Trump's Tax Plan

[Play Angry]

Here is an interesting article from Forbes briefly summarizing Trump's proposed tax plan. Here is another summary posted on Trump's campaign website.

If you are a small business owner who uses a partnership/LLC taxed as a partnership/S corp, grab your ankles ASAP since pass through status would go away (although kudos if your biz involves massive cap ex investments since depreciation may now be taken 100% at the time of the expense; touch your toes again if your business isn't manufacturing or doesn't hold real estate improvements). Passive investments through those same entities would also be subject to double taxation going forward. Similar treatment coming on capital gains taxes if you make six figures but aren't in the 1% club.

Good news though if you previously made over $250k (no Obamacare tax) and incredible news if you make $415k+ (top rate collapses from 39.6% to 33%). Similarly, if you own a business that previously filed as a C corp (usually larger companies), your rate plummets from 35% to 15% although you will lose many non-depreciation deductions.

Great news, especially for low earners without a ton of kids (personal exemptions would no longer exist) as the standard deduction would spring from $6,300 for single filers/$12,600 for married couples to $15,000 for single filers/$30,000 for married couples. Instead of personal exemptions, child care tax deductions will be available and capped at the average cost in that state.

As with every tax plan, there would be some winners and some losers.

Thoughts?

[wufan]

Here is an interesting article from Forbes briefly summarizing Trump's proposed tax plan. Here is another summary posted on Trump's campaign website.

If you are a small business owner who uses a partnership/LLC taxed as a partnership/S corp, grab your ankles ASAP since pass through status would go away (although kudos if your biz involves massive cap ex investments since depreciation may now be taken 100% at the time of the expense; touch your toes again if your business isn't manufacturing or doesn't hold real estate improvements). Passive investments through those same entities would also be subject to double taxation going forward. Similar treatment coming on capital gains taxes if you make six figures but aren't in the 1% club.

Good news though if you previously made over $250k (no Obamacare tax) and incredible news if you make $415k+ (top rate collapses from 39.6% to 33%). Similarly, if you own a business that previously filed as a C corp (usually larger companies), your rate plummets from 35% to 15% although you will lose many non-depreciation deductions.

Great news, especially for low earners without a ton of kids (personal exemptions would no longer exist) as the standard deduction would spring from $6,300 for single filers/$12,600 for married couples to $15,000 for single filers/$30,000 for married couples. Instead of personal exemptions, child care tax deductions will be available and capped at the average cost in that state.

As with every tax plan, there would be some winners and some losers.

Thoughts?

I'm not smart enough to fully comprehend all the ramifications, but here's my take:

I like that It's simple. A simple tax plan means less IRS agents. I like that there is an attempt to create private sector jobs.

I don't like that there might not be any more private sector jobs. I don't like that there is no exemption of income taxes for all earners up to the poverty level.

[jdshock]

Why is depreciation valued so highly when we want companies to hire more people?

[CBB_Fan]

If this is the same tax plan as before, it will reduce federal revenues by up to $590B a year. Most of the cuts would be, as expected, for those in Trump's income bracket or in Trump's industries. He also has proposed:

Billions in new weapons spending, with a focus on new nuclear weaponry and nuclear defenses.
A trillion dollars in infrastructure spending
The wall (estimated cost $12B, plus losses to our nearly $600B a year in trade to Mexico).

For those that believe in basic arithmetic, the tax cut alone will take our national deficit from $600B to $1290B. Add in a trillion in infrastructure spending over 20 years, $250B a year to the military, and the wall and that is a deficit of nearly $1.5T per year.

I hope your Reaganonomics magically erases that deficit instead of working exactly as it did in the 80s, tripling the deficit from $70B to $210B almost instantly. Or how they worked under Bush, turning a surplus into a large deficit.

[wufan]

Why is depreciation valued so highly when we want companies to hire more people?

I don't understand the question (so I obviously can't answer the question). Can you rephrase so I can follow along.

[ShockerPrez]

If this is the same tax plan as before, it will reduce federal revenues by up to $590B a year. Most of the cuts would be, as expected, for those in Trump's income bracket or in Trump's industries. He also has proposed:

Billions in new weapons spending, with a focus on new nuclear weaponry and nuclear defenses.
A trillion dollars in infrastructure spending
The wall (estimated cost $12B, plus losses to our nearly $600B a year in trade to Mexico).

For those that believe in basic arithmetic, the tax cut alone will take our national deficit from $600B to $1290B. Add in a trillion in infrastructure spending over 20 years, $250B a year to the military, and the wall and that is a deficit of nearly $1.5T per year.

I hope your Reaganonomics magically erases that deficit instead of working exactly as it did in the 80s, tripling the deficit from $70B to $210B almost instantly. Or how they worked under Bush, turning a surplus into a large deficit.

Good thing Obama has left America with a nice fat budget surplus in addition to all of the other awesome things he's done while in office. It will give us some breathing room whilst Trump proceeds to really screw things up.

[jdshock]

I don't understand the question (so I obviously can't answer the question). Can you rephrase so I can follow along.

My original post was worded poorly. I just mean that our current tax code gives big depreciation benefits. And the way I interpreted the post was that the benefits would increase even more.

But it seems to me that we shouldn't give tax benefits to invest in capital if we want people to invest in labor.

[ShockerPrez]

My original post was worded poorly. I just mean that our current tax code gives big depreciation benefits. And the way I interpreted the post was that the benefits would increase even more.

But it seems to me that we shouldn't give tax benefits to invest in capital if we want people to invest in labor.

Capital investments spur the economy as well, just with the companies selling the equipment.

