is the case with virtually everything in this proposal). The new max bracket (35%) is not one of the places where the wealthy are getting a tax break (there are other places for that). Since the proposal eliminates itemized deductions aside from mortgage interest and charitable contributions, those in the top tax bracket would still, in most cases, end up in the 40% range and some much higher. Some of the big hits to the highest bracket will be elimination of the deductions for real estate taxes and for state and local income taxes. The other 2 new brackets, 25% and 10%, will likely benefit from the elimination of itemized deductions coupled with the proposed doubling of the standard deduction. In case those of you who might fall into the 25% and 10% brackets were about to feel left out, don't...you're new bracket won't be as low as it seems.
Part of the new proposal will move any medical insurance premiums deducted from a taxpayers paycheck from pre-tax to taxable. The current costs of medical insurance make this a very noteworthy shift. This will have a much larger effect on taxpayers in the lower 2 tax brackets because, as we know, medical insurance premiums are not based upon income. The premium is the same for a given plan whether you make $25,000 per year or $250,000 per year rendering the percentage effect much greater to low income tax payers. This will further burden the insured in an already disabled healthcare insurance system.
The corporate tax proposal slashes the corporate tax rate to 15%. This is a huge reduction...too big to pay for and will require debt subsidization. Subsidization is not atypical for Republican tax plans (see Reagan in 1981 and Bush in 2001). The subsidization of those plans was the dominate reason that the plans had to be rolled back upon the Reagan and Bush exits from the Oval. This is also, not coincidentally, being proposed in conjunction with the dismantling of regulations on the financial industries, furthering the opportunity available to corporate America to exploit the system. Even though I'm sure your level of interest in what I just wrote about the corporate tax rate is sky high, try and stay calm...there's a reason this may be of personal interest to you. The corporate tax rate change will also have a direct effect on the tax returns of many of you.
The proposal also seems to indicate that pass-through entities (Partnerships, S-corps and LLCs) will only be subject to the new 15% tax rate. This is a windfall for the wealthier tax payers who generate income through these entity types. Currently, the pass- through income is taxed at the personal rate of the taxpayer. Therefore, those in the highest personal bracket currently pay 39.6% federal tax on pass-through income. It is not completely clear if the 15% will be the total tax on pass-through income or a surcharge in addition to the personal tax rate but the latter interpretation is EXTREMELY unlikely. The change in this tax rate will put a focus on how much salary is reasonable to pay from a pass-through entity to an owner. Sound tax planning will allow for significant tax savings by maximizing profit and minimizing salary, potentially pushing vast amounts of income into the 15% bracket. We have not seen the detail (nor I am overly confident that it exists) to understand how a loss from a pass-through entity will be woven into the personal tax picture.
There are certainly other issues in this proposal worth discussing, some positive, some negative (estate tax elimination, elimination of alternative minimum tax and elimination of other itemized deductions such as unreimbursed business expenses, to name a few). This proposal is not only unaffordable and certainly unsustainable, it heavily favors the wealthiest Americans. I do not believe that the wealthy should shoulder an unfair burden but they do need to pay their fair share for America to function as a healthy economy. However, as presented, this plan seems to unfairly harm homeowners whose income is in the $200k to $500K range that live in high real estate tax areas (NY, NJ, CA, etc). This is a class of folks who generally have little accumulated wealth despite income levels because of the cost of living in their geographic locations. The loss of itemized deductions for these earners will have a great effect on their amount of tax paid. The elimination of the real estate tax deduction, in particular, will be far from offset by the doubling of the standard deduction, driving up their effective tax rate.
The proposal does not place the best interests of Trump's political base, nor the majority of Americans, at the forefront as promised. It favors the wealthiest of the wealthy. Real reform should not require rollbacks when an administration changes. This plans likely abuse of debt financing will necessitate yet another rollback. It is standard issue Republican administration tax 'reform' just with a more boisterous mouthpiece at the helm. It is not new, it is not revolutionary, it is not what we need now.
