The Trump Tax Plan: What You Need to Know

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Apr 27, 2017 12:56:29 PM

and tagged In the News

Leave a comment

trump tax planThe big news today is the White House's tax plan, which proposes to cut taxes across the board, relieve millions of people from the burden of paying income taxes, and make filing much simpler and easier—all while keeping the budget in balance (or at least not making the situation worse). The question, of course, is whether it can do all it promises, and whether it stands a chance of passing.

Potential benefits

For individuals and families, the plan reduces the number of tax brackets (the highest of which is currently 39.6 percent) from seven to three, at 10 percent, 25 percent, and 35 percent. It also doubles the standard deduction, to $12,600 for single filers and $24,000 for married couples filing jointly. This means that married couples wouldn't have to pay any taxes on their first $24,000 of income. Finally, it repeals the Alternative Minimum Tax (AMT), which was designed to ensure that higher earners pay a minimum level of taxes, and does away with the estate tax, which taxes inheritances.

From a business perspective, the proposal also offers benefits. The plan cuts the maximum corporate tax rate from 35 percent to 15 percent, a clear potential savings. The border adjustment tax, which would have raised taxes for importers, is nowhere to be seen—another advantage for many businesses. Finally, pass-through businesses, including many small companies, would get a 15-percent tax rate.

All in all, for many taxpayers, the plan looks like a real win.

Potential costs

It would also come with substantial costs, however. To pay for the cuts, the administration would eliminate all tax deductions, except the mortgage, charitable giving, and retirement savings deductions. Notably, residents of states with high taxes would not be able to deduct those taxes. Depending on where you live, and how many deductions you take, you might end up paying more. 

The costs at the federal level could be significant as well. Independent experts report that the plan would raise much less revenue for the country than the current tax laws do. The administration expects lower taxes to spur faster growth, making up for the shortfall, but if not, the deficit would rise substantially. The numbers here are uncertain, as the plan includes few details so far. But it does seem reasonable to conclude that, without that additional growth, the deficit would indeed grow, perhaps by a great deal.

Can it pass?

As presented, the plan allocates much of the tax relief to the wealthy, which means it will be difficult to get votes from Democrats. Eliminating the estate tax and the AMT, in particular, will make it a hard sell. On the Republican side, the possibility that the deficit could rise substantially may alienate the Freedom Caucus and other factions focused on fiscal responsibility. The internal Republican debate is likely to be lively, and the path to passage is not clear at all.

At the end of the day, the current tax plan is perhaps best described as an opening bid, laying out themes and priorities but leaving it up to Congress to fill in the details. And that is how it should be. President Trump has presented a road map for where he wants to go. Congress now has to decide how best to get there.

Although it’s worth examining the proposal as is, it is premature to get too involved, as what (if anything) emerges as law is likely to be quite different.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®