[wufan]

I think the idea is that companies will invest in assets for the tax benefit. If those assets are new buildings, then they will hire construction companies to build it. Construction companies will buy new equipment. Equipment builders will but more steel. Refiners will purchase mined metals. Shipping companies will ship the ore and steel and equipment. All along the way people are hired to perform those duties. Those people all pay taxes. I think that's the way it's supposed to work.

[Play Angry]

OTOH, the fella that owns his small town medical practice/accounting office/law office/electrician company etc. and clears $90k just found out that his business would now clear $76.5k because his partnership/LLC/sole proprietorship/S corp pays an extra 15% before he sees a penny. Same goes for the old dude who gets a couple grand a month from his interests in some oil wells near El Dorado - that number just got chopped to 1700 because of double taxation.

I do think this tries to get close-ish to exempting sub-poverty level income as @wufan: mentioned though. $30k is a massive standard deduction for a married couple, and $15k is a lot for a single guy/gal.

[Aargh]

I hope I'm interpreting this wrong. People making over $200K get a nice break and people making over $400K get a huge break. Small business owners making less than $200K get kicked square in the grapes, which will be very painful.

That looks a lot like some people in the $100K - $200K range get a tax bump so people above $400K can get a tax break?

I can see how the depreciation thing would boost the economy. A complete writeoff of a capital outlay in year 1 would REALLY boost investment in capital goods. Taking the entire expense in the first year would seem to significantly lower a tax liability, which means lower revenues from taxes.

Accelerated depreciation currently encourages construction. Anything that's built (but not sold) can produce positive cash flows while producing net losses for tax purposes. Do that often enough and a business can generate huge chunks of cash while the accelerated depreciation wipes out profits and eliminates tax liability.

With a 100% writeoff in Year 1, Year 1 produces unheard of cash flows for businesses. Unfortunately the source of those cash flows is the U.S. Treasury.

It seems this plan would encourage massive, massive purchases and produce a lot of jobs, but the demand for those products would be met and the jobs it created would be lost. It looks like it would create a temporary boom followed by a significant bust.

[wufan]

That looks a lot like some people in the $100K - $200K range get a tax bump so people above $400K can get a tax break?

It seems this plan would encourage massive, massive purchases and produce a lot of jobs, but the demand for those products would be met and the jobs it created would be lost. It looks like it would create a temporary boom followed by a significant bust.

I see these issues as well. If you want to be optimistic about the first part, you could at least say that the higher income guys are still paying a much higher percentage of their income than the middle class. For example, if you make $200K You will pay $50k in taxes. If three people each make $200k they will combine to pay $150k. If you make $600k you will pay $200k in taxes. Remember that with current deductions, a lot of very wealthy people don't pay anywhere near their tax bracket. I think this will stop that and they will actually pay more than current. I could be wrong.

If you want to be optimistic about the second part, if I take advantage of the tax break now, perhaps my business grows rapidly, and I can continue to expand. There is obviously a stopping point to this without external influences, but such is the economy.

[Kung Wu]

I hope I'm interpreting this wrong. . . . Small business owners making less than $200K get kicked square in the grapes, which will be very painful.

That looks a lot like some people in the $100K - $200K range get a tax bump so people above $400K can get a tax break?

OTOH, the fella that owns his small town medical practice/accounting office/law office/electrician company etc. and clears $90k just found out that his business would now clear $76.5k because his partnership/LLC/sole proprietorship/S corp pays an extra 15% before he sees a penny.

If you are a small business owner who uses a partnership/LLC taxed as a partnership/S corp, grab your ankles ASAP since pass through status would go away ...

I don't believe these interpretations are correct, but I am not sure. I don't believe there is a new double taxation. I believe the business income still flows down to the S Corp owner just as it always has. The difference is that that income is taxed at ONLY 15% instead of the FULL individual tax rate you would have been taxed.

So the guy that earns $100k from a business as an owner of an S Corp, plus another $100k as an employee will pay ONLY 15% on the $100k from the business income portion, and then pay his individual 25% rate on the $100k he earned as an employee (or perhaps 33% depending on whether the business income kicks him up into the higher bracket). So he would pay $15k plus $25k = $40k. (Or if he is considered to be in the 33% bracket it would be $15k + $33k = $48k)

Previously he would have paid the 33% on the full $200k (33% because the combined amount bumped him up into another tax bracket). So he would have paid $66k.

I could be completely wrong.

[Play Angry]

That is the exact opposite of what the Forbes author wrote in the linked article w/r/t pass throughs - why do you think he is incorrect?

Edit: article edited this morning, hah! You may be right - that is a huge difference!

[1972Shocker]

I don't believe these interpretations are correct, but I am not sure. I don't believe there is a new double taxation. I believe the business income still flows down to the S Corp owner just as it always has. The difference is that that income is taxed at ONLY 15% instead of the FULL individual tax rate you would have been taxed.

So the guy that earns $100k from a business as an owner of an S Corp, plus another $100k as an employee will pay ONLY 15% on the $100k from the business income portion, and then pay his individual 25% rate on the $100k he earned as an employee (or perhaps 33% depending on whether the business income kicks him up into the higher bracket). So he would pay $15k plus $25k = $40k. (Or if he is considered to be in the 33% bracket it would be $15k + $33k = $48k)

Previously he would have paid the 33% on the full $200k (33% because the combined amount bumped him up into another tax bracket). So he would have paid $66k.

I could be completely wrong.

That is the way I interpreted what is breing proposed. What is now pass-through income would be taxed once at the same 15% rate as C corporation income. However, for C corporations double taxation will still exist to the extent taxable dividends are paid. I don't think this will apply to distributions paid by pass-through entities. Of course, the devil will be in the details once these changes are legislated.