Leave it to Trump to come up with something really simple.
Simple is good! Not that a lot of brackets have ever been a challenge in calculating tax, but we’re going to be going from seven to three.
Here is the tax plan, in a nutshell (I hate that phrase):
3 brackets: Less than $75K: 12% $75K - $225K: 25% More than $225K: 33%
3.8% surtax on investment income: gone
Capital gains stay at 20%
But here is the kicker: The standard deduction (for married filing jointly) goes from $12,600 to $30,000.
Talk about a monkey wrench--with the standard deduction at $30K, how many people do you think are going to itemize deductions? Who has $30K in mortgage interest and state/local taxes? Of course, you guys do, but most people don’t. I’d say that a small minority of people will be itemizing deductions under this system. Which means: the distortive effects of the tax code will start to go away. If getting a mortgage doesn’t help you, then why buy a house? Maybe just rent.
This is powerful stuff.
As for getting the top marginal rate down, that is literally the most important thing to me in the world, because it is incentives that shape behavior.
I mean look. Trump is obviously no fan of taxes himself. He is going to make it a priority to lower them. And with a Republican House and Senate, it shouldn’t be too difficult.
But wait, there’s more. We haven’t talked about corporate taxes, which are supposed to go from 35% to 15%.
A few points here:
If you start running DCFs of companies where their after-tax income goes up massively, look at what happens to the valuation. Yup. Which is pretty much what we’re seeing right now. People forget about the impact that tax has on valuations. You look at after-tax cash flows.
The other aspect of this is that with a 15% rate, I’m sure some companies will repatriate money held overseas. That’s with or without a tax holiday. I bet 15% is the number that gets them to do it.
One final thing. Trump wants to extend the 15% corporate rate to pass-thru entities such as LLCs and S Corps. You might notice that The Daily Dirtnap has “LLC” after it, so you can imagine my ebullience after learning of that development. I can’t imagine a scenario where this isn’t DOA with the Democrats, but who knows? I felt like buying the Dow 50,000 calls after I heard that.
Even the worst economist can see how these changes in tax policy are pro-growth. My students figured it out. They wanted to know what toys I was going to buy. And maybe I will buy a few toys. I will also save and invest. C and I are more productive uses of capital than G (though Keynes treats them equally).
Now if only we could do something about spending.
Mod Note (Andy): This post is an adaptation from the November 28th edition of Jared's Daily Dirtnap Newsletter. If you'd like to read more, WSO readers qualify for a $100 discount to his Daily Dirtnap daily market newsletter...just email [email protected] and mention "WSO Monkey Discount". You can follow Jared on twitter at @dailydirtnap.
RE the market's reaction to taxes: a lot of firms are going to see a one-time accounting charge, because they don't necessarily have any deferred tax liability provisions on their balance sheet. That's probably not a big concern to the market, but if you've got bond covenants to worry about and a lot of foreign income to be repatriated...
So a corporation making billions of dollars pays a lower rate than a middle class individual? Makes sense.
Yes, and now that corporation can take the money it was gonna lose and build more factories, hire more workers, raise pay, fund more R&D, etc.
Your naiveté is too cute. Share buybacks and dividends are what are coming down the pipe. Not taking a stance on tax rate but it sure isn't going to what you outlined.
Yeah, that's not how it works. See, a corporation is owned by shareholders who are paid dividends out of corporate profits, net of corporate income taxes paid. Those dividends are usually taxed at the individuals' income tax rate. So the corporate shareholders are still paying a 15% fee to incorporate their business as a C-corporation.
Actually, this is important to understand because a lot of liberals don't get this (which is why they are so angry about decreasing the corporate income tax rate).
You have Generic Company. Generic Company has 5 shareholders/partners. Generic Company chooses to become Generic Company, Inc. It earns $100 in annual profit. That annual profit would be taxed at 15%, reducing the distributable income to $85. Then Generic Company, Inc. distributes the $85 to the shareholders who then pay, say, 33% rate (individual rate for non-qualified dividends, 20% for qualified), leaving income after taxes of $56.95, for an effective tax rate of 43.05%.
