Taxes Under a Trump Administration

By
November 11, 2016

Donald Trump won more than 270 votes in the Electoral College and thus on January 20, 2017 he is going to become the 45th president of the United States.  In anticipation of that event, congressional tax writers and proponents for tax overhaul are optimistically planning to move bipartisan tax legislation forward in the first part of 2017.  In doing so, they will have to reconcile differences in the proposals put forward by the president-elect during the campaign and by leaders of the House of Representatives (think Wisconsin Congressman Paul Ryan) earlier this year.

Donald Trump’s tax plan would reform the federal tax code by reducing marginal income tax rates for all individuals and businesses, increasing standard deduction amounts, repealing personal exemptions, capping itemized deductions, repealing the individual and corporate alternative minimum taxes (AMT), repealing the 3.8 percent net investment income tax (NIIT), and repealing the federal estate tax.  The details of how some of these proposals would be implemented is not clear.

The Trump tax plan would create three ordinary income tax brackets of 12 percent, 25 percent and 33 percent for individuals, maintaining the current capital gains tax rates of 0 percent, 15 percent and 20 percent.  It would also increase the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married couples filing jointly, eliminating personal exemptions.  Itemized deductions would be capped at $100,000 for single filers and at $200,000 for married joint filers.  So-called tax carried interest income would be taxed at ordinary income tax rates.  Finally, an income tax deduction would no longer be allowed for contributions of appreciated assets to a private charity established by the decedent or the decedent’s relatives.

On the business side, the Trump plan reduces the corporate income tax rate from 35 percent to 15 percent, with the reduced tax rate “available to all businesses, both big and small, that want to retain the profits within the business.” It is unclear whether that means the 15 percent tax rate would apply to all business income or only to businesses that are organized as C corporations, with the ordinary individual tax rates applying to the income of pass-through businesses, such as partnerships and S corporations.  The Trump plan also eliminates most corporate tax expenditures except the research and development credit.  Corporate profits held offshore are subjected to a one-time 10 percent deemed repatriation tax, thus ending the deferral of tax on profits held offshore, which under current law are not subject to U.S. tax until they are repatriated.
The Trump plan repeals all federal transfer taxes — gift, estate tax and generation-skipping transfer taxes.  In place of a transfer tax system (with a current 40% tax rate), the Trump plan proposes a capital gains tax (with an approximate 20% tax rate) on the difference between the date of death value of a decedent’s assets and the decedent’s basis.  (Think of “basis” as the starting point for measuring gain on the sale of an asset.)  Because of the relatively high estate, gift and generation-skipping tax exemptions (each at $5,450,000), those transfer taxes affect very few estates.  For example, only about two-tenths of one percent of all the people who will die in 2016 will have an estate large enough to attract the estate tax.  The capital gains tax proposed under the Trump tax plan also would affect very few beneficiaries because the plan exempts from tax the first $5 million of gains per decedent or $10 million per married couple.

President-elect Trump’s proposed tax changes are estimated to reduce federal tax revenue by $6.2 trillion between 2016 and 2026, increasing the federal debt by approximately $7.2 trillion (including interest) over the same period if not offset by spending cuts. Under the Trump tax plan, nearly all taxpayers would see a reduction in federal taxes in 2017 and thereafter. Taxpayers with household incomes between $143,100 and $292,100 would see an average tax decrease of approximately $4,310. Those with incomes over $3.8 million—the top 0.1 percent—would see an average $1.07 million decrease in federal tax in 2017.

Presidents can propose legislation but need Congress to pass it.  Both House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch have stated their readiness to move forward with bipartisan tax reform.  The devil, of course, is in the details.  Led by Speaker Paul Ryan, Republican House leaders released their plan for comprehensive tax reform in June of this year.  Their plan contains similarities to the Trump tax plan, but there are important differences.  Estimates are that both the Trump tax plan and the House GOP plan will increase the federal debt if not offset by spending cuts, which some members of Congress from both parties will require to gain their votes.  The effort to reach a compromise on tax legislation will be an early test of the Trump Administration’s ability to work with Congress.

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