JimmyTalk: Battle lines are forming on Trump's tax reform proposal

 

An actual bill has yet to be introduced, but everyone in officialdom is weighing in on what it will, might, or won’t do, often from partisan or ideological positions. However, from what we know so far, we can explore how the proposal is affected by the national financial situation and various elements thus far released. 

The U.S. government has racked up a national debt of $20 trillion and fiscal year 2017’s budget deficit was $666 billion. American taxpayers are paying more than $400 billion annually, and rising, in overall interest. The argument by some is tax reform will worsen matters if it reduces government revenue.  The counter-argument is reform stimulates growth, higher federal revenues, more jobs, and better incomes. 

Fundamentally, tax reform simplifies the tax code.  The current proposal reduces individual tax brackets to three: 12, 25, and 35 percent. This streamlines the number of brackets from the current seven: 10; 15; 25; 28; 33; 35; and 39.6 percent. 

As revenue neutrality is also a tax reform component, the highest bracket may be increased or a fourth bracket on the wealthy may be added.  The term “Millionaires Tax” has been used, suggesting it will apply to earnings above $1 million. Currently, the U.S. corporate tax rate is either the world’s highest or within sight of the summit.   A major component of this reform is reducing the country’s 35 percent corporate tax rate to 20 percent. 

The White House plan would drop the top tax rate on “flow-through” or “pass-through” businesses to 25 percent instead of today’s 39.6 percent. Sole proprietorships, S Corporations, and partnership members don’t pay income taxes: income flows through, or passes through, and taxes are paid at individual rates. About 95 percent of U.S. businesses are set up as pass-throughs, either as sole propriertorships, partnerships, and S-corporations.  On those numbers alone the tax reduction would benefit a great many East Tennessee employers.

Tennessee sole proprietors and partnerships will reap the benefit of the 14.6 percent savings; however, owners of S-Corporations and LLC’s subject to the 6.5 percent Tennessee Franchise and Excise tax, will need to consider whether they take profits from their businesses through a salary or a distribution or dividend from business income. If the tax rate on business income decreases as proposed, owners may shift compensation from salaries to distributions, for an 8.1 percent net savings. They’ll save on federal taxes but Tennessee will benefit from the increased F&E tax revenue.

A concern being raised among some politicians and the news media is that some hedge fund managers and venture capitalists could benefit from the tax reduction (seen as negative) along with small and mid-sized businesses (seen as positive). Eliminating itemized deduction for taxes is another part of the reform proposal.  The primary deductible taxes are state income tax, sales tax and property taxes.  As Tennessee is a low-tax state, giving up this deduction in exchange for lower rates should mean a lower tax burden for Tennessee residents. High tax states such as New York and California are already mounting a challenge.  New York Gov. Andrew Cuomo says it will be a “death blow” to his state. If the reduction is approved for pass-through businesses it will end what is effectively a federal subsidy for high-tax states.

Charitable contributions and mortgage interest would still be deductible, and the standard deduction would rise to $12,000 for individuals and $24,000 for married couples.The legislative details of President Trump’s plan will be materializing in the coming weeks, and we’ll explore them as they assume more solid substance.

The original article was published in the Knoxville News Sentinel in October 2017. For more posts by Jimmy Rodefer, please visit the Rodefer Moss Blog.

 

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Tagged #JimmyTalk, Tax Reform, Tennessee Tax