The Trump Tax Proposal was released today. The direction towards spurring the economy, while removing the boot of Government off of the necks of the private sector and the American Citizens, seems to be where they are focused. So, let’s dig through the details and the media spin to find out what this means for you and I.
First, they plan on simplifying the tax brackets. The new brackets change from the current 7 tiers of tax rates, down to just three: 10%, 25%, and a top rate of 35%. Excellent start.
The Standard Deduction would double for married individuals. This is also excellent news. Usually the choice is, “which choice would yield the higher deduction?” Would the Standard deduction be more beneficial than itemizing? The theory behind this move is that the increased Standard Deduction would lead to avoiding the need for the itemization of deductions, in most instances.
For married couples who aren’t home owners, this is a no brainer. Not that you can’t utilize itemized deductions without being a home owner, but typically having huge dollar amounts spent on mortgage interest that can be deductible from income is usually the driving factor. It typically leads many to decide whether or not to itemize their deductions or just simply utilize the Standard Deduction. Having a higher standard deduction allows for a greater impact on lowering your income level. Depending upon the amount of your mortgage interest, you may not even need to utilize itemizing, which simplifies your tax preparation.
It also called for the elimination of most itemized tax deductions but would leave in place the popular deductions for mortgage interest and charitable contributions. Keep in mind, many itemized deductions are never even utilized. It’s not as though medical expense deductions are that effective. They are usually not a factor in itemizing deductions, as you would need to incur expenses of more than the equivalent of 10% of your adjusted income before ANY dollar amount spent above that threshold is allowed as a deduction. You’d have to basically be terminally ill in order to get to that level of costs on the average.
So, don’t fret if you lost those receipts from the “Doc in the Box” over trips due to the flu and maybe a broken bone or two. Charitable giving deductions wont be impacted in this proposal. This is also excellent news, in that this deduction aids in being an incentive to fund organizations which benefit society. This will still be the case through the remaining available deduction.
The estate tax and the alternative minimum tax, which Mr. Trump has railed against for years, would be repealed under his plan. From my experience, the reasoning for the Estate Tax, AKA the “Death Tax” is to eliminate possible tax shelters or creative tax havens. They were trying to avoid someone from creatively moving assets or money to an estate to avoid taxation. Conversely, it also penalizes those wanting to leave something behind to loved ones which would have been earned by an individual, typically for their family members. This would encourage everyone to build economic legacies for loved ones.
The Alternative Minimum Tax is mundane and should be removed. It is basically a dual calculation of deductions. You would deduct, as normal, while calculating a deduction amount that adds back in certain deductions. Your income level allows that additional tax calculation to add back in that tax amount for “wealthy individuals”. Removing this will spur spending by wealthier individuals, which helps provide revenue injection in the marketplace.
President Trump is looking at cutting the tax rate to 15 percent for large corporations, which now pay a rate of 35 percent. Why is this a good thing? First off, the majority of companies aren’t typically C-Corporations. They are pass through entities, such as S-Corporations. C-Corporations are taxed on the revenue they earn, and then taxed again at the shareholder level leading to double taxation. For a business to be able to retain more of their revenue, it will allow them to have more capital to pull from in order to grow.
Expansion of business operations would cause an increase in hiring due to a growing workforce. Equipment and infrastructure revitalization would occur, which will see more spending on companies who can provide those items and services. This, in turn, will allow those companies the ability to earn increased revenue to possibly expand and grow their Businesses as well. More inventory and raw materials purchasing will also occur, benefiting companies and businesses that will see their sales increase as well. From there, it continues to trickle down even further.
From The NY Times: “Mr. Trump also wants that rate for a broad range of firms known as pass-through entities — including hedge funds, real estate concerns like Mr. Trump’s and large partnerships — that currently pay taxes at individual rates, which top off at 39.6 percent.”
Let’s not forget the prior point that was made above, that pass through entities are usually S-Corps or Partnerships (such as General Partnerships, LP’s, and LLC’s) which encompass the majority of businesses in America. Many of these entities are small businesses. The Media will always point to hedge funds in order to anger the anti-capitalist, Bernie Sanders voter who thinks anyone in business is an evil, greedy degenerate. Just keep in mind, this actually benefits a huge chunk of the Middle Class, the small business owners. And if you’re not a small business owner, you’ll benefit from the doubled standard deduction or remaining mortgage interest deduction if you itemize. Not too bad of a proposal, if you ask me.
But here is where the Mainstream Media and Democrat spin begins
From the NY Times:
The concern would be that lawyers, doctors, consultants or other wealthy people in partnerships could structure much of their personal income as business income, effectively reducing their tax rate from 39.6 percent to 15 percent. “We don’t need a tax plan that allows the very rich to use pass-throughs to reduce their rates to 15 percent while average Americans are paying much more,” Senator Chuck Schumer of New York, the Democratic leader, said Wednesday. “That’s not tax reform. That’s just a tax giveaway to the very, very wealthy that will explode the deficit.”
This entire premise is false. For tax purposes, a business can be classified either as a separate taxpaying entity or as a flow-through entity:
C-Corporations are Separate taxpaying entities.
Sole proprietorship’s, S-Corporations, and Partnerships are Flow-through entities
First of all, Pass-through income is mostly personal income. Income that an entity receives are divvied out according to their respective percentage of ownership to the shareholders. Even if the owners receive dividends, they would still have to draw an actual salary. This is required to show that revenue that is distributed back to their prospective owners isn’t constructively made into dividends in order to circumvent ordinary income rates in favor of the lower capital gains tax rates.
Secondly, Lawyers and doctors are professionals who would have to form Personal Service Corporations (also known as Professional Service Corporation). This is an entity that is specifically designed and regulated for those with professional licenses, such as attorney’s engineers, architects, doctors, and public accountants. Lawyers and Doctors couldn’t receive the benefits of a Pass Through entity, because Personal Service Corporations are taxed just as a Separate Taxpaying Entity – like a C-Corporation.
The Democrat talking points against theses tax proposals are focused on playing on the ignorance of the public. They push the narrative of the evil, rich Mr. “Money Bags” Monopoly man persona. Based on economics and the punitive effects of current taxation, this could be an excellent beginning to spurring an economy that has been running on fumes for over the last 8 years.