There still is a lot of book ahead in any tax reform coming out of the Trump administration. But taking a page from candidate Trump’s tax plan, it looks that the number of tax brackets will be cut to three from seven, and the top tax bracket, for those with net income of $225,000 for a married couple or $112,500 for an individual, will be reduced to 33% from 39.6%. Other major changes include reductions of corporate tax rates, capital gains taxes and taxes on “pass-through businesses,” that is, sole proprietorships (S corps), partnerships and LLCs, which make up the bulk of taxpaying businesses.
“The proposals are very pro-business,” says Mike Coglianese, founder and principal of Michael Coglianese CPA in Chicago. “[Trump] wants to cut the business tax rate from 35% to 15%, which is amazing. Even if it only goes down by half of that, it’s good for the market.”
Meanwhile on the congressional side, House Ways and Means Committee Chairman Kevin Brady, R-Texas, also has promised big reform, stating that they plan to redesign the IRS into a “21st century organization” as well as cut all corporate taxes, no matter the size of the firm, to 20%. Also, they want to allow businesses “to immediately write off the full costs of new capital investments,” and end the “Made in America” tax that will tax all products sold in the United States at the same rate no matter where produced.
Coglianese believes the promise of tax reform is a main generator of the stock market’s move to all-time highs, “because investors are factoring tax cuts into each company’s bottom line.” A more favorable tax system plus the reduced uncertainty apparently makes for a buoyant market as the S&P 500 stock index is up 11% since the November election.
He outlines key positive changes from the Trump proposal for business and investors, including the reduction in tax brackets and tax cuts for the wealthy:
- Owners of pass-through businesses can elect to be taxed at 15% rather than under individual rates;
- Capital gains and dividends would be taxed under the current preferential rates. Distributions from large pass-through businesses received by owners who elect to be treated at the 15% flat tax would be taxed as dividends;
- Elimination of the 3.8% net investment tax, which currently applies to individuals who make more than $200,000, or $250,000 if married and filing jointly. This tax, which he says was added to help pay for the Affordable Care Act, is in addition to taxes already on capital gains;
- Elimination of personal exemptions, although high earners are phased out currently;
- Itemized deductions would be capped at $200,000 for married filing jointly;
- Business tax would be cut to 15% from 35% while eliminating many business deductions. Rather than taking depreciation over multiple years, businesses also can take an upfront writeoff for an immediate impact.
Regarding the “pass-through” provision, which some pundits have coined the “Trump Loophole,” the Center on Budget and Policy Priorities outlined the cost of such a tax change, stating it would cost $1.5 trillion over 10 years (according to an Urban-Brookings Tax Policy Center analysis), which would account for “about one-fourth of the Trump campaign tax plan’s total cost.”
Further, the CBPP states that “about half of all pass-through income flows to the top 1% of households (those with incomes above $693,500 in 2016); only about 27% goes to the bottom 90% of households.”