Donald Trump’s administration has been in discussions with Republican leaders for some time now regarding future tax reforms. Today saw the release of a joint proposal which would radically reform the tax regime for corporate America and make significant changes to individual taxation. This has been high on the agenda for some months now and there are hopes that it will placate those who were growing weary of Donald Trump’s empty promises.
Reducing corporation tax
One of the more eye-catching elements of the proposed tax reforms, for which we await more detail, is the intention to reduce corporate tax from 35% down to 20%. This is a massive reduction and has already been well received by Wall Street and investors despite the lack of detail. There is also a proposed change to the “passthrough business rate” which is currently charged under the individual code but will fall to 25% in the future.
These are major changes for American companies although like so many issues involving Donald Trump, there is a distinct lack of detail!
Personal tax
In yet another move which has been hailed as benefiting the rich and not the poor, a plan to reduce the number of personal tax brackets, currently seven, down to just three, which would be 12%, 25% and 35%, has been revealed. There is also the option to introduce a fourth tax bracket which would be targeted towards those at the higher echelons of the income scale.
While there have been many comments regarding the top individual income rate, which would fall from 39.6% down to 35%, and the increase in basic rate tax from 10% up to 12% other factors have been ignored. A doubling of the standard deduction and expansion of the child tax credit system would more than offset the increase in basic rate tax and leave many towards the lower end of the spectrum better off. However, Donald Trump’s critics prefer to focus on high earners and the potential change in their income tax rates going forward.
Helping his supporters
While the increase in basic rate tax would be more than offset by the increase in the standard deduction and expansion of the child credit tax system, many believe that Donald Trump needs to do more. If he’s not careful he could potentially alienate his core voters which would reduce his sway across the US population and his political influence going forward. It was however interesting to see suggestions of a $500 credit for anyone taking care of a family member no matter what their age. As people continue to live longer, assistance for those not able to look after themselves will become more of an issue and the $500 credit would be well received – across the board.
The multitrillion cost of tax reforms
As we touched on above, many of the tax reforms announced today have been fairly vague with no details about how they will be paid for. At this moment in the economic cycle the US authorities cannot afford to give away trillions of dollars without recouping at least part. There are suggestions tonight that some of the wording has been left fairly vague so that the relevant committees meeting in the coming weeks and months will be able to mould their own suggestions around this broad structure. We can only hope that Donald Trump follows up his promises with major changes to the US corporate and US personal taxation systems. He cannot afford to be seen to be helping the rich at the expense of the poor, especially when you bear in mind his support base.