Will President Trump’s Tax Cuts Finally Spur The Economy?

Yesterday afternoon Treasury Secretary Steven Mnuchin announced President Trump’s much-anticipated tax reform package in Washington, DC. There were a few surprises. Here are the highlights.

Much Lower Business Tax Rates. Trump wants to slash the top corporate income tax rate from 35%, the highest in the developed world, to 15% to make US businesses more competitive in the global marketplace. It’s about time.

A reduction to 15% would also be a huge drop from the 39.6% top rate paid by owners and shareholders of so-called “pass-through” businesses (including S-Corps). Those run the gamut from mom-and-pop shops to law firms, hedge funds, etc. In a pass-through business, the owners and shareholders report profits on their personal tax returns.

For the record, I don’t expect the president to be successful in getting the corporate tax rate down to 15%, but a cut to 20% might be doable. I suspect that Trump started at 15% as a means of negotiation with Congress, knowing that 20% is more likely (and acceptable).

Lower Individual Income Tax Rates. Trump wants to reduce the number of tax brackets from seven to three for individuals and joint filers. He called for the new rates to be 10%, 25% and 35% (not 33% as previously expected), down from current top rates of 28%, 33% and 39.6%.

Large Increase in the Standard Deduction. The Trump plan would significantly increase the standard deduction people can claim on their tax returns. The standard deduction would go up to $12,600 for individuals from $6,300 and to $24,000 for married couples filing jointly from $12,700 currently.

Lower Capital Gains Tax. Under Trump’s plan, the top federal capital gains rate would be cut from 23.8% to 20%. This would be achieved by eliminating the 3.8% tax that is used to fund the Affordable Care Act.

Eliminate Numerous Tax Deductions. Trump’s tax package would eliminate all deductions on the personal side with the exception of mortgage interest, charitable giving and retirement savings. It would also eliminate the Alternative Minimum Tax and the Death Tax.

Tax Break For Child-Care Costs. Trump called for two tax breaks to help ease families’ child-care costs. One would let parents deduct the average cost of child-care in their state, based on their child’s age. The other would give a tax break to anyone who sets aside up to $2,000 a year to cover costs associated with child-care and/or elder-care. The contributions would be tax deductible, then grow tax free.

Some argue, however, that millions of low-and middle-income families could see their tax burden increase when combined with Trump’s proposals to eliminate other personal deductions. That seems doubtful especially in light of the doubling of the much larger standard deduction.

Low One-Time Tax on Overseas Profits. The president’s plan called for a low, one-time tax break (presumed to be 10%) on the estimated $2.5-$3.0 trillion of profits that were earned overseas by US multinational corporations but were never brought back to the United States – due to high tax rates. The Tax Policy Center estimated last year that this provision could raise apprx. $150 billion over a decade, money that could be used to offset the cost of some of Trump’s desired tax cuts.

These are just the highlights of the new tax reform package announced by Secretary Mnuchin yesterday. More details are sure to follow and I will have more analysis just ahead.

How to Pay For It All? Treasury Secretary Mnuchin stated that the tax cuts would be paid for by stronger economic growth that would increase federal tax revenues. However, tax policy experts point out that such renewed growth in the economy is not assured, and worry that the tax cuts could cost the government over $2 trillion in the next decade. Time will tell.

At the end of the day, it remains to be seen how much of President Trump’s tax reform package he can get through Congress. Until we know that, and more specific details on how it will be paid for, speculation on how much it will cost is a waste of time.

1Q GDP Expected To Be Weak At Only 1.1% Tomorrow

Tomorrow morning the Commerce Department will release its first of three estimates on Gross Domestic Product for the first quarter of 2017. The pre-report consensus suggests a reading of only 1.1% (annual rate) for the 1Q, down from 2.1% in the 4Q of last year and 1.6% for all of 2016. The consensus range of estimates is from a low of 0.7% to a high of 1.7%.

The report will be released at 8:30AM Eastern time tomorrow.

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