Small businesses have been lobbying hard for changes to the U.S. tax code, which many argue penalizes successful pass-through entities at an unnecessarily high tax rate. That’s because under the current tax code, business owners of sole proprietorships, partnerships, limited liability corporations, and S Corporations assume the profits and loses of their businesses and as a result pay at the rate of individual taxpayers.
The Donald Trump administration’s newly proposed tax changes would presumably do away with that problem. Treasury Secretary Steven Mnuchin said business owners could see their taxes slashed from as high as 39.6 percent to 15 percent, allowing proprietors to invest more in their businesses, instead of Uncle Sam’s tax system.
And the tax proposal suggests similar changes to the rate that large corporations pay, as well. If Trump’s plan were to pass Congress, corporations could see their rate drop 20 percent (from 35 to 15 percent) -- an irresistible lure the administration hopes will bring back businesses that moved their headquarters to other countries with lower tax rates.The proposal would also impose a one-time 10 percent tax on the foreign revenue of companies that choose to return to the U.S.
But the most talked-about feature of the president’s plan is its philosophic change when it comes to personal income taxes.
Under the current code, taxpayers have the option to claim a personal exemption of $6,500 per person/$12,600 couple, or pick from a buffet of tax deductions that are meant to apply to personal circumstance.
Under the administration’s proposal, deductions like claiming your home office, health care and student loan interest – all commonly used deductions – would be eliminated.
Other deductions that could meet their end under the new strategy include:
The administration also said that homeowner deductions like mortgage insurance would stay in place.
Equally significant is the restructuring of tax brackets. The administration proposed dropping the number of brackets from seven to three in a continuing effort to simplify the tax code.
There’s been a considerable amount of back-and-forth criticism of the tax plan in the past few days, with experts ranging from private analysts to former treasury secretaries weighing in on whether the plan would help or hinder the economy.
Former Treasury Secretary Larry Summers, who served under the Bill Clinton and Barack Obama administrations, blasted the proposal for what he called a lack of transparency and detail.
“Most presidential campaigns during the primaries, when they put out a tax plan, they put out more than one page. They put out some analysis, some models, some careful articulation of the proposal and estimate its effects,” Summers told CNBC, noting that the single-page proposal amounted to a list of bulleted items with no factual explanation or analysis as to why the administration felt the steps would work.
Financial analysts who tried to look past this dearth of information brought up that the true beneficiaries of his proposal would include Trump himself. The Trump Corp. is a pass-through entity and would stand to benefit.
The director of federal tax policy for the nonprofit Center on Budget and Policy Priorities, Chuck Marr, reminded readers in a February policy paper that Trump promised during his presidential campaign that his future plan would “have absolutely no tax cut for the upper class.”
In fact, Marr said, by conservative estimates the lower tax rate would give “400 highest-income households a tax break of about $9 million” a year. That includes Trump, who never divested fully from his business dealings. Other analysts estimate his total gains to be somewhere around $65 million a year.
But all of this criticism may be for naught when the plan reaches Congress. Although House Speaker Paul Ryan said he sees the proposal as being “along the same lines” of what House Republicans would support, many who support slimming the federal deficit will be skeptical of the plan’s rationale.
That’s because the substantial tax breaks -- which are, to some degree or another, across the economic spectrum -- will translate to reduced revenue for the federal government and a bigger federal deficit.
The Committee for a Responsible Federal Budget estimates that the changes Trump proposed would cost the government between $3 trillion and $7 trillion over the next 10 years – a conversation-stopper for members of his party who want to see the deficit slashed.
Mnuchin said the administration believes that increased money in the pockets of business owners will mean a more vibrant economy, and in turn, more money to pay off the deficit. He said the “goal” is to boost sustainable economic growth by “3 percent or higher." Some analysts, however, believe that is an unrealistic goal for an economy that has hovered under 3 percent growth for the last five years. And the risk is, say those who are sounding the warning bell, is that unsustainable growth, such as Mnuchin proposes, would only balloon the deficit further.
But until the Trump administration actually submits a detailed, finalized proposal with facts and figures, all of this is speculation. And it hasn’t missed the attention of Trump’s more ardent critics as other ambitious proposals that piqued the ire of both Republicans and Democrats in Congress failed to show a common-sense path forward have been a hallmark of Trump’s first 100 days.
The question is whether he can turn this tax proposal into a concrete strategy that will help small businesses, sustain economic growth and rally a divided Congress on his behalf. Building a sensible tax structure that helps the economic engine of the country grow may not be as hard as it sounds. But getting Congress build on consensus instead of differences and pass a plan that works for all concerned, may be the real challenge.
Wikimedia image: Daniel Schwen
Jan Lee is a former news editor and award-winning editorial writer whose non-fiction and fiction have been published in the U.S., Canada, Mexico, the U.K. and Australia. Her articles and posts can be found on TriplePundit, JustMeans, and her blog, The Multicultural Jew, as well as other publications. She currently splits her residence between the city of Vancouver, British Columbia and the rural farmlands of Idaho.