While President Donald Trump offered a sparse blueprint of his tax reform plans, released Wednesday in a one-page document, industry officials and advisors on Thursday saw some bright spots, adding that the plan was merely “an opening bid” that’s likely a tough sell in Congress.
“We do not think taxes will be the primary driver for most investors and their investment decisions,” said Andrew Crowell, vice chairman of D.A. Davidson’s Individual Investor Group. “It’s the proverbial tail wagging the dog.”
Crowell notes that “the majority of savers have their retirement nest egg in a ‘sheltered’ account like an IRA, Roth IRA or 401(k),” so “none of the capital gains savings or corporate tax cuts directly impact these accounts.”
Indeed, Brad McMillan, chief investment officer for Commonwealth Financial Network, noted in a Thursday commentary that to pay for the proposed tax cuts, the administration would “eliminate all tax deductions, except the mortgage, charitable giving, and retirement savings deductions.”
Notably, however, McMillan continued, “residents of states with high taxes would not be able to deduct those taxes. Depending on where you live, and how many deductions you take, you might end up paying more.”
Costs at the federal level “could be significant as well. Independent experts report that the plan would raise much less revenue for the country than the current tax laws do. The administration expects lower taxes to spur faster growth, making up for the shortfall, but if not, the deficit would rise substantially,” McMillan said.
While the numbers are “uncertain,” McMillan added, “as the plan includes few details so far… it does seem reasonable to conclude that, without that additional growth, the deficit would indeed grow, perhaps by a great deal.”
Trump’s plan also reduces the number of tax brackets, the highest of which is currently 39.6% from seven to three--at 10%, 25%, and 35%, and doubles the standard deduction, to $12,700 for individuals and $25,400 for couples, so married couples making less than that would not pay income taxes at all.
Crowell noted that “once we know where the personal income tax rates land, we’ll have some guidance for what that would mean for retirees tapping into their retirement savings.”
David Haraway a planner with Substantial Financial in Colorado Springs, states that from the “early details, I see it as a flat-tax plan for the 95%, with three brackets. By doubling the standard deduction it will make most people non-itemizers, whether they have mortgage interest or not, since few people have $25,400 in itemized deductions, except those high-tax states.”
The Alternative Minimum Tax along with the estate tax, which also includes “taxes inheritances,” McMillan notes, would also be eliminated.
For businesses, the plan’s goal is to cut the maximum corporate tax rate from 35% to 15%, and as McMillan notes, “pass-through businesses, including many small companies, would get a 15% tax rate.”
The border adjustment tax, “which would have raised taxes for importers,” is nowhere to be found, “another advantage for many businesses,” McMillan added.
Greg Valliere, chief global investment strategist for Horizon Investments, noted Thursday that it’s a no-brainer to see that Wall Street is “calling the shots,” in Trump’s plan.
Trump’s “most visible Goldman Sachs adviser,” Treasury Secretary Steve Mnuchin, “rolled out a rough outline” that was “a Wall Street dream – pro-growth tax cuts that focus on boosting perplexingly weak business fixed investment; individual cuts that should stimulate GDP; and no protectionism like a Border Adjustment Tax,” Valliere said. “This is great for equities, although the implications for fixed income investors are less bullish.”
Crowell added that with tax reform “in theory” being “very stimulative and a pro-growth agenda item, … this should bode well for the economy and GDP growth longer term.”
George Gagliardi, a planner with Coromandel Wealth Management in Lexington, Massachusetts, opined that Trump’s “latest” tax plan “has huuuuuuuge tax cuts for the wealthy and businesses, but no corresponding offsets to make up the difference other than eliminating deductions for middle class taxpayers.”
Trump's tax proposal as articulated "most likely won't pass muster with Congress because of the Senate rules on the resulting deficit increase from his tax plan. I don't think that anyone who seriously understands the world macroeconomic picture believes that the so-called 'growth' projected will pay for the tax cuts," Gagliardi added. "Three years of cuts would result in a deficit increase after 10 years, and thus is forbidden under the Senate's rules (known as 'the Byrd rule'). In other words, the Senate budget reconciliation process will kill it."
Valliere agreed there’s a “long slog ahead” on tax reform, stating that it could be a year away.
However, “for a White House known for deep divisions there’s surprising unanimity on the direction of economic policy – Wall Street will call the shots. Is there any wonder why the stock market is close to record highs this morning?”