A proposal that was deemed by White House officials to be the, “biggest tax cut” in U.S. history, amounts to a mere one page document, leaving much to be pondered.
So what exactly is President Trump proposing? In summation, it cuts the number of income tax brackets from seven to three with a top rate of 35%, and lower rates of 25 and 10%. It also nearly reduces the corporate tax rate in half from 35% to 15%, and eliminates deductions with only a few exceptions like mortgage interest and charitable contribution deductions.
Here’s where it gets more interesting. In attempts to eliminate future inclinations for corporations to hold earnings offshore, Trump has proposed two new elements. One is the plan to change the fundamental way this country taxes foreign earnings and adopt a “territorial” approach.
Rather than following a policy that taxes the global income of companies based in the United States, Trump’s proposal supports a one-time tax policy on the trillions of dollars held by corporations overseas.
Second is a White House plan to allow small businesses, in LLCs and the like, to pass through their earnings at the low corporate rate of 15 percent instead of the higher individual rate. An article published by, The National Interest, explains how this change could open the door to abuses despite it’s purpose of leveling the playing field between large and small business. For instance, people might set up dubious businesses in order to secure the low corporate rate for themselves.
White House spokespeople acknowledged this risk at a press conference announcing the plans and assured all that the law would include language to prevent such abuse. They failed, however, to clarify just how the law would do that.
So how will Uncle Sam pay for it?
According to US News, proponents claim that much of the revenue lost by cutting taxes for businesses and wealthy individuals will be recouped with new revenue generated by higher economic growth that the tax cuts will unleash.
Secretary of the Treasury Steven Mnuchin says it would ‘pay for itself’ through economic growth. Though tax cuts always boost growth rates, it is unclear that such a jump would produce, as the White House suggests, sufficient additional revenue to offset that lost to the net rate reductions.
It is still early in the debates, but only time will tell if the self-proclaimed deal maker can apply his personal financial successes to that of the entire country.
Key points of the plan outlined Apr 26, 2017 by the White House:
- Reduce the 7 tax brackets to 3 tax brackets of 10%, 25%, and 35%
- Double the standard deduction
- Relief for families with child and dependent care expenses
- 15% business tax rate
- Territorial tax system to level the playing field for American companies
- One-time tax on trillions of dollars held overseas
- Eliminate tax breaks for special interests