GOP Tax Reform’s Big Winners and Losers: Andy Friedman

(The chart—rendered in billions of dollars—reflects the House bill, but the Senate bill numbers are not “meaningfully different,” Friedman notes.)

Businesses, Freidman says, “receive over two times the benefit that individuals get under the bill,” a balance that reflects the Trump administration’s “belief that permitting businesses to keep more of their funds will grow the economy, which ultimately will benefit individuals through greater employment and higher wages.”

Under the Senate reconciliation rules, the tax bill may lose no more than $1.5 trillion over the next 10 years, Friedman points out, and the bill comes in just under that amount at $1.46 trillion. 

Further, he says, the rate reduction on C corps from 35% to 20% costs $1,46 trillion, indicating that the corporate rate reduction uses the entire revenue loss allotment. “Accordingly, all of the other provisions in the bill must be revenue neutral in the aggregate: every dollar of revenue lost must be offset by a dollar of revenue gained.”

A taxpayer may end up paying “less tax, more tax, or the same tax depending on how the gainers and losers apply to his or her situation,” Friedman explains.

Investors, Friedman continues, may pay significantly less tax if they:

• currently pay alternative minimum tax;
• have large estates and are actuarially likely to die in the next few years; or
• own a pass-through business other than a service business. Other investors may not fare so well; they should examine their situation carefully to see if the benefit of the reduction in tax rates exceeds the cost of eliminated deductions.

In addition to considering tax changes to individuals, Friedman exhibits in the following chart the sectors that are likely to incur “significant tax changes that could alter their stock valuations.”

As to states taxes, most states use federal adjusted gross or taxable income as the starting point for imposing state tax, Friedman explains.

“States then reduce or increase the federal amount for particular state items. In those states, the expansion of the federal tax base arising from the elimination of deductions is likely to increase the state tax base as well – but without a corresponding reduction in the state tax rate. Thus, many investors may find that, although their federal tax is lower, their state tax has increased.”

(Related: 10 Most Tax-Friendly States for Retirees: 2017)