In an alternative universe, Generic Company becomes Generic Company, LLC. It earns $100 of annual profit and distributes $100 to its partners. Those partners pay a 33% rate (their individual rate) for an effective tax bill of 33%.
Edit: EDITED FOR CLARITY. At a 15% tax rate, qualified dividends would basically be tax rate neutral between ordinary income taxes and net effective corporate tax rate passed through to shareholders, so the rich aren't screwing over the middle class.
Point, which is why I favor cutting the corporate tax and increasing taxes on dividends and LTCG (with an inflation index)
BUT what about:
-Foreign governments that are tax-exempt? Should the UAE's sovereign wealth funds be exempt from taxes derived from US income? -Swiss nationals and other citizens of countries that don't have income tax? -Singapore? Guys like Eduardo Saverin?
Assuming these are ordinary dividends
Yet again, an overly simplisic and wildly inaccurate interpretation of reality. MAGA
The other aspect to this is how do you "balance" the shortfall in tax revenue with spending?
If we make drastic cuts to defense (not likely) and other areas and focus on reducing our debt levels than yes the tax proposal will be great.
I personally want to see us completely remove subsides and end ALL forms of social welfare and even remove the government from SS, Medicare, etc.
There was a time in this country where we didn't have these social programs and people did just fine so why can't we go back to the way it was? Maybe then people will get off their lazy asses and get a job.
What happens to all the people who've been paying into SS their whole lives? They get nothing?
To be sure, I have no problem with social security. Importantly,people who receive social security tend not to have five kids that they can't feed without government assistance at the age of 75, who then go on to have 25 grandkids they can't afford. The same is not true of other social welfare programs
There are simple ways to address this. If I remember correctly, Milton Friedman's solution was to issue individuals a government bond equal to the amount they'd paid in social security over their life-times. The only problem is whether there is the political will to implement such a policy.
"people did just fine". Do you actually have the slightest idea how massively extreme poverty has come down since the advent of these programs? Take a look at poverty among the elderly pre and post SS. The difference is staggering. A huge number of people were not "doing just fine".
But the member berries....
Well, in fairness, you're comparing 2016 to the Great Depression. That's like calling the stock market a no-brainer investment based on its performance between 2009 and 2016.
Completely agree. I'm just worried about the budget. Tax cuts combined with infrastructure spending may balloon the debt and have inflationary implications. Also to add, Trump and the Republican Congress do not have the greatest admiration for the Federal Reserve. Hopefully monetary policy will adjust accordingly, but also put to use interest rate guidance to stem the tide of possible inflation. Just my two cents. Trump and his administration have certainly increased my confidence about the nations' next steps.
But monetary policy adjustments will only balloon the size of current deficit payments, so even if the growth happens, it is unlikely to be revenue neutral.
From a friend, any thoughts?
"he plans to lose exemptions and the lower tax brackets for lower income earners" "he's also getting rid of head of household (that's for people in alternative relationships") which is total fascist move"
If you have a relationship with two equal earners in the 28% bracket or above, the current tax law generally costs two married people more than two single people.
Married people should either get the benefits of head of household too, or maybe let's get rid of these different filing statuses and just have everyone file as single.
Most lower income earners already take a standard deduction. Now, their deduction is $15,000 rather than $6000.
Here is the visualization of the marriage penalty: http://taxfoundation.org/sites/taxfoundation.org/files/docs/FF464_chart…
Why does your friend think that? Head of Household is a status for people who aren't married; if anything, they're probably less likely to be in an abusive relationship than the average taxpayer with children.
I like the plan but disagree with the 15% rate on the pass-thru entities. Kansas tried this recently and it got so horribly abused that it actually caused significant "damage" to the Kansas budget. Basically, people started to "incorporate" themselves into LLCs and partnerships. There are other things that can be done to help small business.
