By Andy Frye
President Donald Trump produced, this week, a one page bullet list of tax reform ideas he’d like to see implemented ASAP.
I have a policy of avoiding political arguments when discussing taxes. I don’t find the “red team vs. blue team” type of stuff productive. I much prefer to look at the facts and the numbers.
With that goal in mind, let me briefly give you three groups that are poised to win rather “bigly” if President Trump can get his tax reform plan (or something like it) passed into law.
Married Couples Who Rent
Under this new plan, the standard deduction amounts would be doubled.
Without dragging you into all the technicalities, doubling the standard deduction gives taxpayers who pay rent a similar level of deduction to the one that homeowners have enjoyed.
Married couples who do not own homes (and, thus, do not itemize deductions) will see a significant tax reduction if the standard deduction doubles.
Running some rough numbers here (don’t hold me to these calculations, “it all depends on your personal situation,” etc.), the typical non-homeowner married couple earning $100,000 income would save about $3,000 on their taxes if and when the standard deduction doubles.
Taxpayers with Business Income
President Trump has proposed a maximum tax of 15% on business income.
The definition of “business income,” here, would include income earned by corporations, but also income earned via “pass through” entities, such as partnerships and S-corporations. Pass through means, in brief, that the business itself does not pay income tax, but instead passes through the profit to the owner’s personal tax return, where the tax is then paid.
Many smaller businesses are set up as pass through entities and currently pay much higher rates than 15%.
Using, again, very rough and “it depends” numbers:
A small business owner earning $200,000 (profit, not sales) could easily save $10,000 or even $20,000 per year if the maximum rate on business incomes goes to 15%.
Trump claims that his plan will spur economic activity and job growth. Certainly if this provision were to pass, it would make receiving business income much more appealing and could, therefore, create a major incentive for increased business investment.
The tax reform plan speaks of changing the tax code into a “territorial system.” This is a 180 degree change from the current US policy of taxing “worldwide” earnings of US citizens and US companies. Up to now, US companies have had to employ legions of accountants and attorneys to devise creative strategies to “get around” this requirement to pay tax on all your worldwide earnings, such as the “Double Irish Arrangement” and the “Dutch Sandwich.”
In a territorial tax system, the need for these creative strategies would appear to disappear; the US company now only has to pay income tax to the country where the operations happen, Uncle Sam no longer has any claims on profits earned in Bangladesh.
President Trump has stated that a main objective of tax reform is to bring company operations and jobs back to the USA–but doesn’t a territorial tax system for corporations make it easier and cheaper for US companies to set up shop in the lowest tax countries they can find?
Perhaps the strategy here is to make sure the US one of those lowest tax countries, by implementing the 15% maximum rate on business income? It’s hard for me to imagine that other countries won’t go lower than that. But perhaps I lack imagination…and need to explore more arrangements and consume more sandwiches.
No matter how you slice it, and not judging whether this is “bad” or “good,” international corporations win bigly (sorry) under this tax plan:
Lower tax rate at home, plus if you find another country that charges even lower than the US charges, it’s easier to set up shop abroad and just pay the locals their reduced rates.
Should be an interesting national discussion over the next few months and hopefully this blog post gives you a little bit of unbiased insight into who stands to gain from the ideas that have been put on the table by President Trump.