Promising big tax cuts and a booming economy, President Donald Trump and congressional Republicans unveiled the first major revamp of the nation’s tax code in a generation Wednesday — a sweeping, nearly $6 trillion tax cut that would deeply reduce levies for corporations, simplify everyone’s brackets and nearly double the standard deduction used by most Americans.
There clearly would be seismic changes for businesses large and small, with implications for companies beyond U.S. borders. The American middle-class family of four could take advantage of a heftier child tax credit and other deductions but face uncertainty about the rate its household income would be taxed.
“Under our framework, we will dramatically cut the business tax rate so that American companies and American workers can beat our foreign competitors and start winning again,” Trump boasted at a speech in Indiana.
Democrats predictably felt differently.
“Each of these proposals would result in a massive windfall for the wealthiest Americans and provide almost no relief to middle-class taxpayers who need it most,” Senate Minority Leader Chuck Schumer, D-N.Y., said at the Capitol.
Trump and the architects of the Republican plan insist that the overhaul is aimed squarely at benefiting the middle class and wouldn’t favor the wealthy. Still, a cut in the tax rate for Americans making a half-million dollars or more would drop by almost 5 percentage points as the wealthiest sliver of the nation reaped tremendous benefits.
Corporations would see their top tax rate cut from 35 percent to 20 percent. For a period of five years, companies could further reduce how much they pay by immediately writing off their investments. That’s all part of an effort that Trump said would make U.S. businesses more competitive globally.
The plan would collapse the number of personal tax brackets from seven to three.
The individual tax rates would be 12 percent, 25 percent and 35 percent — and the plan recommends a surcharge for the very wealthy. But it doesn’t set the income levels at which the rates would apply, so it’s unclear just how much change there might be for a typical family or whether its taxes would be reduced.
“My plan is for the working people, and my plan is for jobs,” Trump told reporters at the White House. “No, I don’t benefit. … I think there’s very little benefit for people of wealth.”
The plan would nearly double the standard deduction to $12,000 for individuals and $24,000 for families. This basically would increase the amount of personal income that is tax-free.
Deductions for mortgage interest and charitable giving would remain, but the plan seeks to end most other itemized deductions that can reduce how much affluent families pay.
A battle is already brewing among Republicans over a move to eliminate the deduction for state and local taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California. Republicans from those states are vowing to fight it.
Republican leaders on Wednesday proposed slashing tax rates for the wealthy, the middle class and businesses while preserving popular tax deductions that encourage buying homes and giving to charity, hoping to unify the party behind a proposal to revamp the U.S. tax code.
But the nine-page framework they released to kick off negotiations left many key questions unanswered, including how they plan to avoid adding trillions of dollars to the government’s debt. The framework leaned heavily on limiting taxes paid by the wealthiest Americans, such as the alternative-minimum tax, and opposition to these changes from Democrats suggest it will be a battleground as negotiations intensify.
Republicans were also careful not to identify numerous tax breaks they might remove, focusing instead of promises to lower rates so much that President Trump estimated the effort would amount to the biggest tax cut of all time.
How Does It Affect Me?
This is easy. I stand to gain. My business income will go from being taxed via brackets to being taxed at a maximum of 25%.
How Does it Affect You?
I believe the average person benefits. I would agree that the wealthy benefit more.
Your results will vary. Please peruse the link at the top to see how you personally may be impacted.
Mish Alternative Proposals
I believe the GOP plan is a step in the right direction. How big a step is certainly debatable.
I make a set different set of far more sweeping proposals.
Mish Individuals Proposal
- Flat tax of 10% on income below $500,000.
- Flat tax of 25% on income above $500,000 up to $2,000,000.
- Flat tax at 35% on income above $2,000,000.
- No deductions for anything other than direct IRA contributions up to $7,500 annually without restriction.
- No tax credits.
- Tax filing is by individuals, not households.
- No tax or FICA on the first $15,000 in income, individually.
- Flat Fica Tax of 5% above $15,000.
- No FICA limit Cap.
- Stock option gains taxed at 40%.
- All stock market gains, short or long, taxed as ordinary income. (I do little or no short-term trading so this idea is not for me. Rather, it promotes market efficiency).
- Flat tax rate of 10% in the US.
- Flat Tax rate of 15% on profits held overseas to encourage immediate repatronization of profits.
- Immediate write-offs to encourage investment.
- No corporate loss rollover to prevent year-end system gaming.
- To prevent S-corporations (like me) from becoming full corporations (taxed at 10%), corporations would have to hire a minimum of 15 non-family related employees.
- The average person who does not switch jobs would not need to do anything other than check a single box. There would be no refunds or tax owed.
- Individuals making below $15,000 pay no tax. This encourages individuals to work, not take welfare.
- Most of the benefits accrue to lower and middle wage earners.
- Earned income fraud disappears.
- The incentive for corporations to move jobs and profits overseas is eliminated.
- Corporations that hire non-family members receive huge benefits. So do lower and middle wage earners.
- I put in hiring restrictions that would prevent S-corporations (such as me) from gaming the system.
- The high tax rate on stock options will reduce shareholder dilution.
- Note that FICA at 5% tax makes the real top effective tax rate 40% and the real bottom rate 15% on income above $15,000.
- IRA deduction encourages saving.
- Elimination of charitable contributions as a deduction stops overvaluing of assets (e.g. donating a piece of land or a painting worth $20,000 and valuing it at $200,000)
If my plan is not revenue neutral, I suggest tweaking it is until it is.
How do I personally fare?
I really do not know, especially at my age. I made a proposal that I believe is far better than the GOP proposal.
I would welcome analysis from the Tax Foundation.
If my plan is not revenue neutral (at a minimum), I would modify my plan until it is.
I was quite pragmatic about this, looking for a better bipartisan proposal than an ideal proposal that would have no chance.
Mike “Mish” Shedlock