I've read all of trumps site on the tax plan and there is NOTHING on pass thru entities. I think this stemmed from a misreporting by Forbes that has grown like wild fire.
Edit: Looks like it was part of his original plan: http://www.bloomberg.com/politics/articles/2016-09-15/trump-drops-15-ra…
"Trump wants to extend the 15% corporate rate to pass-thru entities such as LLCs and S Corps."
Where are you getting this information...I have not seen anything from his statements nor his website that it extends to passthrough entities
Some of his advisors (e.g. Larry Kudlow) have stated that they think corporate income tax reform/rate cuts should extend to small businesses.
That is different than translating that to mean pass through entities...doesn't make much sense either sense there is no double taxation on pass throughs.
Edit: Looks like it was part of his original plan: http://www.bloomberg.com/politics/articles/2016-09-15/trump-drops-15-ra…
Do you know what a Shit Barometer is, boy? Measures the Shit Pressure in the air. When the Barometer rises, and you'll feel it too, your ears will implode with the Shit Pressure. I tried to warn you, Bubs, but you picked the wrong side! Beware, the Shit Winds are a-comin'.
That is an amazing TV show +SB
This is a fucking fantastic plan. Budget neutral. Stimulative. Simple. I didn't vote for Trump, but if he passes this, I might next time.
Just curious - in what way can this possibly be budget neutral? Last I read it was projected to add $5 trillion to the debt over the next 10 years.
15% corporate rate will bring in god knows how much overseas earnings and tax revenue into the U.S. over that period. Right now, the bottom ~48% income earners effectively pay 0 in taxes. That will change under this plan, and the tax cut at the top (coupled with the already discussed corporate tax cuts) will actually stimulate the economy. Not cash-for-clunkers stimulus, but real stimulus. Very excited about this plan.
Trump's tax plan makes single earners earning between 180-440k worse off. Would rather see Paul Ryan's plan be passed, which is better for those upper middle class singles. Extends the 25% bracket from 112.5k to 190k.
Speaking to the OP's comments about the mortgage interest deduction, increasing the standard deduction so much pretty much opens the door to the phasing out of the mortgage interest deduction all-together. After the implementation of the tax plan, only the wealthy (or people with a large mortgage interest deduction) will benefit from the deduction, which will make it politically palatable to remove entirely.
The mortgage-interest deduction, btw, is probably the most absurdly distortive deduction I can imagine--it provides no real benefit at all. All it does is artificially increase the baseline price for which one may purchase his or her residence, simply moving the supply/demand equilibrium price. There is no net savings to the buyer throughout the totality of the market since the subsidy of the mortgage interest deduction simply increases the price of the underlying asset.
This doesn't change the fact that it's smarter, tax-wise, to own a home outright than it is to rent and own a whole bunch of treasuries.
I'd also just note that rates have been creeping up lately and the ten year treasury rate may not be 2% forever. Back when Ivana and Donald were married, mortgage rates were 12%. The expected rate of return on rental property was probably also on that order. So it's possible that we go back to an era when the mortgage interest deduction for a middle-class family works out to 12% of $250K or $30K. Even if mortgage rates don't hit 12%, I could easily see them hitting 6% or 8% like they were a decade ago.
I get what you're saying, but it's going to be impossible to eliminate the income tax difference between owning and renting unless we allow renters to take a tax deduction on their cap rate.
Upper Middle Class Tax Hike: Elimination of 28% tax bracket
Quick point-- the current tax plan hikes taxes on single people earning between ~$120K and $400K. Which is probably like 70% of this forum, if you include the college students who are going to be earning that in two or three years.
The Trump Tax plan eliminates the 28% tax bracket and replaces it with 33%.
Some people will save money. If you're earning between $90K and $120K, your taxes go down. But chances are, you'll be in a higher tax bracket soon. And up until you're earning ~$450K per year, your overall taxes will be higher to the tune of about $4000.
You'll get a bigger standard deduction, sure, but as an NYC resident you're already paying 11% in state and local taxes, so you'll still either itemize or be close to itemizing and the standard deduction doesn't help you.
You could always move to New Jersey (IlliniProgrammer tip).
I'm all for tax cuts. And I can understand tax cuts that benefit the wealthy without helping the middle class-- or tax cuts that reform all kinds of deductions and tax credits (even if many of those deductions are being taken by the middle class). But I don't favor tax reform that raises middle class tax rates while cutting it for people who are a lot richer than me. If we want to make tax rates less progressive, we can do it, but if the objective is a tax cut, let's cut everyone's taxes, or at least enact them through reforming deductions. Some of the tax cuts for the rich are coming from an upper middle class tax increase.
Let's extend the 25% tax bracket up to $170K so we can immunize 28% and 33% tax bracket folks from an increase. And let's fund it with a fourth tax bracket at $1 million-- say at 36, 37 or 38%. You're still getting a tax cut. If you're earning $1 million/year, you still deserve a fair tax rate and you still deserve a tax cut if everyone's getting one, but you're rich just about anywhere. Even in NYC.
Agreed. Also saw a comment about Paul Ryan's Tax Plan: Respect.
"So a corporation making billions of dollars pays a lower rate than a middle class individual? Makes sense." What the forever Hokie said.. and unlike the middle class individual the Corp isn't frittering its income on a daily Starbucks fix, going to Whole Paycheck for groceries for the sake of "image", and any other suburbans soccer mom waste of money you can think of...
Lower taxes always sound great. When you look at the fiscal condition of the US lower taxes look like a really bad idea. The government severely over spends and is severely underfunded and really can't afford decreased revenue. Even assuming economic growth results from the tax cut (which you can't really assume) it probably wouldn't be significant enough to cover lost revenue. Don't get me wrong the tax code is bad and needs to be reformed. My problem is Trump's plan doesn't really address the core issues with the tax code and then his calls for additional spending would continue to increase the deficit assuming entitlement reform doesn't occur. There are some good things in trump's plan of course like lowering the effective corporate tax rate and in fairness i'd say the same thing about just about any politicians tax plan. Both parties seem to generally have ineffective non-data based solutions....i'll stop before that turns into a rant.
First, I will have you know I am in the highest tax bracket, which makes me biased that way, but I still don't get the logic
Trump plan is lower taxes for corporations and rich people, and almost same taxes for the rest. Here is the part that I don't understand. Why would lowering corporate taxes ever stimulate the corporations to expand if the customer base doesn't change.
If a company like GM makes cars that is sold to the middle class. the middle class is not getting enough tax incentive to buy a new car, so Demand on GM cars isn't going to change, then why would they expand.
It would make more sense that if you cut taxes the lower classes, the one who aren't going to buy new cars because they are too poor, then they will want new cars and there fore increase GM demand. and so GM can meet that demand by borrowing money and building the factories.
Even myself, I don't see lowering my taxes as a rich person will affect my buying decisions, I already own a new car and anew phone and buying the best furniture. give me more tax cuts and I will invest the extra money, or go to Europe for vacation. but again, I can invest the money in GM for example, but since GM isn't selling more cars (because 99% of people aren't incentivized to spend more) then the dividend on GM stocks will be lower compared to the stock price. again GM don't have to build more factories.
It seems to me historically that cutting taxes to the rich never stimulate the economy, especially that the resulting deficit is then transferred to the middle class via taxes or inflation. which makes them buy less.
I am a surgeon, I am worried about ACA and medicare going away, because the majority of my patients use them to pay me, if people are less insured, they will not get their procedures as often, which hurts my income as a rich person, far beyond that of what the tax cut will provide. not to mention that those patients of mine who will have more trouble paying their bills, will likely cut on buying things like new cars, which would hurt GM, etc
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